QUESTION 3

(a) The strength and weaknesses of VCFs internal control system can be assessed as follows.
CONTROL ENVIRONMENT
The strength of the said environment is mix. On one hand, the company appears to have strong control
environment as seen from the emphasis place on quality and customer satisfaction coupled with its
readiness to dismiss those staff who are not committed to the objective.
But on the other hand, the failure to establish product costing and attitude towards traditional
accounting and budgets showed that the control environment in these areas are weak.
CONTROL ACTIVITIES
Export sales
The fact that the 90% of the companys sales are exported warrant the use of hedging to mitigate the
effect of fluctuation in foreign exchange rate which was not being practiced by the company.
This would inevitably make the amount of collection less predictable and may have subsequent effect
on the companys cash flow.
Progressive billing
The existing method of billing the customer progressively is deemed appropriate as this would ensure
that the companys intellectual property will be protected. However, if there is no restriction on
dismissed employees joining the competitor companies, this would lead to leakage of companys
confidential information to the latter.
Research and development (R&D)
The investment in research and development is commendable considering that the companys nature of
business involves high technology. The said investment would ensure that the company will continue to
have an edge over its competitors.
However, the fact that the research and development costs are not capitalized showed that it has not
reached the stage to allow the company to benefit from this investment. Also, it has been highlighted as
one of the risk that the research and development has been discontinued.
Export markets
By focusing on the export market would provide a cushion to VCF should the domestic market
experience a contradiction in consumers demand. However, this would also inevitable expose the
company to fluctuation in exchange rate if appropriate safeguards as mentioned earlier are not in place.
Outsourcing of manufacturing operations
Outsourcing is seen as a way of transferring the risk associated with a particular activity. This control is
only appropriate if monitoring exist over the work of the outsourced service provider as ultimately
product quality is the responsibility of VCF.
Salaries for staff

By reviewing the staff well above the industry average would ensure that the company is capable of
attracting, motivating and retaining the talents.
However, it is important that the high salary is commensurate with good performance. Otherwise, the
said payment would be at the expense of the shareholder.
Communication
The preparation of monthly management account would ensure that timely financial information is
being furnished to the board which would then allow sound strategic decision to be make and prompt
corrective action to be taken.
However, Viktors attitude towards these information highlighted earlier would hamper the
effectiveness of communicating the said results to the board.
Monitoring
The companys operation is geographically scattered which made close monitoring by head office
management difficult. The current practice of contacting the respective offices by telephone is not
regarded as effective.
(b) Corporate governance
Good corporate governance emphasizes on the separation of chairman and CEO who are the two most
senior personnel within the company. By doing so, it is believed that any possible abuse can be avoided
as unfettered power is not vested in one person.
To promote meritocracy, good corporate governance practices suggested that the establishment of
nomination committee to oversee the recruitment, removal, orientation and training of the director as
well as succession planning.
Since the said committee is absent in VCF, the board should consider establishing it as currently the
appointment process is handled by Mr Viktor personally.
The presence of the two non-executive directors on the board of VCF meets the requirement of good
corporate governance practices which emphasis on a balanced board so that no one individual or group
of individual could dominate board decision making.
However, the existing composition can be subjected to criticisms as the two non-executive directors are
not regarded as independent because of financial and personal relationship. It is advisable that the
board consider recruiting more independent non-executive directors onto the board to fulfill the
independence requirement.
A total of four board meetings were held during the year. Even though good corporate governance
practices did not specify the minimum number of meeting that are to be held. It is believed that the
current frequency will not ensure that boards attention have focused on all strategic matters.
Board meetings are avenue for strategic matters to be discussed so that prompt and sound decision can
be made to address them. Therefore, the current practice of holding the meetings informally with verbal
review of sales activity is not in line with good practice. We recommend that the board establish a policy

on the type of matters reserved for boards decision making. Consequently, the number of board
meetings should increase accordingly.
The company does not appear to have succession planning in place. Currently, Mr Viktor is the only
personnel who have extensive knowledge about the competitors and customers should he not be able
to report for work for a prolonged period, the smooth running of the company will be affected. It is
therefore essential that the board identify a suitable coordinate or candidates to be groomed for this
purpose.
Internal Control
In the light of the high percentage of export sales, the board should consider making hedging
arrangement instead of just letting the gains and losses to balance each other out which is current
practice.
The scale of VCFs operation justified for the establishment of an in house internal audit function to
perform regular visits to the overseas sales offices, review their controls and feedback the results to the
board. At the same time, the internal auditor would also make recommendation for improving the
weaknesses found.
To address the possible leakage of the companys intellectual property, it is essential that the
employment terms of staff involving in the research and development be revised to include restriction
on joining the competitor companies within certain period of leaving the company.
In addition, to ensure that the research and development would achieve the desired result, it is essential
that they should be carried out on a structured manner after thorough study of their viability of success.
This is especially critical in the current situation where the companys cash flow is tight.
In view that the companys manufacturing operation are outsourced, to ensure that the company
retains some control over the quality of the final product, it is essential that close monitoring is
exercised over the output from the outsourced service provider. This can be undertaken by the internal
audit once it is established.
At the same time, there should be survey being undertaken to determine the salary scale paid to similar
level of staff within the industry. This would ensure that VCFs staff are not rewarded with salaries that
can be regarded as excessive.
Also, periodic assessment of the staff performance is advised to ensure that they are within the
expected level.
The current economic recession warrant the establishment of product costing which would allow the
board to consider the amount of discount or reduction in price that is possible in order to make its
products more competitive.

(b) Risk management

The companys current risk management initiative does not appear to be in line with recommended
practices as it only focuses on the risk that are present within the company (identification) and the
measures to be taken to manage them.
However, without first assessing the respective risks in term of their likelihood of occurrence and impact
on the company, it is unlikely that the significance of the risk would be known and so the resulting
measures taken to address them may not be effective.
To overcome this shortcoming, we recommend that the risks identified be assessed using either
qualitative, semi-quantitative or quantitative methods which can be based on information obtained
from track record, existing literature, scientific models or expert opinion etc.
In addition, we recommend that periodic monitoring be undertaken to determine whether any new risk
has emerged, changes in the previously estimated likelihood of occurrence and impact as well as the
effectiveness of the measures implemented to address the risks.
Lastly, to ensure that prompt corrective actions will be taken by the board and the operating
management, we recommend that risk manager for the risk management committee or a joint audit
and risk management committee who in turn will highlight the significant risk to the board together with
the measures that have been implemented to address them.
Being an internal control itself, it is appropriate that the internal audit perform review on the risk
management system periodically to ensure that the respective processes have been implemented as
planned