Institute news

The company engaged in consignment sales of books. During their audit, the respondents failed to obtain sufficient evidence on the company’s rental income derived from consigned books stored in its warehouse and on the amount due from a consignor. The respondents also failed to prepare adequate documentation of audit procedures performed in those two areas.

The Institute received a referral from the Financial Reporting Council (FRC) about audit irregularities. The group entered into a transaction to sell graphite ore which allowed the buyer to settle the payment by interest-free instalments over a period of 10 years. Such a deferred payment arrangement constituted a financing transaction under Hong Kong Accounting Standard (HKAS) 18 Revenue. Notwithstanding this, the group recognized the revenue and trade receivable of the transaction at invoiced amount without taking into account the discounting effect of the transaction.

In their audit, the respondents failed to identify non-compliance with the relevant accounting standard resulting from the group’s treatment of the transaction. Mr Chan failed to communicate to the audit committee his views on the qualitative aspects of the transaction, which involved significant judgment and estimation. Furthermore, Miss Chan performed certain audit work and reported her work to Mr Chan. This impacted her independence as the EQCR.

Decisions and reasons: The respondents were reprimanded. The Disciplinary Committee ordered that a practising certificate shall not be issued to Mr Chan for two years with effect from 5 January 2019, backdated to follow a previous disciplinary order restricting his ability to hold a certificate. The committee also ordered that Miss Chan pay a penalty of HK$50,000. Further, the committee ordered Mr Chan and Miss Chan to pay costs of the Institute of HK$80,568.50 and HK$25,648.50 respectively, and they equally share the costs of the FRC of HK$20,095.60. When making its decision, the committee noted Mr Chan’s submissions pertaining to this case showed his clear lack of understanding of the relevant accounting requirements and the role of an EQCR. The committee further considered the fact that Mr Chan had a past disciplinary record in relation to a listed company’s audit was an indication of his continuing lack of professional competence.

Ng Ka Kuen, CPA (practising)

Complaint: Failure or neglect to observe, maintain or otherwise apply HKSA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Hong Kong Standards on Auditing, HKSA 220 Quality Control for an Audit of Financial Statements, HKSA 510 Initial Audit Engagements – Opening Balances, HKSA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures, HKSA 700 Forming an Opinion and Reporting on Financial Statements and sections 100.5(c) and 130.1 of the Code of Ethics for Professional Accountants.

Ng was the sole practising director of a corporate practice, UC CPA (Practising) Limited, which is now de-registered. As the newly-appointed auditor of South Sea Petroleum Holdings Limited, a Hong Kong listed company, and its subsidiaries (collectively, group), the corporate practice expressed an unmodified auditor’s opinion on the consolidated financial statements of the group for the year ended 31 December 2014.

The Institute received a referral from the FRC about audit irregularities. As stated previously, the group’s financial statements in the preceding year did not comply with HKAS 18 Revenue. The customer in a prior-year sale was allowed to settle payment by interest-free instalments over 10 years, and such a deferred payment arrangement constituted a financing transaction under the accounting standard. The group failed to correctly account for the arrangement and such accounting non-compliance affected the opening balances and comparative information in the 2014 financial statements.

In the audit, Ng failed to properly evaluate the transaction and obtain sufficient evidence on the balances pertaining to it. Further, Ng failed to appoint an EQCR for the audit.

Decisions and reasons: The Disciplinary Committee reprimanded Ng and ordered him to pay a penalty of HK$100,000 and costs of the Institute and the FRC totalling HK$59,374.20. When making its decision, the committee considered that the case involved the audit of a listed company which affected the investing public. As Ng had been subject to regulatory proceedings on two previous occasions, the committee considered that sufficient sanctions should be imposed as a deterrent.

Yip Hing Lam, Peter, CPA (practising), Leung Ka Fai, CPA (practising) and Yip Leung & Co.

Complaint: Failure or neglect by Yip and Leung to observe, maintain or otherwise apply section 290 of the Code of Ethics for Professional Accountants. Failure or neglect by Yip Leung & Co. to observe, maintain or otherwise apply Hong Kong Standard on Quality Control 1 Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements.

Yip Leung & Co. was the auditor of a private company from 2009 to 2016. Yip was the engagement partner from 2009 to 2013. Leung was the engagement partner from 2014 to 2016 while Yip acted as the EQCR in those audits.

Throughout the engagements, Yip’s close family members were directors and shareholders of the client company. Yip also became a shareholder of the company in 2014. As a result, there were significant threats to the auditor’s independence. Yip and Leung failed to properly address those threats, while Yip Leung & Co. failed to establish adequate policies and procedures to ensure that its audit staff and audit engagements complied with independence requirements.

Decisions and reasons: The respondents were reprimanded. The Disciplinary Committee also ordered Yip, Leung and Yip Leung & Co. to pay a penalty of HK$120,000, HK$120,000 and HK$100,000 respectively, and to jointly pay costs of the Institute of HK$44,866. When making its decision, the committee noted independence is a fundamental principle of the profession. The committee also noted that the breach was serious as it occurred over a period of eight years.