Premier Materials Limited Premier Materials Limited and its subsidiaries (Premier) are in the business of manufacturing and trading of construction materials to build flats. Premier's customers are mainly construction companies in Mainland China, Hong Kong and other Asian countries. As at 31 December 2020, over 90% of Premier's assets were located in Mainland China. Since the economy in Mainland China was doing so well two years ago, Premier embarked on an ambitious expansion plan to double the group's revenues within five years. Premier planned to do this through acquisition of other manufacturers as well as setting up new plants in strategic locations in the Mainland. In the last two years to the end of 2020, indeed there was an increasing trend in sales and receivables. In 2021, Premier did purchase another company, Tiny Ltd. On 21 December 2020, Premier succeeded in issuing bonds of US $130 million at an interest rate of 9.5% per annum. The bonds are listed on the New York Stock Exchange. The money received were used partly to repay bank loans when they were due, while the remaining cash was kept in banks in Mainland China. Extracts from consolidated statement of financial position of Premier As at 31 December 2021 Unaudited $ million As at 31 December 2020 Audited $ million Non-current assets Intangible assets Property, plant and equipment Other investments 200 1,757 85 170 1,570 100 Total non-current assets 2,042 1,840 Current assets 1,450 1,420 Total assets 3,492 3,260 Equity and liabilities Equity Share capital Retained Earnings Other components of equity 1,250 840 155 1,150 780 163 Total equity 2,245 2,093 Non-current liabilities Current liabilities 650 597 620 547 Total equity and liabilities 3,492 3,260 Case Background for assignment Year to 31 December Year to 31 December 2021 2020 Projected Actual $ million $ million 5,770 5,990 120 80 (5,540) (5,800) Revenue Other operating income Operating expenses Operating profit Finance charges 350 (28) 270 (30) Profit before tax Tax expense 322 (57) 240 (41) Profit for the year 265 199 The extract from the memo prepared by an audit senior of Lau & Lam in preparation of the audit plan. Existing engagement and proposed engagement between Lau & Lam, CPAs and Premier Lau & Lam, a firm of Certified Public Accountants accepts the engagement for the audit of Premier in accordance with Hong Kong Standards on Auditing. Lau & Lam has been the auditor of Premier since 2018 and has been appointed auditors for the financial year ending 31 December 2021. Julie Chan is the manager in charge of the audit of Premier. Lau & Lam has also been offered a contract to provide a payroll service to Premier. Although Lau & Lam has not accepted or rejected this offer, previously in the past 2 years, Lau & Lam has assisted Premier's Chief Executive Officer(CEO)'s personal tax planning. Internal audit and controls effectiveness Premier's internal audit department has offered the services of its internal audit team to help perform audit procedures. The audit senior proposes to use the internal auditors to complete the audit work and place reliance on internal controls, which will reduce the amount of substantive testing which needs to be performed and proposes not to re-test the controls. This is because in the previous year's audit, controls were tested and found to be highly effective even though there were changes in systems and the control environment during the year. New personnel Due to its expansion plans, Premier engaged T&T, an external consultant in Hong Kong, to perform a thorough operational efficiency review of Premier, in particular for sales and purchase processes. The T&T report suggested changing to more sophisticated IT system and recommended hiring experienced personnel to manage its expansion. Premier hired Mr. Thomas Chan to be in charge of the system expansion in May 2021. Thomas is the brother of Julie's father. 3) Use analytical procedures (trend analysis or ratio analysis) to identify three additional risks of material misstatements. Discuss which financial statement line item(s) may be in error. You are doing 2021 audit so you use whatever information is available. Your purpose in calculating these trend analysis/ratios is to get additional information about the company that may lead to an increase in RMM. For example if a company has a bank loan that requires a certain current ratio and the company is close to violating that ratio, then there is an increase in RMM. (This is not in your case.) Do not discuss these ratios from management point of view. 5) Identify and discuss two ethical issues including principles, any necessary identified threats and safeguards. The ethical issues MUST be from the auditor's point of view. Remember we are preparing an audit plan. Premier Materials Limited Premier Materials Limited and its subsidiaries (Premier) are in the business of manufacturing and trading of construction materials to build flats. Premier's customers are mainly construction companies in Mainland China, Hong Kong and other Asian countries. As at 31 December 2020, over 90% of Premier's assets were located in Mainland China. Since the economy in Mainland China was doing so well two years ago, Premier embarked on an ambitious expansion plan to double the group's revenues within five years. Premier planned to do this through acquisition of other manufacturers as well as setting up new plants in strategic locations in the Mainland. In the last two years to the end of 2020, indeed there was an increasing trend in sales and receivables. In 2021, Premier did purchase another company, Tiny Ltd. On 21 December 2020, Premier succeeded in issuing bonds of US $130 million at an interest rate of 9.5% per annum. The bonds are listed on the New York Stock Exchange. The money received were used partly to repay bank loans when they were due, while the remaining cash was kept in banks in Mainland China. Extracts from consolidated statement of financial position of Premier As at 31 December 2021 Unaudited $ million As at 31 December 2020 Audited $ million Non-current assets Intangible assets Property, plant and equipment Other investments 200 1,757 85 170 1,570 100 Total non-current assets 2,042 1,840 Current assets 1,450 1,420 Total assets 3,492 3,260 Equity and liabilities Equity Share capital Retained Earnings Other components of equity 1,250 840 155 1,150 780 163 Total equity 2,245 2,093 Non-current liabilities Current liabilities 650 597 620 547 Total equity and liabilities 3,492 3,260 Case Background for assignment Year to 31 December Year to 31 December 2021 2020 Projected Actual $ million $ million 5,770 5,990 120 80 (5,540) (5,800) Revenue Other operating income Operating expenses Operating profit Finance charges 350 (28) 270 (30) Profit before tax Tax expense 322 (57) 240 (41) Profit for the year 265 199 The extract from the memo prepared by an audit senior of Lau & Lam in preparation of the audit plan. Existing engagement and proposed engagement between Lau & Lam, CPAs and Premier Lau & Lam, a firm of Certified Public Accountants accepts the engagement for the audit of Premier in accordance with Hong Kong Standards on Auditing. Lau & Lam has been the auditor of Premier since 2018 and has been appointed auditors for the financial year ending 31 December 2021. Julie Chan is the manager in charge of the audit of Premier. Lau & Lam has also been offered a contract to provide a payroll service to Premier. Although Lau & Lam has not accepted or rejected this offer, previously in the past 2 years, Lau & Lam has assisted Premier's Chief Executive Officer(CEO)'s personal tax planning. Internal audit and controls effectiveness Premier's internal audit department has offered the services of its internal audit team to help perform audit procedures. The audit senior proposes to use the internal auditors to complete the audit work and place reliance on internal controls, which will reduce the amount of substantive testing which needs to be performed and proposes not to re-test the controls. This is because in the previous year's audit, controls were tested and found to be highly effective even though there were changes in systems and the control environment during the year. New personnel Due to its expansion plans, Premier engaged T&T, an external consultant in Hong Kong, to perform a thorough operational efficiency review of Premier, in particular for sales and purchase processes. The T&T report suggested changing to more sophisticated IT system and recommended hiring experienced personnel to manage its expansion. Premier hired Mr. Thomas Chan to be in charge of the system expansion in May 2021. Thomas is the brother of Julie's father. 3) Use analytical procedures (trend analysis or ratio analysis) to identify three additional risks of material misstatements. Discuss which financial statement line item(s) may be in error. You are doing 2021 audit so you use whatever information is available. Your purpose in calculating these trend analysis/ratios is to get additional information about the company that may lead to an increase in RMM. For example if a company has a bank loan that requires a certain current ratio and the company is close to violating that ratio, then there is an increase in RMM. (This is not in your case.) Do not discuss these ratios from management point of view. 5) Identify and discuss two ethical issues including principles, any necessary identified threats and safeguards. The ethical issues MUST be from the auditor's point of view. Remember we are preparing an audit plan