EC Interior Design and Construction Company Limited (“EC”) is a private company in Hong Kong specializing in residential and commercial interior design. It was founded by Mr. Eagle Chan, an interior designer. For each project, Eagle first draws the design according to the client’s request. Then a team of construction workers completes the refurbishment. Eagle follows up the project and makes any necessary adjustment to his original design if the construction team meet any difficulty or if the client further requests any change.

Eagle mainly focuses on design work. His sister, Winnie Chan, is responsible for the financial and hiring of each project. Winnie hires construction workers based on the project size. All workers have hired on a part-time basis and paid daily. No detailed record of workers is kept. On each working day, Winnie takes notice of how many workers are on the site, then calculates and prepares the cash for the daily salaries.

Eagle is a risk-taker. His design is bold and creative and has earned him several design awards in the current year. He considers EC is ready for listing now especially when he becomes famous. If EC successfully gets listed, every top executive will get a bonus. Thus, Winnie is eager for the listing because she hopes to get more bonuses to settle down her personal debts.

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

(b) Winnie Chan understands that you, who are the audit partner of EC, have experience in auditing a similar industry as EC and you have also been involved in audits related IPOs. She asks you to share some experience with her so that she can better prepare for the listing. Evaluate whether you can share this experience with Winnie Chan.