You are the audit manager for the audit of Master Mines Limited. It is a listed company
Question:
You are the audit manager for the audit of Master Mines Limited. It is a listed company in Hong Kong, specializing in sulphur exploitation in various parts of the world (with five different locations). In order to increase its revenue generation ability, management has decided to set up new plants in China and that requires a funding from bank borrowing of HK$130 million with the support of its latest audited financial statements as at 31 March 2023.
The company had just removed its CEO last year and the new CEO, Mr. Yeung, is expecting to double the revenue in the coming year with a growth of 25% in net profit. He is a minerals expert but seems to have paid little attention to the importance of a good internal control system.
Due to the lack of control in a sulphur mine in Argentina, there was a mine explosion and this caused serious contamination in the surrounding towns. The government of Argentina has started to sue the company for compensation and the financial loss resulted from the claim is still a doubt. The media has also reported that with high profile and the government of Argentina urges the company to be solely responsible for the remedial action for such an explosion.
During your preliminary review of the financial statements, your audit team has noticed that there is an outstanding trade receivable balance amounting to 25% of total assets (Last year the amount was only half of the current balance and that accounted for 2% of total assets in prior year).
In order to save costs for higher profit margin, the company has cut 20% of the total staff all over the world in current year. Due to some recent changes in economic environment, the sulphur price is expected to drop in the coming future.
Required:
Identify and discuss the factors or issues that you would consider when you assess the risk of material misstatements.
(20 marks)
Auditing and Assurance Services A Systematic Approach
ISBN: 978-0077732509
10th edition
Authors: William Messier Jr, Steven Glover, Douglas Prawitt