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About us
Risk-based financial statements review programme
1. The risk-based financial statements review programme commenced since 1 January 2011.
2. The Financial Reporting Council (FRC) proactively selects and reviews annual financial statements of listed entities to identify issues in financial statements which indicate possible:

(a) relevant irregularities (please refer to the section ‘What is a “relevant irregularity”?’ for further details); and/or
(b) non-compliance with accounting requirements (please refer to the section ‘What is a “relevant non-compliance”?’ for further details).

Selection of financial statements for review

3. The FRC adopts a risk-based approach and selects financial statements based on the following criteria:

(a) Newly listed entities;
(b) Frequent change of directors and senior management;
(c) Change of auditors;
(d)
Listed entities using Accounting Standards for Business Enterprise (ASBE)1;
(e) Overseas auditors;
(f) Small audit firm dealing with complex audit issues;
(g) Alleged non-compliance with accounting requirements and/or auditing or reporting irregularities; listed entities subject to intervention by Hong Kong Exchanges and Clearing Limited and the Securities and Futures Commission; or prolonged suspended listed entities (other than shells);
(h) Financial statements with prior period adjustments suggesting investors relying on prior period financial statements may have been misled;
(i) Industry theme; and
(j) Random basis.
4. The review period commences in January each year. At the beginning of each review period, a work plan, which includes the industry theme selected and the proposed number of financial statements to be reviewed under each category, is prepared.

Initial review of financial statements

5. The FRC has a panel of reviewers. Reviewers are appointed because of their knowledge and experience in financial reporting or auditing.
6. Reviewers review financial statements and accountants’ reports of newly listed companies, financial statements prepared under ASBE, and those containing complex or contentious accounting/auditing issues. The FRC assigns two reviewers to review each set of financial statements selected. The reviewers report issues and findings identified to the FRC.
7. Based on reports from the reviewers, if it appears that there are possible auditing irregularities and/or non-compliance with accounting requirements, the FRC may conduct further review on the case.
8. The FRC internally reviews financial statements with prior period adjustments which may indicate lack of adequate professional skepticism.

Further review of financial statements

9. The auditor and/or listed entity concerned may be asked to provide additional information and explanations of the issues identified by the reviewers.
10. Following an assessment of the information and evidence available, the FRC will decide on the appropriate action to be taken. This may include initiating an investigation or an enquiry, referral of the case to the appropriate regulatory bodies and/or law enforcement agencies, and/or any other action considered appropriate by the FRC.
11. Please refer to the sections ‘investigations’ and ‘enquiries’ for the details about the procedures governing investigations and enquiries of the FRC.

Footnote:
1Since 15 December 2010, Mainland incorporated entities listed in Hong Kong are allowed to prepare their financial statements using Mainland accounting standards and to engage the services of approved Mainland audit firms.

Page last updated: 21 January 2016