FACULTY OF BUSINESS AND INFORMATION SCIENCE (FoBIS)

BA202 AUDITING 1
GROUP ASSIGNMENT

Lecturer: Josephine Chang Swee Mei

Submission date: 9 July 2015

Marks: 30%

Marks are to be given for teamwork and professional work done on the assignment.

Name of company Tenaga Nasional Berhad (TNB)

No. Name ID No. Contribution
1 Ng Hiap Kwan 1001231864 Question 4(b) +edit
2 Lim Hui Min 1001231845 Question 4(a) +edit
3 Pan Sin Yee 1001231622 Question 1(a) & 1(b)
4 Lilian Lee Min Hui 1001231735 Question 1(b) & 3(a)
5 Tan Siew Wei 1001231328 Question 2(b) &
3(b)
6 Sim Su Yee 1001231764 Question 2(a) & 2(b)

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 Table of Contents

No Contents Page(s)

1 Question 1 2-7
2 Question 2 8-19
3 Question 3 20-22
4 Question 4 23-26
5 References 27-28

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Question 1

(a) Describe the companys background, organizational structure and the nature of the
business.

Background of Company

Tenaga Nasional Berhad (TNB) is the largest electricity utility provider in Malaysia and a
leading utility company in Asia. TNB is listed on Main Board of Bursa Malaysia with the total
assets of RM87 billion. The company has almost 35,000 employees serving an estimated 8.3
million customers in East and West Malaysia. TNB has been providing their services, powering
electricity to households and premises since 1949 when it was set up as the Central Electricity
Board. (Corporate Profile, 2015). On 22th June 1965, Central Electricity Board (CEB) of the
Federation of Malaya was renamed as the National Electricity Board of the States of Malaya
(NEB) and was led by a Malaysian CEO. In the 80s, the electricity used in whole Peninsular was
supplied by the Board replacing the Perak River Hydro Electric Power company (PRHEP) and
its subsidiary Kinta Electric Distribution CO. Ltd (KED). By year 1984, the Board has achieved
the highest revenue of RM2.2 billion with fixed assets approximately RM5.5 billion and a
significant reduction in tariffs was offered first time in the history. On 1 st September 1990, the
Malaysian Prime Minister, Dato Seri Dr. Mahathir bin Mohamad replaced National Electricity
Board (NEB) with establishment of Tenaga Nasional Berhad (TNB) as the heir and successor.
TNB has now became a private company wholly-owned by government with the appointed Tan
Sri Dato Haji (Dr) Ani bin Arope as the chairman of the company. (History , 2015)

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Organizational Structure

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Nature of Business

The nature of business of TNB is to generate, transmit and distribute electricity (Core Business
of Tenaga Nasional , 2015). TNB provide the supply of electricity to households and industry all
over Malaysia with electricity generated from six thermal stations and three major hydroelectric
schemes. In term of general division, TNB is entrusted to develop, operate and maintain the
portfolio of power generating units. In term of transmission division, it helps in managing and
operating 132kV, 275kV and 500kV network which also known as National Grid. National Grid
helps to connect the transmission system of Thailand and Singapore. National grid include
activities such as strategy formulation, system planning, project management and others. TNB is
holding 80% equity on Sabah Electricity Sdn. Bhd. which helps to manage Sabah Grid.
Moreover, distribution division is entrusted to carry out two value chain business activities on
behalf of TNB namely Distribution Network Operations and Electricity Retail Operations.

On top of that, TNB diversify their businesses by involving in non-core business area such as
manufacturing of transformers, high voltage switchgears and cables, consultancy services,
architectural, civil, electrical engineering works and services , repair and maintenance. The
company also enlists in research and development (R&D), property development and
management services. In recent years, TNB is trying to expand their business to overseas by
emerging markets in Asia-Pacific, Middle-East and North Africa regions. In year 2005, TNB has
established a 20-Year Strategic Plan with ultimate objective to transform into a world-class
player by the year 2025. Investment has been made on the professional development being
carried out by its employees to achieve it. In the Strategic Plan, it emphasizes on green initiatives
such as renewable sources, effective demand side management and complementation of
Governments carbon reduction agenda. (Core Business of Tenaga Nasional , 2015)

Being a Government-linked company, TNB has a strong emphasize on social responsibilities,

thus a foundation Yayasan Tenaga Nasional (YTN) was established in 1993 to operate various
CSR programmes that give advantages to underprivileged. Scholarship is given in term of
education as a successful social outreach programmes.

TNB Vision

"To Be Among the Leading Corporations in Energy and Related Businesses Globally"

TNB Mission

"We Are Committed to Excellence in Our Products and Services"

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(b) Name any ONE (1) of the companys competitors and describe the companys external
environment.

Tenaga Nasional Berhad (TNB) is the monopoly with no competitor in the power electricity
supply industry. It is an attractive industry which has a high entry barrier, suppliers and buyers in
weak position, no threats from substitute products and weak rivalry among competitors. Even if
other companies have enough capital to operate this business, they could not make it because
there is legal entry barrier set by government to protect any competitor from entering to this
industry. Consumers like us do not have any choices whether to subscribe to TNB because there
is no any company providing electricity as the government in Malaysia do not grant licenses or
accept any companies into this market. Being monopolist in electricity industry in Malaysia, they
must have huge supply of electricity to support itself. TNB produces a huge output at the same
time it enables their average cost of production to be reduced, so there is no competitor want to
compete with TNB as well. By just having one company in this industry could help in
maintaining a healthy market as this industry is has a vital contribution to Malaysia economy.
For instance, if there are two companies supplying electricity to household and industry in
Malaysia, TNB and X Company. With the existence of two companies, it has created a
competitive market and given a choice for consumers to choose. From a consumers perspective,
consumer will definitely preferred company offering the same goods and services with lower
price and better quality. Moreover, the increase of number of transmission towers of different
companies makes it difficult to track and direct the cable to each household according to the
suppliers they have chosen. To solve this issue, government came out with the restriction to limit
any parties from interrupting this industry by providing license only to TNB as the country
electricity supply monopolist. No doubt to say, government intervention and imposition of
regulation have made entry of new firms unattractive and almost impossible.
External Environment
External Environment has three categories and they are general environment, industry
environment and competitor environment. General environment focuses on companys future
growth such as opportunities and threats. Industry environment focuses on factors and conditions
that will influence a firms profitability within an industry. Competitor environment emphasizes
on predicting the dynamics of competitors actions, response and intentions.
In this assignment, the industry evironment of TNB will be study and analyse for further details.
The industry environment can be analyze using Porters Five Forces Competition Model. These
forces include threat of new entrants, bargaining power of suppliers, bargaining power of buyers,
threat of substitute products and rivalry among competing firm.

Threat of new Entrants

Entry of new entrant depends on the barriers to entry and the barriers to exit in that particular
industry. There will be higher difficulty to enter into competitive environment industry when
there are barriers. The main barriers to entry are economies of scale, capital requirements to start
a business, access to distribution channels and government regulatory policies.

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The threat of new entrance into the electricity utilities industry is low due to there is high barrier
to entry into the industry. This is because government in Malaysia do not grant any licenses or
accept other new companies into the market. Hence, TNB is the monopoly firm that provide
electricity and this is the reason of why consumers are given no choice but to utilise electricity
from TNB (Insider, 2013). Economies of scale of TNB will stop other firms from joining and
competing with TNB because TNB is the main electricity provider which means an increase in
the output of the firm will lead to a reduction of per unit cost of the product. Therefore,
economies of scale acted as a barrier to entry because new entrant is impossible to match the
scale of the existing company.
The barrier that the potential entrants faced from the disadvantages of independent of economic
factors is the government regulatory policies. TNB is a private company wholly-owned by
government and even Prime Minister, Najib Razak has reaffirmed his support for TNBs
dominant role in providing affordable and reliable power to fuel the countrys quest to become a
developed nation (INTERNATIONAL, 2014). This has showed a strong barrier in this industry
that will prevent any future threat of new entrants to this industry. Therefore, there are no major
competitors that will affect TNB.
Therefore, the lower the threat of new entrants, the higher the barriers to entry, the lower the
possibility of the industry profit potential to decrease as a whole.
Bargaining Power of Suppliers
Bargaining power of buyer suppliers, same as the buyer has also power to influence the profit of
the company (Porter, 1998). As TNBs core business is to supply power to household and
industry in Malaysia and they own the raw materials to produce power. This showed that TNB do
need any supply from the external, thus, there are no suppliers that supply to TNB and not
suitable substitute products are available. Therefore, the bargaining power of suppliers is low but
it unable to pose any threat of forward integration to buyers industry.
Bargaining Power of Buyers
TNB as the monopolist in electricity utility industry, consumers has no choice but choose to
subscribe to them in order to get electricity supply to carry out daily activities with no bargaining
power in pricing. However, TNB do not practice price discrimination to torture consumer but set
a fixed price to all consumers based on their monthly usage. In this case, even though the buyers
are large in number and able to purchase a large portion of the industrys output but their
switching cost is high as there is no option for them to choose. Buyer is unable to pose any threat
to integrate backward into the sellers industry.
Threats of Substitute Products
Due to the characteristic of monopoly industry, TNB not being threatened with the existence of
any substitute products. In order to be substitute product, the product must allow buyer to have
few switching costs, the price of the substitute product must be low and have a same or equal
quality with the existing ones. In TNB case, TNB has the access to coal, the cheapest raw
material, to generate electricity in Malaysia. TNB ownership on the scarce raw material plays
significant and effective barrier of entry to other firm from accessing into these resources to

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produce the same output. A monopoly firm which owns the entire supply of the input to the
production will have complete control over the industry.

Rivalry among competing firms

There is no competitor in the industry and the growth in this industry is high, thus the intensity of
rivalry among competitors is absolutely zero. However, TNB has collaboration with Sime Darby
by converting palm oil mill effluent (POME) into biogas to generate electricity.
Sime Darby is playing significant role in Malaysia economy as it involves in various industries
such as plantations, industrial equipment, motors, property and lastly energy and utilities in over
20 countries (Core Business of Sime Darby , 2015). Sime Darby Plantation is their core business
and they are also recognized as the worlds largest producer of sustainable palm oil and one of
the world largest listed palm oil companies with the production of approximately 2.8 million
tonnes in a year. The activities carry out in Sime Darby Plantation included the development of
oil palm plantations, cultivation of oil palm, management of estates and crude palm kernel oil
(CPKO).
Currently, TNB is investing in renewable sources of energy especially in hydroelectricity and
biomass. On 25th June 2013, Tenaga Nasional Berhad and Sime Darby Berhad had signed a
contract for joint venture to undertake a biogas project to develop six potential biogas plants in
Peninsular Malaysia of a total capacity of 12MW with palm oil mill effluent (POME) (TNB,
SIme Darby in biogas joint venture , 2013). In the joint venture agreement, Sime Darby Berhad
is holding 51% stake and TNB 49%. The objective of this joint venture is to emphasize on
renewable energy due to the current shortage of gas supply and aging power plant. By converting
the palm oil mill effluent that being generated in large volume during the production of crude
palm oil (CPO) into biogas can develop renewable energy and sell the electricity generated to
national grid. Since Sime Darby Berhad is having the resources of POME which can develop
renewable energy, it has threatened TNB a little but it never is a strong competitor to TNB.

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Question 2

(a) Tabulate the composition (name, position, gender, age, race, experience, qualification,
remuneration, shareholdings, contribution, etc.) of the companys board of directors and
board committee members.

Name Position Gender Age Race Experience Qualification

1) Tan Sri Non Male 74 Malay - senior ministerial positions - Master of Arts in
Leo Independent both at the federal and state History, University
Moggie Non- levels of Otago, New
executive - Former Minister of Energy, Zealand
Chairman Communications and
Multimedia (1998-2004), - Master of
Minister of Works (1989-1995), Business
Minister of Energy, Administration,
Telecommunications and Posts Pennsylvania State
(1978-1989&1995-1998) in the University, U.S.A
Federal Cabinet and Minister of
Local Government (1977-1978)
and Minister of Welfare Services
(1976-1977) in the State
Government of Sarawak.
- (1966-1974) Civil Servant with
various positions in the Sarawak
State Civil Service
- member of Council Negeri
Sarawak (1974-1978), a Member
of Parliament (1974-2004).

2) Datuk President/ Male 57 Malay - July 2012:President/Chief - Master of

Seri Ir. Chief Executive Officer or TNB Business
Azman Executive Administration,
Bin Officer - From 1979, he has served the University of
Mohamm Non Company in various technical Malaysia
ad Independent and engineering capacities within
Executive Distribution Division (Assistant - Bachelor of
Director District Engineer, District engineering
Manager, Area Manager, (Electrical
Assistant General Manager, Engineering,
General Manager and Senior University of
General Manager) Liverpool, U.K.

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3) Datuk Non Female 59 Malay - 1981:began career in the - Bachelor of
Nozirah Independent Malaysia Civil Service as Social Science
Binti Non Assistant Secretary, Finance (Hons) (Urban
Bahari Executive Division in the Ministry of Studies),
Director Finance University of
Science, Malaysia
- Deputy Under Secretary, - Diploma in
Procurement and Supplies Public
Division (2002-2004), Deputy Administration,
Under Secretary (2005-2007) Institute
and Under Secretary, Loan Administarion
Management, Financial Market (INTAN),
and Actuary Division (2007- Malaysia
2011) and Director of Budget - Harvard Business
Management Division (March- School, U.S.A
May 2011).

4) Dato Senior Male 68 Malay - He has been a partner, - Chartered

Zainal Independent Executive Director, Country Accountant of the
Abidin Non- Managing Partner and Chairman England and Wales
Bin Putih Executive in the Firm of Hanafiah Raslan Institute
Director & Mohamad
- Former Chairman of Malaysian
Accounting Standards Board,
Mentakab Rubber Company
Berhad and Pengurusan
Danaharta Nasional Berhad.
- Former President of Malaysian
Institute of Certified Public
Accountants, former member of
Malaysian Communications and
Multimedia Commission and
former Advisor to Messrs Ernst
& Young Malaysia.
- currently Chairman of CIMB
Bank Berhad, Dutch Lady Milk
Industries Berhad and Land &
General Berhad

-Directorships in a number of

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 private companies including as
Chairman of Mobile Money
International Sdn. Bhd. and
Touch n Go Sdn. Bhd.

-Trustee of the National Heart

Institute Foundation, the Perdana
Leadership Foundation and
MACPA Educational Trust Fund
as well as a member of
Perbadanan Putrajaya.

5) Dato Non Male 50 Malay -1984-1990:served in public - Fellow of the

Mohamm independent accounting firm in the U.K. Institute of
ad Zainal Non -1990-2002: Joined Chartered
Bin Shaari Executive PricewaterhouseCoopers Accountants in
Director -2004-2013: Khazanah Nasional England and Wales
Berhad Executive Director/Chief
Operating Officer - Fellow of the
Association of
Chartered Certified
Accountants, U.K.

- Member of the
Malaysian Institute
Accountants

- Member of the
Malaysian Institute
of Certified Public
Accountants

6) Tan Sri Independent Male 63 Indian -Registered Professional - Bachelor of

Dato Hari Non- Engineer with the Board of Electrical and
Narayana Executive Engineers, Malaysia. Electronics
n a/l Director Engineering,
Govindas - Held key positions in InchCape University of
amy Berhad and Tamco Cutler- Northumbria,
Hammer Sdn. Bhd. England

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 - Former Chairman of Noblemax
Resources Sdn. Bhd. and Deputy
Chairman of Emrail Sdn. Bhd.

7) Tan Sri Independent Female 73 Malay - Senior Assistant Registrar of - Barrister-at-Law,

Dato Seri Non- High Court, President of the Grays Inn,
Siti Executive Sessions Court, Senior Federal London
Norma Director Counsel of the Attorney
Binti Generals Chambers, Deputy - Certificate in
Yaakob Public Trustee and Chief Public
Registrar of the Federal Court. International Law
in Post-Finals
-Judge of the High Court of Course, Council of
Malaya (1983- 1994) Legal Education,
London
-Judge of the Court of Appeal,
Malaysia (1994-2000)

-2001-2005:Judge of Federal
Court of Malaysia

-2005-2007:Chief Judge of
Malaya

- Presently the Chairman of

Malaysian Competition
Commission.

8) Dato Independent Male 69 Malay -began in 1966 and served for 35 - Diploma in
Fuad Bin Non years in various technical and Technology,
Jaafar Executive engineering key positions Brighton College
Director including Assistant Distribution of Technology
Engineer, Senior District (now Brighton
Manager, Construction Engineer, University), United
Assistant Senior Construction Kingdom
Engineer, Senior Construction
Engineer, Deputy Chief
Engineer/Assistant General

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 Manager and Deputy General
Manager.
- Jan 1994: General Manager of
Transmission Division and later
Senior General Manager of
Energy Supply.
- 1997: Chief Operating Officer
and Executive Director
-September Oct 2000- Nov 2011:
President/Chief Executive

9) Datuk Independent Male 52 Chine - Chief Executive - Advanced

Chung Non se Officer/Executive Director of Computer
Hon Executive Rexit Berhad. Programming,
Cheong Director -Has over 30 years of CDS Computer
professional experience and Data Services
profound knowledge in
information technology (IT)
industry.
-2001:Managing Director of E-
Resource.com Sdn. Bhd.
- 2003:Joined Rexit Solution
Sdn. Bhd. and later became the
Managing Director of Rexit
Venture Sdn. Bhd.

10) Dato Independent Male 57 Malay -2009: Member of the - O.N.D.

Abd Non Suruhanjaya Perkhidmatan (Engineering),
Manaf Executive Awam Negeri Perak Cambridgeshire
Bin Director -1993: Chairman in several College of Arts and
Hashim private companies that involve in Technology
the constructions, H.N.D., Thames
telecommunications and solar Valley University
hybrid sectors (Slough Campus
- Various positions in Shapadu
Decloedt Dredging Sdn. Bhd.
(1990 1992), Industrial Boilers
and Allied Equipment (1984
1986), Hakasa Sdn. Bhd. (1983
1984) and Asie Sdn. Bhd. (1982
1983).

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 -Member of Perak State
Assembly subsequent to the
Malaysian General Election
2013.

Executive Director

Name Total annual Committee Membership Current Directorship

compensation
1) Datuk Seri Ir.
Azman Bin 2,332,580.55 Attends Board Committee TNB Group of
Mohd Meetings Companies

Non- Executive Directors

Name Total annual Committee Membership Current Directorship

Compensation
1) Tan Sri Leo -Chairman of the Board Finance and
Moggie 654,666.75 Investment Committee -ACE Jerneh Insurance
Berhad

- TNB Group of
Companies
2) Datuk Nazrah
Binti Bahari 264,676.56 -Chairman of the Board Tender -Bank Pembangunan
Committee Malaysia Berhad

-Proton Holdings Berhad

3) Dato
Mohammad 314,991.31 -Chairman of the Board Audit -CIMB Group Holdings

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Zainal bin
Shaari Committee Berhad

-Member of Board Finance and -Petron Malaysia

Investment Committee Refining & Marketing
Bhd
-Member of Board Risk Committee
-Dutch Lady Milk
Industries Berhad

-Land & General Berhad

-CIMB Investment Bank

Berhad

-CIMB Bank Berhad

-Southeast Asia Special

Asset Management
Berhad

4) Dato Zainal None

Abidin bin Putih 301,014.65 -Member of the Board Tender
Committee

-Member of the Board Nomination

and Remuneration Committee

-Member of the Board Finance and

Investment Committee
5) Tan Sri Dato
Hari Narayanan 298,436.50 -Member of the Board Audit -SP Setia Berhad
a/l Gavindasamy Committee
- Puncak Niaga Holdings
-Member of the Board Nomination Berhad
and Remuneration Committee
-IEV Holdings Ltd.
- Member of the Board Risk
Committee

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6) Dato Fuad
bin Jaafar 340,639.95 -Member of the Board Tender -TNB Group of
Committee Companies

-Member of the Board Nomination

and Remuneration Committee

-Member of the Board Disciplinary

Committee

7) Tan Sri Dato

Seri Siti Norma 278,733.00 -Chairman of the Board Nomination
binti Yaakob and Remuneration Committee
-Chairman of the Board Disciplinary
Committee
-Member of the Board Finance and
Investment Committee
-RAM Holdings Berhad
- RAM Rating Services
Berhad
-RAM Rating (Lanka)
Limited

8) Dato Abd
Manaf bin 272,167.00 -Member of the Board Audit -Integrax Berhad
Hashim Committee

-Member of the Board Tender

Committee

-Member of the Board Disciplinary

Committee

9) Datuk Chung -Chairman of the Board Risk

Han Cheong 315,024.26 Committee -Rexit Berhad
-Member of the Board Audit
Committee -Rexit (Labuan) Berhad
-Member of the Board Finance and
Investment Committee

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10) Suria binti None None
Ab Rahman 15,620.00
(Alternate
Director to
Dato
Mohammad
Zainal bin
Shaan)

Directors Interests in Shares and Debentures

According to the Register of Directors shareholdings, particular of interests of Directors who

held office as at the end of the financial year in shares in the Company as follows:

Number of ordinary shares of RM1.00 each

As at Acquired Disposed As at
1.9.2012 31.8.2013
Datuk Seri Ir. Azman bin 4,375* 996760 996760 4375*
Mohd
Dato Zainal Abidin bin Putih 1,562 0 0 1,562

Dato Fuad bin Jaafar 78,125 0 0 78,125

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Tan Sri Dato Seri Siti Norma 1562 0 0 1562
binti Yaakob

Options over ordinary shares of RM1.00 each

As at Acquired Disposed As at
1.9.2012 31.8.2013
Datuk Seri Ir. Azman bin 858,427 138,333 996,760 0
Mohd

*Through nominees of Tasec Nominees (Tempatan) Sdn. Bhd.

Other than as those disclosed above, none of the Directors in office at the end of the financial
year held any other interest in shares or debentures of the Company and its related corporations.

(b) Explain how the board of directors and the audit committee members improve
corporate governance

Board of Directors (BOD)

Generally, board of directors of a company should set the direction of the company and monitor
management in order that the company will achieve its objectives. The corporate governance
framework should underpin the boards accountability to the company and its members.The
board of directors is usually made up of executive directors and non-executive directors.
Executive directors are full-time employees of the company elected by the Board. Their duties
are usually concerned with policy matters or functional business areas of major strategic
importance. Large companies like Tenaga Nasional Berhad tend to have more than one executive
directors of different duties and responsibilities. Non-executive directors (NEDs) are not
employees of the company and are not involved in its day-to-day running. They should have high
ethical standards and act with integrity and probity. They should support the executive team and
monitor its conduct, demonstrating a willingness to listen, question, debate and challenge.

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According to the TNB annual report 2013, the Board is the primary decision-making body for all
matters. The Board has a rolling agenda to ensure that the key areas remain in focus throughout
the year. Additionally, the Board of Directors has the following roles and responsibilities:
a) Approving the strategic plan for the Group that may include performance objectives,
operating budgets and processes to ensure that the Group that promotes sustainability;
b) Promoting ethical and responsible decision making;
c) Reviewing the adequacy and integrity of the Groups internal control systems and
management information systems including systems for compliance with applicable laws,
regulations, rules, directives and guidelines;
d) Overseeing the conduct of the Groups business and build sustainable value for
shareholders including its control and accountability systems;
e) Appointing and determining the duration, remuneration and other terms of appointment
of the President/Chief Executive Officer as well as the Top Management;
f) Evaluating and monitoring the performance of the President/Chief Executive Officer and
the Top Management through their Key Performance Indicators (KPIs);
g) Developing and reviewing the succession planning of the senior management;
h) Monitoring and reviewing the Groups Risk Management System and internal
compliance and control; and
i) Overseeing the development and implementation of the shareholder communications
policy for the Company.
Furthermore, The Board will establish committees and approve their respective charters and
the limits of authority delegated to each committee. The limit of authority outlines principles to
govern decision making within the Group, including appropriate escalation and reporting to the
Board. The Board has also delegated to the President or Chief Executive Officer and through the
President or Chief Executive Officer to other Executives, responsibility for the day-to-day
management. In addition, the limits of authority have both the monetary and non-monetary limits
of authority for proposing and approving its operational and management decision making
activities prior to their execution. These delegations balance effective oversight with appropriate
empowerment and accountability of management.
Based on the annual report of TNB, the Chairman of the Board is Tan Sri Leo Moggie, takes
the lead and guides the Board with a well focus on governance, compliance and the Board
performance. Besides that, he maintains a constant flow of interlocution with the President or
Chief Executive Officer and provides appropriate mentoring and guidance. He also maintains the
relationship between Directors and Management that are approachable and auspicious to
productive cooperation and he is the primary point of communication between the Board and the
President or Chief Executive Officer. Tan Sri Leo Moggie is also Chairman of several
subsidiaries within TNB Group. The Board is satisfied that Tan Sri Leo Moggie commits the
time necessary to discharge his role effectively. The Chief Executive Officer, Datuk Seri Ir.
Azman bin Mohd together with his management team are responsible for developing strategic
objectives for the business and for the day-to-day management of the Company with all powers,
discretions and delegations as authorised by the Board. At the end, the Board will develop
strategic objectives for approach to corporate governance, including establishing appropriate
principles and guidelines relating to corporate governance that are practices to facilitate the
Boards independence.

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Audit Committee

Tenaga Nasional Berhads Board of Audit Commitee consist of four members, all whom are
Non-Executive Directors. They are a significant aspect of corporate governance. An Audit
Committee can be very effective not only in providing objective oversight of the accounting of
an organization, but also in helping to set an ethical tone at the top. Below are the roles of
Audit Committee to improve Corporate Governance:

Risk Management and internal control

The TNBs Board Audit Committee (BAC) is responsible in assessing companys risk by
reviewing the companys reports such as TNB Strategic Risk Reports and TNB Risk Assessment
Reports. To promote and improve the risk management awareness, BAC will review activities
undertaken by the Enterprise Wide Risk Management Department

In term of internal control, BAC are responsible to assess the quality and effectiveness of the
system of internal control and the efficiency of the Groups operations, review the findings on
internal control in the Group by the internal and external auditors and to review and approve the
Statement of Internal Control for the annual report as required under Bursa Malaysia Listing.
Internal control is a process affected by entitys board of directors, management, and other
personnel- designed to provide reasonable assurance regarding the achievement of objectives
such as reliability of financial reporting, effectiveness and efficiency of operations and
compliance with applicable laws and regulations.

Internal Audit

Internal Audit is independent of both business management and of the activities under its review.
Internal Audit is responsible in providing assurance that the design and operation of the Groups
risk management and internal control system is effective. In addition, they oversee and monitor
Group Internal Audit (GIA) Departments activities and review its performance. It approves the
annual audit program and receives report from the GIA concerning the effectiveness of risk
management and internal control. GIA also conducts regular reviews and appraisals of the
effectiveness of the governance, risk management and internal controls processes within the
Company. TNBs Group Internal Audit Department also supports the Board through BAC to
facilitate in discharging its responsibilities in maintaining a sound system of the internal control
to safeguard shareholders investment, the interest of stakeholders and the Groups assets.

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Relationship with External Audit

Through BAC, The Board are able to maintain a transparent and professional relationship with
the External Auditors. Besides that, they also help to oversee the detailed terms of engagement
with External Auditors. BAC shall meet the external and internal auditors or both at least twice a
year to discuss issues arising out of audit and any matters that the auditors wish to discuss in the
absence of the Management. Besides that, BAC is responsible to reviewed and approved the
external auditors audit plan and scope for the annual audit. They are responsible of reporting the
results of annual audit to the Board of Directors. Lastly, BAC are required to assess the
performance of the external auditors and recommend their appointment and remuneration to the
Board of Directors.

Financial Results

BAC is also responsible to review the quarterly and Annual Financial Statements of the
Company and Group including announcements and recommend them to the Board for approval
to ensure they are clear, balanced and comprehensive. They also reviewed Internal Control
Memorandum (ICM) & Significant Accounting Issues (SAI) reported by the external auditor.
The Board of Directors is assisted by the BAC to oversee the integrity of the Groups financial
reporting and as part of these roles, the operation of the financial reporting processes. The
processes are aimed at providing assurance that the financial statements and related notes are
completed in accordance with applicable legal requirements and accounting standards and give a
true and fair view of the Groups financial positions.

Question 3

(a) Describe the investigations you would carry out, including the statutory and ethical
matters you would consider before you can accept the appointment as the
companys auditor.

According to IFACs Code of Ethics for Professional Accountants, it states before accepting a
new client relationship, a professional accountant in public practice shall determine whether

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acceptance would create any threats to compliance with the fundamental principles. Potential
threats to integrity or professional behaviour may be created from. For example, questionable
issues associated with the client (its owners, management or activities) (ACCA, 2011). When the
audit firm decided to take on new client, the firm should make an investigation on the
potential client, its owners and business activities. This main motive to investigate a new
client is to ensure the integrity of the potential client and the possibility of fraud which may
create unacceptable risk to the firm. An auditor will not want to expose himself or herself to any
possibility of legal liability for failure to detect fraud. All of these investigations procedures are
to know your client and your customer due diligence which are carried out to comply with anti-
money laundering regulations.
Besides, auditor should evaluate the clients standing in financial stability, business
community and relations with its previous auditor (CPA, 2010). This is to prevent any
possibility of risk of material misstatement that relate to the fraudulent of financial reporting
which will harm the reputation of auditor if he or she faced fraud and error after accepting the
client (Understanding the Entity and its' enviroment, 2006). Other than that, auditor can also
source external information of the potential clients such as interviewing bank, other business
related to client and also lawyers. After obtaining the knowledge of potential clients business,
auditors may draft an effective and efficient strategy for the purpose of audit engagement. By
doing so, auditors can make an initial estimate of the levels of risk for the engagement. When the
risk of the engagement is high, auditors have to increase intensity of their audit procedures
(Planning the Audit; Linking Audit Procedures to Risk). At the same time, auditor may hire
professional investigator to acquire information about the background of the company and
management as well as the reputation of the company. However, if the company has no previous
auditor, the auditor may need to undertake even more extensive investigations (Castatela).
Auditor should also assess whether there are any conflict of interest or confidentiality issues
that might arise, so this ethical matter must be evaluated in relation to the potential client in order
to make appropriate precaution steps.
Therefore, before accepting the appointment as the companys auditor, the auditor should assess
whether there are any circumstances which could involve their independence in regards to the
client.

(b) Explain why it is important that an auditor should send a letter of engagement to the
client prior to undertaking the audit.
An auditor is important to clarify what are the uses of the term of audit engagement.
However, an auditor must follow specific procedures and guidelines to perform the engagement.
The term audit engagement is referring to an engagement letter by which the auditor should
notify the client that will engage in audit services. It could be the evidenced by signature by a
person at an appropriate level within the entity, for example the finance director. The auditor
must send an audit engagement letter to the client before commencing any professional work of

21
the audit. The letter summarizes all the information about the client and the precise scope of the
audit and nature of the work to be undertaken. The engagement letter is done through the final
step
One of the reasons to send a letter of engagement is to summarize the duties of both the
auditor and the client. It is to help prevent misunderstandings about the auditors work. In
other words, the letter of engagement explains that the scope of the auditors work which
governed by law or regulation. In order to carry out their responsibilities of the directors to the
third party, its engagement is required to explain the auditor reports. Therefore, it can minimize
misunderstandings between auditor and the client.

Besides that, the responsibility of an auditor is providing a reasonable opinion on the

financial statements. According to ISA 200 requires the auditor to comply with all ISAs
relevant to the audit. In planning and performing an audit of special purpose financial statements,
the auditor shall determine whether application of the ISAs requires special consideration in the
circumstances of the engagement. When it is conducting for planning and performing the
accounting records or procedures, auditor will consider the companys internal controls and
assess the accounting principles used in order to evaluate and determine the auditing procedures
for the purpose of expressing an opinion on the financial statements and to provide assurances on
the internal control. Nevertheless, the auditor should have a reasonable expectation of detecting
material errors and fraud in the company affairs. In arriving of the auditors opinion, it required
to consider the reports whether the proper accounting records as required by Section 209(1)(d)
have been maintained by the company, whether the companys financial statements are in
agreement with accounting records, whether the auditors have provided all the information and
explanations which auditors consider for the purpose of audit and whether the profit or loss
account and the balance sheet give a true and fair view of the companys profit and loss, results
of operations, and cash flows. (Basu) Hence, it clearly defines the of auditors responsibility.

Furthermore, the directors are responsible for preparing the financial statements
and for ensuring there are proper books of accounts and for preparing financial statements which
give a true and fair view and have been prepared in accordance with International Financial
Reporting Standards (IFRS). (Moloney, 2015) All disclosures information and representations
are the responsibility of the directors and senior management for the financial statements. Other
than that, internal control is designed to provide reasonable assurance that assets are properly
safeguarded and that the accounting records are reliable. Therefore, management has
responsibility to maintain proper accounting records, the adoption and application of accounting
policies and the implementation of systems of record keeping and internal control that maintain
reliability of the financial statements avoiding possibility of material misstatements to the
financial statements.

The importance of the identification of an applicable financial reporting framework

is to form the auditors opinion and by any applicable law or regulation. The auditor may also
have certain other communication and reporting responsibilities to users, management, those
charged with governance, or parties outside the entity, in relation to matters arising from the
audit. These may be established by the ISAs or by applicable law or regulation. ISA 200
describes how the financial reporting frameworks are acceptable for general purpose financial

22
statements. According to ISA 200 requires the auditor to comply with (a) relevant ethical
requirements, including those pertaining to independence, relating to financial statement audit
engagements, and (b) all ISAs relevant to the audit. (International Standard on Auditing 200,
2009) It also requires the auditor to comply with each requirement of an ISA unless, in the
circumstances of the audit, the entire ISA is not relevant or the requirement is not relevant
because it is conditional and the condition does not exist. In exceptional circumstances, the
auditor may judge it necessary to depart from a relevant requirement in an ISA by performing
alternative audit procedures to achieve the aim of that requirement.

Moreover, it also serve as a reference to the expected form and content of any reports
to be issued by the auditor and a statement that there may be circumstances in which a report
may differ from its expected form and content. Reference to financial statements in this ISA
means a complete set of general purpose financial statements. It comprises a summary of
significant accounting policies and other information. The requirements of the applicable
financial reporting framework determine the form and content of the financial statements, and
what constitutes a complete set of financial statements. In other words, the auditors report states,
for example, that the auditor has audited the financial statements of the entity, which stated as
the title of each financial statement comprising the complete set of financial statements required
by the applicable financial reporting framework, specifying the date or period covered by each
financial statement and notes to the financial statements, including a summary of significant
accounting policies. Besides that, the form and content of the audit engagement letter may vary
for each entity. Information included in the audit engagement letter on the auditor's
responsibilities may be based on section 200, Overall Objectives of the Independent Auditor and
the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards. (Terms of
Engagement, 2012). In addition, an audit engagement letter may make reference to, for example,
the following:
a) Arrangements regarding the planning and performance of the audit
b) The expectation that management will provide written representations
c) The unavoidable risk that some material misstatements may go undetected due to the
inherent limitations in an audit
d) The agreement of management to make available to the auditor draft financial statements
and any accompanying other information in time to complete the audit in accordance
with the proposed timetable
e) The agreement of management to inform the auditor of facts that may affect the financial
statements;
f) The basis on which fees are computed and billing arrangements
g) Restrictions to the auditor's liability.

Question 4

(a) Compute and tabulate any appropriate FIVE (5) ratios for 2013 and 2012. Use the
template below to tabulate your computations.

Change
No Ratio Page Formula 2013 2012
(+/-)
1 Current 231,2 Current assets RM20,459.0mil RM19,305.6mil -0.18

23
 RM10,879.8mil
RM9,354.2mil
Ratio 32 Current liabilities = 1.88
=2.06

RM 63,639.7mil RM53,311.8mil
Debt to 232, Total liablities 0.28
2 RM35,390.9mil RM35,157.3mil
equity 233 Total equity
=1.80 =1.52
Operating RM 620.8mil RM2,140.6mil
74, Operating income
3 Profit RM 37,130.7mil RM 35,848.4mil -0.04
267 Net sales
margin = 0.02 =0.06
RM31,862.3mil RM31,308.2mil
Inventory 229, Cost of Goods Sold
4 RM2,859.95mil RM2,744.05mil -0.27
turnover 267 Average Inventory
=11.14 =11.41
Net Income RM4630.7mil RM4419.1mil
Earning 229,2
5 Average common 5,592 5,475 2.1sen
per share 74
shares oustanding =82.81sen =80.71sen
RM5,855.6mil RM5,821.1mil
Return on 229,2 Income before taxes
6 RM93,749.85mil RM83,766.7mil -0.01
assets 31 Average total assets
=0.06 =0.07

*Source of all infromation and data are from: Tenaga Nasional Berhad Annual Report 2013.

(b) Based on the results from the above analytical procedures, discuss the strengths and
weaknesses of the company. Also, discuss how these internal attributes affect the
assessment and evaluation of risk by the external auditor.

Current ratio

24
 The current ratio can give a sense of the efficiency of a company's operating cycle or its
ability to turn its product into cash. Companies that have trouble getting paid on their receivables
or have long inventory turnover can run into liquidity problems because they are unable to
alleviate their obligations. Acceptable current ratios vary from industry to industry and are
generally between 1 and 3 for healthy businesses.
The higher the current ratio, the more capable the company is of paying its obligations. A
ratio under 1 suggests that the company would be unable to pay off its obligations if they came
due at that point. If all other things were equal, an external auditor would consider a high current
ratio to be better than a low current ratio, because a high current ratio means that the company is
more likely to meet its liabilities. (gurufocus, 2015)
In application to Tenaga National Berhad, the current ratio for the year 2013 is lower than
that of 2012 by 0.12 standing at 1.88. Although the company has suffer decreased efficiency in
its operating cycle, however it is still in an healthy category and suffer no huge liquidity
problems. External auditors must evaluating the risk by looking at the financial statement and
ensure the data such as current asset and current liabilities are fraud free and report the truth to
the shareholders or act in accordance to International Standards on Auditing (ISAs).

Debt to equity ratio

The debt-to-equity ratio is one of the leverage ratios. Total equity and total liabilities are
easily obtained from the balance sheet. The existence of debt-to-equity ratio is to show how
much debt the company has for every dollar of shareholders equity. Typically, bank will
compare the debt-to-equity ratio of Tenaga National Berhad to others in the industry to analyse if
TNB is loan worthy.
Lower values of debt-to-equity ratio are favourable and indicating lesser risk. Higher
values of debt-to-equity ratio is unfavourable as it means that the business relies more on
external lenders thus it is at higher risk, especially at higher interest rates thus will end up to be
taken over. To explain this, debt-to-equity ratio of 1.00 explain that half of the assets are financed
by debts and half by shareholders' equity. In connection, a value higher than 1.00 means that
more assets are financed by debt that those financed by money of shareholders' and the
percentage of assets of a business which are financed by the debts is increasing. Moreover, value
higher than 2.00 are viewed as situation critical and unfavourable. (business literacy institute,
2015)

In application to Tenaga National Berhad, the debt to equity ratio as at 2013 is higher
than that of 2012 by 0.28 at a point of 1.80. This logically means that TNB relied more on
external lenders and possesses higher risk of being taken over compared to 2012. External
auditors must evaluating the risk by looking at the financial statement and ensure the data such as
total liabilities and total equity are fraud free and report the truth to the shareholders or act in
accordance to International Standards on Auditing (ISAs).
Operating margin ratio

25
 Operating margin gives analysts an idea of how much a company makes (before interest
and taxes) on each dollar of sales. When looking at operating margin to determine the quality of
a company, it is best to look at the change in operating margin over time and to compare the
company's yearly or quarterly figures to those of its competitors. If a company's margin is
increasing, it is earning more sales. (investopedia, 2015)
A higher operating margin is more favourable compared with a lower ratio because this
shows that the company is making enough money from its ongoing operations to pay for its
variable costs as well as its fixed costs. (My accounting course, 2015)
In application to Tenaga National Berhad, the operating margin as at 2013 is lower than
that of 2012 by 0.04 at a point of 0.02. This logically means that TNB has not earned more sales
as compared to the last year. External auditors should investigate the financial statement to find
out whether the figures such as net sales or operating income has misstatement or consist of
fraudulent act. If found so, they should execute their responsibilities by reporting to the company
shareholders or act in accordance to International Standards on Auditing (ISAs).

Inventory turnover ratio

Inventory turnover is a measure of how efficiently a company can control its product, so
it is important to have a high turn. In general, a higher value of inventory turnover indicates
better performance and lower value means inefficiency in controlling inventory levels. A lower
inventory turnover ratio may be an indication of over-stocking which may pose risk of
obsolescence and increased inventory holding costs. However, a very high value of this ratio
may be accompanied by loss of sales due to inventory shortage. This measurement shows how
easily a company can turn its inventory into cash. (My accounting course, 2015)
Inventory turnover ratio should be compared against industry averages. High inventory
levels are unhealthy because they represent an investment with a rate of return of zero. It also
opens the company up to trouble should prices begin to fall. (Accounting Explained, 2015)
In application to Tenaga National Berhad, the inventory turnover of the year 2013 is
lower than that of 2012 by 0.27 which it stands at 11.14. This explains that TNB poses greater
risk of inefficiency in controlling inventory. External auditors must evaluating the risk by
looking at the financial statement and ensure the data such as cost of goods sold and average
inventory are fraud free and report the truth to the shareholders or act in accordance to
International Standards on Auditing (ISAs).
Earning per share ratio
Earnings per share are the same as any profitability or market prospect ratio. Higher
earnings per share are always better than a lower ratio because this means the company is more
profitable and the company has more profits to distribute to its shareholders. (Accounting for
management, 2015)
EPS figure is very important for actual and potential common stockholders because the
payment of dividend and increase in the value of stock in future largely depends on the earnings

26
of the company. The higher the EPS figure, the better it is. A higher EPS is the sign of higher
earnings, strong financial position and, therefore, a reliable company to invest money. (My
accounting course, 2015)
In application to Tenaga National Berhad, the earning per share for the year 2013 is
greater than that of 2012 by 2.1sen which it currently stands at 82.81sen. This interprets that
TNB is more profitable compared to 2012 and is able to give more profits to its shareholders.
External auditors must evaluating the risk by looking at the financial statement and ensure the
data such as net income and average common shares outstanding are fraud free and report the
truth to the shareholders or act in accordance to International Standards on Auditing (ISAs).

Return on asset ratio

Return on assets ratio measures how effectively a company can turn and earn a return on
its investment in assets. Return on assets shows how efficiently a company can covert the money
used to purchase assets into net income or profits.
It makes sense that a higher ratio is more favourable because it shows that the company is
more effectively managing its assets to produce greater amounts of net income. A positive ROA
ratio usually indicates an upward profit trend as well. ROA is most useful for comparing
companies in the same industry as different industries use assets differently. (My Accounting
Course, 2015)
In application to Tenaga National Berhad, the return on asset ratio for the year 2013 is
lower than that of 2012 by 0.01 which it currently stands at 0.06. This explains that TNB has
done weaker in effectively managing its assets. External auditors must evaluating the risk by
looking at the financial statement and ensure the data such as income before tax and average total
asset are fraud free and report the truth to the shareholders..

Reference
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Accounting Explained. (2015, 6 30). Inventory Turnover Ratio. Retrieved from Accounting
Explained website: http://accountingexplained.com/financial/ratios/inventory-turnover

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Accounting for management. (2015, 6 30). Earnings per share (EPS) ratio. Retrieved from
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Annual Report. (2013). Retrieved from

http://www.tnb.com.my/tnb/application/uploads/annualreports/2e51ab12c69b173820afd6
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