Question 4 (18 marks)

Karen, Anna, Edward and Richard are university classmates, majoring in jewellery design. Shortly after their graduation in 2017, they set up a company called Crafts & Design Jewellery Limited (C&D). Each of them holds 25% of C&Ds issued shares. C&D has its financial year ended at 30 June.

C&D is engaged in designing, manufacturing and trading of jewellery products. It offers a wide range of jewellery products made with karat gold (K-gold), silver and steel. Its products include rings, earrings, pendants, necklaces, bracelets, and bangles. C&D operates one online store and one retail store in Tsim Sha Tsui selling its own jewellery products. Like many small and medium-sized entities, a lot of C&Ds operations are managed by the four shareholders. Due to limited manpower and resources, C&D does not hire any accounting staff, instead Edward handles all the accounting and finance matters of C&D.

Due to the trendy and unique design, C&D soon gains popularity among youngsters. After making a loss in 2018, C&D struggled to breakeven in 2019. In March 2020, C&D is approached by a venture capital fund, which would like to invest in C&D and provide funding for its expansion.

In early 2020, the government announced that the total number of tourists visiting Hong Kong has dropped by 20% as compared with those in last year. This affects the overall performance of retail business in Hong Kong.

Required:

(a) Assume you were the audit manager in-charge of C&Ds audit for the financial year ending 30 June 2020, assess C&Ds risks of material misstatements at the financial statement level. (8 marks)

(b) Suggest auditors responses to the assessed risks of material misstatements at the financial statement level identified in Part (a). (10 marks)

[Total for Question 4: 18 marks]