You are the Manager-in-charge of the audit of Jasa Packaging Sdn. Bhd., a subsidiary of Jasa Holdings Berhad, for the year ended 30 June 2021. JASA is engaged in the manufacturing of a wide range of plastic packaging products. While reviewing the initial work performed by your audit team, the following matters have come to your attention:

(i) The quantity of material scrapped during the year is materially different from the quantity of scrap sold. The company’s records show nil balance both at the beginning and at the end of the financial year. No reconciliation for the difference has been provided by JASA.

(ii) Sales revenue for the year has increased by 7% over the previous year. However, it has been noted that sales in the last two weeks of June 2021 have been exceptionally high and represent 15% of the annual sales. The audit working papers carry the following observations in respect of the above:

• 70% of the sales in the last two weeks of June were made to two new customers whose credit assessment has not been formally documented.
• a large portion of the goods sold to the above-referred customers was returned in the first week of July 2021, and
• the yearly management bonuses are linked to the operating performance of JASA.

(iii) During the year, JASA purchased a new machine for RM2 million. The payment voucher is duly supported by the invoice from the supplier. However, the fixed assets schedule provided by the client shows the amount capitalised as RM200,000 million. Depreciation has been charged on this amount. The difference of RM1.8 million appears in the bank reconciliation statement.

REQUIRED

(a) Evaluate each of the independent situations (i) to (iii) above and justify the type of misstatement it represents a fraud or an error.

(b) What actions would you take to deal with the above matters?

[(3+6)+12=21 marks]

Response Template

2 (a) & (b)	Fraud or Error? (1 mark x 3)	(a) Analysis and assessment of fraud or error (2 marks x 3)	(b) Actions to be taken by the audit team ( 4 marks x 3	Marks
(i) Sale of scrap
(ii) Revenue
(iii) Property plant and equipment