questions Marks will be awarded for logical argumentation and Hong Kong. It owns over 200 Chinese, Asian and Western restaurants and bakery shops, Delicacies Limited ("Delicacies") is a well-known food and beverage company listed in festive products, such as rice cakes, mooncakes and rice dumplings in its own food factory the premises of which are all leased from third parties. It also produces a wide range of Delicacies has a board of directors with years of experience in the food and beverage aggressive on accounting. Delicacies has structured processes and controls in place in the management team set the tone at the top which places a high value on ethics and is not its daily operation from good quality control, sales, procurement, cash management member, from senior management to shop staff, are well-defined. board of directors is measured on both financial and non-financial performance indicators. set with reference to their roles and responsibilities. Detailed procedures manuals are The remuneration and performance evaluation of the senior management and shop staff are available to assist staff to carry out their daily work in standard processes and controls. Delicacies also has an experienced internal audit team which reports directiy to the CASE ntation of the answers, premises in Hong Kong and Shenzhen. industry and a dedicated management Both the board of directors and staff management, to financial reporting. The roles and responsibilities of each staff The remuneration of the There were no control and beverage operations and provides constructive recommendations to management on improving the processes and controls for daily operations. deficiencies reported by the external auditor to the Audit Committee in the past years. Delicacies is profitable with a strong and healthy cash flow. All sales transactions in the restaurants and shops are settied by cash, credit cards or pre-paid vouchers. The point-of-sales ("POS") system, which is self-developed and highly customised by Delicacies, has been used for many years and is directly interfaced with the general ledger All the restaurants and bakery shops of Delicacies use the POS system. There were no POS system issues reported by the external auditor to the Audit Committee in the past years. The internal audit team also did not report any process and control improvement recommendations to the Audit Committee in the past years. These festive product vouchers were available for sale online and at five designated five restaurants and bakery shops by either presenting a paper voucher or e-voucher with Customers redeemed the festive products at the a QR code. Delicacies sold over 3,000,000 vouchers last year. These festive product vouchers were tracked under a separate voucher management system which currently had no direct interface with the POS system. All redeemed vouchers were sent back to the headquarters on a regular basis. The vouchers issued, sold and redeemed were centrally reconciled at the headquarters. The internal audit team in their report to the Audit Committee suggested certain control improvements for voucher management. The internal audit findings indicated that the voucher records were not reconciled to the festive products ABC & Co has been the auditor of Delicacies for the past 15 years. From a better corporate the management of Delicacies arranged to pre-sale the festive products by way of vouchers Customers were required to pre-pay for the vouchers to redeem festive producted restaurants and bakery shops. sales records and cash receipt records relating to voucher sales on timely basis. governance perspective, the Audit Committee has decided to rotate the auditor in the yeart The Chief Financial Officer of Delicacies has therefore approached DEF & Co for an audit service proposal and would like to nominate DEF & Co as their new auditor. Question 1 Explain the procedures that DEF & Co should carry out prior to accepting the auditor nomination from Delicacies Limited. (8 marks) Question 2 (a) Analyse and explain the fraud risk of material misstatements in terms of management override of controls. (4 marks) (b) Propose relevant audit procedures in response to the risk of material misstatements identified in Question 2(a). (7 marks)