You are the senior audit manager of a Hong Kong CPA firm, Lam, Ma, Ng and Co (LMN). Your firm has recently been engaged as the audit of Grace Holding Company Limited (Grace) and you are currently in charge of the audit of Grace for the year ended 31 December 2021. Grace, a company incorporated in Hong Kong, engages in the manufacturing and trading of high quality computer and mobile components and assembling parts in China. Grace has three factories in China which are owned by its three subsidiaries incorporated in China. Grace is listed on the GEM Board of the Hong Kong Stock Exchange.

Grace has an internal audit department which is headed by Thomas Tang, an experienced Fellow Member (FCPA) in the Hong Kong Institute of Certified Public Accountants.

During the planning meeting with Matthew Mok, the chief executive officer, the following information has come to your attention:

Profits are coming under increasing pressure from the appreciation of Renminbi and the increase of labour costs in China. There is pressure from institutional investors for better returns in the form of dividends and the main institutional investors are considering selling a proportion of their shares in the company.

All staff and directors of Grace are remunerated (at least in part) on a performance-related basis, some with share options. Staff are generally highly qualified and well paid.

Grace has good accounting and internal control systems. Inventory is material to accounts, and there is good set of permanent inventory records.

The sales increase in the eight months to 31 August 2021 over the previous year has been achieved by attracting new customers and by offering extended credit. The new credit arrangements allow customer three months credit before their debt becomes overdue, rather than the one month credit period allowed previously. As a result of this change, trade receivable age has increased from 1.6 to 4.1 months.

The purchasing manager and warehouse manager were dismissed on 15 August 2021. Replacement purchasing manager and warehouse manager were appointed in early October.

Operational compliance issues are important to Grace. Many countries have inflexible quality standards and some projects are being held up because of difficulties in obtaining approval from regulators for new components.

A staff of a third party courier was injured seriously due to an accident in Graces premise in September. The courier staff was confirmed to be handicapped and has submitted his claim for damage to Grace.

Required:

Identify and discuss the factors or issues that you would consider when you assess the risk of material misstatement of Grace for the audit of Graces financial statements for the year ended 31 December 2021.