Question

Keep Beautiful Company Limited (“KB”) is a Hong Kong company providing beauty care services through prepaid packages. Since hiring Ms Marie Tam as the CEO, KB has been developing rapidly. There are currently 10 beauty salons in Hong Kong, which five of them have been opened during the financial year ended 31 December 2019. Marie plans to open more beauty salons in Macau and the Mainland China. Although some Directors are concerned with the rapid development, Marie assures them that this strategy is essential to obtain the maximum market shares because beauty care services industry is highly competitive. In order to maintain competitive, beauty salons are often equipped with beauty care machines with the latest technology. Therefore, KB has signed lease agreements with various beauty care machine suppliers. Before the implementation of HKFRS 16, KB has always treated the leasing as operating leases. With HKFRS 16 effective for annual periods beginning on or after 1 January 2019, KB is now required to recognize the lease assets and the corresponding lease liabilities on the balance sheet. The Legislative Council may pass the bill for the statutory cooling-off period for prepaid consumer contracts, including those relating to beauty care services. Marie has been worried about this bill. She arranges training sessions for the staff to comfort and persuade consumers to stay in the prepaid packages when they have a second thought. Before joining KB, Marie was the COO of another beauty care services company which was eventually dissolved due to litigation of dishonest selling activities.

Required:

Assume you are the audit manager of KB for the year ended 31 December 2019, evaluate the inherent risk for the audit of KB.

[Total for Question: 10 marks]

Answer 1