what happens when auditor is being irresponsible to the company? the management team ofthe subsidiaries. Due tothat, the ownership andrecoverable amount ofthe subsidiaries could notCurrent global trends in the footwear industryOver the years, the global footwear industry has diversified across differentgeographic regions such as in Europe, Asia Pacific, North America andLatin America. The global footwear market is driven by a number of factorsincluding the growth of the fashion industry, increasing demand for newdesigns of footwear and awareness about a healthy and active lifestyle.The increase in today's population and tendency of people to spend morehave also become contributing factors in the growing demand for footwearacross the global market.However, the growth of the global footwear industry is becomingslower day by day. This is due to many external and internal factors.The main factor that contributes to the decline is the rising price of rawmaterials. Due to the high price, many footwear companies today facedifficulties in getting raw materials at cheaper prices, thus they do nothave any choice but to increase their selling price to cover the increasingcost per pair of shoes. Other than that, factors such as the increase ofenvironmental concerns, rising cost of local labour, the price war andalso fierce global competition have also contributed to the slow growth ofthe footwear industry. This then left the companies with no choice but toswitch to cheaper grade materials and low quality production as they needto ensure they are able to bear the cost.However, despite the slow growth, there is still opportunity in thefootwear market far the companies. This can happen when there arechanges in customers' lifestyle and fashion trends, the emerging role ofe-commerce, and the increasing new brands in the market that wouldbe determined which ledto incomplete audit work.On top of that,Hongweiproblemsinventories. The auditorswere unable to obtainаppropriatefromfaced somewiththeevidenceits subsidiaries,GreenateInvestmentLtd and Evidoma Ltd, toascertain whether the group still had ownership over the inventories. Dueto this, audit work could not be completed.Auditors were also not able to complete the audit report as they couldnot determine whether all significant events occurring after the reportingperiod had been adequately dealt with in the financial statements withrespect to disclosures, presentation and adjustments. There were also risksthat occurred due to fraud where the auditors could not obtain disclosurefrom management of the subsidiaries regarding the results of theirassessment of the risk whether the financial statements may be misstatedas a result of fraud.Furthermore, internal control was also another problem that led to theinability to obtain sufficient assurance that there were no material weaknessesin the system of internal accounting controls or that there was no risk thatthe financial statements may be materially misstated as a result of fraud.The auditors were also informed that there were legal claims thatappeared to have been brought by certain parties against Jinjiang ShoeMaterial Ltd. The auditors have not completed their investigations due to somelimitations and were currently unable to provide the required informationand comprehensive legal advice. The auditors also were unable to assessthe completeness of all legal cases, extent of liabilities, including contingentliabilities, that might arise. The company received information from thegovernment of the People's Republic of China's website that indicated thatthere were litigation cases involving the company's aperating subsidiary inChina, namely Jinjiang Shoe Material Ltd, but the company was unable toconfirm the information. The details of the 10 lawsuits were on the website;however, the names of the parties to the suits were not available.In addition, fines were imposed on the both directors, Gary Menon andJasımine Kaur, as they were named as the defendants to the claims. GaryMenon was charged RM1,600,000 for causing Hongwei to commit financialenhance the demand of footwear in coming years.Current problems in Hongwei Holdings BerhadHongwei is now facing a big problem where the release of its December2015 annual report is delayed. This is because there is additional work tobe done by the auditors as part of the process of investigating and verifyingthe expenditure incurred and the bank balances. However, the board hadagreed to notify Bursa Malaysia Securities Berhad on the development andprogress of the matter, and set a new deadline of no later than two monthsfrom the year end. But Hongwei still failed to meet the new deadline andwas unable to submit the annual report in the agreed time. Due to this,Hongwei's share price has started to drop tremendously in trading. Theshare price has been dropping each year.Besides, there are many other problems arising around Hongweiand its subsidiaries. In order to complete the delayed audit report, theauditors had to meet up with the management team of all the subsidiariesto solve the problems. However, the auditors were unable to contact themanagement of the subsidiaries. There were no commitments given by Profit/(Loss) for the year attributableFinancial position of Hongwei Holdings Berhad andincome for the year ended 31 December 2016.Hongwei had been making losses for a few years since 2013. Even thoughreporting breaches and permitting the conglomerate to commit corporategovernance breaches, foreign listing requirements breaches, disclosurebreaches and the non-compliance with Bursa Malaysia Securities' Directives,Jasmine Kaur was fined RM1,600,000 for causing Hongwei to commitfinancial repurting breaches and permitting it to commit the corporategovernance breaches, foreign listing requirements breaches, disclosurebreaches and the non-compliance with Bursa Malaysia Securities'Directives. Aside from that, two out of five board members resigned lastmonth due to personal reasons without any prior notice. The companyalso had lost its company secretary and agent. This has left the companywithout a proper functioning board with all non-executive directors andthe chief financial officer resigning, leaving only Gary Menon and JasmineKaur as the board. On top of that, Gary Menon and Jasmine Kaur had failedor refused to communicate with either the regulators or the new board inMalaysia and following Bursa's enforcement action, fines of RM1,600,000each had been imposed on them.All these problems led to the going concern of Hongwei Holdings Berhad.The issues raised indicated that the existence of a material uncertaintythat may cast significant doubt about the group's and company's ability tocontinue as going concerns, and due to the auditors' inability to contact themanagement of the subsidiaries, they were unable to determine whetherthe use of the going concern assumption is appropriate.doancial position of Hongwei Holdings Berhad andits groupGroupRMB'000CompanyRMB'00010 equity holdersegwej had been making losses for a few years since 2013. Even thoughHoroup was making profits, the company itself was continuousiy makingeses. Appendices 1 and 2 contain the company's and group's statement ofancial position as well as the consolidated statement of comprehensiveome for the year ended 31 December 2016.906,732(28,783)Application QuestionsAppointment of new directors to resolve problemsas part of corporate governanceAs the condition of, Hongwei worsened by the day, new directors wereappointed so as to recognize the importance of corporate governancein running the operations of the company and group and of the trustand expectations placed upon their shoulders by the shareholders andstakeholders. In fulfilling the respective fiduciary duties, the principlesof transparency, integrity and professionalism should rightfully beincorporated into all levels of the group's corporate hierarchy.The appointment of the new independent directors was to safeguardthe interest of shareholders and ensure proper governance in Hongwei.However, the newly appointed directors had not been able to establishcontrol over the operations of the group (which are in China) since theirappointment and, as such, were acting without a funetioning organization.The newly appointed board of directors had taken steps to comply withthe best practices of principles of good corporate governance as set out inthe Malaysian Code on Corporate Governance 2012 and the main marketlisting requirements of Bursa Malaysia Securities Berhad. It was with thisin mind that the new directors reported their findings to the shareholdersin the manner of application of the principles contained in the code to thebest of their ability and with the limited information available on hand forthe financial year ended in this report.Hongwei Holdings Berhad has been in the footwear industry formore than 20 years. Even as the global growth of the footwearindustry is becoming slower day by day, Hongwei is still able tomaintain its competitiveness in the industry. However, the positionof Hongwei in the industry today is worrying due to the internaland external problems that it faces.Chairman Gary Menon had passed the duty to solve all thecompany's problems to CEO Jasmine Kaur. The first task thatJasmine Kaur should do is to detect all the issues and weaknessesin the organizational structure of Hongwei and ways to correct thestructure so that a better structure could be developed. Other thanthat, an overview of the overall performance of the company andgroup should be done to determine the position of the company inthe industry and whether the company is still attractive to be in thebusiness.

Auditing is a process in which an auditor checks the accounts and financial statements of the…

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Business

Accounting

what happens when auditor is being irresponsible to the company?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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