module c business assurance - hong kong

Q u a l i f i c a t i o n P r o g r a m m e

Module C Business Assurance

D E C E M B E R 2 0 1 4 A N D J U N E 2 0 1 5 S U P P L E M E N T

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Changes at a glance

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Changes at a glance

Amended on Learning Pack and Flashcards Supplement

Chapter Name Page

Technical Updates

Learning Pack

1 Scope of corporate governance 1

4 Code of ethics 2

5 Framework for assurance engagements 4

19 Audit related services and other assurance engagements 6

Flashcards

5 Framework for assurance engagements 18

19 Audit related services and other assurance engagements 18

Appendix 1 Revised Flashcards: Chapter 19: Audit related services and other assurance engagements

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Reminder of the examination cut-off rule

HKICPA operates a 'cut-off' rule whereby students will only be examined on standards and legislation that had been released on or before 31 May each year.

The same examinable contents applies to the December session of 2014 and the June session of 2015. Examinable contents are applicable to both module and final examinations.

In determining what is examinable, reference must be made to both the release date of the pronouncements (or the enactment date of the legislation) and their corresponding effective date.

Legislation and the Institute's pronouncements that meet the following conditions will be examined:

Condition 1: Have been released/enacted six months prior to the reference date of 1 December 2014 (cut-off being 31 May 2014) AND

Condition 2: Have been effective/will be effective on or before the 13th month from the reference date i.e. 1 January 2016.

Examinable standards

You will find a list of the standards that are examinable in your examination session by logging onto the HKICPA online QP Learning Centre.

Introduction

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Introduction

This Supplement has been produced for those candidates preparing for the December 2014 and June 2015 examination sessions of the HKICPA Qualification Programme.

It is designed to be used in conjunction with the fourth edition of the Learning Pack, and it will bring you fully up to date for developments that have occurred in the period since publication of the Learning Pack and 31 May 2014, the cut-off date for examinable standards and legislation for the December 2014 and June 2015 examinations.

The Supplement comprises a technical update on developments that will be examinable in December 2014 and June 2015 examination sessions that are not currently covered in the Learning Pack. The topics covered are listed on the contents page, and are covered in chapter order.

In each case the text in the Supplement explains how the Learning Pack is affected by the change, for example whether the new material should be read in addition to the current material in the Learning Pack, or whether the new material should be regarded as a replacement.

Good luck with your studies!

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December 2014 and June 2015 Supplement

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Technical Update – Learning Pack

Chapter 1 Scope of corporate governance

A Guide on Better Corporate Governance Disclosure In February 2014 HKICPA issued A Guide on Better Corporate Governance Disclosure. The following information should be read in conjunction with section 1.6 Chapter 1 of the Learning Pack.

The aim of this Guide is to encourage meaningful corporate governance disclosures by Hong Kong listed companies under the revised Code which took effect in 2012. It contains four sections and within each section a number of 'themes' are addressed. The themes are key areas that disclosures should address. These are as follows:

(1) The board: its role, what it did during the year and how

Theme A: The board's key roles are setting the issuer's strategy and monitoring the management’s performance.

Theme B: A good board process facilitates the operation of the board.

Theme C: The board’s work during the year and how it is linked to the issuer’s strategy.

(2) Accountability and audit: internal controls – sound and effective controls

Theme A: The issuer has to maintain a sound internal controls system.

Theme B: The board is responsible for the issuer's maintaining a sound internal controls system and should acknowledge this in the Corporate Governance report.

Theme C: The board has to review the system’s effectiveness and report to the shareholders at least on an annual basis.

Theme D: Report users, including investors, would also appreciate a high level description of key risks facing the company, their impact and the mitigating measures taken.

(3) Accountability and audit: audit committee – rigorous and effective oversight

Theme A: Audit committee members, in particular its chairman, must possess the right skills and experience to effectively carry out their responsibilities.

Theme B: A good process facilitates the working of the audit committee.

Theme C: The audit committee should carry out its responsibilities in an objective and conscientious manner, to effectively monitor the integrity of the company's financial reporting and maintain oversight of its internal control and risk management systems and other relevant internal processes, as stated in its terms of reference.

Theme D: In fulfilling its responsibilities, the audit committee should engage with and assess the effectiveness of the work of external and internal auditors.

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Theme E: In addition, investors would also be interested to know how the audit committee's focus, including new areas of focus, during the year link to the issuer’s strategy, development and changing risks.

(4) Communication with shareholders: encouraging participation by shareholders

Theme A: The board should maintain effective on-going dialogue with shareholders.

Theme B: AGMs are a special focus of the shareholders' communication policy and should be treated as an opportunity to enhance two-way communication with shareholders.

Directors' Duties

Add the text below to Chapter 1 section 4.1 of the Learning Pack.

The new Companies Ordinance has introduced a statutory statement to provide clear guidance to directors on their duty of skill, care and diligence. The old ordinance did not contain any provisions on this area, and the common law position in Hong Kong was not entirely clear. The Companies Ordinance now states that a director must exercise reasonable care, skill and diligence, and it sets out a mixed objective and subjective test to be applied in determining the standard required. The objective test refers to the general degree of knowledge, skill and experience that may reasonably be expected of a person carrying out the functions of the director in question.

Chapter 4 Code of ethics

A number of changes have been made to the Code of Ethics for Professional Accountants.

These include the following:

A change to the definition of those charged with governance as follows:

The person(s) or organizations(s) (for example, a corporate trustee) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting process. For some entities in some jurisdictions, those charged with governance may include management personnel, for example, executive members of a governance board of a private or public sector entity, or an owner-manager.

A revision of the requirements dealing with breaches resulting in a more robust framework for dealing with these situations.

More specific requirements and comprehensive guidance regarding the identification and managing of conflicts.

As a result of the changes to guidance on conflicts of interest sections 4.1 and 4.2 of Chapter 4 should be replaced with the following text.

Conflicts of interest A conflict of interest may be created when:

The professional accountant provides a professional service related to a particular matter for two or more clients whose interests with respect to that matter are in conflict; or


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The interests of the professional accountant with respect to a particular matter and the interests of the client for whom the professional accountant provides a professional service related to that matter are in conflict.

Examples of situations in which conflicts of interest may arise provided by the Code of Ethics (s. 220) include the following:

Providing a transaction advisory service to a client seeking to acquire an audit client of the firm, where the firm has obtained confidential information during the course of the audit that may be relevant to the transaction

Advising two clients at the same time who are competing to acquire the same company where the advice might be relevant to the parties' competitive positions

Providing services to both a vendor and a purchaser in relation to the same transaction

Representing two clients regarding the same matter who are in a legal dispute with each other

Providing strategic advice to a client on its competitive position while having a joint venture or similar interest with a major competitor of the client

Advising a client on the acquisition of a business which the firm is also interested in acquiring

Evaluating potential issues

One of the key principles that the professional accountant must consider when evaluating issues relating to conflicts of interest is whether a reasonable and informed third party would be likely to conclude that compliance with the fundamental principles of the Code have not been compromised.

The Code requires that an effective conflict identification process should be in place. The nature of this process will depend on factors including:

The nature of the professional service provided

The size of the firm

The size and nature of the client base

The structure of the firm, for example the number and geographic location of the offices

Identified conflicts of interest

If a conflict of interest is identified the professional accountant is required to evaluate:

The significance of the relevant interests or relationships The significance of the threats created by performing the service

Safeguards

It may be necessary to apply safeguards in order to eliminate threats or reduce them to an acceptable level. The Code provides the following examples of relevant safeguards:

Implementing procedures to prevent unauthorised disclosure of confidential information. This could include:

- Using separate teams

- Creating separate areas of practice for speciality functions within the firm

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- Establishing policies and procedures to limit access to client files, the use of confidentiality agreements and/or the physical and electronic separation of confidential information

Regular review of the application of safeguards by a senior individual not involved in the engagement

Review of the work performed by an individual not involved in the engagement

Consulting with third parties, such as a professional body, legal counsel or another professional accountant

In addition, the nature of the conflict of interest and the related safeguards if any, should be disclosed to the clients affected, and when safeguards are required, their consent must be obtained to the professional accountant performing the service.

If explicit consent is requested from a client and the consent is refused, the professional accountant should decline the engagement or discontinue the service (or terminate other relationships which are the cause of the conflict).

Safeguards insufficient

If safeguards cannot reduce the threat created by the conflict of interest to an acceptable level the professional accountant must decline the engagement or discontinue the service. Alternatively the relationship/interest causing the conflict could be terminated/disposed of.

Conflicts of interest – professional accountant in business

More comprehensive guidance is also provided for the professional accountant in business (s.310).

Chapter 5 Framework for assurance engagements

Hong Kong Standards on Auditing

The table in section 1 of Chapter 5 which lists the Hong Kong Standards in issue should be amended as follows:

Hong Kong Framework for Assurance Engagements (Amended)

HKSA 610 (Revised 2013) Using the Work of Internal Auditors

HKSAE 3000 (Revised) Assurance Engagements Other than Audits or Reviews of Historical Financial Information

A new standard, HKSIR 500 Reporting on Profit Forecasts, Statements of Sufficiency of Working Capital and Statements of Indebtedness was issued in April 2014 and has an effective date of 1 July 2014.

Hong Kong Framework for Assurance Engagements

An amended Framework was issued in March 2014 to take in to account conforming amendments resulting from the release of HKSAE 3000 (Revised) Assurance Engagements other than Audits or Reviews of Historical Financial Information.


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All references to HKSAE 3000 in Chapter 5 should be to HKSAE 3000 (Revised).

Section 2.2 of Chapter 5 should be replaced with the following material:

2.2 Elements of an assurance engagement

Key term

An assurance engagement is an engagement in which a practitioner aims to obtain sufficient appropriate evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the measurement or evaluation of an underlying subject matter against criteria (Framework para 10).

The following changes should be made to section 2.3.

2.3.1 A three party relationship

The reference to a direct reporting engagement should be deleted.

2.3.4 Sufficient appropriate evidence

This section should be replaced with the following text.

The practitioner plans and performs an assurance engagement with professional scepticism in order to obtain sufficient appropriate evidence in the context of the engagement about the reported outcome of the measurement or evaluation of the underlying subject matter against criteria. The practitioner considers materiality assurance engagement risk (see section 2.3.6 below) and the quantity and quality of evidence when planning and performing the engagement, in particular when determining the nature, timing and extent of evidence gathering procedures.

Sufficiency is about the quantity of evidence.

Appropriate is about quality of evidence (relevance and reliability).

2.3.5 Written assurance report

This section should be replaced with the following text.

In a reasonable assurance engagement the practitioner’s conclusion is expressed in the positive form that conveys the practitioner’s opinion on the outcome of the measurement or evaluation of the underlying subject matter.

In a limited assurance engagement, the practitioner’s conclusion is expressed in a form that conveys whether, based on the engagement performed, a matter(s) has come to the practitioner’s attention to cause the practitioner to believe the subject matter information is materially misstated.

(This is discussed further in section 2.4 and Chapter 19.)

2.4 Types of assurance engagement

The text in this section should be replaced with the following.

In accordance with the amended Framework and HKSAE 3000 (Revised) Assurance Engagements other than Audits of Historical Financial Information an assurance engagement will be classified on two dimensions:

An assurance engagement will be either a reasonable assurance engagement or a limited assurance engagement (Framework paras 14 –15).

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An assurance engagement will be either an attestation engagement or a direct engagement (Framework paras 12 – 13).

Attestation engagements and direct engagements are discussed further in Chapter 19.

2.4.2 Limited level of assurance

The text in this section should be replaced with the following.

Engagement risk must be reduced to an acceptable level under the circumstances but that risk will be greater than for a reasonable assurance engagement.

For example: A review performed in accordance with HKSRE 2400 (Revised) Engagements to Review Historical Financial Statements is a limited assurance engagement.

The conclusion is expressed in 'negative terms' for example:

'Based on the procedures performed and evidence obtained, nothing has come to our attention that causes us to believe that the entity has not complied, in all material respects with XYZ law' (Framework para 86).

Section 4.3 Investment circular reporting engagements

The reference to HKSIR 300 Accountants’ Reports on Pro Forma Financial Information in Investment Circulars should be deleted as it has been replaced by HKSAE 3420.

Chapter 19 Audit-related services and other assurance engagements

Section 2.1 of Chapter 19 of the Learning Pack should be replaced with the following material.

HKSAE 3000 (Revised) Assurance Engagements other than Audits or Reviews of Historical Financial Information HKSAE 3000 (Revised) Assurance Engagements other than Audits or Reviews of Historical Financial Information was issued in March 2014 and is effective for assurance reports dated on or after 15 December 2015. This revised standard has also resulted in an Amended Framework (see Chapter 5) and conforming amendments to:

HKSAE 3402 Assurance Reports on Controls at a Service Organisation

HKSAE 3410 Assurance Engagements on Greenhouse Gas Statements

HKSAE 3420 Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus

Assurance engagements

As seen in Chapter 5 an assurance engagement is defined as:

'An engagement in which a practitioner aims to obtain sufficient appropriate evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the subject matter information (that is, the measurement or evaluation of an underlying subject matter against criteria).' (HKSAE (Revised) 3000.12)


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An assurance engagement will be classified on two dimensions.

An assurance engagement will be either:

(i) A reasonable assurance engagement – an engagement in which the practitioner reduces engagement risk to an acceptably low level in the circumstances of the engagement as the basis for the practitioner’s conclusion. The practitioner’s conclusion is expressed in a form that conveys the practitioner’s opinion on the outcome of the measurement or evaluation of the underlying subject matter against criteria.

(ii) A limited assurance engagement – an assurance engagement in which the practitioner reduces engagement risk to a level that is acceptable under the circumstances of the engagement but where that risk is greater than for a reasonable assurance engagement as the basis for expressing a conclusion in a form that conveys whether, based on the procedures performed and evidence obtained, a matter(s) has come to the practitioner’s attention to cause the practitioner to believe the subject matter information is materially misstated. The nature, timing and extent of procedures performed in a limited assurance engagement is limited compared to that necessary in a reasonable assurance engagement but is planned to obtain a level of assurance that is, in the practitioner’s professional judgment, meaningful. To be meaningful, the level of assurance obtained by the practitioner is likely to enhance the intended users’ confidence about the subject matter information to a degree that is clearly more than inconsequential.

An assurance engagement will be either:

(i) An attestation engagement – an assurance engagement in which a party other than the practitioner measures or evaluates the underlying subject matter against the criteria. A party other than the practitioner also often presents the resulting subject matter information in a report or statement. In some cases however, the subject matter information may be presented by the practitioner in the assurance report. In an attestation engagement, the practitioner’s conclusion addresses whether the subject matter information is free from material misstatement.

(ii) A direct engagement – an assurance engagement in which the practitioner measures or evaluates the underlying subject matter against the applicable criteria and the practitioner presents the resulting subject matter information as part of, or accompanying, the assurance report. In a direct engagement, the practitioner’s conclusion addresses the reported outcome of the measurement or evaluation of the underlying subject matter against the criteria.

Examples of an attestation engagement include the following:

Providing assurance on a sustainability performance report prepared by management/management’s expert

Providing assurance on a statement by another party of compliance with law or regulations

Providing assurance on a value for money assessment made by another party

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Acceptance and continuance

In accordance with HKSAE 3000 (Revised) the practitioner is required to comply with relevant ethical requirements. In addition the pre-conditions for an assurance engagement must exist (HKSAE (Revised) 3000.24) in order to determine whether this is the case the practitioner must discuss the following with the appropriate party:

(a) Whether the roles and responsibilities of the appropriate parties are suitable in the circumstances, and

(b) Whether the engagement exhibits all of the following characteristics:

(i) The underlying subject matter is appropriate

(ii) The criteria that the practitioner expects to be applied in the preparation of the subject matter information are suitable for the engagement circumstances, including that they exhibit the characteristics of relevance, completeness, reliability, neutrality and understandability

(iii) The criteria that the practitioner expects to be applied in the preparation of the subject matter information will be available for the intended users

(iv) The practitioner expects to be able to obtain the evidence needed to support the practitioner’s conclusion

(v) The practitioner’s conclusion is to be contained in a written report

(vi) A rational purpose including in the case of a limited assurance engagement, that the practitioner expects to be able to obtain a meaningful level of assurance

If the preconditions for an assurance engagement do not exist and changes are not made, the practitioner should not accept the engagement as an assurance engagement.

Quality control

The engagement partner is responsible for quality control. He must ensure that he has sufficient competence to accept this responsibility and must ensure that the engagement team is sufficiently competent and capable. Where law or regulation requires it, quality control reviews must be conducted.

Planning and performing the engagement

HKSAE 3000 (Revised) requires the practitioner to plan and perform the engagement with professional scepticism and to exercise professional judgment. The practitioner is also required to plan the engagement so that it will be performed in an effective manner and will achieve the practitioner’s objectives. Examples of the main matters that may be considered include (HKSAE (Revised) 3000.A86-89):

The circumstances of the engagement that define its scope

The expected timing and nature of the communications required

The results of engagement acceptance activities


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The engagement process

The practitioner’s understanding of the appropriate party and their environment, including the risks that the subject matter information may be materially misstated

Identification of the intended users and their information needs, and consideration of materiality and the components of engagement risk

The extent to which fraud is relevant

The nature, timing and extent of resources necessary to perform the engagement, such as personnel and expertise requirements, including the nature and extent of expert’s involvement

The impact of the internal audit function on the engagement

If the practitioner discovers, after the engagement has been accepted that not all the preconditions for the assurance engagement are present, the practitioner must assess whether the matter can be resolved. The practitioner must decide whether they should continue with the engagement and whether the matter should be reported in the assurance report, and if so how (HKSAE (Revised) 3000.42).

The practitioner may also discover after the engagement has been accepted that some of the applicable criteria are unsuitable or some or all of the underlying subject matter is not appropriate. In this situation the practitioner will consider withdrawing from the engagement (if this is allowed by law or regulation). If the practitioner continues the impact of these issues on the assurance report must be considered. A qualified or adverse conclusion must be expressed or a disclaimer of conclusion depending on the circumstances (HKSAE (Revised) 3000.43).

Materiality

The practitioner must consider materiality in order to determine the nature, timing and extent of procedures and to determine whether the subject matter is free from material misstatement. HKSAE (Revised) 3000.A92 states that materiality is not affected by the level of assurance provided by the engagement because materiality is based on the information needs of the intended users. This means that materiality for a reasonable assurance engagement is the same as for a limited assurance engagement.

Understanding the underlying subject matter and other engagement circumstances.

The practitioner must obtain an understanding of the underlying subject matter. The extent of the work and the nature of the procedures performed will depend of whether the engagement is a limited or reasonable assurance engagement (HKSAE (Revised) 3000.45).

Obtaining evidence

The practitioner must consider the following:

Risk consideration and responses to risk

Relevance and reliability of information used as evidence

Whether the work of a practitioner’s expert is expected to be used

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Whether the work of another practitioner, a responsible party’s or measurer’s or evaluator’s expert or an internal auditor is expected to be used

Written representations from appropriate parties will also be sought.

Subsequent events

When relevant the practitioner is required to consider the effect of events up to the date of the assurance report and must also act appropriately where facts become known after the date of the assurance report which may have caused the report to be amended had they been known at the time. The practitioner does not have a responsibility, however, to perform any specific procedures regarding the subject matter after the date of the assurance report (HKSAE (Revised) 3000.61).

Assurance report

HKSAE (Revised) 3000.69 requires that the assurance report contains the following basic elements at a minimum:

(a) A title that clearly indicates that the report is an independent assurance report

(b) An addressee

(c) An identification or description of the level of assurance obtained by the practitioner, the subject matter information, and when appropriate, the underlying subject matter. When the practitioner’s conclusion is phrased in terms of a statement made by the appropriate party, that statement shall accompany the assurance report, be reproduced in the assurance report or be referenced therein to a source that is available to the intended users

(d) Identification of the applicable criteria

(e) Where appropriate, a description of any significant inherent limitations associated with the measurement or evaluation of the underlying subject matter against the applicable criteria

(f) When the applicable criteria are designed for a specific purpose, a statement alerting readers to this fact and that, as a result, the subject matter information may not be suitable for any other purpose

(g) A statement to identify the responsible party and the measurer or evaluator if different, and to describe their responsibilities and the practitioner’s responsibilities

(h) A statement that the engagement was performed in accordance with HKSAE 3000 or where there is a subject-matter specific HKSAE, that HKSAE

(i) A statement that the firm of which the practitioner is a member applies HKSQC 1, or other professional requirements, or requirements in law or regulation, that are at least as demanding as HKSQC 1.

(j) A statement that the practitioner complies with the independence and other ethical requirements of the Code, or other professional requirements, or requirements imposed by law or regulation, that are at least as demanding as Parts A, B and D of the Code related to assurance engagements.


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(k) An informative summary of the work performed as a basis of the practitioner’s conclusion. In the case of a limited assurance engagement, an appreciation of the nature, timing, and extent of procedures performed is essential to understanding the practitioner’s conclusion. In a limited assurance engagement, the summary of the work performed shall state that:

(i) The procedures performed in a limited assurance engagement vary in nature and timing from, and are less in extent than for, a reasonable assurance engagement; and

(ii) Consequently, the level of assurance obtained in a limited assurance engagement is substantially lower than the assurance that would have been obtained had a reasonable assurance engagement been performed.

(l) The practitioner’s conclusion:

(i) When appropriate, the conclusion shall inform the intended users of the context in which the practitioner’s conclusion is to be read.

(ii) In a reasonable assurance engagement, the conclusion shall be expressed in a positive form.

(iii) In a limited assurance engagement, the conclusion shall be expressed in a form that conveys whether, based on the procedures performed and evidence obtained, a matter(s) has come to the practitioner’s attention to cause the practitioner to believe that the subject matter information is materially misstated.

(iv) The conclusion in (ii) or (iii) shall be phrased using appropriate words for the underlying subject matter and applicable criteria given the engagement circumstances and shall be phrased in terms of (a) the underlying subject matter and applicable criteria, (b) the subject matter information and the applicable criteria, or (c) a statement made by the appropriate party.

(v) When the practitioner expresses a modified conclusion, the assurance report must contain a section that provides a description of the matter(s) giving rise to the modification and a section that contains the practitioner’s modified conclusion.

(m) The practitioner’s signature

(n) The date of the assurance report

(o) The location in the jurisdiction where the practitioner practices

An example of a conclusion expressed in a form appropriate for a reasonable assurance engagement would be:

'In our opinion, the entity has complied, in all material respects, with XYZ law.'

An example of a conclusion expressed in a form appropriate for a limited assurance engagement would be:

'Based on the procedures performed and evidence obtained, nothing has come to our attention that causes us to believe that the entity has not complied, in all material respects, with XYZ law.'

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The assurance report may also include an Emphasis of Matter paragraph or an Other Matter paragraph (HKSAE (Revised) 3000.73).

Modified conclusions

Where a scope limitation exists and the effect of the matter could be material the practitioner must express a qualified conclusion or a disclaimer of conclusion.

Where the subject matter information is materially misstated the practitioner must express a qualified conclusion or an adverse conclusion.

Conforming amendments

Conforming amendments have been made to a number of other HKSAEs as a result of the issue of HKSAE 3000 (Revised).

HKSAE 3402 Assurance Reports on Controls at a Service Organisation

The following should be read in conjunction with section 2.1.3 of Chapter 19.

The conforming amendments are effective for assurance engagements where the assurance report is dated on or after 15 December 2015. The following points should be noted:

There are a number of changes in terminology:

Old terminology New terminology

Professional accountant in public practice Practitioner

Assertion-based engagement Attestation engagement

Direct reporting engagement Direct engagement

Assertion Statement

All references to HKSAE 3000 are replaced with references to HKSAE 3000 (Revised).

The definition of the internal audit function has been revised as follows:

'A function of an entity that performs assurance and consulting activities designed to evaluate and improve the effectiveness of the entity’s governance, risk management and internal control procedures.'

The content of the service auditor’s assurance report has been revised to include a statement that the firm of which the practitioner is a member applies HKSQC 1 or other professional requirements, or requirements in law or regulation, that are at least as demanding as HKSQC 1. A statement must also be included that the practitioner complies with independence and other ethical requirements of the Code or other professional requirements that are equally demanding.

HKSAE 3410 Assurance Engagements on Greenhouse Gas Statements

The following should be read in conjunction with section 2.1.4 of Chapter 19.


As above, 'assertion-based' engagement has been replaced with 'attestation engagement' and 'direct-reporting engagement' is now 'direct engagement'.


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All references to HKSAE 3000 are replaced with references to HKSAE 3000 (Revised).

Guidance on the practitioner’s responsibilities to read other information have been clarified.

The content of the assurance report has been revised. It must now include an identification and description of the level of assurance (reasonable or limited) obtained by the practitioner. A statement must be made that the firm of which the practitioner is a member applies HKSQC 1 or other professional requirements, or requirements in law or regulation, that are at least as demanding as HKSQC 1. A statement must also be included that the practitioner complies with independence and other ethical requirements of the Code or other professional requirements that are equally demanding.

The conforming amendments remove the reference to a negative form of conclusion for a limited assurance engagement. This has been reworded as follows:

'In a limited assurance engagement, the conclusion shall be expressed in a form that conveys whether, based on procedures performed and evidence obtained, a matter(s) has come to the practitioner’s attention to cause the practitioner to believe that the GHG statement is prepared, in all material respects, in accordance with the applicable criteria.'

Also a point has been added stating that where a modified conclusion is given, the matters giving rise to the modification must be described.

HKSAE 3420 Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus

The following should be read in conjunction with section 3 of Chapter 19.


The content of the assurance report has been revised. It must now include an identification and description of the level of assurance (reasonable or limited) obtained by the practitioner. A statement must be made that the firm of which the practitioner is a member applies HKSQC 1 or other professional requirements, or requirements in law or regulation, that are at least as demanding as HKSQC 1. A statement must also be included that the practitioner complies with independence and other ethical requirements of the Code or other professional requirements that are equally demanding.

The following additional paragraphs should be added to the example report in section 3.3.1 of Chapter 19 above the Practitioner’s Responsibilities section.

'Our independence and quality control

We have complied with the independence and other ethical requirements of the Code of Ethics for Professional Accountants issued by the Hong Kong Institute of Certified Public Accountants, which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.

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The firm applies Hong Kong Standard on Quality Control 1 and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements.'

HKSIR 300 Accountants report on pro forma financial information in investment circulars Section 3.4 of Chapter 19 should be deleted as HKSIR 300 is replaced by HKSAE 3420.

HKSIR 500 Reporting on profit forecasts, statements of sufficiency and statements of indebtedness

This is a new standard which was issued in April 2014 and is effective where the investment circular is dated on or after 1 July 2014. The following material should be added to Chapter 19.

1 Introduction

HKSIR 500 Reporting on Profit Forecasts, Statements of Sufficiency and Statements of Indebtedness provides guidance for accountants when reporting on specific types of information included in an investment circular. An investment circular is issued by an entity for the use of third parties to assist them in making investment decisions, for example when there is a new listing of equity securities. Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (Listing Rules) and the Rules Governing the Listing of Securities on the Growth Enterprise Market Operated by the Stock Exchange of Hong Kong Limited (GEM Rules) set out the reporting requirements that companies must follow:

Profit forecasts

There is no specific requirement that an investment circular should incorporate a profit forecast, however where it is included it must be clear, unambiguous and presented in an explicit manner. The principal assumptions on which it is based must be stated and it must be prepared on a basis that is consistent with the accounting policies normally adopted by the entity (HKSIR 500.4).

Statement of sufficiency of working capital

The Listing Rules and GEM Rules require that an investment circular relating to a new listing of equity securities must include a statement by the directors that in their opinion the working capital available to the group is sufficient for the group’s present requirements (that is for at least the next 12 months from the date of publication of the investment circular) or if not, how the directors propose to provide that additional working capital required (HKSIR 500.9).

Statement of indebtedness

The Listing Rules and GEM Rules require that an investment circular relating to a new listing of equity securities must include a statement as at the most recent practicable date (normally no more than two months before the issue of the investment circular) of the total amount of debt securities, borrowings, indebtedness, mortgages, charges, contingent liabilities and guarantees (HKSIR 500.13).


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2 Directors' responsibilities

HKSIR 500 makes it clear that the directors are solely responsible for the preparation of the profit forecast, working capital statement and indebtedness statement (HKSIR 500.16).

3 Reporting accountant's responsibilities: Profit forecasts

The reporting accountant is required to report (normally in a letter) on the accounting policies and the calculations used for the forecast. In order to do this the accountant must plan and perform the work in accordance with HK SIR 500 and HKSAE 3000. Typically the following procedures will be required:

Obtain the board memorandum prepared by the directors.

Review the issuer’s recent history regarding the general nature of its activities, its main products, markets, customers, suppliers and so on.

Discuss the plans, strategic and risk analysis with the directors.

Consider the consistency of underlying assumptions with the business analysis of the directors and assess the source and reliability of the evidence supporting management’s best-estimate assumptions.

Establish which accounting policies have been adopted by the issuer in published financial statements so as to ensure that they are acceptable and have been consistently applied in the preparation of interim accounts and the profit forecast.

Consider the assumptions on which the profit forecast has been based in the course of their work to determine that the profit forecast is consistent with and has been properly compiled on the basis of the assumptions made by the directors.

Read the minutes of the board and of other important management meetings which contain key factors that might affect the forecast.

Check the arithmetical accuracy of the forecast and the supporting information.

Obtain written representations from the board of directors regarding the intended use of the profit forecast, the completeness of significant management assumptions and management’s acceptance of its responsibility for the profit forecast.

Reporting accountant’s letter

The letter is addressed to the directors and the sponsors and would normally include the following:

A specific identification of the profit forecast and documents to which the letter refers

The fact that the directors are solely responsible for the profit forecast

The fact that the reporting accountants have reviewed the accounting policies and calculations used in arriving at the profit forecast

If, as will frequently be the case, the reporting accountants have not carried out an audit of results for the expired period, a statement to that effect

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Whether in the opinion of the reporting accountant the profit forecast, so far as the accounting policies and calculations are concerned, has been properly compiled on the basis of the assumptions made by the directors, as set out in the document, and is presented on a basis consistent with the accounting policies normally adopted by the issuer

An example of a letter on a profit forecast is provided in HKSIR 500 Appendix 1.

4 Reporting accountant’s responsibilities: Reporting on statements of sufficiency of working capital

The reporting accountant is required to plan and perform work in accordance with HKSIR 500 and HKSAE 3000. The degree of work required will in part depend on the reliability of forecasts made in the past and the extent of the surplus of resources over those required. The approach adopted will be similar to that for the profit forecast together with the following procedures:

Comparing the forecast with the group’s existing financing facilities and cash resources, or that are to become available to the group;

Independently obtaining direct confirmation from the appropriate third party of the extent of financing facilities and resources available to the group;

Considering adjustments for items such as capital expenditure and prepayments which exert no impact on the profit forecast but may significantly impact the working capital forecast; and

Considering management’s sensitivity analysis and the extent of any margin or headroom.

Letter on statement of sufficiency of working capital

The following is an extract from a letter on a statement of sufficiency of working capital as provided by HKSIR 500 Appendix 2.

'Opinion

On the basis of our procedures, we report that:

(a) In our opinion, the statement has been made by the directors of the company after due and careful enquiry; and

(b) The persons or institutions providing finance have confirmed in writing the existence of such facilities as of (date) that are shown to be required by the company’s working capital forecast.'

5 Reporting accountant’s responsibilities: Reporting on statements of indebtedness

When issuing a letter on a statement of indebtedness the reporting accountant will perform a range of agreed upon procedures which are agreed with the entity issuing the information. The work is performed in accordance with HKSIR 500 and HKSRS 4400. Typically procedures would include the following:

Obtaining the schedule of indebtedness prepared by the directors including a complete list of bankers and other lenders of the group;

Agreeing amounts to the issuer’s records;

Obtaining bank reconciliations;


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Checking that cash book figures are included in the schedule of indebtedness;

In respect of debt securities, checking the amounts to underlying agreements;

Comparing amounts disclosed in respect of mortgages and charges to bank confirmations received directly by the reporting accountants or, in the absence of such, to loan agreements or similar documents;

Obtaining direct confirmation from banks and other lenders and finance providers regarding the amounts of term loans and other borrowings or indebtedness in the nature of borrowing outstanding at the relevant date and whether the amounts are secured or if such confirmation has not been received, setting out the alternative evidence in support of the amount; and

Obtaining written representations from the issuer’s directors regarding the completeness and accuracy of the amounts disclosed in the schedule of indebtedness.

Letter on a statement of indebtedness

Appendix 3 of HKSIR 500 includes an example of a letter on a statement of indebtedness. The precise detail will depend on the nature of the procedures agreed with the entity.

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Technical Update – Flashcards

Chapter 5 Framework for assurance engagements

On page 32 replace text describing an assurance engagement as follows: An assurance engagement is an engagement in which a practitioner aims to obtain sufficient appropriate evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the measurement or evaluation of an underlying subject matter against criteria.

On page 33 replace the text under the heading 'Assurance given' as follows: An assurance engagement can be a reasonable assurance engagement or a limited assurance engagement. Absolute assurance cannot be given.

On page 33 change the second bullet point in the 'Reporting' box as follows: Limited assurance is expressed in negative terms.

On page 37 First bullet point Reference to HKSAE 3000 should be changed to HHSAE 3000 (Revised).

On page 37 Second bullet point Delete reference to HKSIR 3000.

Chapter 19 Audit-related services and other assurance engagements

Replace pages 158 and 161 (see Appendix) Page 163 Add: Reporting on profit forecasts, statements of sufficiency of working capital and statement of indebtedness (HKSIR 500)


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Appendix 1

Revised Flashcards: Chapter 19: Audit related services and other assurance engagements

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module c business assurance - hong kong

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