Reference no: EM132768150

Question: You are an audit manager of C & A Company, a CPA firm in Hong Kong SAR. Recently a partner of your firm, Mr. Calvin Cheung gave you an instruction to carry out a preliminary review on a potential client, Woody Limited ("Woody"). Your firm has been approached by Woody to audit their financial statements for the year ended 31 March 2020. You are aware of the following after discussion with Miss Zoe Ning, Woody's Finance Director, on 15 June 2020: Woody is listed on the Hong Kong Stock Exchange and it manufactures and sells products made from wood imported from overseas. In recent years, the company has expanded into the manufacture of fencing and quality garden furniture, which is sold with a 6-year guarantee. Most sales are made to domestic customers, but the company also has a small export market which has grown steadily over the last few years. During the year, Woody's revenue increased by 25% and the gross and operating margins increased by 9% and 5% respectively. Inventory and trade receivable balances are significantly higher than the previous year as a result of increased activities. Online ordering on the company's website started in April 2019. Internet orders have grown steadily and the company has received 11,000 orders, which represent 7% of total company sales. The company continues to invest in its website to improve its speed and ease of use for customers. The company treats this as a long term investment and capitalises all capital expenditure in the non-current account. A shareholder of Woody who is also the General Manager of the company has announced his intention to sell all of his shareholding in Woody in order to concentrate on his other business interests. Negotiations are underway with a potential buyer for his shares. Miss Ning also disclosed to you that her sister is working with your firm as a junior auditor and she made a specific request to include her in the audit team this year. She indicated to you that it was just a small favour and that she would seriously consider appointing another accounting firm next year if this request is ever declined.

Required: Identify issues or conditions surrounding this potential engagement that your firm would consider as indicating a higher risk of material misstatements.