Question 1 (35 marks)

Sweaty Passion Limited (SP) is a listed company in Hong Kong engaging in trading of sportswear and sports equipment.

You are the auditor of SP. At the beginning of the audit, the audit partner determines the materiality for the financial statements as a whole at HK$1 million and the threshold for clearly trivial misstatements at HK$50,000.

The annual audit is substantially completed. During the course of the audit, the following audit findings are identified.

1. (i) Some aged inventories that amounted to HK$0.4 million are identified through the review of the inventory ageing report. The sales reports indicated that there were no sales of these inventory items in the past 12 months. The management of SP considers that no inventory provision is necessary.

2. (ii) A sales cut-off error that amounted to HK$5 million is identified in one of the sales cut-off test samples. Transaction of next year is misrecognised as current year transaction. It is uncertain whether the sales cut-off error is an exceptional one. The profit margin ratio of SPs products is 10%. The total revenue of SP is HK$600 million.

3. (iii) The outstanding balance of a Japanese supplier is found to be converted into Hong Kong Dollars by using a wrong exchange rate. The purchase transaction is denominated in Japanese Yen, with the outstanding balance of 20 million. The balance is stated at the book at HK$1.5 million, with exchange rate at 0.075. The closing exchange rate as at the year-end should be 0.085. It is uncertain whether the exchange error is an exceptional one.

Required:

1. (a) In view of the audit findings presented above, propose follow up audit procedures on each findings.

   (18 marks)