Read the information on âValuable Jewellery Ltd.â.
Valuable Jewellery Ltd.
You are the audit manager of a Hong Kong CPA firm, Lee and Young. Your firm has recently been engaged as the auditor of Valuable Jewellery Ltd. (Valuable Jewellery) and will be conducting the audit for the year ended 30 June 2016. Valuable Jewellery is a company incorporated in Hong Kong and is engaged in the manufacture and trading of a wide range of jewellery. Its products are mainly sold to local customers and mainland tourists in Hong Kong.
During the planning stage of the audit, you discovered the following:
1) Valuable Jewellery was established 30 years ago by Mr Tse, a man who is highly respected in the jewellery business and internationally known for his jewellery designs and gem valuation expertise. Mr Tse remains the Managing Director of the company and holds 80% of its issued share capital. Mr Tseâs two daughters, Delphine and Daphne, each hold 10% of the remaining shareholding and are also executive directors on the Board of Directors.
(2) Valuable Jewelleryâs previous auditor was a sole practitioner who unfortunately died from a heart attack last year. Your CPA firm was introduced to Mr Tse through his son-in-law, who is currently the administrative manager of your CPA firm, Prior to l 15 engagement, your CPA firm had never been involved with companies in the Jewellery industry.
(3) Valuable Jewelleryâs had unmodified(clean) audit reports issued by its previous auditors from the start of the business.
(4) With the economic recovery, there has been a sharp increase in the companyâs sales for the year under review. To cope with such an increase in demand, two new shops, one located in Tsim Sha Tsui and another in Macau, were opened during the year in addition to the main shop in Central.
(5) All high value gems were kept by Mr Tse in his private safe in the main shop. When certain gems were needed for a particular design, Mr Tse would take his gem collections out and pick the appropriate pieces. He would then decide the cost allocation of the designed jewellery.
Answer the following questions.
(a) Since Valuable Jewellery is a new audit client, you would have considered some issues/undertaken some actions before you agreed to accept this new client. Identify and discuss one potential independence issue and one competency issue that you should have considered. (6 marks)
(b) In performing the planning of the audit of Valuable Jewellery, you need to perform risk assessments by identifying factors that may increase or decrease the risk of material misstatement. (7 marks)
(i) Briefly define the two components that is part of risk of material misstatement (RMM).
(ii) Discuss why auditors perform risk assessments.
(c) Regarding the case of Valuable Jewellery, identify and discuss four factors or issues that you would consider when you assess the risk of material misstatement at the financial statement level. (8 marks)
(d) Assume that during the audit, you found out that the Macau store was leased from Mr Tseâs wife. You also found out that the amount being paid was two times the market price of similar rental properties. Mr Tse refuses to disclose this related party transaction in the notes to the financial statement. The amount involved is considered material but not very material. Identify the audit opinion you think is the most appropriate and justify your choice. (4 marks)
