You in and out the warehouse and this

are the senior audit manager of Mainkind & Co. By rotation, this is the
first time you are handling the audit of an existing client, Digest Medical Supplies
Co (Digest), whose financial year end was 31 December 2017.
is a pharmaceutical medical supplies company, which manufactures and supplies
a wide range of medical supplies locally as well as overseas.  
draft financial statements show revenue of RM 46 million and profit before
tax of RM 4.2 million.


previous finance director left the company in October 2017 after he was discovered
claiming fraudulent expenses from the company for a significant period of
company appointed a new finance director who was previously the financial
controller of multi-national manufacturing company on January 2018. The new
finance director has expressed surprise that Mainkind & Co had not
uncovered the fraud during last year’s audit.

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the year Digest has spent RM 3.8 million on developing several new products. These
projects are at different stage of development and the draft financial
statements show the full amount of RM 3.8 million being recognised as
intangible assets.
order to fund this development, RM 4 million was borrowed from the bank and
is due for repayment over a ten-year period. The bank has attached minimum
profit targets as part of the loan covenants.


new finance director has informed the audit partner that since the year end
there has been an increased number of sales returns and that in the month of
January over RM 2 million of goods sold in December were returned.


audit team attended the year-end inventory count at Digest’s warehouse. The audit
team present raised concerns that during the count there were movements of
goods in and out the warehouse and this process did not seem well controlled.


the year, a review of plant and equipment in the factory was undertaken and
surplus plant was sold, resulting in a profit on disposal of RM 2 million.


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