Question

You are the manager in charge of the audit of Burning Limited (“Burning”). Burning is a private company engaging in the production of furniture products. The management of Burning is considering the listing of the company to the Hong Kong Stock Exchange (“HKEX”) in the near future and has asked your accounting firm to submit a proposal for appointment as Burning’s reporting accountant.

The management has asked your accounting firm to include the following clauses in the proposal:

1. Your firm agrees to offer a flexible fee structure of HK$4,000,000, payable in four equal instalments with the last instalment only payable upon successfully listing the shares of Burning to the HKEX;

2. Your firm agrees not to charge for any additional work that might be found necessary during the listing exercise;

3. Your firm agrees to participate in the Burning road show with the sponsors, and assist the management to respond to questions from institutional investors on Burning’s financial matters; and

4. When conducting the exercise, your accounting firm will work on information to be provided by the management of Burning and will complete the work as quickly as possible with minimal questions / issues to be raised.

Required:

1. Discuss what “independence of mind” and “independent in appearance” are.

2. Comment on the potential issues regarding your firm’s proposal to Burning serving as the reporting accountant, and how you would explain to the management of Burning that the proposal has to be revised.

Answer 1