HKCFEF Limited and the contributing law firms, accountants and sponsors are not offering these due diligence guidelines as legal, financial or professional advice or services and they should not be relied upon as such. These due diligence guidelines should not be used as a sole basis for any decision, action or inaction and are not meant to serve as a substitute for the advice of qualified professionals.
Due Diligence Guidelines –
3. Work Scope of Accountants
A sponsor should assess whether the scope of the accountant’s work:
(i) is appropriate to the opinion given by the accountant; and
(ii) adequately covers the reliability of information provided to the accountant, if not, the sponsor should:
(A) request that the scope of the accountant’s work be expanded;
(B) seek the assistance of a third party; or
(C) extend its due diligence having regard to the procedures set out in paragraph 17.6,
to cover the information provided to the accountant.
Note 1: As an accountant performs audit procedures on information received from a listing applicant under applicable professional standards, a sponsor is not expected to carry out any further due diligence on this information. Nevertheless, if a sponsor is aware of any matters which raise concerns relating to the information underlying the accountant’s report, the sponsor should conduct further enquiries necessary to satisfy itself that these concerns are addressed; these enquiries may involve obtaining relevant supporting information and documents.
Note 2: If the accountant relies on information prepared by a third party, for example where a legal adviser is engaged to confirm the title of properties, the sponsor should follow the procedures set out in [Code of Conduct] paragraph 17.6(g). If an accountant who relies on information prepared by a third party also follows standards which are at least equivalent to those required under [Code of Conduct] paragraph 17.6(g), the sponsor may rely on the work performed by the accountant in that respect. [Paragraph 17.7(b) of the Code of Conduct]
3.2.1 In relying on the audit or review opinion provided by the accountant, apart from the standard above, the sponsor is also expected to satisfy itself that the scope of work to be undertaken by the accountant and the methodology proposed to be used by the accountant is appropriate. In particular, the sponsor should satisfy itself that the scope of work is appropriate for the opinion required to be given in the circumstances of the listing applicant, especially where scope of work is not set by a relevant professional body.16 For listings where the accountant’s report is drawn up in conformity with Hong Kong Financial Reporting Standards, the scope of work is set out under the relevant auditing and assurance standards issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). For listings where other reporting standards are used, the scope of work will typically be set out under the relevant auditing standards issued by a relevant professional body.
3.2.2 Note 1 to Paragraph 17.7(b) of the Code of Conduct specifically states that the sponsor is not expected to carry out further due diligence on information received from the listing applicant on which the accountant has performed audit procedures.
3.2.3 With respect to comfort letters, HKSIR 400 emphasises that it is the sponsor and not the accountant who must determine what is sufficient for the sponsor’s due diligence investigation in connection with its obligations under the Listing Rules. As such, the sponsor should reach an early understanding and agreement with the accountant as to the sponsor’s requirements for:
(a) the information on which comfort is required;
(b) the procedures required to provide such comfort; and
(c) the procedures the accountant can properly perform.17
3.3 Recommended Steps
3.3.1 The sponsor’s due diligence with respect to the accountant’s work scope typically involves interviewing the accountant to determine whether the audit or review has been conducted in accordance with the relevant standards of the HKICPA. If the audit or review is conducted in accordance with auditing standards that the sponsor is not familiar with, in addition to ensuring that the accountant has adhered to the relevant auditing standards, the sponsor should also obtain and review such auditing standards and assess whether the accountant’s work scope is appropriate for the audit or review opinion given. The sponsor should also check that there is no limitation in scope which might adversely impact on the degree of assurance given by the accountant’s report, opinion or statement.18
3.3.2 Regarding the comfort letter, the sponsor should discuss with the accountant as soon as possible after the appointment of the accountant to reach an agreement as to the scope of work to be undertaken and the methodology to be used by the accountant. Such understanding should be reflected in an arrangement letter between the listing applicant, the sponsor and the accountant. In particular, the sponsor should consider whether:
(a) the arrangement letter is in the customary form called for by HKSIR 400 and is consistent with the applicable Hong Kong laws and rules and the understanding or agreement between the parties; and
(b) whether the procedures proposed by the accountant are customary and otherwise appropriate.
3.3.3 If the level of comfort provided by the accountant is insufficient for the sponsor’s purposes, the sponsor may wish to consider conducting additional due diligence work to bridge the gap. Such additional due diligence work may involve making enquiries with and/or, if necessary, seeking further evidence or authoritative documents or certificates from the listing applicant’s board or management, customer, supplier, bank, related parties or third parties.
3.3.4 For all information (including factual information)19 which is prepared by a third party or has not been verified by the accountant but has been relied on by it for purposes of the accountant’s report, the sponsor may wish to conduct further due diligence, having regard to the procedures set out in Paragraph 17.6 of the Code of Conduct, to satisfy itself that the information can be so relied upon.20 For instance, in the case where a consolidated subsidiary, if material to the business operations or financial results of the listing applicant, has been audited by a firm of accountants that is not affiliated with the principal accounting firm and the financial information has been prepared by such accountant, the sponsor should follow the procedures set out in Paragraph 17.6(g) of the Code of Conduct.
3.3.5 Sample questions for the accountants as part of the due diligence exercise relating to the accountants’ scope of work included in Appendix II.
20. Paragraph (c)(i) of and Paragraph 14(c) of Practice Note 21 to the Listing Rules. Please also refer to paragraph 1.2.3.
HKCFEF Limited and the contributing law firms, accountants and sponsors are not offering these due diligence guidelines as legal, financial or professional advice or services and they should not be relied upon as such. These due diligence guidelines should not be used as a sole basis for any decision, action or inaction and are not meant to serve as a substitute for the advice of qualified professionals. See here for the full terms and conditions.