Case Study

Chan manufacturing Co. Ltd became your CPA firm's (Law & Wu's) audit client two years ago and you are the audit partner in charge of this audit engagement.You did not encounter any significant audit problems last year. However, in the current years audit, a dispute has arisen between Mr. King (Chan's financial controller) and you over the materiality of certain unrecorded liabilities. In particular, Mr. King argues that the total amount of unrecorded liabilities is immaterial and it is therefore unnecessary to adjust the financial statements in this regard.

In your opinion, the amount is material and the financial statements should be adjusted accordingly. Some guidance are provided by accounting and auditing in determining the materiality of given amounts in the financial statements.

Mr. King believes that he knows better what the financial statement readers would or would not deem to be a material amount. He requests you not to adjust the financial

statements for the unrecorded liabilities. Otherwise, he will find another auditor to replace you.

Explain

Chan has decided to replace you by another auditor the current year's audit.

a. Can Chan do this? If yes, what statutory procedures should Chan follow b. Being the existing auditor, what are your rights under the Companies Ordinance?