The Institute wishes you a prosperous year of the rat
The Institute sends you and your family Chinese New Year blessings for the year of the rat. We wish you a year of happiness and great success.
BCGA Series launches seminars
The Best Corporate Governance Awards (BCGA) Series are designed to help participants learn ways to improve governance practices and prepare for changes to reporting requirements in Hong Kong. The seminar on 20 February will look at the latest risk management and internal control (RM and IC) practices, which are key areas in the assessment for the Institute’s Best Corporate Governance Awards. Speakers will share tips on what makes an effective RM and IC system. The seminar on 27 February will cover the latest trends in environmental, social and governance reporting, with the speaker sharing first-hand experience of advising a variety of businesses. More details on the two seminars can be found on the Institute’s website.
ERP Series to cover end-to-end business processes
The Enterprise Resource Planning (ERP) Series from February to May will cover the four critical end-to-end business processes and the embedding of internal controls when designing ERP systems. The speaker will share her experience on how to design an ERP system to bring managerial and operational efficiencies. Participants will also look at case studies and discuss audit procedures to test the adequacy of internal controls. More details can be found on the Institute’s website.
AGM and Council meeting minutes
Minutes from the 47th annual general meeting and December Council meeting are now available for members to read. They can be found in the “Members’ area” of the Institute’s website.
Resolutions by Agreement
Chan Mei Ling, CPA (practising)
Complaint: Failure or neglect to observe, maintain or otherwise apply Hong Kong Standard on Auditing (HKSA) 500 Audit Evidence.
Chan audited the financial statements of a private company for the year ended 31 December 2016 and expressed an unmodified auditor’s opinion. In the audit, Chan failed to perform appropriate audit procedures to obtain sufficient evidence on the company’s accounts receivable, accounts payable and administrative expenses.
Regulatory action: In lieu of further proceedings, the Council concluded the following action should resolve the complaint:
- Chan acknowledges the facts of the case and her non-compliance with professional standards;
- Chan be reprimanded; and
- Chan pays an administrative penalty of HK$25,000 and the Institute’s costs of HK$15,000.
Kwee Wei, CPA (practising), Wong Sau Ling, CPA and KPMG
Complaint: Failure or neglect by Kwee and KPMG to observe, maintain or otherwise apply HKSA 200 (Clarified) Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Hong Kong Standards on Auditing, HKSA 500 (Clarified) Audit Evidence and HKSA 510 (Clarified) Initial Audit Engagements – Opening Balances. Failure or neglect by Wong to observe, maintain or otherwise apply HKSA 220 (Clarified) Quality Control for an Audit of Financial Statements.
KPMG audited the consolidated financial statements of Modern Beauty Salon Holdings Limited, a Hong Kong listed company and its subsidiaries for the years ended 31 March 2014 to 2017. Kwee was the engagement partner and Wong was the engagement quality control reviewer.
In 2012, the company issued a convertible note to its controlling shareholder and chairperson as consideration of a business combination. The terms of the note contained contingent settlement provisions which would obligate the company to redeem the unconverted outstanding balance of the note in cash when certain events occurred. Notwithstanding this, the company recognized its contractual obligation to pay interest for the note as a financial liability and the residual balance as an item in equity, whereas it should have comprised embedded derivative financial instruments and a financial liability.
In their initial audit for 2014, the respondents concurred with the opening balances pertaining to the convertible note and failed to properly evaluate whether that accounting treatment complied with the requirements of Hong Kong Accounting Standard (HKAS) 32 Financial Instruments: Presentation. In 2017, the convertible note matured and part of it had to be settled by cash. The company then reassessed the initial accounting treatment of the note, and after discussion with the respondents, made prior year adjustments regarding the note.
Regulatory action: In lieu of further proceedings, the Council concluded the following action should resolve the complaint:
- The respondents acknowledge the facts of the case and their non-compliance with the relevant professional standards;
- They be reprimanded; and
- Kwee, Wong and KPMG jointly pay an administrative penalty of HK$35,000 and costs of the Institute and the Financial Reporting Council (FRC) totalling HK$62,828.
Yam Tak Fai, Ronald, CPA (practising), Wong Wo Cheung, CPA (practising) and RSM Hong Kong
Complaint: Failure or neglect by Yam and RSM Hong Kong to observe, maintain or otherwise apply HKSA 200 (Clarified) Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Hong Kong Standards on Auditing, HKSA 230 (Clarified) Audit Documentation, HKSA 330 (Clarified) The Auditor’s Responses to Assessed Risks, HKSA 500 (Clarified) Audit Evidence and HKSA 530 (Clarified) Audit Sampling. Failure or neglect by Wong to observe, maintain or otherwise apply HKSA 220 (Clarified) Quality Control for an Audit of Financial Statements.
RSM Hong Kong (formerly known as RSM Nelson Wheeler) audited the consolidated financial statements of Modern Beauty Salon Holdings Limited, a Hong Kong listed company, and its subsidiaries (collectively group) for the years ended 31 March 2010 to 2012 and expressed unmodified auditor’s opinions. Yam was the engagement partner and Wong was the engagement quality control reviewer.
The FRC investigated the audits and noted audit irregularities concerning revenue recognition and a convertible note.
The audit irregularities concerning revenue recognition related to the 2010 to 2012 audits. The group recognized the unutilized portion of prepaid service contracts as revenue when customers changed contracts before expiry, and the underlying service treatments had not yet been delivered. This was contrary to HKAS 18 Revenue.
In the 2010 and 2011 audits, the respondents failed to consider the risk of material misstatement in relation to change in services or transfer of unutilized prepaid contracts, and failed to plan and perform audit procedures to test those transactions and the relevant internal controls. In the 2012 audit, the respondents identified the accounting non-compliance and, through audit tests performed, calculated the expected misstatements in the deferred revenue balance and the corresponding amount of revenue recognized in the financial statements. Management determined an amount based on the respondents’ calculation, and adjusted the financial statements accordingly. However, the respondents failed to justify that the management’s adjusted amount was sufficiently precise to correct the misstatements in the financial statements.
The irregularity concerning the convertible note related to the 2012 audit. The company issued a convertible note to its controlling shareholder and chairperson as consideration of a business combination. The terms of the note contained contingent settlement provisions which would obligate the company to redeem the unconverted outstanding balance of the note in cash when certain events occurred. Notwithstanding this, the company recognized its contractual obligation to pay interest for the note as a financial liability and the residual balance as an item in equity, whereas it should have comprised embedded derivative financial instruments and a financial liability.
In their audit, the respondents failed to properly evaluate those contingent settlement provisions against the requirements of HKAS 32 Financial Instruments: Presentation, and prepare sufficient audit documentation to support their conclusion on the classification of the convertible note.
Regulatory action: In lieu of further proceedings, the Council concluded the following action should resolve the complaint:
- The respondents acknowledge the facts of the case and their non-compliance with the relevant professional standards;
- They be reprimanded; and
- Yam, Wong and RSM pay an administrative penalty of HK$40,000, HK$10,000 and HK$50,000, respectively, and they jointly pay costs of the Institute and the FRC totalling HK$283,748.
Disciplinary findings
Chan Kwok Tung, Gordon, CPA (practising) and Gordon Chan & Company Certified Public Accountants
Complaint: Failure or neglect to observe, maintain or otherwise apply HKSA 210 Agreeing the Terms of Audit Engagements, HKSA 500 Audit Evidence, HKSA 580 Written Representations, HKSA 700 Forming an Opinion and Reporting on Financial Statements and sections 100.5(c) and 130 of the Code of Ethics for Professional Accountants.
Chan is the sole proprietor of Gordon Chan & Company Certified Public Accountants which audited the financial statements of three private companies for two years. There were a number of deficiencies in the audits. Firstly, the respondents failed to agree the terms of the engagements with the companies’ management. Secondly, there were deficiencies in the audit procedures conducted on bank confirmations and income statements. Finally, the respondents failed to obtain written representations from management and to state the date in two of their auditor’s reports.
Decisions and reasons: The respondents were reprimanded and were ordered to jointly pay a penalty of HK$80,000 and costs of disciplinary proceedings of HK$31,931. When making its decision, the Disciplinary Committee considered the case was serious but noted that the respondents’ past clean disciplinary record and their cooperation throughout the proceedings were mitigating factors.
Chan Mei Mei, CPA (practising), Ho Yiu Hang, Ricky, CPA (practising) and Asian Alliance (HK) CPA Limited
Complaint: Failure or neglect by Chan and Asian Alliance 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 230 Audit Documentation, HKSA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment, HKSA 330 The Auditor’s Responses to Assessed Risks, HKSA 500 Audit Evidence, HKSA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures and HKSA 700 Forming an Opinion and Reporting on Financial Statements. Failure or neglect by Ho to observe, maintain or otherwise apply HKSA 220 Quality Control for an Audit of Financial Statements. Failure or neglect by Chan and Ho to observe, maintain or otherwise apply sections 100.5(c) and 130.1 of the Code of Ethics for Professional Accountants.
Asian Alliance (formerly known as Zhonglei (HK) CPA Company Limited) audited the consolidated financial statements of Neo Telemedia Limited, a Hong Kong listed company, and its subsidiaries (collectively group) for the years ended 30 June 2011 and 2012. Chan was the engagement director and Ho was the engagement quality control reviewer of the audits.
The Institute received a referral from the FRC about audit irregularities concerning certain acquisition transactions entered into by the group. The respondents failed to identify the incorrect classification and measurement of a contingent consideration payable by the group in one of the acquisitions. In addition, the respondents failed to perform sufficient audit procedures and prepare adequate documentation in respect of assessing the impairment of goodwill and other intangible assets arising from the acquisitions.
Decisions and reasons: The respondents were reprimanded. The Disciplinary Committee ordered that the practising certificates of Chan and Ho be cancelled, with no issuance of practising certificates to Chan and Ho for 36 months and 24 months respectively, to be effective from 16 December 2019. Further, Chan, Ho and Asian Alliance were ordered to pay a penalty of HK$150,000, HK$110,000 and HK$200,000 respectively, and to jointly pay costs of the Institute and the FRC totalling HK$466,869.60. When making its decision, the committee noted that the public are entitled to expect practising accountants and corporate practices to discharge their duties and carry out their work to the highest standards. The respondents’ breaches demonstrated a lack of professional competence and are therefore serious. The committee further noted that it is important to maintain public confidence in the accountancy profession, and sanctions imposed should act as deterrence against non-compliance by accountancy professionals of the high standards expected of them.
Details of the Resolutions by Agreement and disciplinary findings are available at the Institute’s website.
