Question(25 marks) Pretty Heels Limited (PH) is a listed company in Hong Kong engaged in manufacturing and selling ladies shoes. It operates a factory in Shenzhen, China, and 10 retail shops in Hong Kong. Its head office is in Hong Kong. In September 2021, the management of PH discovers that some bank balances of the Shenzhen factory are unaccounted for and the Finance Manager, Timmy, is suspected to have been involved. PH has reported the loss to the local police. Initial ndings of the investigation indicates that the loss amount is approximately HK$5 million. The management of PH investigates the cause and nature of the loss of funds in the factory and identies that Timmy has stolen the company chop and issued a few cheques to withdraw money from the company bank account. Then, Timmy has changed the balances from the companys bank statements downloaded from the internet banking facility before sending them to the head ofce in Hong Kong. The management of PH believes that the mentioned fraud conducted by Timmy is definitely an internal control problem and asks the external auditor to propose some possible internal control activities to address the internal control weaknesses.

(e) Discuss the threat(s) to compliance with the Code of Ethics for Professional Accountants if the external auditor suggests the internal control activities for PH to apply, and propose any THREE safeguards to reduce the threat(s) to an acceptable level. (5 marks)