Innovative Game Company Limited (“IG”) develops game applications that can be downloaded from app stores as well as played directly on the internet. IG offers its players to play the games free of charge. Players are only required to purchase virtual currency to obtain the premium in-game items or game features. Players can pay for virtual currency using credit cards and other electronic payments. It has gained popularity among youngsters quickly and its game “Dragon Legend” has been the most downloaded game in the year 2020.

In general, the media attributes IG’s success to the company’s CEO, Tony Chan. Tony dropped out from the university five years ago to establish IG with two of his friends.

He is very talented in designing games and writing computer programs. The two friends mainly focus on graphic design. Tony almost involves in every operation of the company.

Tony and the two friends, together as the management, acknowledge that the online game industry is competitive and would like to attract talented teams with innovative and creative ideas to diversify the variety of games. Accordingly, IG offers competitive packages to its innovation team whose performance is measured by the revenue generated from each of new games.

With the success of “Dragon Legend,” Tony is eager for a listing plan so that IG can increase its capital for future expansion. In order to achieve the listing plan in 2021, aggressive targets have already been set. The management will be awarded a special bonus if IG can be listed successfully.

Required:

(a) Evaluate the risk of material misstatement due to fraud by considering the fraud risk factors. 

(b) Propose audit procedures that you will perform in respect of the fraud risks identified in part (a).