Question 1

Case: Sassoon Ltd

As the audit manager of Lum & Lo Ltd, CPAs, you are in charge of the annual audit of Sassoon Ltd for the year ended 30 August 2018. Your firm has been the auditor of Sassoon Ltd since it was incorporated in Hong Kong in 2013. In the past, your CPA firm has been satisfied with the internal controls of Sassoon Ltd and has given unmodified audit reports.

Sassoon Ltd is a manufacturer of cosmetic products with sales mainly to department stores and pharmacies in the Asia-Pacific region. Sassoon Ltd is owned by the Li family and has a simple management structure with the managers of the respective departments reporting directly to the Managing Director, Mr Paul Li.

During the course of the audit, you have noted the following matters.

1) This year, Sassoon Ltd has started to explore the mainland market by sending goods on a consignment basis to a number of pharmacies in Shenzhen. The respective pharmacies produce a monthly sales report for Sassoon Ltd which uses the information to recognize monthly revenue as well as the basis for invoicing the pharmacies. The industry standard credit period of 60 days from the invoice date is given to the pharmacies. The consignment inventory of HK$2,000,000 is included in the year-end inventory which represents about 10% of the total inventory. Sassoon Ltd recognizes $6,000,000 of revenue from consignment sales for the year which represents about 10% of the sales revenue for the same period.

Required

a ) Assess the risk of material misstatements at the financial statement level. You should discuss the specific circumstances of Sassoon Ltd that you have considered and your judgement on the level of risk (i.e. low, medium or high).

b) Regarding the consignment sales of Sassoon Ltd, identify the majoraudit issues in the company's consignment sales recognition for the purpose of assessing the risk of material misstatement at the assertion level. (12 marks)