Read the information on “Bright Future Ltd.”. Bright Future Ltd. Bright Future L
ID: 2585034 • Letter: R
Question
Read the information on “Bright Future Ltd.”.
Bright Future Ltd.
Bright Future Ltd.(Bright Future), was initially established in the mid 1990’s by Ms Pretty Pang. Bright Future is in the business of manufacturing and sales of a wide range of lighting fixtures, both for residential and commercial uses. The company has over 6,000 employees and four factories in Mainland China. Bright Future was listed five years ago on the Main Board of the Hong Kong Stock Exchange.
Ms Pang, the CEO, is a forward thinker and places great emphasis on innovation. The company has over 50 research engineers and aggressively aims to develop one hundred new models each year. Bright Future has a wide variety of patented lighting fixtures and is constantly deve1oping more innovative products with more advanced technology.
During 2015, the Finance Director and the Financial Controller both resigned for personal reasons. While a new Finance Director has started last month, the post of Financial Controller has yet to be filled.
In May 2015, Bright Future’s previous auditor, Seto and Lum, retired and declined to stand for re-appointment after reporting on the financial statements for the year ended 31 December 2014 in Bright Future’s annual general meeting.
ln June 2015, Ms Pang invited Mr Ho of Ho and Wong, to be the new auditor. Ms Pang had met Mr Ho (one of the audit partners of Ho and Wong) at her University’s alumni dinner in 2014.
Ho and Wong has recently been engaged in three initial public offering exercises and is very short of manpower. Mr Ho is in the process of assessing this prospective engagement. He has extracted the following figures from the financial statements and management accounts for analysis as follows:
Income statement
Extracted from Management accounts (6 months: 1 January-30 June 2015)
HK$’000
Extracted from Audited financial statement (Year ended 31 December 2014)
HK$’000
Sales
101,549
304,678
Gross profit
60,237
105,689
Net profit before tax
45,322
48,557
Answer the following questions:
(a) Discuss four procedures or considerations (other than the independence consideration) that Ho and Wong should undertake prior to accepting this new audit engagement. (8 marks)
(b) After Ho and Wong has agreed to accept the nomination as Bright Future Ltd.’s auditor, discuss two ethical obligations that Ho and Wong has to act as the incoming auditor with regard to the change in auditor of Bright Future Ltd. (4 marks)
(c) Evaluate the risk of material misstatement by discussing four risks relating to the audit of Bright Future Ltd. as at 31 December 2014. (8 marks)
(d) During the course of the audit, Bright Future Ltd. refused to include a Statement of Cash Flows as part of their financial statements and management would not change their mind even after many meetings with the auditor. Describe the type of audit opinion the auditor should issue and explain your reasoning. If more than one type of opinion may be appropriate, describe the conditions under which each type is chosen. (5 marks)
Extracted from Management accounts (6 months: 1 January-30 June 2015)
HK$’000
Extracted from Audited financial statement (Year ended 31 December 2014)
HK$’000
Sales
101,549
304,678
Gross profit
60,237
105,689
Net profit before tax
45,322
48,557
Explanation / Answer
(A)
The procedure or considerations that the Ho and Wo should undertake prior to accepting new assignment are as follows:
i) To obtain information considered necessary in the circumstances before accepting an engagement with a new client;
ii) They should ascertain for the integrity of the principal owners, key management and those charged with governance of the entity;
iii) Whether the engagement team is competent to perform the audit engagement and has the necessary capabilities, including time and resources;
iv) Significant matters that have arisen during the current or previous audit engagement, and their implications for continuing the relationship.
(B)
The two ethical obligations that Ho and Wong has to act as the incoming auditor with regard to the change in auditor of Bright Future Ltd., are as follows:
(i) To find out whether the change of auditor has been properly dealt with in accordance with the Companies Ordinance or other legislation; and
(ii) Request the prospective client’s permission to communicate with the auditor last appointed.
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