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Mark is the manager of BBB Ltd. (BBB), a computer manufacturer operating in Hong Kong. Mark graduated from one of the private universities in Hong
Mark is the manager of BBB Ltd. (BBB), a computer manufacturer operating in Hong Kong. Mark graduated from one of the private universities in Hong Kong three years ago. He secured a job at BBB in 2020. By just looking at his qualification and his capability to manage, BBB granted him the managerial position at the beginning of 2021 . Mark is having a hard time at BBB because of the following reasons. First, since he took the management position a year ago, he lacks experience. Second, there is an integrity concern over his recent decisions. Third, the company has the following issues that complicate Mark's managerial roles: - In previous audits, computer maintenance accounts were intentionally misstated. - Unlike the prior years, the company's cash flow for the current year is negative. - Mark's reward is more dependent on profitability of the company. - Given BBB is a large company, its tax computation is very complex. - To expand its operations, BBB has constructed two ten-story buildings around TST area. This capital expenditure is retained as investment. - BBB opened a major retail outlet in South Korea. - BBB has various transactions that are not part of the normal processes. - Expensive computer accessories are stored by BBB in the form of inventory. - Under the terms of the contract for sale, BBB undertakes to remedy, by repair or replacement, manufacturing defects that become apparent within three years from the date of sale. As a result, provisions for warranty are a material liability. Required: a) Study the above case study and discuss how the issues 30 marks indicated above could affect the risk of a material misstatement. b) Assume that it has been set that the overall materiality for the 10 marks audit of BBB at $50,000. When auditing property, plant and equipment of BBB, can the auditor just select and test assets with a balance more than $50,000 ? Should assets with a balance less than $50,000 be selected for testing? Discuss your reasons
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