The analysis reveals that Crow Co and Starling Co combined have a significantly reduced profit for the year, with revenue
also slightly reduced. The apparent increase in costs may be caused by one-off costs to do with the acquisition of Canary
Co, such as due diligence and legal costs. However there remains a risk of misstatement as costs could be overstated
or revenue understated.
Possible manipulation of financial statements
A risk of misstatement arises in relation to Canary Co as its financial statements have been prone to manipulation. In
particular, its management may have felt pressure to overstate revenue and profits in order to secure a good sale price
for the company. The existence of contingent consideration relating to the Group’s post acquisition revenue is also a
contributing factor to possible manipulation, as the Group will want to avoid paying the additional consideration.
Grant received
Starling Co has received a grant of $35 million in respect of environmentally friendly capital expenditure, of which
$25 million has already been spent. There is a risk in the recognition of the grant received. According to HKAS 20
Accounting for Government Grants and Disclosure of Government Assistance government grants shall be recognised as
income over the periods necessary to match them with the related costs which they are intended to compensate. This
means that the $35 million should not be recognised as income on receipt, but the income deferred and released to
profit over the estimated useful life of the assets to which it relates. There is a risk that an inappropriate amount has
been credited to profit this year.
A further risk arises in respect of the $10 million grant which has not yet been spent. Depending on the conditions of
the grant, some or all of it may become repayable if it is not spent on qualifying assets within a certain time, and a
provision may need to be recognised. $10 million represents 1·8% of consolidated assets, likely to be material to the
CS Group financial statements. It is likely to form a much greater percentage of Starling Co’s individual assets and
therefore be more material in its individual financial statements.
New IT system
A new system relevant to financial reporting was introduced to Crow Co and Starling Co. HKSA 315 indicates that the
installation of significant new IT systems related to financial reporting is an event that may indicate a risk of material
misstatement. Errors may have occurred in transferring data from the old to the new system, and the controls over the
new system may not be operating effectively.
Further, if Canary Co is not using the same IT system, there may be problems in performing its consolidation into the
CS Group, for example, in reconciling inter-company balances.16
Starling Co finance director
One of the subsidiaries currently lacks a finance director. This means that there may be a lack of personnel with
appropriate financial reporting and accounting skills, increasing the likelihood of error in Starling Co’s individual financial
statements, and meaning that inputs to the consolidated financial statements are also at risk of error. In addition, the
reason for the finance director leaving should be ascertained, as it could indicate a risk of material misstatement, for
example, if there was a disagreement over accounting policies.
