Question
You are the audit manager of Michael & Gabriel CPA Limited and are currently carrying out the audit of Eason Limited (Eason) for the year
You are the audit manager of Michael & Gabriel CPA Limited and are currently carrying out the audit of Eason Limited (Eason) for the year ended 30 September 2020. Eason is a company incorporated in Hong Kong and is engaged in the manufacturing of a wide range of Chinese herbal health products. Sales of Eason’s products are mainly made to major chain stores and supermarkets in Hong Kong.
After reviewing the draft financial statements, you identify that inventory is one of the key financial statements areas, which represents 15% of the total assets of Eason. Raw materials represent 52% of the total inventory. Raw materials largely comprise of bulk inventories of various Chinese herbs. Eason keeps more than 500 types of herbs. Many of these raw materials are expensive Chinese herbs. Most of them have long use-by-dates provided that they are properly stored. The identification of Chinese herbs requires expert knowledge since many different herbs with significantly different costs and effects have a similar appearance. Also, same type of herbs can be classified in different classes according to their quality. The costs of different classes of same herbs could vary materially.
Your audit partner, Michael, expresses in a meeting, “We can’t rely on the management’s expert. We should find an auditor’s expert to assist in the audit of Eason.” He recommends seeking help from Mr Raphael Yip, a registered Chinese medicine practitioner.
Required:
(a) Explain why an auditor’s expert is needed in the audit of Eason.
(b) As mentioned by Michael, explain why management’s expert is less reliable as compared with auditor’s expert.
(c) Determine how your audit team would convince yourselves that Mr Raphael Yip is a suitable candidate to be the auditor’s expert.
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