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SECTIONAICASEBACKGROUND Dymi Limited ("Dymi"), together with its subsidiaries ("Dymi Group"), is a listed company on the Stock appliances such as air purifiers, vacuum cleaners, electric fans, dehumidifiers, hair dryers and LED lights. Dymi mainly sells its products through its self-operated stores in Hong Kong and over 20 well-known adults by emphasising its products' excellent designs and functions. Its products have recently become very popular. Dymi has a long business relationship with its distributors. team mainly responsible for product design and prototyping. Its product manufacturing activities are all outsourced to third party suppliers who specialise in original equipment manufacturing. Dymi has a team in Shenzhen working closely with the outsourced manufacturers on procurement and quality control. ABC ＆ Co has been the auditor of Dymi for years and is very familiar with Dymi's business operation and its management team. John Chan is the engagement leader of Dymi's audit. To plan for the coming annual audit, John had a meeting with Dymi's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") in September 2021 to understand Dymi's latest business development. Below is an extract from the meeting notes: - During the first half of 2021, Dymi further expanded its number of self-operated stores from five to eight. The three newly opened stores are different from the previous stores. Each new concept store and provided Dymi with a new revenue stream. The CEO commented that the concept stores have turned from breakeven to profit-making in just 4 months' time and provide Dymi with good cash flow. Most of the transactions in the concept stores are settled by electronic payments, and Dymi usually receives the cash from the payment service providers within a month. - Dymi launched its Dymi customer loyalty programme in February 2021. Customers who purchase Dymi products are automatically registered as Dymi club members and earn points. Every HK$$250 spent earns 1 Dymi point. 20 Dymi points can be used to redeem a cash coupon of face value Dymi cafe, or to pay for Dymi club activities. Dymi points will expire automatically at the end of each calendar year. The CEO considers the Dymi club customer loyalty programme to be a big success and says that it has helped boost sales during the year. stores, Dymi has implemented a highly customised new point-of-sales system during the year that connects to all of its online and offline stores and stores operated by the chain distributors. Dymi has Dymi APP provide Dymi's management with instant and transparent data on product sales in each location. The new point-of-sales system and the Dymi APP directly interface with Dymi's general ledger, which enhances the preparation of management accounts in terms of revenue and deferred revenue recognition. - Dymi has further strengthened its due diligence procedure on accepting new distributors. There is no new distributor during the year. Dymi's policy allows no return of goods from distributors. During the year, two of Dymi's distributors in Hong Kong and Taiwan have experienced financial difficulty due to the prolonged impact of pandemic. For prudence's sake, management has decided to make a full provision against these trade receivables of HK$$30 million in aggregate. The CFO also explained that the trade receivable turnover day will increase for the year as there are delays of settlement from payments due from any of its distributors. The CFO expects that no credit loss provision will have to be considered for the trade receivables due from the distributors other than the two distributors which are in financial difficulty. Extract of Dymi Group's consolidated financial statements for the year ended 31 December 2021 Consolidated statement of financial position 2021 2020 Change Change (Unaudited) (Audited) HKS'million HK$$'million HKS'million Fixed assets 15% Right-of-use assets 733% Inventory 60% Trade receivables 138% Prepayment and other receivables 7% (20) Cash and bank (10%) (3) Other assets (43%) Total assets 32% Lease liabilities 667% Trade payables 32% (2) Accrual and other payables (12%) Other liabilities (17%) Total liabilities 49% Net assets 24% Consolidated statement of profit or loss 2021 2020 Change Change (Unaudited) (Audited) HKS'million HKS'million HK$$'million Sales of products - HK self-operated stores 20% - HK distributors 30% - Taiwan distributors 10% - Singapore distributors 30% Sales of services and meals N/A 1,.178 Total revenue 31% Cost of sales 33% Gross profit 27% 2021 2020 Change Change (Unaudited) (Audited) HK$$'million HK$$'million HK$$'million Gross profit margin 36% 37% Selling and distribution expenses 31% General and administrative expenses 20% Profit before tax 27% Profit tax 18% Profit after tax 29% John calculated the overall materiality using the financial figures in the consolidated financial statements of Dymi Group and determined that the overall materiality amounted to HK$$13 million, calculated as 5% of the profit before tax. 12 marks /22 min Subsequent to the meeting with Dymi's CEO and CFO, the CFO provided John with a copy of the three new lease contracts entered into with the respective landlords in the year. The CFO explained that the terms and conditions set out in the lease contracts regarding rental period, rent-free period, rent per month, rental payment date, etc. are clearly specified. Dymi also successfully negotiated with the iandiords the following terms: - Dymi has the soie discretionary right to extend the lease contracts for another 3 years upon expiry of the original contract terms of 3 years. - Dymi has the right to terminate the lease contracts anytime during the contract periods as long as a 6-month notice has been given to the landlord(s) in advance. Required: (b) Propose audit procedures to address the risk of material misstatements identified in Question 3(a). (7 marks)
SECTIONAICASE BACKOROUND Halo Motors Limited (the “Company") is a company listed on the Hong Kong Stock Exchange. The Company, together with its subsidiaries, (hereafter coillectively known as the "Group") is the authorised dealer of a few European brands automobiles in mainland China. The Group usually enters into a dealership agreement with each car manufacturer. The Group is granted the authorised dealership to sell specific brands or models of vehicles within mainland China. The Group is also responsible for the selling and marketing activities, and their related costs, and the provision of warranties and repair and maintenance services to the car owners. The Group makes direct purchases of vehicles from the car manufacturers and resells them through its retail showrooms. Usually, the purchases are denominated in Euro or Us dollars. The Group is responsible for the shipment costs and all the in-country storage costs. Sales of vehicles are only authorised in mainland China. All sales are invoiced in Renminbi (RMB) Vehicle sales have a quick turnaround of cash because the buyers either settle in cash or apply for car loans so that the full amounts are settled by the banks within 7 days. Once sales are made, the Group transfers the legal titles of the vehicles to the buyers by registering on the government system. Accordingly, the Group does not have long outstanding trade receivables. The functional currency of the Group is RMB. Exchange differences arising from transactions denominated in foreign currencies other than RMB are charged to the profit and loss account as exchange differences for that year. CPA Limited is the auditor of the Company and is engaged in performing the audit of the Company's consolidated financial statements for the year ended 30 June 2022. Bob is one of the engagement managers and supervises 5 audit staff to work on the account balances of "Inventories" and "Provisions Below are the management schedules prepared by the Group's accounts department relating to "lnventories" and "Provisions and accruals" which are extracted from the sub-ledgers: I. Inventories 30 June 2022 30 June 2021 Unit cost RMB'000 Unit cost RMB'000 Quantity Quantity (RMB) (Unaudited) (RMB) (Audited) Model A 745,000 93,125 720,000 72,000 895,000 120,825 Model B 810,000 61,560 677,000 Model C 88,010 550,000 44,000 569,000 Model D 22,760 650,000 65,000 950,000 19,000 Model E 950,000 23,750 15.000 Parts and accessories 12.000 Gross balance 358,720 278,310 Less: provision for net realisable value (3.000) and obsolescence 355,720 Net balance 278.310 According to the Group's accounting policies, inventories are stated at the lower of cost and net realisable value. Costs of inventories are determined using the first-in, first-out method. Net realisable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale. Costs necessary to make the sale include incremental costs directly attributable to the sale and non-incremental costs which the Group must incur to make the sale. As at the reporting date, provision for net realisable value amounting to RMB3 million was made, which was related to Model E. Due to keen competition in the market, the selling price of Model E dropped significantly during the year. The provision for net realisable value was calculated based on its selling price as of the year-end date. Il. Provisions and accruals 30 June 2022 30 June 2021 RMB'000 RMB'000 (Unaudited) (Audited) (i) Provision for warranties 23,000 23,400 (ii) Provision for penalties 30,000 (ii) Accrued selling and marketing expenses 12,000 11,500 14.000 (iv) Accrued sales incentives 9.000 Total 79.000 43.900 (i) Provision for warranties - The Group provides 3-year warranties for car owners. Each year, the Group charges provision for warranties to the profit and loss account based on management estimation with a formula of "Average historical claim rate for the past 5 years x annual sales". When actual warranty claims are made by customers, the provision balance will be deducted and indicated as "claims during the year" in the movement below: 2022 2021 RMB'000 RMB'000 (Unaudited) (Audited) Balance at 1 July 23,400 19,000 (20,100) Claims during the year (5,600) 19.700 Provision for the year 10.000 23.000 Balance at 30 June 23,400 Claim rates for the last five years 2022 1.20% 2021 0.60% 0.60% 2020 0.55% 0.55% 2019 0.53% 0.53% 2018 0.52% 0.52% 2017 N/A 0.45% 0.68% Average claim rate 0.53% (i) Provision for penalties - As continuous loss from the sale of Model E had incurred, the Group's management decided to terminate its dealership agreement with the car manufacturer early. According to the dealership agreement which originaliy would have expired on 30 June 2025, any party which terminates the agreement eariy is required to pay a penalty of RMB25 million per year to the other party for the remaining period (i.e., 3 years) uniess the parties agree otherwise. During the year, the management started riegotiations with the car manufacturer for an overall settiemenj smount of the periaities at RMB30 milion. However, as of yet, the Group has not obtained agreement from the car manufacturer. (ill) Accrued seiling and marketing expenses - This represents the costs incurred for selling and marketing activities oonducted before the year-end date but not yet paid. Subsequent to the year-end date, all these unpaid selling and marketing expenses have been paid. (iv) Accrued sales inceritives - This represents the accrual for sales incentives payable to the saiesmen. As part of the bonus system, salesmen who can meet the sales quantity targets of certain car models can abtain a bonus equivalent to 1-to-3 months of his/her monthly salary. 12 marks (22 min Propose substantive tests of details for the valuation assertion of the Group's inventories, including the provision for net realisable value and obsolescence. (12 marks) iagically and Efficiently, you will pass HKICPA with ME
SECTIONAICASE BACKOROUND Halo Motors Limited (the “Company") is a company listed on the Hong Kong Stock Exchange. The Company, together with its subsidiaries, (hereafter coillectively known as the "Group") is the authorised dealer of a few European brands automobiles in mainland China. The Group usually enters into a dealership agreement with each car manufacturer. The Group is granted the authorised dealership to sell specific brands or models of vehicles within mainland China. The Group is also responsible for the selling and marketing activities, and their related costs, and the provision of warranties and repair and maintenance services to the car owners. The Group makes direct purchases of vehicles from the car manufacturers and resells them through its retail showrooms. Usually, the purchases are denominated in Euro or Us dollars. The Group is responsible for the shipment costs and all the in-country storage costs. Sales of vehicles are only authorised in mainland China. All sales are invoiced in Renminbi (RMB) Vehicle sales have a quick turnaround of cash because the buyers either settle in cash or apply for car loans so that the full amounts are settled by the banks within 7 days. Once sales are made, the Group transfers the legal titles of the vehicles to the buyers by registering on the government system. Accordingly, the Group does not have long outstanding trade receivables. The functional currency of the Group is RMB. Exchange differences arising from transactions denominated in foreign currencies other than RMB are charged to the profit and loss account as exchange differences for that year. CPA Limited is the auditor of the Company and is engaged in performing the audit of the Company's consolidated financial statements for the year ended 30 June 2022. Bob is one of the engagement managers and supervises 5 audit staff to work on the account balances of "Inventories" and "Provisions Below are the management schedules prepared by the Group's accounts department relating to "lnventories" and "Provisions and accruals" which are extracted from the sub-ledgers: I. Inventories 30 June 2022 30 June 2021 Unit cost RMB'000 Unit cost RMB'000 Quantity Quantity (RMB) (Unaudited) (RMB) (Audited) Model A 745,000 93,125 720,000 72,000 895,000 120,825 Model B 810,000 61,560 677,000 Model C 88,010 550,000 44,000 569,000 Model D 22,760 650,000 65,000 950,000 19,000 Model E 950,000 23,750 15.000 Parts and accessories 12.000 Gross balance 358,720 278,310 Less: provision for net realisable value (3.000) and obsolescence 355,720 Net balance 278.310 According to the Group's accounting policies, inventories are stated at the lower of cost and net realisable value. Costs of inventories are determined using the first-in, first-out method. Net realisable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale. Costs necessary to make the sale include incremental costs directly attributable to the sale and non-incremental costs which the Group must incur to make the sale. As at the reporting date, provision for net realisable value amounting to RMB3 million was made, which was related to Model E. Due to keen competition in the market, the selling price of Model E dropped significantly during the year. The provision for net realisable value was calculated based on its selling price as of the year-end date. Il. Provisions and accruals 30 June 2022 30 June 2021 RMB'000 RMB'000 (Unaudited) (Audited) (i) Provision for warranties 23,000 23,400 (ii) Provision for penalties 30,000 (ii) Accrued selling and marketing expenses 12,000 11,500 14.000 (iv) Accrued sales incentives 9.000 Total 79.000 43.900 (i) Provision for warranties - The Group provides 3-year warranties for car owners. Each year, the Group charges provision for warranties to the profit and loss account based on management estimation with a formula of "Average historical claim rate for the past 5 years x annual sales". When actual warranty claims are made by customers, the provision balance will be deducted and indicated as "claims during the year" in the movement below: 2022 2021 RMB'000 RMB'000 (Unaudited) (Audited) Balance at 1 July 23,400 19,000 (20,100) Claims during the year (5,600) 19.700 Provision for the year 10.000 23.000 Balance at 30 June 23,400 Claim rates for the last five years 2022 1.20% 2021 0.60% 0.60% 2020 0.55% 0.55% 2019 0.53% 0.53% 2018 0.52% 0.52% 2017 N/A 0.45% 0.68% Average claim rate 0.53% (i) Provision for penalties - As continuous loss from the sale of Model E had incurred, the Group's management decided to terminate its dealership agreement with the car manufacturer early. According to the dealership agreement which originaliy would have expired on 30 June 2025, any party which terminates the agreement eariy is required to pay a penalty of RMB25 million per year to the other party for the remaining period (i.e., 3 years) uniess the parties agree otherwise. During the year, the management started riegotiations with the car manufacturer for an overall settiemenj smount of the periaities at RMB30 milion. However, as of yet, the Group has not obtained agreement from the car manufacturer. (ill) Accrued seiling and marketing expenses - This represents the costs incurred for selling and marketing activities oonducted before the year-end date but not yet paid. Subsequent to the year-end date, all these unpaid selling and marketing expenses have been paid. (iv) Accrued sales inceritives - This represents the accrual for sales incentives payable to the saiesmen. As part of the bonus system, salesmen who can meet the sales quantity targets of certain car models can abtain a bonus equivalent to 1-to-3 months of his/her monthly salary. 10 marks 1 18 mir XYZ Limited ("XYZ") is a Hong Kong incorporated start-up company. Its principal activities are the development of a block chain ecosystem and applications. XYZ generates no revenue and is still at the early stage of designing and developing the infrastructure of its own chain. C＆C Limited ("C＆C") is a venture capital. In September 2021, XYZ launched its pre-series A funding. C＆C subscribed to a 20% equity interest in XYZ at a consideration of HK$$35 milion. XYZ has become an associate company of C＆C and has been initially recognised at cost in C＆C's financial statements. C＆C's financial year end is 30 June 2022. Lee ＆ Co is the auditor of C＆C. Lee ＆ Co has determined that the overall materiality of the 2022 audit is HK$$10 million. In August 2022, in the regular business update meeting held between XYZ and C＆C, management of by XYZ is slightly more than the budget. Management of C＆C obtained from XYZ the latest forecast and engaged an external valuer to assist them in assessing the fair value of XYZ as at 30 June 2022 for their impairment assessment of C＆C's investment in XYZ. C＆C concluded that the fair value of its investment in XYZ as at 30 June 2022 sill approximated HK$35 milion after considering the business updates provided by XYZ and reviewing the valuation results prepared by the external valuer, and therefore no impairment of its investment in XYZ is recognised for theyearended30June2022. Lee ＆ Co during the audit planning has assessed and concluded that the risk of material misstatements in relation to the valuation of C＆C's investment in XYZ is high. Required: Propose audit procedures to address the risk of material misstatements in relation to the valuation of C＆C's investment in XYZ. (10 marks)
SECTIONAICASERACRDROLD manager of Kape, and you are now planning the audit for the year ended 31 December 2022. Kape, together with its subsidiaries ("the Group), engages in the development and management of real estate properties in maintand China Throughout 2022, the COVID-19 pandemic persisted and strid fravei restrictions remain in plece in mest countries, This has imposed numerous difficulties on your fim members and their ability to take business trips to other countries. Limited ("GAAL") to pertom the investment properties valuafion. During the year, the Group continued to record a significant decline in gross rental income from leassd properties in Hong Kong, as tough COViD-19 curbs implemented during the year dampened retail sales in Hong Kong As such, Kape offered two-months' rent concessions to its tenants from 1 July 2022 to 31 Aupust 2022. Kape also acquired a piece of land in a tier one city in mainland China at a cost of HK$$450,000,000 in cost) for the whole project ("Project") is HK$$1,800,000,000. The Project commenced in January 2020 and the expected completion date is June 2023. The Project is mainly financed by bank borrowings, as detailed below. The audit engagement team noted that there are no other new borrowings that have been entered into by the Group since then. During the past year's audit, there was no significant audit issue related to the bank borrowing balance. Galaxy Bank Silver Bank Principal amount HK$$800.000.000 HK$$200.000.000 Interest rate 8% per annum 6% per annum Whole facility drawdown on Whole facility drawdown on Drawdown date 1 December 2019 1 June 2020 Maturity date 30 June 2024 30 June 2024 - Secured by one investment - Project's completion date cannot be property with fair value of not less later than 31 July 2023, otherwise the than HK$$300 million in Hong Kong Major securities/ loan will be repayable on demand covenants - Kape needs to obtain consent from - Except above, no repayable on Silver Bank for any new or modified demand clause financing arrangement Extracts of Kape's consolidated financial information for the fiscal years 2021 and 2022 are shown below: 2022 2021 (Unaudited) (Audited) HK$$'000 HK$'000 Assets Non-current assets 鸣软教香 2022 2021 (Unaudited) (Audited) HK$$'000 HK$$'000 Investment properties 2,299,123 2,229,233 147,114 Property, plant and equipment 177,246 Right-of-use assets 12.105 14.762 2.458.342 2.421,241 Current assets Properties under development for sale 629,353 457,346 Trade receivables 21,342 12,256 Financial assets at fair value through profit or loss 85,600 91,826 347.352 Cash and bank balance 802.912 1.083.647 1,364,340 3.541.989 3.785.581 Liabilities Current liabilities Short-term borrowings 193,284 214,012 15,241 Lease liabilities 11,918 Trade and other payables 64,345 58,081 Current tax payable 27.054 12,084 299.924 296.095 Non-current liabilities Long-term borrowings and other interest-bearing liabilities 1,010,000 1,247,817 Lease liabilities 11.912 14,626 1.021.912 1.262.443 1,321.836 1.558.538 Net assets 2,220,153 2,227,043 Net current assets 783,723 1,068,245 2022 2021 (Unaudited) (Audited) HK$$'000 HK$$'000 Revenue - Rental income 198,432 179,303 - Management services fee 10,537 9,753 (10,110) Changes in fair value of investment properties 13,169 (6,890) (Loss)/ Profit for the year 5.810 had construction defects and did not meet the requirements of the approved design. The incidents December 2023. Due to the delay in the completion date, the management expects there will be an overrun of the Project construction costs, and Galaxy Bank may exercise their rights to call partial or full loan repayment immediately, as the delay in the completion date will breach one of the covenants in the borrowing agreement. The Group will face a working capital sufficiency issue due to the unexpected cash outflow and the consequences of the breached covenant. 15 marks / 27 min (c) Assume that the external valuer's competence, capabilities, and objectivity are satisfactory. Propose audit procedures to address the risk of material misstatements relating to the existence and valuation assertions of the investment properties of Kape. (8 marks)
SECTIONAICASERACRDROLD manager of Kape, and you are now planning the audit for the year ended 31 December 2022. Kape, together with its subsidiaries ("the Group), engages in the development and management of real estate properties in maintand China Throughout 2022, the COVID-19 pandemic persisted and strid fravei restrictions remain in plece in mest countries, This has imposed numerous difficulties on your fim members and their ability to take business trips to other countries. Limited ("GAAL") to pertom the investment properties valuafion. During the year, the Group continued to record a significant decline in gross rental income from leassd properties in Hong Kong, as tough COViD-19 curbs implemented during the year dampened retail sales in Hong Kong As such, Kape offered two-months' rent concessions to its tenants from 1 July 2022 to 31 Aupust 2022. Kape also acquired a piece of land in a tier one city in mainland China at a cost of HK$$450,000,000 in cost) for the whole project ("Project") is HK$$1,800,000,000. The Project commenced in January 2020 and the expected completion date is June 2023. The Project is mainly financed by bank borrowings, as detailed below. The audit engagement team noted that there are no other new borrowings that have been entered into by the Group since then. During the past year's audit, there was no significant audit issue related to the bank borrowing balance. Galaxy Bank Silver Bank Principal amount HK$$800.000.000 HK$$200.000.000 Interest rate 8% per annum 6% per annum Whole facility drawdown on Whole facility drawdown on Drawdown date 1 December 2019 1 June 2020 Maturity date 30 June 2024 30 June 2024 - Secured by one investment - Project's completion date cannot be property with fair value of not less later than 31 July 2023, otherwise the than HK$$300 million in Hong Kong Major securities/ loan will be repayable on demand covenants - Kape needs to obtain consent from - Except above, no repayable on Silver Bank for any new or modified demand clause financing arrangement Extracts of Kape's consolidated financial information for the fiscal years 2021 and 2022 are shown below: 2022 2021 (Unaudited) (Audited) HK$$'000 HK$'000 Assets Non-current assets 鸣软教香 2022 2021 (Unaudited) (Audited) HK$$'000 HK$$'000 Investment properties 2,299,123 2,229,233 147,114 Property, plant and equipment 177,246 Right-of-use assets 12.105 14.762 2.458.342 2.421,241 Current assets Properties under development for sale 629,353 457,346 Trade receivables 21,342 12,256 Financial assets at fair value through profit or loss 85,600 91,826 347.352 Cash and bank balance 802.912 1.083.647 1,364,340 3.541.989 3.785.581 Liabilities Current liabilities Short-term borrowings 193,284 214,012 15,241 Lease liabilities 11,918 Trade and other payables 64,345 58,081 Current tax payable 27.054 12,084 299.924 296.095 Non-current liabilities Long-term borrowings and other interest-bearing liabilities 1,010,000 1,247,817 Lease liabilities 11.912 14,626 1.021.912 1.262.443 1,321.836 1.558.538 Net assets 2,220,153 2,227,043 Net current assets 783,723 1,068,245 2022 2021 (Unaudited) (Audited) HK$$'000 HK$$'000 Revenue - Rental income 198,432 179,303 - Management services fee 10,537 9,753 (10,110) Changes in fair value of investment properties 13,169 (6,890) (Loss)/ Profit for the year 5.810 had construction defects and did not meet the requirements of the approved design. The incidents December 2023. Due to the delay in the completion date, the management expects there will be an overrun of the Project construction costs, and Galaxy Bank may exercise their rights to call partial or full loan repayment immediately, as the delay in the completion date will breach one of the covenants in the borrowing agreement. The Group will face a working capital sufficiency issue due to the unexpected cash outflow and the consequences of the breached covenant. Propose audit procedures to address the risk of material misstatements relating to the accuracy and cut-off assertions of the rental income of Kape. (6 marks)
SECTIONAICASERACRDROLD manager of Kape, and you are now planning the audit for the year ended 31 December 2022. Kape, together with its subsidiaries ("the Group), engages in the development and management of real estate properties in maintand China Throughout 2022, the COVID-19 pandemic persisted and strid fravei restrictions remain in plece in mest countries, This has imposed numerous difficulties on your fim members and their ability to take business trips to other countries. Limited ("GAAL") to pertom the investment properties valuafion. During the year, the Group continued to record a significant decline in gross rental income from leassd properties in Hong Kong, as tough COViD-19 curbs implemented during the year dampened retail sales in Hong Kong As such, Kape offered two-months' rent concessions to its tenants from 1 July 2022 to 31 Aupust 2022. Kape also acquired a piece of land in a tier one city in mainland China at a cost of HK$$450,000,000 in cost) for the whole project ("Project") is HK$$1,800,000,000. The Project commenced in January 2020 and the expected completion date is June 2023. The Project is mainly financed by bank borrowings, as detailed below. The audit engagement team noted that there are no other new borrowings that have been entered into by the Group since then. During the past year's audit, there was no significant audit issue related to the bank borrowing balance. Galaxy Bank Silver Bank Principal amount HK$$800.000.000 HK$$200.000.000 Interest rate 8% per annum 6% per annum Whole facility drawdown on Whole facility drawdown on Drawdown date 1 December 2019 1 June 2020 Maturity date 30 June 2024 30 June 2024 - Secured by one investment - Project's completion date cannot be property with fair value of not less later than 31 July 2023, otherwise the than HK$$300 million in Hong Kong Major securities/ loan will be repayable on demand covenants - Kape needs to obtain consent from - Except above, no repayable on Silver Bank for any new or modified demand clause financing arrangement Extracts of Kape's consolidated financial information for the fiscal years 2021 and 2022 are shown below: 2022 2021 (Unaudited) (Audited) HK$$'000 HK$'000 Assets Non-current assets 鸣软教香 2022 2021 (Unaudited) (Audited) HK$$'000 HK$$'000 Investment properties 2,299,123 2,229,233 147,114 Property, plant and equipment 177,246 Right-of-use assets 12.105 14.762 2.458.342 2.421,241 Current assets Properties under development for sale 629,353 457,346 Trade receivables 21,342 12,256 Financial assets at fair value through profit or loss 85,600 91,826 347.352 Cash and bank balance 802.912 1.083.647 1,364,340 3.541.989 3.785.581 Liabilities Current liabilities Short-term borrowings 193,284 214,012 15,241 Lease liabilities 11,918 Trade and other payables 64,345 58,081 Current tax payable 27.054 12,084 299.924 296.095 Non-current liabilities Long-term borrowings and other interest-bearing liabilities 1,010,000 1,247,817 Lease liabilities 11.912 14,626 1.021.912 1.262.443 1,321.836 1.558.538 Net assets 2,220,153 2,227,043 Net current assets 783,723 1,068,245 2022 2021 (Unaudited) (Audited) HK$$'000 HK$$'000 Revenue - Rental income 198,432 179,303 - Management services fee 10,537 9,753 (10,110) Changes in fair value of investment properties 13,169 (6,890) (Loss)/ Profit for the year 5.810 had construction defects and did not meet the requirements of the approved design. The incidents December 2023. Due to the delay in the completion date, the management expects there will be an overrun of the Project construction costs, and Galaxy Bank may exercise their rights to call partial or full loan repayment immediately, as the delay in the completion date will breach one of the covenants in the borrowing agreement. The Group will face a working capital sufficiency issue due to the unexpected cash outflow and the consequences of the breached covenant. 10 marks /18 min (b) Propose audit procedures on bank confirmations, in particular to address the risk of material misstatements relating to the accuracy, completeness, and classification assertions of the long-term borrowlngs of Kape. (4 marks) (c) Apart from the confirmation procedures mentioned in Question 3(b), propose other audit procedures to address the risk of material misstatements relating to the accuracy, completeness, and classification assertions of the long-term borrowings of Kape. (2 marks)
SECTIONAICASEBACKGROUND ISPs Limited ("ISPs") is a start-up private company which offers Innovative Solar Panel Solutions to its customers. It specialises in building mini-scale solar energy systems for small grid homes, schools, factories, and commercial buildings. IsPs provides sales of solar panels and installation services to its customers. Since incorporation, ISPs has successfully signed four contracts with its customers. The details of the contracts are set out below: Contract Contract Total costs Gross profit/ Expected time Date of contract sum Margin% (HK$$) (loss) (HK$$) number of completion (HK$$) (50.000) C-001 600.000 650.000 (8.3%) 1 August 2022 April 2023 C-002 600.000 380.000 220.000 36.7% 3 October 2022 May 2023 15 October C-003 125.000 125.000 250.000 50.0% December 2022 2022 28 October C-004 450.000 500.000 52.6% 950.000 July 2023 2022 Total: 2.400.000 1.605,000 IsPs's first two contracts achieved a relatively low or even loss margin because management is willing to lower its price to get credentials from the market. According to market statistics, the gross margin for varies depending on the complexities of the installation. There is no market index in the industry that ISPS can make reference to as ISPS is at the start-up stage. purchase orders to these suppliers and requests the suppliers to ship the solar panels to the customers' premises directly. Accordingly, IsPs does not keep solar panels as its inventories. Both suppliers request IsPs to pay a 30% deposit when placing the purchase order, and the remaining balance is to be paid within 30 days after the goods are delivered. ISPs is going to prepare its first financial statements for the period from the date of its incorporation (1 April 2022) to 31 December 2022. According to its accounting policy, revenue from the sale of solar panels is recognised at the point in time when control of the asset is transferred to the customer, with the sale of solar panels to a customer. Revenue from the provision of installation service is also recognised at the point in time when service is rendered, when customer acknowledgement is obtained. Contracts for bundled sales of solar panels and installation services are comprised of two performance obligations because the promises to transfer the solar panels and provide installation services are capable of being distinct and separately identifiable. Accordingly, the transaction price (i.e., the contract sum) is allocated based on the relative stand-alone selling prices of the solar panels and installation services. The allocation of the sale of solar panels and installation services for IsPs's contracts is as follows: Allocation% Allocated Allocated sale of Allocation% Contract Total contract for sale of installation solar panels for installation number sum (HK$$) (HK$$) solar panels services (HK$$) services iagicallyandEfficiently,youwillpassHKicpAwithME Allocated Allocation% Allocated sale of Allocation% Contract Total contract installation for sale of solar panels forinstallation number sum (HK$$) (HKs) services (HKs) solar panels services 600.000 180.000 70% C-001 420.000 30% C-002 420.000 70% 600.000 180.000 30% C-003 50% 250.000 125.000 125.000 50% C-004 89% 950.000 850.000 100.000 11% Total: 1.815.000 2.400.000 585.000 The respective margin eamed from the sale of solar panels and installation services income is detailed below: Sale of solar Installation Installation Sale of solar Sale of solar panels services Installation services Contract Gross panels Installation panels services Gross number Sale (HKS) Cost (HKS) profit/(loss) Cost (HK$$) services profit/(loss) (HK$$) (HK$$) (HK$$) 420.000 (35.000) 195.000 C-001 455,000 180.000 (15.000) 420.000 C-002 270.000 150.000 180.000 110.000 70.000 125.000 125.000 C-003 62.500 62.500 62.500 62.500 850.000 225.000 100,000 625,000 225,000 C-004 (125,000) 585.000 1.012.500 Total: 1.815.000 592.500 IsPshas three operational departments:Engineering,Procurement and Finance. for the installation of the solar panels. (2) The Procurement Department is responsible for sourcing the supplies of solar panels and other materials. (3) The Finance Department is responsible for financing, accounting, cash payments, and disbursement activities. IsPs has purchased an accounting software from an external vendor. As IsPs does not have the source code,any system changes raised by IsPs would require the external vendor to process.The accounting software records the transactions for sales, purchases, cash receipts, and disbursements. shown below: Information Manual Description of internal controls processing controls controls Sales are made to customers approved by IC#1 the Engineering Department. The Engineering Department allocates the sales of IC#2 solar panels and service income for each contract. Pre-numbered invoices are initiated by IC#3 the Engineering Department. Information Manual Description of internal controls processing controls controls The system records the revenue based on IC#4 the issued invoices. As extracted from the draft financial statements, the financial information relating to revenue and cost of sale and services for the period ended 31 December 2022 is as below: Notes HK$$ Revenue - Sale of solar panels 1,815,000 -Installation serviceincome 125.000 1.940.000 Cost of sale and services - Sale of solar panels 1,012,500 - Installation service 62.500 1.075.000 Gross profit 865.000 Notes: 1. This relates to the sale of solar panels for contracts C-001 to C-004. The solar panels were delivered to customers within one month after the contracts were signed. period. CPA Limited has been engaged as ISPS's auditor to audit its first financial statements for the period ended 31 December 2022. You are the audit manager of this audit engagement team. The planning materiality is set at HK$80,000. 14 marks /24 min The audit team is now evaluating the effectiveness of internal controls IC#1 to IC#4 as set out in the case background in relation to ISPS's revenue recognition process and has considered that although certain controls are in place, internal controls to address the risk of material misstatements for different revenue-related assertions are still not adequate. Required: (c) Based on Question 1(a) and Question 1(b) above, conclude the effectiveness of the design of Isps's internal controls and propose test of controls and substantive procedures to audit the revenue of ISPS. Explain your answers. (8 marks) callyanli
SECTIONAICASEBACKGROUND ISPs Limited ("ISPs") is a start-up private company which offers Innovative Solar Panel Solutions to its customers. It specialises in building mini-scale solar energy systems for small grid homes, schools, factories, and commercial buildings. IsPs provides sales of solar panels and installation services to its customers. Since incorporation, ISPs has successfully signed four contracts with its customers. The details of the contracts are set out below: Contract Contract Total costs Gross profit/ Expected time Date of contract sum Margin% (HK$$) (loss) (HK$$) number of completion (HK$$) (50.000) C-001 600.000 650.000 (8.3%) 1 August 2022 April 2023 C-002 600.000 380.000 220.000 36.7% 3 October 2022 May 2023 15 October C-003 125.000 125.000 250.000 50.0% December 2022 2022 28 October C-004 450.000 500.000 52.6% 950.000 July 2023 2022 Total: 2.400.000 1.605,000 IsPs's first two contracts achieved a relatively low or even loss margin because management is willing to lower its price to get credentials from the market. According to market statistics, the gross margin for varies depending on the complexities of the installation. There is no market index in the industry that ISPS can make reference to as ISPS is at the start-up stage. purchase orders to these suppliers and requests the suppliers to ship the solar panels to the customers' premises directly. Accordingly, IsPs does not keep solar panels as its inventories. Both suppliers request IsPs to pay a 30% deposit when placing the purchase order, and the remaining balance is to be paid within 30 days after the goods are delivered. ISPs is going to prepare its first financial statements for the period from the date of its incorporation (1 April 2022) to 31 December 2022. According to its accounting policy, revenue from the sale of solar panels is recognised at the point in time when control of the asset is transferred to the customer, with the sale of solar panels to a customer. Revenue from the provision of installation service is also recognised at the point in time when service is rendered, when customer acknowledgement is obtained. Contracts for bundled sales of solar panels and installation services are comprised of two performance obligations because the promises to transfer the solar panels and provide installation services are capable of being distinct and separately identifiable. Accordingly, the transaction price (i.e., the contract sum) is allocated based on the relative stand-alone selling prices of the solar panels and installation services. The allocation of the sale of solar panels and installation services for IsPs's contracts is as follows: Allocation% Allocated Allocated sale of Allocation% Contract Total contract for sale of installation solar panels for installation number sum (HK$$) (HK$$) solar panels services (HK$$) services iagicallyandEfficiently,youwillpassHKicpAwithME Allocated Allocation% Allocated sale of Allocation% Contract Total contract installation for sale of solar panels forinstallation number sum (HK$$) (HKs) services (HKs) solar panels services 600.000 180.000 70% C-001 420.000 30% C-002 420.000 70% 600.000 180.000 30% C-003 50% 250.000 125.000 125.000 50% C-004 89% 950.000 850.000 100.000 11% Total: 1.815.000 2.400.000 585.000 The respective margin eamed from the sale of solar panels and installation services income is detailed below: Sale of solar Installation Installation Sale of solar Sale of solar panels services Installation services Contract Gross panels Installation panels services Gross number Sale (HKS) Cost (HKS) profit/(loss) Cost (HK$$) services profit/(loss) (HK$$) (HK$$) (HK$$) 420.000 (35.000) 195.000 C-001 455,000 180.000 (15.000) 420.000 C-002 270.000 150.000 180.000 110.000 70.000 125.000 125.000 C-003 62.500 62.500 62.500 62.500 850.000 225.000 100,000 625,000 225,000 C-004 (125,000) 585.000 1.012.500 Total: 1.815.000 592.500 IsPshas three operational departments:Engineering,Procurement and Finance. for the installation of the solar panels. (2) The Procurement Department is responsible for sourcing the supplies of solar panels and other materials. (3) The Finance Department is responsible for financing, accounting, cash payments, and disbursement activities. IsPs has purchased an accounting software from an external vendor. As IsPs does not have the source code,any system changes raised by IsPs would require the external vendor to process.The accounting software records the transactions for sales, purchases, cash receipts, and disbursements. shown below: Information Manual Description of internal controls processing controls controls Sales are made to customers approved by IC#1 the Engineering Department. The Engineering Department allocates the sales of IC#2 solar panels and service income for each contract. Pre-numbered invoices are initiated by IC#3 the Engineering Department. Information Manual Description of internal controls processing controls controls The system records the revenue based on IC#4 the issued invoices. As extracted from the draft financial statements, the financial information relating to revenue and cost of sale and services for the period ended 31 December 2022 is as below: Notes HK$$ Revenue - Sale of solar panels 1,815,000 -Installation serviceincome 125.000 1.940.000 Cost of sale and services - Sale of solar panels 1,012,500 - Installation service 62.500 1.075.000 Gross profit 865.000 Notes: 1. This relates to the sale of solar panels for contracts C-001 to C-004. The solar panels were delivered to customers within one month after the contracts were signed. period. CPA Limited has been engaged as ISPS's auditor to audit its first financial statements for the period ended 31 December 2022. You are the audit manager of this audit engagement team. The planning materiality is set at HK$80,000. 12 marks / 22 mln As al 31 Deoermbet 2022,isps recorded the fofowing trade payables and deposite for purohases of solerpenetswithtetivosuppliers HKS Depositsforpuruhesesof solarpanrels SupplterA 150,000 Supplier B 153.750 303.750 Trade psyables Supplier A 1,000,000 Supplier B 1.025.000 2.025.000 The audit team has analysed these balances and has considered that both the"Deposits for purchases of solar panels" and "Trade payables" may be materially misstated. Reauired: (b) In view of Question 3(a),propose audit procedures to verify the "Deposits for purchases of solar panels"and"Trade payables"balances. (4marks)
SECTION AICASE BACKGROUND You are an audit manager at Chan ＆ Chan CPA Limited. Recently, your firm accepted a new audit engagement for the year ending 31 March 2024 for ChatAl Inc ("ChatAl") which is a prominent technology company specialising in Al language chatbot services. ChatAl operates in multiple geographical locations, including mainland China, Hong Kong, Korea, and Singapore. The company completed a series of fundraising and is currently preparing to kick-start its IPO process, with plans to go public and list on the Main Board of the Hong Kong Stock Exchange. ChatAl aims to leverage its strong performance, innovative technology, and global presence to attract potential investors and achieve a successful public listing. The company is currently in the development stage and continuously experiencing losses. It does not expect to turn around its financial performance within the next two to three years. However, due to the trendy and promising nature of the Al industry and the company's market position, its valuation has been steadily increasing over the past few years. This trend in valuation is reflective of investor optimism about ChatAl's long-term prospects, despite the current financial challenges. Investors are seemingly confident in the company's innovative capabilities and its potential to capitalize on the expanding applications of Al technology. This confidence sustains the company's market value and attracts further investments, even as it continues to navigate through its early developmental phase and associated financial losses. With operations spanning multiple countries, ChatAl has a diverse customer base and a global presence. ChatAl operates on a membership-based model, offering users various subscription packages with flexible payment options such as per-chat, weekly and monthly plans. To support its operations, ChatAl relies on complex IT systems consisting of interconnected components. These systems enable seamless integration between operational activities and the finance system, ensuring accurate financial transactions. ChatAl has implemented automated controls to effectively manage its different subscription plans and maintain proper billing practices. ChatAl also relies on the system to automatically calculate monthly revenue and deferred revenue based on the subscription plans subscribed by users of the application. As part of its expansion, ChatAl has acquired several technology companies over the past years. This expansion strategy has not only broadened ChatAl's technological capabilities and market reach but has also led to significant accounting implications, including the recognition of goodwill and intangible assets. Some of the acquired companies have a financial year end of 30 June. Goodwill is attributable to the acquired market shares, future expansion prospect, economies of scale and synergies expected to be derived from combining the resources and operations of ChatAl post-acquisition. The management of ChatAl undertook a meticulous process to allocate the acquired goodwill and and operational scopes where the benefits of the acquisitions are expected to manifest. These regions were identified based on the lowest level of cash-generating unit (CGU). This level is critical as it is the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets or groups of assets. The management performs the annual goodwill impairment assessment. The assessment involves comparing the recoverable amounts of each CGU or group of CGUs to the respective carrying amounts. The recoverable amounts are calculated using a value in use model. The calculation incorporates various financial assumptions, including projected cash flow growth rates, discount rates and risks specific to the asset, and other relevant economic factors. If the carrying amount of the CGU, as recorded on the statement of financial position, exceeds its recoverable amount, an impairment loss will be recognised. ChatAl completed several rounds of fundraising in prior years, attracting investors from various countries. To support their operations locally, the funds raised were deposited in local banks of the respective countries where the investors are located. This approach ensured that the necessary financial resources are readily available for local operations and facilitates efficient management of funds across different geographical locations. The predecessor auditor issued an unqualified opinion for the FY2023 audited financial statements for end, which is prepared under Hong Kong Financial Reporting Standards. 2024 2023 Unaudited Audited HK$$'000 HK$$'000 428.000 Cashand cash equivalents 525.000 Trade receivables 102,510 95.800 Goodwill 300.000 300.000 Intangible assets 48.000 60.000 (38.000) Trade and otherpayables (21.000) (200.000) Convertible bond (200.000) Propose the audit procedures over the opening balance for each of the three financial statement line items fortheyear ending31March2024. (a) Trade receivables (b)Tradeandotherpayables (c)Convertiblebonds (9marks)
SECTION AICASE BACKGROUND You are an audit manager at Chan ＆ Chan CPA Limited. Recently, your firm accepted a new audit engagement for the year ending 31 March 2024 for ChatAl Inc ("ChatAl") which is a prominent technology company specialising in Al language chatbot services. ChatAl operates in multiple geographical locations, including mainland China, Hong Kong, Korea, and Singapore. The company completed a series of fundraising and is currently preparing to kick-start its IPO process, with plans to go public and list on the Main Board of the Hong Kong Stock Exchange. ChatAl aims to leverage its strong performance, innovative technology, and global presence to attract potential investors and achieve a successful public listing. The company is currently in the development stage and continuously experiencing losses. It does not expect to turn around its financial performance within the next two to three years. However, due to the trendy and promising nature of the Al industry and the company's market position, its valuation has been steadily increasing over the past few years. This trend in valuation is reflective of investor optimism about ChatAl's long-term prospects, despite the current financial challenges. Investors are seemingly confident in the company's innovative capabilities and its potential to capitalize on the expanding applications of Al technology. This confidence sustains the company's market value and attracts further investments, even as it continues to navigate through its early developmental phase and associated financial losses. With operations spanning multiple countries, ChatAl has a diverse customer base and a global presence. ChatAl operates on a membership-based model, offering users various subscription packages with flexible payment options such as per-chat, weekly and monthly plans. To support its operations, ChatAl relies on complex IT systems consisting of interconnected components. These systems enable seamless integration between operational activities and the finance system, ensuring accurate financial transactions. ChatAl has implemented automated controls to effectively manage its different subscription plans and maintain proper billing practices. ChatAl also relies on the system to automatically calculate monthly revenue and deferred revenue based on the subscription plans subscribed by users of the application. As part of its expansion, ChatAl has acquired several technology companies over the past years. This expansion strategy has not only broadened ChatAl's technological capabilities and market reach but has also led to significant accounting implications, including the recognition of goodwill and intangible assets. Some of the acquired companies have a financial year end of 30 June. Goodwill is attributable to the acquired market shares, future expansion prospect, economies of scale and synergies expected to be derived from combining the resources and operations of ChatAl post-acquisition. The management of ChatAl undertook a meticulous process to allocate the acquired goodwill and and operational scopes where the benefits of the acquisitions are expected to manifest. These regions were identified based on the lowest level of cash-generating unit (CGU). This level is critical as it is the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets or groups of assets. The management performs the annual goodwill impairment assessment. The assessment involves comparing the recoverable amounts of each CGU or group of CGUs to the respective carrying amounts. The recoverable amounts are calculated using a value in use model. The calculation incorporates various financial assumptions, including projected cash flow growth rates, discount rates and risks specific to the asset, and other relevant economic factors. If the carrying amount of the CGU, as recorded on the statement of financial position, exceeds its recoverable amount, an impairment loss will be recognised. ChatAl completed several rounds of fundraising in prior years, attracting investors from various countries. To support their operations locally, the funds raised were deposited in local banks of the respective countries where the investors are located. This approach ensured that the necessary financial resources are readily available for local operations and facilitates efficient management of funds across different geographical locations. The predecessor auditor issued an unqualified opinion for the FY2023 audited financial statements for end, which is prepared under Hong Kong Financial Reporting Standards. 2024 2023 Unaudited Audited HK$$'000 HK$$'000 428.000 Cashand cash equivalents 525.000 Trade receivables 102,510 95.800 Goodwill 300.000 300.000 Intangible assets 48.000 60.000 (38.000) Trade and otherpayables (21.000) (200.000) Convertible bond (200.000) 11 marks (20 min (a) Explain to Andy, who is an audit junior, the procedures on circulating bank confirmations. (6 marks) (b) Besides the confirmation procedures mentioned in Question 2(a), propose additional audit procedures to address the risk of material misstatements relating to the accuracy and existence assertions of ChatAl's cash in banks. (5 marks)
SECTION AICASE BACKGROUND You are an audit manager at Chan ＆ Chan CPA Limited. Recently, your firm accepted a new audit engagement for the year ending 31 March 2024 for ChatAl Inc ("ChatAl") which is a prominent technology company specialising in Al language chatbot services. ChatAl operates in multiple geographical locations, including mainland China, Hong Kong, Korea, and Singapore. The company completed a series of fundraising and is currently preparing to kick-start its IPO process, with plans to go public and list on the Main Board of the Hong Kong Stock Exchange. ChatAl aims to leverage its strong performance, innovative technology, and global presence to attract potential investors and achieve a successful public listing. The company is currently in the development stage and continuously experiencing losses. It does not expect to turn around its financial performance within the next two to three years. However, due to the trendy and promising nature of the Al industry and the company's market position, its valuation has been steadily increasing over the past few years. This trend in valuation is reflective of investor optimism about ChatAl's long-term prospects, despite the current financial challenges. Investors are seemingly confident in the company's innovative capabilities and its potential to capitalize on the expanding applications of Al technology. This confidence sustains the company's market value and attracts further investments, even as it continues to navigate through its early developmental phase and associated financial losses. With operations spanning multiple countries, ChatAl has a diverse customer base and a global presence. ChatAl operates on a membership-based model, offering users various subscription packages with flexible payment options such as per-chat, weekly and monthly plans. To support its operations, ChatAl relies on complex IT systems consisting of interconnected components. These systems enable seamless integration between operational activities and the finance system, ensuring accurate financial transactions. ChatAl has implemented automated controls to effectively manage its different subscription plans and maintain proper billing practices. ChatAl also relies on the system to automatically calculate monthly revenue and deferred revenue based on the subscription plans subscribed by users of the application. As part of its expansion, ChatAl has acquired several technology companies over the past years. This expansion strategy has not only broadened ChatAl's technological capabilities and market reach but has also led to significant accounting implications, including the recognition of goodwill and intangible assets. Some of the acquired companies have a financial year end of 30 June. Goodwill is attributable to the acquired market shares, future expansion prospect, economies of scale and synergies expected to be derived from combining the resources and operations of ChatAl post-acquisition. The management of ChatAl undertook a meticulous process to allocate the acquired goodwill and and operational scopes where the benefits of the acquisitions are expected to manifest. These regions were identified based on the lowest level of cash-generating unit (CGU). This level is critical as it is the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets or groups of assets. The management performs the annual goodwill impairment assessment. The assessment involves comparing the recoverable amounts of each CGU or group of CGUs to the respective carrying amounts. The recoverable amounts are calculated using a value in use model. The calculation incorporates various financial assumptions, including projected cash flow growth rates, discount rates and risks specific to the asset, and other relevant economic factors. If the carrying amount of the CGU, as recorded on the statement of financial position, exceeds its recoverable amount, an impairment loss will be recognised. ChatAl completed several rounds of fundraising in prior years, attracting investors from various countries. To support their operations locally, the funds raised were deposited in local banks of the respective countries where the investors are located. This approach ensured that the necessary financial resources are readily available for local operations and facilitates efficient management of funds across different geographical locations. The predecessor auditor issued an unqualified opinion for the FY2023 audited financial statements for end, which is prepared under Hong Kong Financial Reporting Standards. 2024 2023 Unaudited Audited HK$$'000 HK$$'000 428.000 Cashand cash equivalents 525.000 Trade receivables 102,510 95.800 Goodwill 300.000 300.000 Intangible assets 48.000 60.000 (38.000) Trade and otherpayables (21.000) (200.000) Convertible bond (200.000) 10 marks / 18 min (a) Assuming the audit materlality applied for this year audit is HK$45 million, evaluate the risk of material misstatements relating to ChatAl's goodwill in terms of valuation assertion as at year ending 31 March 2024. (4 marks) (b) Propose audit procedures to address the risk of material misstatements relating to the valuation assertion of the goodwill. (6 marks)
BECTIONAICASEBACKOROUND Jeng Groceny ("Jeng') was set up In Hong Kong last year. It sells grocery items through its oriline mobikg application and physlcal kiosks. Jeng is owned by a few shareholders, including certain private @ily funds, and has a small management toam. This team is comprised of the Chief Executive Oficor, Ckis Finance Offioer and other senlor management personnel who are responsible for all sales, marketirg. acoounting, finance and administrative matters. Several senior management personnel are the rslater parties of Jeng. Jeng's shareholders have set aggressive sales targets in the first five years. To rmee receive a discretionary bonus depending on Jeng's sales achieved. Jeng sells its own purchased goods and consignment goods for various local and overseas brands. f faces severe competition in the industry because several competing large grocery stores have been dominant In the market for a considerable amount of time. However, Jeng offers a wide range of goods and an online sales platform, which may make it better suited than competitors to meet the needo of young couples. After only a year of operation, Jeng has become one of the top 10 grocery retailers in Hong Kong and has approximately 1 million registered members. Jeng has now set up more than 50 self-service kiosks in Hong Kong which cover all major residential areas. Jeng to become profitable when it attains a larger market share and membership numbers. To ensurs healthy growth, management is currently looking for new investors to inject capital into Jeng. Below is an extract of the segmental financial information that management has prepared for Jeng's potential investors: Consignment Sale of goods 2024 Total sales HK$$'000 HKS'000 HK$$'000 300,000 Revenue 85,000 385,000 (150,000) Less: Cost of sales (150,000) (100.000) (45.000) Less: Selling and distribution expenses (145.000) 50,000 40,000 90,000 Less:Administrativeexpense (85,000) Less:Otherexpenses (55.000) Loss for the period (50.000) Jeng's revenue for each segment is further analysed below: (a) Sale of goods - This represents the sales of Jeng's own goods purchased from external suppliers. The model used by Jeng is a traditional sales model where Jeng owns its inventories. Jeng also has a membership program where registered members are entitled to a 5% discount and a 7-day full refund and return for this type of sales goods. Non-members are not entitled to any discount or refund of goods. (b) Consignment sales - This represents the commission income earned from its principals where Jeng acts as an agent. Jeng is engaged as the agent selling the goods on behalf of the principals. All shipping costs are borne by the principals, and Jeng is responsible for listing the items on its online platform or placing them in kiosks. Jeng is also responsible for the collection of the sales receipts from customers. When successful sales of consignment goods are made, Jeng retains 10% of the pagicallyndficeny,u willass KIPA with gross sales amount as commission income. Jeng is not required to bear any inventory risk for this type of sales. Consignment sales do not offer any discount, goods retum, or refunds. The common steps in Jeng's revenue and receipt cycle include: Sales of aoods Online sales: 1. Only registered members are entitied to order goods online. Each member is required to begins with the receipt of a purchase order (PO) from Jeng's registered members. The sales orders are pre-numbered, describe the item, price, and delivery terms, and provide authorised billing and delivery addresses. 2. All online sales are prepaid. Purchases must be made using electronic payment methods, such as with a credit card. All electronic payments are controlled by the external vendor or card issuer. After a received payment is reconciled with the invoice amount for each transaction, the approved transaction is sent to Jeng to confirm successful payment. 3. When payment is confirmed, a delivery note listing the items to be delivered and showing the completed packing list is forwarded to the billing department. 4. Delivery usually takes one to two days. Invoices are prepared when goods are delivered, and invoice items, quantities, and prices are matched with the sales orders and delivery notes. Kiosk sales: 1. The cycle begins with a customer purchasing goods at one of Jeng's kiosks. Customers can be Jeng's registered members or non-members. Members are required to scan their membership QR codes at the check-out machines for verification. 2. Upon checking out, customers scan the goods at the self-checkout machines. 3. Invoices are prepared when payments are made by customers. Only electronic payment methods are accepted (e.g., using a credit card or mobile payment). After approved payments are confirmed and reconciled with the billing amounts, self-checkout machines print the receipts. Consignment sales(online and sales at kiosks) 1. The system can identify which items are on consignment, regardless of whether they are online sales or kiosk sales. The first few steps of the revenue and payment cycles for consignment sales are the same as for normal sales transactions. amount by 90% and record a net 10% of the gross amount as the commission income each month. 90% of the revenue is payable to the principals. Jeng has invested significantly in its information technology system to support the fully automated sales and payment cycle and the point of sale (Pos) application for recording transactions in its kiosks. To assist potential investors in analysing the performance of Jeng, the company has engaged a CPA of new investors' due diligence. You are the audit manager of this audit engagement. 12 marks / 22 min During the audit, the audit team asked the Chief Finance Officer (CFO) about the following specific account balances and obtainedCFO's preliminary responsesas set out below: (a) Provision for sales return (HK$$9 million) - "This is a provision for sales returns that we made at the end of the year, as registered members are entitled to a 7-day sales return and refund period. Our claimed any sales return from Jeng, we reversed the provision in the next month (falling in the next financial year)." (4 marks) (b) Management bonus (HK$$5 million) - "Although Jeng is loss-making, the discretionary bonus is an incentive to motivate our senior management (including the CEO, myself and other officers) to meet their sales targets. This bonus is solely discretionary and Jeng is not contractually obliged to reward these officers." (4 marks) certain kiosks which were closed during the year." (4 marks) Reguired: Based on the background information of the case, apply professional skepticism and analyse the reasonableness of the CFo's responses. Design audit procedures to audit each of the above specific account balances. (12 marks)
BECTIONAICASEBACKOROUND Jeng Groceny ("Jeng') was set up In Hong Kong last year. It sells grocery items through its oriline mobikg application and physlcal kiosks. Jeng is owned by a few shareholders, including certain private @ily funds, and has a small management toam. This team is comprised of the Chief Executive Oficor, Ckis Finance Offioer and other senlor management personnel who are responsible for all sales, marketirg. acoounting, finance and administrative matters. Several senior management personnel are the rslater parties of Jeng. Jeng's shareholders have set aggressive sales targets in the first five years. To rmee receive a discretionary bonus depending on Jeng's sales achieved. Jeng sells its own purchased goods and consignment goods for various local and overseas brands. f faces severe competition in the industry because several competing large grocery stores have been dominant In the market for a considerable amount of time. However, Jeng offers a wide range of goods and an online sales platform, which may make it better suited than competitors to meet the needo of young couples. After only a year of operation, Jeng has become one of the top 10 grocery retailers in Hong Kong and has approximately 1 million registered members. Jeng has now set up more than 50 self-service kiosks in Hong Kong which cover all major residential areas. Jeng to become profitable when it attains a larger market share and membership numbers. To ensurs healthy growth, management is currently looking for new investors to inject capital into Jeng. Below is an extract of the segmental financial information that management has prepared for Jeng's potential investors: Consignment Sale of goods 2024 Total sales HK$$'000 HKS'000 HK$$'000 300,000 Revenue 85,000 385,000 (150,000) Less: Cost of sales (150,000) (100.000) (45.000) Less: Selling and distribution expenses (145.000) 50,000 40,000 90,000 Less:Administrativeexpense (85,000) Less:Otherexpenses (55.000) Loss for the period (50.000) Jeng's revenue for each segment is further analysed below: (a) Sale of goods - This represents the sales of Jeng's own goods purchased from external suppliers. The model used by Jeng is a traditional sales model where Jeng owns its inventories. Jeng also has a membership program where registered members are entitled to a 5% discount and a 7-day full refund and return for this type of sales goods. Non-members are not entitled to any discount or refund of goods. (b) Consignment sales - This represents the commission income earned from its principals where Jeng acts as an agent. Jeng is engaged as the agent selling the goods on behalf of the principals. All shipping costs are borne by the principals, and Jeng is responsible for listing the items on its online platform or placing them in kiosks. Jeng is also responsible for the collection of the sales receipts from customers. When successful sales of consignment goods are made, Jeng retains 10% of the pagicallyndficeny,u willass KIPA with gross sales amount as commission income. Jeng is not required to bear any inventory risk for this type of sales. Consignment sales do not offer any discount, goods retum, or refunds. The common steps in Jeng's revenue and receipt cycle include: Sales of aoods Online sales: 1. Only registered members are entitied to order goods online. Each member is required to begins with the receipt of a purchase order (PO) from Jeng's registered members. The sales orders are pre-numbered, describe the item, price, and delivery terms, and provide authorised billing and delivery addresses. 2. All online sales are prepaid. Purchases must be made using electronic payment methods, such as with a credit card. All electronic payments are controlled by the external vendor or card issuer. After a received payment is reconciled with the invoice amount for each transaction, the approved transaction is sent to Jeng to confirm successful payment. 3. When payment is confirmed, a delivery note listing the items to be delivered and showing the completed packing list is forwarded to the billing department. 4. Delivery usually takes one to two days. Invoices are prepared when goods are delivered, and invoice items, quantities, and prices are matched with the sales orders and delivery notes. Kiosk sales: 1. The cycle begins with a customer purchasing goods at one of Jeng's kiosks. Customers can be Jeng's registered members or non-members. Members are required to scan their membership QR codes at the check-out machines for verification. 2. Upon checking out, customers scan the goods at the self-checkout machines. 3. Invoices are prepared when payments are made by customers. Only electronic payment methods are accepted (e.g., using a credit card or mobile payment). After approved payments are confirmed and reconciled with the billing amounts, self-checkout machines print the receipts. Consignment sales(online and sales at kiosks) 1. The system can identify which items are on consignment, regardless of whether they are online sales or kiosk sales. The first few steps of the revenue and payment cycles for consignment sales are the same as for normal sales transactions. amount by 90% and record a net 10% of the gross amount as the commission income each month. 90% of the revenue is payable to the principals. Jeng has invested significantly in its information technology system to support the fully automated sales and payment cycle and the point of sale (Pos) application for recording transactions in its kiosks. To assist potential investors in analysing the performance of Jeng, the company has engaged a CPA of new investors' due diligence. You are the audit manager of this audit engagement. 12竹店12 As set cut in the cese background, the sales of Jeng's own goods are recorded at "gross" amounf ar the consignmem sates sre recorded at “net" sales arnount, which represented the commission inoomg To adjuet the compgnment gales from a "gross" to a “"net" basis, each month the acoounting teem wg post a manual joumal entry to adiust the sales amount of the monthly consignment saies to Re commission income This manual joumal antry is posted by the accounting team at each monch's chg directiy to the genenal ledger upon cloaing the financial statements. Below are the hypothetical antries (aseuming a sates tem of HK$$100 and therefore a net commissiry Income of Hi(S10): Entry if1 (When goods are soid to customer) Dr. Cash HK$$100 Cr. Revenue HK$$100 HK390 The resuiting revenue of consignment sales therefore will record HK$$10 (i.e. "net' basis) imateed y HK$100 (i.e. "groes" basis) in the revenue account. Curing the audit, the audit team obtained the list of these manual joumal entries and noted thef t) manual entrtes reiating to the “gross" vs "net"' on consignment sales were posted at each moritfh-ere However, the audit team aiso found that, in addition to these 12 manual entries, the accounting teaa posted 50 cther joumal entries, all of which were credited to the revenue account, and the amourts o aome of these joumal entries are significant. Avthcugn the presentation of the consignment sales at gross amount does not have any impact or the net profit, it would still materially impact Jeng's financial statements if manual entry #2 is not propefy Dosted. Further, through the posting of the 50 other manual entries which were credited to the revenue acccunt, it may provide opportunities for management to overstate its revenue by recording inapprcpdate joumal entries. Required: on the consignment sales, and proposing any other work to ensure the consignment sales are presented at a "net" basis; and (il) the 50 other manual entries which were credited to tre revenus account. Explain your rationale in the memo. Note: A maximum of 2 marks for communication skills and 2 marks for analytical skills will be awardet. (12 marks) gically and Efficiently,you will pass HKIcpA with ME
BECTIONAICASEBACKOROUND Jeng Groceny ("Jeng') was set up In Hong Kong last year. It sells grocery items through its oriline mobikg application and physlcal kiosks. Jeng is owned by a few shareholders, including certain private @ily funds, and has a small management toam. This team is comprised of the Chief Executive Oficor, Ckis Finance Offioer and other senlor management personnel who are responsible for all sales, marketirg. acoounting, finance and administrative matters. Several senior management personnel are the rslater parties of Jeng. Jeng's shareholders have set aggressive sales targets in the first five years. To rmee receive a discretionary bonus depending on Jeng's sales achieved. Jeng sells its own purchased goods and consignment goods for various local and overseas brands. f faces severe competition in the industry because several competing large grocery stores have been dominant In the market for a considerable amount of time. However, Jeng offers a wide range of goods and an online sales platform, which may make it better suited than competitors to meet the needo of young couples. After only a year of operation, Jeng has become one of the top 10 grocery retailers in Hong Kong and has approximately 1 million registered members. Jeng has now set up more than 50 self-service kiosks in Hong Kong which cover all major residential areas. Jeng to become profitable when it attains a larger market share and membership numbers. To ensurs healthy growth, management is currently looking for new investors to inject capital into Jeng. Below is an extract of the segmental financial information that management has prepared for Jeng's potential investors: Consignment Sale of goods 2024 Total sales HK$$'000 HKS'000 HK$$'000 300,000 Revenue 85,000 385,000 (150,000) Less: Cost of sales (150,000) (100.000) (45.000) Less: Selling and distribution expenses (145.000) 50,000 40,000 90,000 Less:Administrativeexpense (85,000) Less:Otherexpenses (55.000) Loss for the period (50.000) Jeng's revenue for each segment is further analysed below: (a) Sale of goods - This represents the sales of Jeng's own goods purchased from external suppliers. The model used by Jeng is a traditional sales model where Jeng owns its inventories. Jeng also has a membership program where registered members are entitled to a 5% discount and a 7-day full refund and return for this type of sales goods. Non-members are not entitled to any discount or refund of goods. (b) Consignment sales - This represents the commission income earned from its principals where Jeng acts as an agent. Jeng is engaged as the agent selling the goods on behalf of the principals. All shipping costs are borne by the principals, and Jeng is responsible for listing the items on its online platform or placing them in kiosks. Jeng is also responsible for the collection of the sales receipts from customers. When successful sales of consignment goods are made, Jeng retains 10% of the pagicallyndficeny,u willass KIPA with gross sales amount as commission income. Jeng is not required to bear any inventory risk for this type of sales. Consignment sales do not offer any discount, goods retum, or refunds. The common steps in Jeng's revenue and receipt cycle include: Sales of aoods Online sales: 1. Only registered members are entitied to order goods online. Each member is required to begins with the receipt of a purchase order (PO) from Jeng's registered members. The sales orders are pre-numbered, describe the item, price, and delivery terms, and provide authorised billing and delivery addresses. 2. All online sales are prepaid. Purchases must be made using electronic payment methods, such as with a credit card. All electronic payments are controlled by the external vendor or card issuer. After a received payment is reconciled with the invoice amount for each transaction, the approved transaction is sent to Jeng to confirm successful payment. 3. When payment is confirmed, a delivery note listing the items to be delivered and showing the completed packing list is forwarded to the billing department. 4. Delivery usually takes one to two days. Invoices are prepared when goods are delivered, and invoice items, quantities, and prices are matched with the sales orders and delivery notes. Kiosk sales: 1. The cycle begins with a customer purchasing goods at one of Jeng's kiosks. Customers can be Jeng's registered members or non-members. Members are required to scan their membership QR codes at the check-out machines for verification. 2. Upon checking out, customers scan the goods at the self-checkout machines. 3. Invoices are prepared when payments are made by customers. Only electronic payment methods are accepted (e.g., using a credit card or mobile payment). After approved payments are confirmed and reconciled with the billing amounts, self-checkout machines print the receipts. Consignment sales(online and sales at kiosks) 1. The system can identify which items are on consignment, regardless of whether they are online sales or kiosk sales. The first few steps of the revenue and payment cycles for consignment sales are the same as for normal sales transactions. amount by 90% and record a net 10% of the gross amount as the commission income each month. 90% of the revenue is payable to the principals. Jeng has invested significantly in its information technology system to support the fully automated sales and payment cycle and the point of sale (Pos) application for recording transactions in its kiosks. To assist potential investors in analysing the performance of Jeng, the company has engaged a CPA of new investors' due diligence. You are the audit manager of this audit engagement. 23 marks / 42 min You are the Audit Manager at a meeting with the Chief Finance Officer (CFO) of LaFa Group ("the Group"), a global fast fashion retailer. The meeting is fo understand the Group's business deveiopments and future plans for the upcoming audit. The Group is a global retailer in the fast fashion industry, operating over 1,000 stores worldwide. These economic downturn, intensified compefition, and shifting market trends, the Group has seen a decline in sales volume, and many stores are operating at a loss. in response, a global mid-year sales promotion was launched to sell slow-moving goods at discounted prices to improve liquidity, However, the CFO expressed dissatisfaction with the campaign's outcome. Despite selling most of the slow-moving goods below cost during the promotion, the Group still has a significant amount of such goods. Additionally, there are concerns about reported stock losses detected during the Group's regular cycle counts. Required: (a) (i) Evaluate the risk of material misstatement in relation to the existence and valuation of the Group's inventories. (4 marks) (a) (i) Propose audit procedures to address the above risk of material misstatements. (8 marks) (b) (i) Evaluate the risk of material misstatement in relation to the valuation of the Group's right-of-use assets. (3 marks) (b) (i) Propose audit procedures to address the above risk of material misstatements. (4 marks) (c) In response to the challenges, the CFo plans to negotiate with landlords for a modification on the lease contracts of most stores before the year-end. Propose audit procedures to address the risk of material misstatements in relation to the lease modification. (4 marks)
SECTION AICASE BACKGROUND You are Chris, an audit manager at GY Hong Kong CPA Firm ("GY-HK"). You and an audit partner, James, have been assigned to take up the financial year 2024 ("FY2024") consolidated financial statements audit for InnoBio Group Limited ("lnnoBio" or "the Group"), a non-listed private group. InnoBio, a leading biotechnology company based in Hong Kong, specialises in innovative cancer treatments. it operates laboratories in Hong Kong, Germany and Japan to leverage diverse expertise access a wide talent pool, and ensure proximity to key markets and regulatory bodies. development initiative. This investment included the following: HK$$'000 Employee benefits expenses 200,000 Laboratory and sample fees 100.000 Other technology costs 50.000 Total R＆D expenses 350.000 InnoBio has established a detailed process to evaluate projects for R＆D capitalisation. This process involves thorough documentation and review by directors of the R＆D department and the finance department. This process aims to ensure that only eligible costs are capitalised as R＆D expenses. InnoBio implements various internal controls to manage these expenses, including:: Expense Tracking: Advanced accounting software tracks R＆D expenditures in real time;: Timesheet Records: Hours spent on different projects are monitored through detailed timesheets;: Approval Controls: R＆D spending on new projects requires rigorous approval processes; and: Management Review: Senior management regularly reviews financial reports. InnoBio has received numerous government grants in different countries or regions, including direct subsidies, rent-free office space, and salary support for scientists. There are various types of criteria stipulated in different government grants across countries or regions. The majority of government grants in FY2024 were provided by the government of the Hong Kong Special Administrative Region to encourage collaboration among high-tech companies. To qualify, applicants must (i) have over 70% of laboratory staff in Hong Kong and several regions in mainland China; and (ii) ensure R＆D expenses account for at least 50% of total expenses for the coming 3 years. The government prepays HK$$60 million in the first year to support R＆D activities and requires an independent auditor to verify compliance each fiscal year. If the criteria are not met, the government can reclaim part of the subsidy with interest. InnoBio applied for such grants and received HK$60 million in "Deferred government grants" in the FY2024 consolidated financial statements. You checked the relevant Hong Kong Accounting Standards and noted:: Grants from the government are recognised at fair value where there is reasonable assurance that the grant will be received and the company will comply with all specific conditions. 。 Government grants related costs are deferred and recognised in the consolidated statements of profit or loss over the period necessary to match them with the costs they are intended to compensate. InnoBio established an internal audit department to enhance corporate governance. A recent internal audit review in FY2023 identified the following issues: (i) a high turnover rate in the R＆D department led to inconsistencies in applying capitalisation criteria, resulting in some projects being improperly capitalised; (ii) irregularities in timesheet entries; (ii) inconsistencies in expense invoices and allocations; and (iv) potential non-compliance with government grant conditions due to improper filing of subsidy agreements and insufficient documentation to prove compliance with criteria. There is significant pressure to meet financial targets in order to continue meeting investors expectations and raise additional fundings. The Chief Executive Officer (CEO) has emphasised the importance of grant criteria in order to avoid any refunds required. During a recent board meeting, a proposal was made to classify certain administrative and promotional expenses as R＆D expenses to meet grant criteria. InnoBio meticulously maintains its accounting records at local offices, with the Hong Kong headquarters consolidating management accounts and preparing the consolidated financial statements. For the subsidiaries in Germany and Japan, InnoBio engages GY Germany CPA Limited ("GY-DE") and GY JP CPA Limited ("GY-JP"), part of your network firms, to support the respective local statutory audits. As the Group auditor for InnoBio, your audit team plans to engage GY-DE and GY-JP as component auditors to support the FY2024 Group's financial statement audit, as operations in Germany and Japan finalised InnoBio's audit engagement. Due to language barriers, they did not translate and provide access rights to their audit working papers, but conducted a web interview with your team to discuss key audit issues in English. The CFO has proposed that your audit team follow a similar approach in FY2024 as in previous years, and they will assist in coordinating with the Germany and Japan subsidiaries and discuss with GY-DE and GY-JP when necessary. 13 marks / 23 min (b) Propose audit procedures to address the risk of material misstatements identified in Question 1(a). (8 marks)
SECTION AICASE BACKGROUND You are Chris, an audit manager at GY Hong Kong CPA Firm ("GY-HK"). You and an audit partner, James, have been assigned to take up the financial year 2024 ("FY2024") consolidated financial statements audit for InnoBio Group Limited ("lnnoBio" or "the Group"), a non-listed private group. InnoBio, a leading biotechnology company based in Hong Kong, specialises in innovative cancer treatments. it operates laboratories in Hong Kong, Germany and Japan to leverage diverse expertise access a wide talent pool, and ensure proximity to key markets and regulatory bodies. development initiative. This investment included the following: HK$$'000 Employee benefits expenses 200,000 Laboratory and sample fees 100.000 Other technology costs 50.000 Total R＆D expenses 350.000 InnoBio has established a detailed process to evaluate projects for R＆D capitalisation. This process involves thorough documentation and review by directors of the R＆D department and the finance department. This process aims to ensure that only eligible costs are capitalised as R＆D expenses. InnoBio implements various internal controls to manage these expenses, including:: Expense Tracking: Advanced accounting software tracks R＆D expenditures in real time;: Timesheet Records: Hours spent on different projects are monitored through detailed timesheets;: Approval Controls: R＆D spending on new projects requires rigorous approval processes; and: Management Review: Senior management regularly reviews financial reports. InnoBio has received numerous government grants in different countries or regions, including direct subsidies, rent-free office space, and salary support for scientists. There are various types of criteria stipulated in different government grants across countries or regions. The majority of government grants in FY2024 were provided by the government of the Hong Kong Special Administrative Region to encourage collaboration among high-tech companies. To qualify, applicants must (i) have over 70% of laboratory staff in Hong Kong and several regions in mainland China; and (ii) ensure R＆D expenses account for at least 50% of total expenses for the coming 3 years. The government prepays HK$$60 million in the first year to support R＆D activities and requires an independent auditor to verify compliance each fiscal year. If the criteria are not met, the government can reclaim part of the subsidy with interest. InnoBio applied for such grants and received HK$60 million in "Deferred government grants" in the FY2024 consolidated financial statements. You checked the relevant Hong Kong Accounting Standards and noted:: Grants from the government are recognised at fair value where there is reasonable assurance that the grant will be received and the company will comply with all specific conditions. 。 Government grants related costs are deferred and recognised in the consolidated statements of profit or loss over the period necessary to match them with the costs they are intended to compensate. InnoBio established an internal audit department to enhance corporate governance. A recent internal audit review in FY2023 identified the following issues: (i) a high turnover rate in the R＆D department led to inconsistencies in applying capitalisation criteria, resulting in some projects being improperly capitalised; (ii) irregularities in timesheet entries; (ii) inconsistencies in expense invoices and allocations; and (iv) potential non-compliance with government grant conditions due to improper filing of subsidy agreements and insufficient documentation to prove compliance with criteria. There is significant pressure to meet financial targets in order to continue meeting investors expectations and raise additional fundings. The Chief Executive Officer (CEO) has emphasised the importance of grant criteria in order to avoid any refunds required. During a recent board meeting, a proposal was made to classify certain administrative and promotional expenses as R＆D expenses to meet grant criteria. InnoBio meticulously maintains its accounting records at local offices, with the Hong Kong headquarters consolidating management accounts and preparing the consolidated financial statements. For the subsidiaries in Germany and Japan, InnoBio engages GY Germany CPA Limited ("GY-DE") and GY JP CPA Limited ("GY-JP"), part of your network firms, to support the respective local statutory audits. As the Group auditor for InnoBio, your audit team plans to engage GY-DE and GY-JP as component auditors to support the FY2024 Group's financial statement audit, as operations in Germany and Japan finalised InnoBio's audit engagement. Due to language barriers, they did not translate and provide access rights to their audit working papers, but conducted a web interview with your team to discuss key audit issues in English. The CFO has proposed that your audit team follow a similar approach in FY2024 as in previous years, and they will assist in coordinating with the Germany and Japan subsidiaries and discuss with GY-DE and GY-JP when necessary. 2(a). (6 marks)
SECTION AICASE BACKGROUND You are Chris, an audit manager at GY Hong Kong CPA Firm ("GY-HK"). You and an audit partner, James, have been assigned to take up the financial year 2024 ("FY2024") consolidated financial statements audit for InnoBio Group Limited ("lnnoBio" or "the Group"), a non-listed private group. InnoBio, a leading biotechnology company based in Hong Kong, specialises in innovative cancer treatments. it operates laboratories in Hong Kong, Germany and Japan to leverage diverse expertise access a wide talent pool, and ensure proximity to key markets and regulatory bodies. development initiative. This investment included the following: HK$$'000 Employee benefits expenses 200,000 Laboratory and sample fees 100.000 Other technology costs 50.000 Total R＆D expenses 350.000 InnoBio has established a detailed process to evaluate projects for R＆D capitalisation. This process involves thorough documentation and review by directors of the R＆D department and the finance department. This process aims to ensure that only eligible costs are capitalised as R＆D expenses. InnoBio implements various internal controls to manage these expenses, including:: Expense Tracking: Advanced accounting software tracks R＆D expenditures in real time;: Timesheet Records: Hours spent on different projects are monitored through detailed timesheets;: Approval Controls: R＆D spending on new projects requires rigorous approval processes; and: Management Review: Senior management regularly reviews financial reports. InnoBio has received numerous government grants in different countries or regions, including direct subsidies, rent-free office space, and salary support for scientists. There are various types of criteria stipulated in different government grants across countries or regions. The majority of government grants in FY2024 were provided by the government of the Hong Kong Special Administrative Region to encourage collaboration among high-tech companies. To qualify, applicants must (i) have over 70% of laboratory staff in Hong Kong and several regions in mainland China; and (ii) ensure R＆D expenses account for at least 50% of total expenses for the coming 3 years. The government prepays HK$$60 million in the first year to support R＆D activities and requires an independent auditor to verify compliance each fiscal year. If the criteria are not met, the government can reclaim part of the subsidy with interest. InnoBio applied for such grants and received HK$$60 million in "Deferred government grants" in the FY2024 consolidated financial statements. You checked the relevant Hong Kong Accounting Standards and noted:: Grants from the government are recognised at fair value where there is reasonable assurance that the grant will be received and the company will comply with all specific conditions. 。 Government grants related costs are deferred and recognised in the consolidated statements of profit or loss over the period necessary to match them with the costs they are intended to compensate. InnoBio established an internal audit department to enhance corporate governance. A recent internal audit review in FY2023 identified the following issues: (i) a high turnover rate in the R＆D department led to inconsistencies in applying capitalisation criteria, resulting in some projects being improperly capitalised; (ii) irregularities in timesheet entries; (ii) inconsistencies in expense invoices and allocations; and (iv) potential non-compliance with government grant conditions due to improper filing of subsidy agreements and insufficient documentation to prove compliance with criteria. There is significant pressure to meet financial targets in order to continue meeting investors expectations and raise additional fundings. The Chief Executive Officer (CEO) has emphasised the importance of grant criteria in order to avoid any refunds required. During a recent board meeting, a proposal was made to classify certain administrative and promotional expenses as R＆D expenses to meet grant criteria. InnoBio meticulously maintains its accounting records at local offices, with the Hong Kong headquarters consolidating management accounts and preparing the consolidated financial statements. For the subsidiaries in Germany and Japan, InnoBio engages GY Germany CPA Limited ("GY-DE") and GY JP CPA Limited ("GY-JP"), part of your network firms, to support the respective local statutory audits. As the Group auditor for InnoBio, your audit team plans to engage GY-DE and GY-JP as component auditors to support the FY2024 Group's financial statement audit, as operations in Germany and Japan finalised InnoBio's audit engagement. Due to language barriers, they did not translate and provide access rights to their audit working papers, but conducted a web interview with your team to discuss key audit issues in English. The CFO has proposed that your audit team follow a similar approach in FY2024 as in previous years, and they will assist in coordinating with the Germany and Japan subsidiaries and discuss with GY-DE and GY-JP when necessary. 15 marks ( 27 min (a) You are the auditor of Alpha Limited ("Alpha") and are now performing the confirmation procedures consolidation purposes, you are considering to circularise negative confirmations to its trade payables based on the balances as of 31 March 2025. You understand that circularising negative confirmations and confirming account balances as of a different reporting date are permitted, but certain criteria are required to be met. Required: Advise under what conditions that you can circularise negative confirmations to Alpha's trade payables based on the respective balances as of 31 March 2025 for the year-end balances of 30 June 2025. (5 marks) (b) You are the auditor of Beta Limited ("Beta") and are now auditing the trade receivable balances as of 30 June 2025. You have circularised confirmations for seven key balances and five random samples. Out of the twelve confirmations, only two key trade receivables responded with agreements, and they were new customers who had business with Beta this year. However, you noted that both confirmations were sent from the same address which is different from the ones that you sent out. For the remaining confirmations, none of them have responded. Required: in response to the above situation. (5 marks) (c) You are the auditor of Gamma Limited ("Gamma") and are now auditing customers' rebates for the year ended 30 June 2025. During the year, there were two one-off payments, each of which amounted to HK$$10 million recorded as rebates to two key customers. At the year-end date, Gamma confirmations to these two key customers. One responded that they did not receive any rebates from Gamma during the year and another one responded that the amount of rebate that they received is significantly lower than that stated on the confirmation. Required: Advise on the possible implications of the disagreements responded to by customers and your follow-up actions. (5 marks)
SECTION AICASE BACKGROUND You are Chris, an audit manager at GY Hong Kong CPA Firm ("GY-HK"). You and an audit partner, James, have been assigned to take up the financial year 2024 ("FY2024") consolidated financial statements audit for InnoBio Group Limited ("lnnoBio" or "the Group"), a non-listed private group. InnoBio, a leading biotechnology company based in Hong Kong, specialises in innovative cancer treatments. it operates laboratories in Hong Kong, Germany and Japan to leverage diverse expertise access a wide talent pool, and ensure proximity to key markets and regulatory bodies. development initiative. This investment included the following: HK$$'000 Employee benefits expenses 200,000 Laboratory and sample fees 100.000 Other technology costs 50.000 Total R＆D expenses 350.000 InnoBio has established a detailed process to evaluate projects for R＆D capitalisation. This process involves thorough documentation and review by directors of the R＆D department and the finance department. This process aims to ensure that only eligible costs are capitalised as R＆D expenses. InnoBio implements various internal controls to manage these expenses, including:: Expense Tracking: Advanced accounting software tracks R＆D expenditures in real time;: Timesheet Records: Hours spent on different projects are monitored through detailed timesheets;: Approval Controls: R＆D spending on new projects requires rigorous approval processes; and: Management Review: Senior management regularly reviews financial reports. InnoBio has received numerous government grants in different countries or regions, including direct subsidies, rent-free office space, and salary support for scientists. There are various types of criteria stipulated in different government grants across countries or regions. The majority of government grants in FY2024 were provided by the government of the Hong Kong Special Administrative Region to encourage collaboration among high-tech companies. To qualify, applicants must (i) have over 70% of laboratory staff in Hong Kong and several regions in mainland China; and (ii) ensure R＆D expenses account for at least 50% of total expenses for the coming 3 years. The government prepays HK$$60 million in the first year to support R＆D activities and requires an independent auditor to verify compliance each fiscal year. If the criteria are not met, the government can reclaim part of the subsidy with interest. InnoBio applied for such grants and received HK$$60 million in "Deferred government grants" in the FY2024 consolidated financial statements. You checked the relevant Hong Kong Accounting Standards and noted:: Grants from the government are recognised at fair value where there is reasonable assurance that the grant will be received and the company will comply with all specific conditions. 。 Government grants related costs are deferred and recognised in the consolidated statements of profit or loss over the period necessary to match them with the costs they are intended to compensate. InnoBio established an internal audit department to enhance corporate governance. A recent internal audit review in FY2023 identified the following issues: (i) a high turnover rate in the R＆D department led to inconsistencies in applying capitalisation criteria, resulting in some projects being improperly capitalised; (ii) irregularities in timesheet entries; (ii) inconsistencies in expense invoices and allocations; and (iv) potential non-compliance with government grant conditions due to improper filing of subsidy agreements and insufficient documentation to prove compliance with criteria. There is significant pressure to meet financial targets in order to continue meeting investors expectations and raise additional fundings. The Chief Executive Officer (CEO) has emphasised the importance of grant criteria in order to avoid any refunds required. During a recent board meeting, a proposal was made to classify certain administrative and promotional expenses as R＆D expenses to meet grant criteria. InnoBio meticulously maintains its accounting records at local offices, with the Hong Kong headquarters consolidating management accounts and preparing the consolidated financial statements. For the subsidiaries in Germany and Japan, InnoBio engages GY Germany CPA Limited ("GY-DE") and GY JP CPA Limited ("GY-JP"), part of your network firms, to support the respective local statutory audits. As the Group auditor for InnoBio, your audit team plans to engage GY-DE and GY-JP as component auditors to support the FY2024 Group's financial statement audit, as operations in Germany and Japan finalised InnoBio's audit engagement. Due to language barriers, they did not translate and provide access rights to their audit working papers, but conducted a web interview with your team to discuss key audit issues in English. The CFO has proposed that your audit team follow a similar approach in FY2024 as in previous years, and they will assist in coordinating with the Germany and Japan subsidiaries and discuss with GY-DE and GY-JP when necessary. Gooday Properties Development Limited ("Gooday") is a property developer listed in Hong Kong which constructs residential properties in re-developed areas. Its properties held for sale are valued at the lower of cost and net realisable value ("NRV"). NRV is the expected selling prices less cost to sale. The "Prices indices for Hong Kong Property" announced by the Rating and Valuation Department indicate that the domestic property index has been dropping for consecutive years since 2022. Due to the significant NRV provision for the current year ending 31 December 2025. You are the auditor of Gooday. Required: (b) Your team has completed the audit procedures for the NRV provision of Gooday's properties held for sale, and no irregularities were identified, except for the following two property sites, which have a complex situation. its construction five years ago. The cost of these car parks is HK$$295,000 per unit. As no sales of car parks have been noted for the last three years, management used the selling price that was transacted three years ago, which was HK$300,000 as the NRV, concluded that no NRV provision is required. (4 marks) (b) Your team has completed the audit procedures for the NRV provision of Gooday's properties held for sale, and no irregularities were identified, except for the following two property sites, which have a complex situation. (i) Property 2 represents a re-developed property site under construction. Management provides an internal valuation report which indicates that the fair value of Property 2 is above cost. The fair value was determined based on an assumption that the property selling price will rebound by next year with a compound growth rate of 15%. This was made with reference to the last financial crisis, the property prices were at their bottom after three years' downturn. The fair value was also estimated based on the selling price of an adjacent property applying with a 15% compound growth, coupled with the cost control campaign. No NRV provision is considered necessary. (4 marks) Evaluate the relevance, reliability and adequacy of audit evidence.obtained to support the 2. Explain your answer.
SECTION AICASE BACKGROUND Kooma Ski Limited (Kooma") was founded by a Swiss family and was engaged in the design and manufacturing of ski equipment under the brand "Ace". Kooma has its own factory which is in Switzerland ("Swiss factory"). Some years ago, a Chinese equity fund acquired 70% equity shareholding in Kooma from its founder. Thereafter, the Chinese equity fund became the controlling shareholder of Kooma. In the following year, Kooma identified another ski brand named "Bee", and successfully obtained exclusive distribution rights for manufacturing and selling Bee's products in the Asia Pacific. In the year of 2021, Kooma established a new factory in China ("China factory") solely for Bee's production. Kooma continued to expand its business, and in late 2022, Kooma acquired an international ski equipment distributor, namely Cow Distribution Company ("Cow"). This resulted in Kooma becoming one of the market leaders in this industry. In December 2024, Kooma underwent an IPO and was successfully listed on the Hong Kong Stock Exchange. After listing, Kooma announced a series of plans continuing to expand its business. In the below are the related announcements. Announcement dated 1 Februany 2025 ".. Our China factory has reached its full capacity, accordingly, we have identified another place to build our second factory in China. In view of the significant growth in our Bee products, we have also bought a total of 101 patents of Bee's ski products from its owner, which is a third party. This plan can align our long-term goals for business growth..." Announcement dated 1 May 2025 "...The board of directors has decided to close its Swiss factory by the end of 2025. All the production lines of Ace will be moved to our new China factory and the production will start from July 2026. After the removal, management will look for interested buyers to purchase the Swiss factory including the plant and machinery from Sub Ace. The new factory in China will be equipped with more advanced needs... Announcement dated 1 October 2025 "..Our subsidiary Cow Distribution Company has recorded losses in the six months ended 30 June 2025. Management has revisited the current distribution agreements and will consider terminating some of the low margin distributorships..." Kooma currently has three subsidiaries with distinct businesses: (1) Sub Ace, (2) Sub Bee and (3) Sub Cow. (1) Sub Ace produces its own branded ski equipment for professional skiers in international games like the Olympics. Its brand, "Ace", has been established by Kooma for half a century and currently is the No.1 ski brand in the world. Approximately 75% of professional skiers use Ace. Its production lines are in the Swiss factory. (2) Sub Bee produces a wide range of ski products for beginners to advanced skiers. The brand "Bee" manufacturing and sales of Bee products in Asia Pacific. During 2025, Kooma purchased all the related patents of Bee's ski products from Beetle. Thereafter, Sub Bee owned all the patents of "Bee" and was able to distribute its products worldwide. The production of Bee products is in the China factory. Rkitualh and Eficiently,youwill pass HKICPAwithME (3) Sub Cow is a distributor which distributes various reputable ski and snowboard gear woridwide. However, due to the pandemic fiu outbreak in recent years, Sub Cow has encountered liquidity problems. Its then shareholders sold all equity interests in Cow to Kooma to resoive Cow's solvency issues in December 2022. Below is the extracted financial information of Kooma for the year ended 31 December 2025 and as of that date. Subsidiaries (in HKS'miltion) Ace Bee Cow Total Proft and loss: Revenue Gross profi Gross margin (%) 23% 42.5% 2.5% 26% Operating profit/(loss) (2) Profit margin (%) 17% -5% 25% 16% Non-current assets by subsidiaries: Property, plant, and equipment (*) Goodwill Other intangible assets ()/(#) " it represents the factory premises, plant, machinery and equipment of Swiss factory and China factory recorded by Sub Ace and Sub Bee, respectively. ^ it represents the patents purchased by Sub Bee from Beetle, a third-party company. The patents are amortised over a period of 25 years. # It represents the distribution contracts identified during the acquisition of Sub Cow. 13 marks / 23 min You are auditing the intangible assets (ie. patents) of Sub Bee. You noted that the legal titles of the patents have not yet been transferred to Sub Bee by Beetle, the third party. Management advised that this was due to the fact that Beetle had not settled the long overdue levies payable to the respective government, therefore a legal restriction on the transfer of Beetle's patents was imposed. As management was not aware of this restriction prior to the purchases of the patents, Sub Bee had already paid Beetle the consideration in full, which cannot be refunded. In this regard, management has obtained a confirmation signed by Beetle confirming that Sub Bee has the sole rights to use, control and execute these patents, including subsequent disposals. Required: (a) Analyse the above situation and explain why the lack of a proper legal title of these patents may have a material impact on the financial statements of Sub Bee. (3 marks) (b) Determine appropriate audit procedures and advise additional audit evidence to be obtained for auditing the patents. (10 marks)
SECTION AICASE BACKGROUND Kooma Ski Limited (Kooma") was founded by a Swiss family and was engaged in the design and manufacturing of ski equipment under the brand "Ace". Kooma has its own factory which is in Switzerland ("Swiss factory"). Some years ago, a Chinese equity fund acquired 70% equity shareholding in Kooma from its founder. Thereafter, the Chinese equity fund became the controlling shareholder of Kooma. In the following year, Kooma identified another ski brand named "Bee", and successfully obtained exclusive distribution rights for manufacturing and selling Bee's products in the Asia Pacific. In the year of 2021, Kooma established a new factory in China ("China factory") solely for Bee's production. Kooma continued to expand its business, and in late 2022, Kooma acquired an international ski equipment distributor, namely Cow Distribution Company ("Cow"). This resulted in Kooma becoming one of the market leaders in this industry. In December 2024, Kooma underwent an IPO and was successfully listed on the Hong Kong Stock Exchange. After listing, Kooma announced a series of plans continuing to expand its business. In the below are the related announcements. Announcement dated 1 Februany 2025 ".. Our China factory has reached its full capacity, accordingly, we have identified another place to build our second factory in China. In view of the significant growth in our Bee products, we have also bought a total of 101 patents of Bee's ski products from its owner, which is a third party. This plan can align our long-term goals for business growth..." Announcement dated 1 May 2025 "...The board of directors has decided to close its Swiss factory by the end of 2025. All the production lines of Ace will be moved to our new China factory and the production will start from July 2026. After the removal, management will look for interested buyers to purchase the Swiss factory including the plant and machinery from Sub Ace. The new factory in China will be equipped with more advanced needs... Announcement dated 1 October 2025 "..Our subsidiary Cow Distribution Company has recorded losses in the six months ended 30 June 2025. Management has revisited the current distribution agreements and will consider terminating some of the low margin distributorships..." Kooma currently has three subsidiaries with distinct businesses: (1) Sub Ace, (2) Sub Bee and (3) Sub Cow. (1) Sub Ace produces its own branded ski equipment for professional skiers in international games like the Olympics. Its brand, "Ace", has been established by Kooma for half a century and currently is the No.1 ski brand in the world. Approximately 75% of professional skiers use Ace. Its production lines are in the Swiss factory. (2) Sub Bee produces a wide range of ski products for beginners to advanced skiers. The brand "Bee" manufacturing and sales of Bee products in Asia Pacific. During 2025, Kooma purchased all the related patents of Bee's ski products from Beetle. Thereafter, Sub Bee owned all the patents of "Bee" and was able to distribute its products worldwide. The production of Bee products is in the China factory. Rkitualh and Eficiently,youwill pass HKICPAwithME (3) Sub Cow is a distributor which distributes various reputable ski and snowboard gear woridwide. However, due to the pandemic fiu outbreak in recent years, Sub Cow has encountered liquidity problems. Its then shareholders sold all equity interests in Cow to Kooma to resoive Cow's solvency issues in December 2022. Below is the extracted financial information of Kooma for the year ended 31 December 2025 and as of that date. Subsidiaries (in HKS'miltion) Ace Bee Cow Total Proft and loss: Revenue Gross profi Gross margin (%) 23% 42.5% 2.5% 26% Operating profit/(loss) (2) Profit margin (%) 17% -5% 25% 16% Non-current assets by subsidiaries: Property, plant, and equipment (*) Goodwill Other intangible assets ()/(#) " it represents the factory premises, plant, machinery and equipment of Swiss factory and China factory recorded by Sub Ace and Sub Bee, respectively. ^ it represents the patents purchased by Sub Bee from Beetle, a third-party company. The patents are amortised over a period of 25 years. # It represents the distribution contracts identified during the acquisition of Sub Cow. Success Bank is one of the largest banks in Hong Kong, operating across both the Mainland and Hong Kong. The bank primarily focuses on lending to property developers in these regions, offering both secured and unsecured loans. In the 2024 financial year, giobal interest rates have risen significantly. As a result of the increased rates, property prices in the Mainland and Hong Kong have continued to decline. Many of Success Bank's clients, primarily large property developers, have reduced new building prices to their lowest levels in a decade and postponed the sale of completed units. Additionally, several clients who are property developers have defaulted on their loan covenants. In response to these challenges, Success Bank has stopped accepting debt securities and shares from certain property developers as collateral. The bank has also tightened or revoked collateral financing value ratios. One of Success Bank's major clients, Global Development Company ("Global"), a listed entity on the Hong Kong Stock Exchange, is experiencing significant financial difficulties and is under immense pressure to delist from the market. In 2024, Global defaulted on loan payments totaling HK$$80 milion. As a precaution, Success Bank's management has decided to make a 50% expected credit loss provision against Global's loan balance of HK$$1,oo0 million. Reguired: As the audit engagement manager of Success Bank, (b) Propose audit procedures to address the above risk of material misstatements, in particular the audit procedures in assessing management's judgement and estimates applied in the expected credit losses assessment. (8 marks)
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