Are Malaysians Richer by 50%? Applying Audit Techniques (Part 2)

- highly relevant to F8 and P7 candidates

A. If Malaysians Average Income have increased 49% from 2009 to 2012, why MORE qualify for the BR1M payouts?

Pic 01: Original number forecast of poor people needing aid.

When launching the ETP, PEMANDU said, “A key focus will be on ensuring that substantial improvements are made for people with the lowest household incomes.” Ironically, it is another so-called ‘achievement’ of PEMANDU which is really the total failure of the ETP in terms of raising the incomes of poor Malaysians.

The number of Malaysians eligible for welfare has been INCREASING under PEMANDU’s tenure. It was originally estimated that only 3.4m households comprising 53% of total households in Malaysia earned less than the RM3,000 per month threshold for entitlement to the RM500 Bantuan Rakyat 1 Malaysia (BR1M) handout . But ultimately, approximately 4.2 million applications were approved which resulted in RM2.1billion being paid instead of the originally anticipated RM1.8billion. Under the latest BR1M 2.0, which also includes individuals earning less than RM2000 per month, a total of 6.1m applications have been approved.

Pic 02: Malaysian Caretake government were surprised that there were many more poor people.

Applying Substantive Analytical Procedures:

If GNI per capita has indeed soared 48.8% in two years as PEMANDU claims, why has the number of Malaysians who are eligible for welfare handouts increased? Over 20 million Malaysians, or nearly 70% of our population are on welfare while PEMANDU trumpets projects and investments under the ETP.

The average income in Malaysia has INCREASED. At the same time the number of poor income group earners qualify for BR1M has also INCREASED. This could only mean that the poor income level has DECREASED while the rich income group has INCREASED.

If the cities folks income has remained stagnant, then it could only mean that our Malay, Chinese, Indian, Iban, Kadazan & Dusun brothers income in the rural areas have DECREASED. 

B. What is the implications that Committed Investment has fallen 82% from 2011 to 2012 ?

Committed investments slumped 82% from RM179.2b in 2011 to RM32.1b in 2012. Recaling the earlier article ( Part 1 ), the actual investment in 2012 is unknown. This implies that investment is so low that PEMANDU conveniently avoid disclosing it.

Applying Substantive Analytical Procedures:

The ETP experienced a spectacular reversal in its second full year of existence in 2012. The value of committed investments in 2012, their Gross National Income (GNI) impact and the number of JOBS CREATED COLLAPSED compared to the previous year.

Reflecting the low value-added nature of these investments, the number of jobs expected to be created fell too but by a 70% from 313,741 in 2011 to 94,702 in 2012.

C. What kind of jobs are likely created? 

The jobs created are likely to be low-income levels since a substantial bulk of committed investment are unskilled labour intensive industry involving constructions, infrastructure development, schools and hospitals projects. 

Pic 03: Transformation programme were mainly unskilled labour intensive work. The CIMB Group (Cambodia, Indonesia, Myammar, Bangladesh immigrants)  stands to benefit the most.

Applying Substantive Analytical Procedures:

Go ahead please, read The Star paper and caretaker Government’s commitment to deliver their promise to Selangor state. These are mainly low end jobs creation.

D. Did the Year 2011 Committed investment spillover to 2012?

The actual investments in 2011 was only RM12.9b, what happened to the balance committed investment of RM166.5billion?

Applying Substantive Analytical Procedures:

Any reasonable Malaysian would expect to see a large amount of actual investments in 2012 from the RM179b committed by 2011 Entry Point Projects (EPPs). They have had a whole year or more to be rolled out, and would have had the help of PEMANDU cutting red tape and fast tracking processes.

Pic 04: Google Office comprising of Knowledge workers. Malaysia is the World's 3rd best in exporting talents - 1,000,000 members.

The 2012 ETP Annual Report fails to state the breakdown of investments between the public (government) and private sector . Malaysia has failed to retained its top talents, instead these have moved overseas seeking high value and skilled profession. Note that the private sector by its nature motivated by wealth seeking objectives will act faster in implementing committed projects. ETP expects private sector contribute 92% of the investment necessary to drive the ETP.

Pic 05: Hmmm... IAS 24 on Related Parties Transactions says disclosures required in respect of those parties, including the compensation of key management personnel. So that would include the Prime Ministers and his managerial personnel working for Malaysia Incorporated., doesn't it?

The miserable investment, GNI impact and job figures for 2012 coupled with the absence of disclosure on the amount of actual investments and the public-private breakdown suggests the following logical conclusions:

1. That many of the announced EPPs, especially those in 2011, have failed to take off;

2. That the private sector is not driving the EPPs as originally envisioned; and

3. That the private sector is losing confidence and interest in the ETP.

VERDICT : FAILURES by a Spectacular Degree

Conclusion : SUSTAINABLE Solutions

If PEMANDU and the ETP were truly about transforming our nation for the better, there must be far more emphasis on improving education, skills and the social and business environment. They must also have the political will to combat grand corruption rather than just clear red tape and increase competition by dismantling monopolies which are controlled by political cronies. Finally they must be honest and transparent about their achievements rather than resort to manipulating statistics in order to deceive the public. Only then can we take real steps towards a future where all Malaysians can have the dignity of decent jobs, housing and security.

Pic 06: Vote YOURSELF for a better future. Can you graduate as ACCA Affliate or Masters Degree?

These topics belong to P1 (GRE) on Corporate Transparency and Accountability and P3 (BA) on Strategic Re-positioning, don’t they? 

FINAL NOTE TO ALL ACCA Candidates: 

PS: Every Malaysian has the democratic right to cast their vote. No doubt about it. However, do note that if you spend precious time going to home town to do that, statistically your vote is insignificant out of total voters population of 13.3 million. Thus, your vote is unlikely to affect the final election results. I know, I know. You will say we must vote to change for a better Malaysia.

Still, you are better off in voting YOURSELF, invest in ACCA studies in preparation of the real election results – will you be elected as an ACCA Affliate? Just a thought to encourage you to achieve your success. 

Hey, in 5 years time, if you are fed up of the incumbent government of 2013, you can still vote right? 

Sources: 

1) http://www.pemandu.gov.my/gtp/Improving_Rural_Basic_Infrastructure-@-GTP_2@0_Improving_Rural_Development.aspx, 2013

2) http://refsa.org/, 2013

What are Substantive Analytical Procedures?

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Critically relevant to F8 and P7 Candidates

Tutorial Notes:

Explanation of analytical procedures

'Analytical procedures' means evaluation of the financial and other information, and the review of plausible relationships among both financial and non-financial data. For example, sales have a direct relationship with royalty expenses, provided royalty payments are based on the number of units sold. Therefore analytical procedures will include determining whether the sale for a period has a direct relationship with the royalty expenses incurred during the same period.

The analytical procedure also includes investigation of identified fluctuations and relationships that are inconsistent with other relevant information or deviate significantly from predicted amounts. For example if the relationship between sales and royalty expenses is not direct, then the auditor would investigate the reasons for the deviations because it indicates a possibility of a misstatement of either sales or royalty expenses in the financial statements.

Analytical procedures help in understanding an entity and its environment and its overall review at the end of the audit. They are also used as substantive procedures when their use can be more effective or efficient than tests of details, in reducing the risk of material misstatement at the assertion level to an acceptably low level.

How can Substantive Analytical Procedures by used?

The different types of analytical procedures available to the auditor are as follows:

Comparison with prior periods

Comparable information of the current year is compared with information relating to prior periods. This comparison helps to identify unusual changes or fluctuations in amounts. For example a comparison of revenue and gross profits of the current year with the amounts of the previous year will help determine the percentage of growth in sales and whether the gross profit margin was similar as in the previous year.

Another Example: 

The contagious virus H7N9 is spreading in China. What is the plausible relationship to the air travel industry? The expectation is FEWER travellers to China and rest of Asia. Thus, expect that the highly geared airline companies with high exposure to Asian markets to have significant lower passengers load and may pose a Going Concern risks. 

Pic 01: Bird Flu making Chinese nervous? Or Doctors on way to work?

Pic 02: Chip! Chip! Chip! Buy 1 Free 2.

Pic 03: Expect airline industry in Asia to experience big declines. A Going Concern issue?

Pic 04: Travelers thinking, "Where to go? Beijing? Sao Paolo? "

Comparison with anticipated resulted

Actual results are compared with anticipated results of the entity or budgets and/or forecasts. Unusual discrepancies identified by the comparisons indicate a possibility of misstatement in the area where the discrepancy is noticed. This would have to be investigated by further audit procedures. For example a comparison of sales will be made with budgeted sales and if major deviations are noticed, these would have to be investigated. In fact if the actual results show a significant fall as compared to the budgeted results, the auditor may have to investigate whether the going concern status of the entity is affected.

Comparison with industry information

Client information is compared with industry information either for the industry as a whole or by comparison with entities similar in size to the client. For example, receivable days of a client are compared with the receivable days of the industry.

End of Tutorial Notes

Next article, I will demonstrate how you apply them on Government Top Think Tank's PEMANDU's performance. 

PEMANDU: Malaysians income increased by 49%! Really? (Part 1)

- relevant to F8 and P7 Candidates.  

Pic 01: Country's Top Think Tank Economic Body

The acronym that the Performance Management and Delivery Unit within the prime minister’s department is better known by. PEMANDU is the government agency that created and is now steering the Economic Transformation Programme or ETP.

Pic 02: Top PEMANDU Spokesperson Idris Jala

The 2012 ETP Annual Report states “The country’s GNI per capita has risen from US$6,700 in 2009 to US$9,970* in 2012. This represents a 48.8 per cent surge in just a two-year period. Based on current projections and “barring unforeseen circumstances”, this gives Malaysia the potential to achieve a GNI per capita of US$15,000 earlier than the 2020 target.

Pic 03: Forex Currency - Majority Malaysians use Ringgit Malaysia

Performing Tests of Details:

 

[1] PEMANDU still cannot get its basic math and data right. It said (nominal) GNI per capita hit US$9,970 in 2012, but also said it was RM30,809 and the exchange rate was RM3.058:US$1. However, at that exchange rate, RM30,809 is equivalent to US$10,075. It is shocking that this high-powered unit cannot even get the basics correct;

Pic 04 : Baby hard at work, "Ummmm... 4 x 1 = 92. Mom will be so proud of me."

[2] PEMANDU is a local government body operating in Malaysia, there is no reason for translation on foreign exchange for it ISN’T in accordance to IAS 21: The Effects of Changes In Foreign Exchange Rates states that the “Functional currency: the currency of the primary economic environment in which the entity operates.”

Pic 05: IAS 21: Which Currency are Malaysians using?

Is PEMANDU primary economic environment in US$ or RM? The answer is obvious. So why does the Prime Minister Department quote Malaysia’s average income earnings in US$? Is it because at US$ has weakened against the currency of the rest of the world, so its opportunity to OVERSTATE Malaysia’s earnings? 


Conclusion
You see, what you are studying in F8 and P7 are extremely relevant to the real world of macro-management. The government of the day should practice better Governance and install plus review internal controls so as not to repeat such follies. 

Sources: 
http://refsa.org/, 2013, Reports on ETP, Visited; 11th April

http://etp.pemandu.gov.my/annualreport/, 2013, Annual Report, Visited: 11th April.   

How can the Malaysia's General Election 2013 help you in your Audit Exams?

 - relevant to F8 and P7 Candidates. Also may be relevant to the 13.5 million Malaysian voters.

Exam Note: There are 3 articles in 2013 thusfar, on Audit. The emphasis on matters and Other Matters Paragraph were highlighted. Seldom tested topic on Culture Controls are also out. You should be familiar with these as they appear to be very high risk exam questions this coming June 2013 exams. 

Election fever is peaking. Both sides, government and opposition promised a Better Malaysia. Which sides would you vote? Before I embark on this hot topic, a disclaimer of liability is - in no way am I advocating sides. I am Neutral, politically speaking. I mean, I tried to apply membership with UMNO and PAS. Both rejected me for reasons I am still unsure about (tongue in the cheek). SO this is a neutral article but hopefully enjoyable in relations to applying audit principles related to F8 (AA) and P7 (AAA) of ACCA.

Pic 01: The Government claimed they have kept their Promises, have they?

Investors make decisions but they should rely on External Auditor’s Report. Thus the ACCA’s 2 audit subjects are highly relevant. Let us perform an audit on Government’s Financial Statement and focusing on the Statement of Financial Position (short as SOFP).

Remember to apply your audit knowledge.

Pic 02: The opposition are filled with many talents who 'audited' the Executive Government's Financial Figures

A. Year 2011 – if Government Economic Report is audited

On Audit Evidences, do you take Management’s Targeted figures or Actual Figures as inputs to Financial Statements? Say the management has a target to achieve Rm100 million but the actual figures turn out to be RM7 million.  A difference of 93%. I hope your answer is always ACTUAL Figures! Financial Statements reflect only Actual figures.

I got news for you. Malaysian government reported that the promised investment for 2011 is RM179 billion but the actual sum invested is RM12.9 billion, which is mere 7% of the Targeted Figure. It goes on to say that it has successfully transformed the country with “Promises Delivered” or in Bahasa is “Janji Ditepati”. They should hire ACCA graduates working in Audit Firm to audit the figures for credibility.

EXAM QUESTION: What is the impact on Audit Report, 2011?

Impact on 2011 Audit Report: Issue Modified Audited Report with Basis for Qualified Report that the investment figure is materially misstated by 93% or RM166.1 billion. The actual amount should be RM12.9billion but the management of Malaysian Government has taken RM179billion.

The Audit Report’s second paragraph is “EXCEPT FOR” the material figure investment stated above the Financial Statements are fairly stated. 

OTHER MATTER PARAGRAPHS
External Auditors need to highlight that the Executive Director's Statement ( I think you know who ) is inconsistent with the Financial Statement's content. The Executive Director mentioned that the entity has achieved its promise on delivering investment of RM179 billion in 2011 but this is not consistent with our findings.  
(please see ISA 706)

B. Year 2012 – if Government Economic Report is audited

Pic 03: It is a Fantasy Figure. Don't worry, so long as you are my  Dream world, you can believe me.

The government of the day continued to trumpet their achievement that in year 2012, the country has promised investment of RM32.1 billion. Not really impressive as this means a drop of RM146.9 billion compared to Year 2011. This time, it gets better, the government omitted the actual investment figures.

EXAM QUESTION: What should Auditors do at the final stage of audit review?

As Auditors, you need to perform additional audit procedures to verify the figure using Tests of Details or Substantive Analytical Procedures. SO you need to find corroborative evidences. The following are the sources of information :

1)     Malaysian Investment and Trade Investment (MITI)

2)     2^nd Finance Minister Tan Sri Yaakob

3)     Economic Transformation Program Think Tank

EXAM QUESTION: Can you rely on the above information sources as evidences?

I hope your answer is no, because No. 1 above is controlled and influenced by the government. No.2 is the internal Executive Director of entity. No. 3 is the ‘middle management’ of Government who are accustomed to take instructions from Executive Directors. They ethically lacked independence and objectivity.

Thus all 3 sources are weak evidences. The next step for auditors is to issue a Letter to Management requiring them to give evidences on the Promised Investment for 2012. However, according to ISA 580 any evidences from management as the SOLE Evidence is insufficient for External Auditors. Thus they are unable to obtain corroborative evidence.

EXAM QUESTION: What is the impact on Audit Report, 2012?

Impact on Audit Report, 2012

Basis for Qualified Opinion

We are “UNABLE TO OBTAIN” sufficient audit evidences related to the investment that Malaysia received for the year 2012. The management in the Malaysian Government stated that the amount is RM32.1 billion but we don’t have any evidences relating to this.

Qualified Opinion

We issue a Modified Audit Report and qualified opinion that “EXCEPT FOR” the matter discussed above, the financial statement is fairly stated for the year 2012. 

OTHER MATTER PARAGRAPHS
External Auditors need to highlight that the Executive Director's Statement is inconsistent with the Financial Statement's content. The Executive Director mentioned that the entity has achieved its promise on delivering investment of RM32,1 billion in 2012 but this is not verifiable as we have insufficient evidences to corroborate it. (please see ISA 706)  

Pic 04: I trusted you!

CONCLUSION

If the entity has 2 years of Modified Audit Report with “EXCEPT FOR” Audit opinion highlighting  material misstatements, what should investors do? In this case, the investors are voters. The logical cold answer is investors would demand a change of existing management.

Would they? Difficult to judge. This is because many evidences suggest that investors will continue to buy in company’s shares on Stock Market even though the External Auditors gave a qualified opinion that the company is no longer a Going Concern! Case in point – Transmile Berhad, Silver Bird Berhad, Megan Media Berhad, Ekran Berhad and PMI Berhad to name a few. 

The famous researcher Robert J. Shiller said this is “irrational exuburence”. Yes, no doubt that many investors/voters will still vote for existing management – government of the day until the entity becomes the next Cypress, Spain, Iceland and Portugal with government who bankrupted their country.Widely expected the power of the day will be given new mandate.

What should you do as ACCA candidates? Perhaps, if time permits, that is my next topic. 

Sources: 
Refsa,  2013, http://refsa.org/focus-papers/infographics/do-you-feel-50-richer/ , Visited on: 8th April