Assignment Task: Read the information on "Fu Kee Ltd.".
Case Scenario: Fu Kee Ltd.
You are the audit senior in charge of the audit of Fu Kee Ltd. for the year ended 30 November 2019. The company has not been previously audited by your CPA firm but you have already obtained some background knowledge of the company during the introductory discussions with management.
You know that the company has two factories located in Korea and also two in Vietnam. The two factories in Vietnam manufacture all goods for fulfilling orders from various customers, which amount to 35% of the total production. Factories in Korea manufacture entirely for stock. The stock will subsequently be sold to a variety of retail and wholesale outlets.
Due to the expansion of the company operations, the accounting department has increased to 10 employees, with two qualified accountants (CPAs) among them. The accounting function is under the control of the Finance director who is also a CPA.
You have been informed that the company has been experiencing poor trading conditions for the past three years and it is suffering from problems of liquidity and slow moving inventory.
Answer the following questions -
Question 1: One of the prospective client acceptance issues is to obtain an understanding of the audit client's background - including information on the client's financial information, industry and management style. Explain why this is important.
Question 2: Differentiate between risks of material misstatement (RMM) and detection risk and discuss the relationship between the two.
Question 3: For Fu Kee Ltd., identify three risks of material misstatement factors, indicate whether you think each factor increase or decrease RMM and explain your reasons.
Question 4: The Hong Kong Standards on Auditing requires that new auditors issue two letters prior to starting the audit. Name and briefly discuss the purpose of each of these two letters.