2018.01 PANASIALUM

Company Name: PanAsialum Holdings Company Limited
Stock Code: 02078
Year end: September 30, 2015

Basis for Disclaimer of Opinion

Scope Limitations Relating to Findings of the Investigation

A s a result o f the matters identified i n the independent investigation (the “Investigation”) conducted by an independent professional adviser as described in Note 2.1.1 to the consolidated financial statements, we had planned to conduct extended procedures in the audit of the Company’s consolidated financial statements as at and for the year ended September 30, 2014 (the “2014 Audit”), but had encountered various limitations in the 2014 Audit.

The Group has taken into account of the findings of the Investigation when it prepared the consolidated financial statements as at and for the year ended September 30, 2015. Due to the findings of the Investigation and taken into consideration of the scope limitations encountered in the 2014 Audit, we have continued to plan to conduct extended procedures in the audit of the Company’s consolidated financial statements as at and for the year ended September 30, 2015. However, the scope limitations encountered in the 2014 Audit remained unresolved, and there were also other limitations, as outlined below.

(1) Recoverability of prepayments to a supplier

As described in Note 2.1.1(A) to the consolidated financial statements, the Group recognized a n impairment provision o f RMB25,999,000 (equivalent t o HK$33,014,000) against the prepayments made to Supplier A as at September 30, 2014. During the year ended September 30, 2015, the Group continued to make prepayments t o Supplier A totalling RMB12,696,000 (equivalent t o HK$16,043,000) for the purchase of aluminium ingots; however, no aluminium ingots were subsequently delivered to the Group by Supplier A in relation to the prepayments made during the year ended September 30, 2015. After taking into account the amount of RMB5,430,000 (equivalent to HK$6,866,000) recovered through the legal proceedings against Supplier A as described in Note 2.1.1(A), the Group had made a further impairment provision of RMB12,696,000 (equivalent to HK$16,043,000) during the year ended September 30, 2015.

Management was unable to provide us with satisfactory evidence about the background of Supplier A, as well as the business rationale and commercial substance of the prepayments made to Supplier A. We were unable to obtain the confirmation reply from Supplier A to confirm the amounts of aluminium ingots purchase from it during the year ended September 30, 2015 as well as the outstanding prepayment balances to Supplier A as at the same date. We were also unable to interview with Supplier A to ascertain the amounts and nature of the prepayments made to Supplier A.

As such, we were unable to obtain sufficient and appropriate documentary evidence to ascertain the nature, occurrence, accuracy, completeness and presentation of the total prepayments made to Supplier A o f RMB12,696,000 (equivalent to HK$16,043,000) during the year ended September 30, 2015. There were also no alternative audit procedures that we could perform to satisfy ourselves as to whether the impairment charge of RMB12,696,000 (equivalent to HK$16,043,000) recognized during the year ended September 30, 2015 and the net prepayment balance to suppliers of HK$25,297,000 as at the same date were fairly stated. Consequently, we were unable to determine whether any adjustment to these amounts was necessary.

(2) Recoverability of receivables from, and possible relationship with, certain customers in Australia

A customer in Australia together with its subsidiaries and affiliates (collectively the “Australia Customers”) was one of the Group’s largest customers. Due to a group restructuring of the Australia Customers, two new companies were incorporated in Australia in April 2014 (“Australia Customer A” and “Australia Customer B”). In May 2014, Australia Customer A agreed to assume, from the Australia Customers, the payment obligations of the trade payables to the Group totalling HK$319,503,000. Since May 2014, Australia Customer B had begun to act as an import agent for Australia Customer A.

Meanwhile, the Group started making sales to another new customer (“Customer C”) during the year ended September 30, 2014.

As described in Note 2.1.1(B) to the consolidated financial statements, the Investigation revealed possible connections between certain relatives of the former chairman of the Company with Australia Customer A and Australia Customer B. There were also possible connections between some of the Australia Customers and Supplier A. In addition, there was evidence indicating that certain goods sold to Customer C were resold to Australia Customer B.

Furthermore, Australia Customer A and Australia Customer B delayed in settlement and the outstanding trade receivables from them became long overdue as at September 30, 2014. Customer C had delayed its settlement which the Group had continuously demanded for settlement but in vain. After taking into account the subsequent collections and balances recovered from the relevant legal actions described in Note 2.1.1(B) to the consolidated financial statements, total outstanding trade receivables of HK$100,102,000 from Australia Customer A, Australia Customer B and Customer C were written off during the year ended September 30, 2014.

During the year ended September 30, 2015, while there were no sales to Australia Customer A, the Group continued to record sales to Australia Customer B and Customer C of HK$241,902,000 and HK$36,352,000, respectively. The trade receivable balances (before the current year write-off) outstanding from Australia Customer B and Customer C were HK$225,398,000 and HK$32,797,000, respectively as at September 30, 2015.

Furthermore, Australia Customer B delayed in settlement and the outstanding trade receivables from it became long overdue as at September 30, 2015. Customer C had delayed its settlement which the Group had continuously demand for settlement but in vain. After taking into account the subsequent collections and balances recovered from the relevant legal actions described in Note 2.1.1(B) to the consolidated financial statements, total trade receivables from Australia Customer B and Customer C of HK$137,806,000 and HK$36,352,000, respectively, in relation to the sales executed during the year ended September 30, 2015, had been written off in the same year.

Management was not able to provide us with sufficient information and explanations about the background of Australia Customer A and Australia Customer B as well as their relationship with the Australia Customers, and the business rationale to accept the assignment of trade receivables of HK$319,503,000 from the Australia Customers to Australia Customer A (which was newly incorporated in April 2014). We were also unable to obtain satisfactory explanations and adequate evidence from management to ascertain the relationship, if any, between the Group and Australia Customer A and Australia Customer B, and between Customer C and Australia Customer B and/or Australia Customer A (and thus the relationship of Customer C, if any, with the Group), nor were we able to interview the relevant counterparties identified in the Investigation. We were also unable to obtain the satisfactory confirmation replies from Australia Customer A, Australia Customer B and Customer C to confirm the trade receivable balances with them as at September 30, 2015.

Management was also not able to provide us with adequate documentary evidence to support the rationale of recognizing the write-off of trade receivables from Australia Customer B and Customer C totalling HK$174,158,000 during the year ended September 30, 2015, and of the impairment assessment of the outstanding trade receivables from Customer C.

Because of the above scope limitations, there were no alternative audit procedures that we could perform to satisfy ourselves as to:

(i) whether the Group had any related party relationships with the Australia Customers, Australia Customer A, Australia Customer B and Customer C, and thus the accuracy and completeness of the disclosures of related party balances and transactions in the Company’s consolidated financial statements as at and for the year ended September 30, 2015; and

(ii) whether the write-off of trade receivables from Australia Customer B and Customer C totalling HK$174,158,000 recognized during the year ended September 30, 2015 and the total write-off amounts of trade receivables from Australia Customer A, Australia Customer B and Customer C o f HK$274,260,000 recognized up to September 30, 2015 were fairly stated; and whether these write-offs were recognized in the proper accounting periods.

Consequently, we were unable to determine whether any adjustment to these amounts and disclosures was necessary.

(3) Impairment of investment in and advances to, and possible relationship with, an associated company

As described in Note 2.1.1(C) to the consolidated financial statements, the Group had in August 2014 invested an amount of HK$17,524,000 to acquire a 45% equity interest in Leading Sense Limited (“Leading Sense”), which was accounted for as an associated company. As at September 30, 2015, the Group had an outstanding advance of HK$44,841,000 (before write-offs) to Leading Sense and its subsidiaries (the “Leading Sense Group”).

Based on the findings of a legal adviser of the Company, possible connection between one of the registered shareholders of Leading Sense and the former chairman of the Company was identified.

Management was not able to obtain the financial information of Leading Sense Group nor were they able to contact the other shareholders or management of Leading Sense Group since January 2015. Based on management’s collectability assessment, the Group had written off its investment in an associate company of HK$5,893,000 and amounts due from an associated company of HK$44,841,000 during the year ended September 30, 2015.

Management was not able to provide us with the details of the background of Leading Sense’s shareholders as well as the business rationale and commercial substance of the advances to the Leading Sense Group. No satisfactory confirmation reply was obtained by us from Leading Sense in relation to the outstanding advance balance. We were also unable to obtain satisfactory explanations and adequate evidence from management to ascertain whether there are other relationships between Leading Sense Group and the Group, nor were we able to interview with the relevant counterparties in relation to the investment in Leading Sense. Management was also unable to provide us with satisfactory explanations and adequate information to support their impairment assessment of the investment and advance balances, together with the basis and rationale of recognizing the write-off during the year ended September 30, 2015. We were also unable to obtain the latest financial information of Leading Sense Group for the year ended September 30, 2015 nor were we able to get access to the financial records and interview with the management of the Leading Sense Group. We were thus unable to ascertain the share of loss and share of net assets from Leading Sense Group recognized by the Group as at and during the year ended September 30, 2015.

Because of the above scope limitations, there were no alternative audit procedures that we could perform to satisfy ourselves as to:

(i) the business rationale and the commercial substance of the advances to the Leading Sense Group;

(ii) the existence/occurrence, accuracy and completeness of the Group’s advances to Leading Sense Group;

(iii) whether the effects of these transactions had been properly accounted for, classified and disclosed, including whether the write off of the investment and amounts due from an associate company totalling HK$50,734,000 together with the related cash flows presentation for the year ended September 30, 2015 were fairy stated and whether such write-offs were recognized in the proper accounting periods;

(iv) whether the investment in an associated company of HK$nil and the share of its loss of HK$9,493,000 were fairly stated in the Company’s consolidated financial statements as at and for the year ended September 30, 2015; and

(v) whether the Group had any related party relationships with Leading Sense Group before its investment in August 2014, and thus the accuracy and completeness of the disclosures of related party balances or transactions in the Company’s consolidated financial statements as at and for the year ended September 30, 2015.

Consequently, we were unable to determine whether any adjustment to these amounts and disclosures was necessary.

(4) Off-book transactions conducted through personal bank account and off-book cash transactions

As described in Note 2.1.1(D), during the year ended September 30, 2015, the current board of directors of the Company (the “Current Board”) identified certain records setting out certain off-book transactions taken place during the period from January 2015 to June 2017 that were conducted either through a personal bank account opened in the name of the spouse of an employee of the Group or in cash. These off-book transactions were not previously accounted for or recorded in the Company’s consolidated financial statements.

These off-book transaction records indicated that there were proceeds from sales of scraps, which were then used for payments of salaries to employees of the Group or expense reimbursements to certain employees of the Group, including the chief executive officer and an executive director of the Company. The total proceeds from sales of scraps amounted to HK$8,199,000 and the total payment of expenses amounted to HK$7,848,000 for the year ended September 30, 2015.

The Current Board considered these off-book transactions were attributable to the Group, and therefore total other income of HK$8,199,000 and administrative expenses of HK$7,848,000 were recorded in the Company’s consolidated statement of comprehensive income for the year ended September 30, 2015; and other receivables of HK$251,000 and cash of HK$100,000 were recorded in the Company’s consolidated statement of financial position as at September 30, 2015.

Management did not maintain adequate and full underlying supporting and documentary evidence for these off-book transactions. We were also not able to obtain satisfactory and adequate underlying supporting evidence from the relevant bank for these off-book transactions as shown in the bank statements. Despite making our requests through management, we were unable to obtain certain of the confirmation replies from nor were we able to arrange interviews with certain of the counterparties involved in these off-book transactions. We were also not able to obtain sufficient evidence to assess whether there are other off-book transactions not recorded by the Group.

Because of the above scope limitations, there were no alternative audit procedures that we could perform to satisfy ourselves as to:

(i) the occurrence, accuracy, valuation, rights and obligations, existence and completeness of the off-book transactions and balances; and the related tax impacts, if any; and

(ii) whether the information and documents provided to us for the purpose of our audit were complete and accurate in all material respects, and whether the Company’s consolidated financial statements and the notes to the consolidated financial statements as at and for the year ended September 30, 2015 are free from material misstatements.

DISCLAIMER OF OPINION

Because of the significance of the matters described in the Basis for Disclaimer of Opinion paragraphs, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the consolidated financial statements and as to whether consolidated financial statements have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

2017.12 DYNASTY WINES

Company Name: Dynasty Fine Wines Group Limited
Stock Code: 00828
Year end: December 31, 2012

Basis for Disclaimer of Opinion

  1. Issues Arising from the Investigation and Scope Limitations

As disclosed in note 2.2 to the consolidated financial statements, the Company was informed in 2013 of certain anonymous allegations which might have an impact to the consolidated financial statements of the Group in relation to the sales arrangements with certain distributors, discrepancies in inventories held by the Group, recognition and classification of selling expenses and certain other matters. In response to these allegations, the audit committee of the Company (“Audit Committee”) commissioned an independent investigation (“Investigation”) involving third party consultants to investigate certain of these allegations. The Investigation was completed in 2016. The Investigation has identified certain sales agreements and arrangements, storage of inventories in the offsite warehouses and other arrangements, as described in note 2.2(i) to the consolidated financial statements, that were not previously identified and accounted for by the Group and not disclosed to us during or prior to our audit of the Group’s consolidated financial statements for the year ended 31 December 2011.

Based on the findings of the Investigation, the directors considered it necessary to make adjustments to the Company’s consolidated financial statements for the year ended 31 December 2011 and before, and consequently prior year adjustments were considered by the Group in respect of the following matters:

(i) Sales arrangements with certain distributors

Revenues arising from the sales transactions under the sales arrangements with certain key distributors from 2009 to 2011 were previously recognised in the consolidated financial statements at the time when goods were shipped out of the Group’s manufacturing plants. As described in note 2.2(i) to the consolidated financial statements, the Investigation revealed that the goods were in fact shipped to certain offsite warehouses. The Group was responsible for the continuing management of such inventories, bore the inventory risk before the shipments to the downstream distributors and end customers, and was obliged to assist the distributors to identify downstream distributors and end customers to further distribute the goods. Some of these goods were shipped to these downstream distributors and end customers in subsequent periods.

Based on the findings of the Investigation, the directors considered that revenue arising from these sales arrangements should have been booked when the goods were shipped to the downstream distributors or end customers as instructed by the distributors, i.e., when the actual risks and rewards associated with these goods were transferred to the downstream distributors or end customers. As a result, a prior year adjustment was recorded in the consolidated financial statements of the Group as at and for the year ended 31 December 2011.

(ii) Discrepancies in inventories

As described in note 2.2(ii) to the consolidated financial statements, the Investigation has identified that, as at the time when the Investigation was conducted, certain of the Group’s inventory records in 2012 and prior years were not properly maintained and a substantial number of documents supporting the movements of inventories prior to 31 December 2014 and other supporting documents were missing. During management’s process of reconstructing the Group’s inventory records as at 31 December 2014, a net aggregated unexplained difference made up by different inventory items between the physical count result and the accounting records of inventory amounting to HK$53,148,000 was recognised as stock loss for the year ended 31 December 2014 based on the judgement and estimation made by the Group.

Besides, during the physical count of inventory balances at 31 December 2014 the Group identified significant balances of obsolete inventories amounting to HK$244,451,000 for unsellable finished goods due to quality issue. Together with other adjustments, provisions for inventory write-down of HK$210,244,000 was charged to the Group’s consolidated financial statements for the year ended 31 December 2013, while the related balance as at 31 December 2014 was HK$263,389,000.

The directors considered that the events leading to the discrepancies in inventories might have happened in and/or prior to 2012. However, due to the missing supporting documents and inventory records, the Group was unable to quantify the impact, if any, in and prior to 2012. As a result, no adjustment was made by the Group on the consolidated financial statements of the Group as at and for the years ended 31 December 2012 and 2011 in respect of the discrepancies in inventories relating to the unexplained difference and obsolete inventories mentioned.

(iii) Recognition and classification of selling expenses

As described in note 2.2(iii) to the consolidated financial statements, the Investigation has identified certain arrangements with respect to selling and other expenses payable to the distributors in respect of the sales transactions conducted under the sales arrangements described in (i) above. The directors considered that certain selling expenses had not been recorded in the proper reporting periods. Also, as at the time when the Investigation was conducted, it was found that the accounting records and supporting documents in relation to these selling expenses incurred in and prior to 2012 were not properly maintained. Although the Group has attempted to reconstruct its records in relation to selling expenses, due to the loss of the relevant records and documents the Group was unable to accurately and completely reallocate these selling expenses to the relevant accounting periods in and prior to 2012. Based on the limited information available, the directors estimated that distribution expenses of HK$45,517,000 had been understated in the Group’s consolidated financial statements for year ended 31 December 2011 and a prior year adjustment was recorded accordingly.

Further, during the process of reconstructing the selling expenses records, the Group considered that certain marketing expenses reimbursed to the distributors or incurred in other marketing activities previously recorded as distribution expenses were related to the sales transactions with the distributors, and thus should have been adjusted and accounted for as a reduction of the revenue earned from the distributors. Due to the loss of the relevant records and documents, the Group was unable to quantify the impact, if any, in and prior to 2012. As a result, no adjustment was made by the Group in this respect on the consolidated financial statements of the Group as at and for the years ended 31 December 2012 and 2011.

The details of the above prior year adjustments together with their impacts are more fully described in note 2.2 to the Group’s consolidated financial statements.

As explained above, during or prior to our audit of the Group’s consolidated financial statements for the year ended 31 December 2011, we were not provided by management or the directors with the aforementioned sales agreements and other supporting documents governing the terms of sales arrangement, inventory management and the relevant selling activities entered into between the Group and certain key distributors as mentioned above, nor were we informed of the existence of the inventories stored in the offsite warehouses. In response to such matters identified in the Investigation, we have planned to conduct extended procedures in the audit of the Group’s consolidated financial statements as at and for the year ended 31 December 2012. However, there were scope limitations encountered in our audit as outlined below.

Management did not maintain adequate accounting records and supporting documents, in particular, the sales agreements and shipping documents, for a substantial portion of the sales transactions to enable us to assess the sales transactions for the year ended 31 December 2012. The management was also not able to provide adequate supporting documents to enable us to satisfactorily complete the independent confirmation procedures in relation to the trade receivables balances as at 31 December 2012 and the sales transactions for the year then ended.

Management did not maintain adequate accounting records and supporting documents to support the calculation of the costing of the inventory balances together with the related costs of goods sold as at and for the year ended 31 December 2012. Management was also not able to provide any satisfactory evidence and explanation to the unexplained differences in the accounting records of inventory balance as at 31 December 2012. In addition, the management did not perform proper physical count of inventory balance at 31 December 2012 to cover the quantity of the inventory stored in all of the offsite warehouses and identify any obsolete inventories. Moreover, although the directors considered that the events leading to the significant unexplained differences of HK$53,148,000 between the physical count results at 31 December 2014 and the accounting records and the obsolete inventories described in note 2.2(ii) to the consolidated financial statements might have happened in and/or prior to 2012, the directors were unable to quantify the impact of these matters, if any, in and prior to 2012 due to the missing supporting documents and inventory records.

Management did not maintain adequate accounting records and supporting documents for the selling expenses incurred in and prior to 2012 to enable us to assess whether the marketing activities were carried out in the same period in which the selling expenses were recorded. Further, although the directors considered that certain marketing expenses reimbursed to the distributors or incurred in other marketing activities previously recorded as distribution expenses should have been adjusted and accounted for as a reduction of the revenue earned from the distributors, the directors were unable to quantify the impact of this, if any, in and prior to 2012 due to the loss of the relevant records and – 21 – documents. Management was also not able to provide adequate supporting documents to enable us to satisfactorily complete the independent confirmation procedures in relation to the selling expenses for the year ended 31 December 2012.

Because of the above scope limitations, we were unable to obtain sufficient appropriate audit evidence and there were no alternative audit procedures that we could perform to satisfy ourselves as to:

(1) the occurrence, cut-off, accuracy, valuation, rights and obligations, existence and completeness of the sales transactions, the related receivables and payables balances and the related tax impacts as at and for the year ended 31 December 2012;

(2) the occurrence, cut-off, accuracy, valuation, rights and obligations, existence and completeness of the inventory balances together with the related cost of goods sold and the related tax impacts as at and for the year ended 31 December 2012;

(3) the occurrence, cut-off, accuracy, rights and obligations, existence and completeness of the selling and other expenses and the related payable balances and the related tax impacts as at and for the year ended 31 December 2012; and

(4) the accuracy and completeness of the prior year adjustments identified and recorded by management in relation to (1) and (3) above in all material respects.

Accordingly, we were not able to determine whether any adjustments to the consolidated financial statements were necessary.

  1. Impairment of Property, Plant and Equipment

As described in note 15 to the consolidated financial statements, the Group’s consolidated balance sheet included property, plant and equipment with a carrying amount of HK$556,504,000 at 31 December 2012. During the year, Group has been making losses and incurring operating cash outflows that were considered to be an indicator of impairment. However, the directors did not carry out an impairment assessment of its property, plant and equipment at 31 December 2012 because the directors were unable to estimate the recoverable amounts of these assets as at 31 December 2012 due to the loss of the relevant records and documents.

Failure to perform impairment assessment when there is an indicator of impairment is a departure from Hong Kong Accounting Standard 36, “Impairment of Assets”. Had an impairment assessment been performed, an impairment loss might have been recognised in the Group’s consolidated income statement for the year ended 31 December 2012. As the directors did not carry out an impairment assessment as at 31 December 2012, we were unable to determine the effects of the impairment provision, if any, on the consolidated financial statements of the Group as at and for the year ended 31 December 2012.

Disclaimer of Opinion

Because of the significance of the matters described in the Basis of Disclaimer of Opinion paragraphs, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the consolidated financial statements. In all other respects, in our opinion the consolidated financial statements have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

2017.11 RICH GOLDMAN

Company Name: Rich Goldman Holdings Limited
Stock Code: 00070
Year end: June 30, 2017

BASIS FOR QUALIFIED OPINION

Reference is made to the paragraph headed “Basis for Qualified Opinion” set forth in the section headed “Extract of Independent Auditor’s Report” in the Announcement regarding the qualified opinion provide by the auditors of the Company, Zhonghui Anda CPA Limited (“Zhonghui”) on (i) the investment in an associate and loss on disposal of an associate; and (ii) the intangible assets in respect of the junket business. Set out below is the supplementary information regarding the aforesaid qualified opinion:

Investment in an associate and loss on disposal of an associate

The qualified opinion was related to the investment in Good Omen Enterprises Limited (“Good Omen”), a BVI Company incorporated with limited liability which is principally involved in receiving profit streams from gaming and entertainment related business. Prior to its disposal, it was indirectly owned as to 20% by the Company and 80% by Ms. Lao Sio Meng (“Ms. Lao”) and was accounted for as an associate by the Company.

As disclosed in the annual report of the Group for the year ended 30 June 2016, in September 2015, Good Omen engaged a lawyer to recover outstanding trade receivables owed by the junket promoter. The Group did not take any further actions as it only held 20% interest, a non-controlling interest in Good Omen and the remaining 80% interest is held by Ms. Lao, the sole owner of the junket, and therefore the Group in a very weak position to take actions against junket promoter as both Good Omen and the junket promoter are controlled by Ms. Lao. As such, the Board is of the view that it would be appropriate to dispose of its interest in Good Omen.

On 23 March 2017, the Group entered into the share transfer agreement with Ms. Lao in relation to the disposal (the “Disposal”) of its 20% equity interest in Good Omen for a consideration of HK$10 million. As all of the applicable ratios in respect of the Disposal were less than 5% at the material time, the Disposal did not constitute a notifiable transaction for the Company under Chapter 14 of the Listing Rules.

Intangible assets in respect of the junket business

(i) Background of intangible assets in respect of the junket business

Profit Sharing Agreements

The Group entered into respective profit sharing agreements with Hou Wan Entertainment Unipessoal Limitada (“Hou Wan”), Neptune Ouro Sociedade Unipessaoal Limitada (“Neptune Ouro”) and Hao Cai Sociedade Unipessaoal Limitada (“Hao Cai”) during the year ended 30 June 2009. The Group subsequently entered into another two profit sharing agreements with Lucky Star Entretenimento Unipessoal Limitada (“Lucky Star”) and Hoi Long Sociedade Unipessaoal Limitada (“Hoi Long”) during the year ended 30 June 2010 and the year ended 30 June 2013, respectively. There is no expiry date shown in the profit sharing agreements entered into by the Group with the above junkets (collectively, the “Profit Sharing Agreements”).

Hou Wan, Neptune Ouro, Hao Cai, Lucky Star and Hoi Long are all companies incorporated in Macau.

Junket Representative Agreement – Hou Wan

On 17 February 2006, Hou Wan entered into a junket representative agreement with Venetian Macau Limited (“Venetian Casino”). The agreement was effective from 1 January 2006 to 31 December 2006. On 11 April 2007, Hou Wan entered into a junket representative agreement with Venetian Casino effective until 31 December 2007. On 5 February 2008, Hou Wan entered into a junket representative agreement with Venetian Casino effective until 31 December 2008. On 1 January 2009, Hou Wan entered a junket representative agreement with Venetian Casino effective until 31 December 2009.

In 2010, Hou Wan entered into a junket representative agreement with Venetian Casino with effect of an one-year term with a new clause (the “Renewal Clause”) that “At the expiry of the initial term, the term of the agreement shall automatically renew for one year terms, unless either party gives the other party written notice of non-renewal thirty days prior to the expiration of the initial term or applicable renewal term”. On 30 December 2016, Hou Wan entered into a junket representative agreement with Venetian Casino with the Renewal Clause. The agreement was effective until 31 December 2017. On 31 July 2017, Hou Wan received a notice from Venetian Casino for termination effective on 30 August 2017.

Junket Representative Agreements – Neptune Ouro and Hao Cai

On 31 August 2007, Hao Cai entered into a junket representative agreement with Venetian Casino. The agreement was effective from 31 August 2007 to 31 December 2008. On 5 February 2008, Hao Cai entered into a junket representative agreement with Venetian Casino effective until 31 December 2008.

Subsequently in 2010 and 2011, Hao Cai entered into a junket representative agreement with effect of an one-year term with a new clause that “at the expiry of the initial term, the term of the Agreement shall automatically renew for one year terms, unless either party gives the other party written notice of non-renewal thirty days prior to the expiration of the initial term or applicable renewal term”. On 31 May 2017, Hao Cai received a notice from Venetian Casino for termination effective on 30 June 2017.

Junket Representative Agreement – Lucky Star

On 23 June 2008, Lucky Star entered into a junket representative agreement with Galaxy Casino, S.A. (“Galaxy Casino”). On 18 June 2015, Lucky Star received a notice from Galaxy Casino for termination with effect on 1 July 2015.

Junket Representative Agreements – Hoi Long

On 28 April 2017, Hoi Long entered into a renewal and supplementary junket representative agreement with Sociedade De Jogos De Macau, S.A. (“SJM”) (the “Hoi Long Agreement”). The agreement was effective from 28 April 2017 to 28 April 2018.

The agreement dated 28 April 2017 confirmed that Hoi Long had entered into a junket representative agreement with SJM on 26 April 2012 effective until 28 April 2015. Another two renewal agreements dated 27 April 2015 and 15 February 2016 were effective until 28 April 2016 and 28 April 2017, respectively (together with the aforementioned junket representative agreements, collectively the “Junket Representative Agreement”).

(ii) Reason for the audit qualification

According to Hong Kong Accounting Standard 38 “Intangible Assets”, the useful life shall be assessed by whether an entity is definite or indefinite.

The Company confirmed that no further information could be provided. According to the available information provided by the Company, Zhonghui was unable to reliably assess and conclude the useful life determination of the intangible assets as follows:

  • Initial recognition of the intangible assets (useful life is ruled as indefinite)

Zhonghui was unable to conclude whether the useful life of intangible assets is indefinite according to the Profit Sharing Agreements without defined expiry term and the Junket Representative Agreements with defined expiry term.

  • 1st reassessment on useful life due to termination of Lucky Star as at 30 June 2016 (useful life is changed from indefinite to remaining 5 to 7 years)

According to Hong Kong Accounting Standard 8 “Accounting Policies, Changes in Accounting Estimates and Errors”, the accounting effect of error shall be applied retrospectively and the accounting effect of change of estimate shall be recognized prospectively.

Zhonghui would not assess how much of the impact of the change is due to error and estimate how much is due to change. Zhonghui was unable to justify the effect of the adjustment related to the year ended 30 June 2016, and prior years.

  • 2nd reassessment on useful life due to termination of Hou Wan, Neptune Ouro, Hao Cai as at 30 June 2017 (useful life is changed from remaining 4 to 6 years to remaining 0 to 10 months)

Zhonghui would not assess how much of the impact of the change is due to error and estimate how much is due to change in estimate. Zhonghui is unable to justify the effect of the adjustment related to the years ended 30 June 2017, 2016, and prior years.

The impact of the above uncertainties is material to the consolidated financial statements of the Group. Zhonghui therefore qualified the carrying value of intangible assets as at 30 June 2016 and 2017 and the impairment and amortization charged for the years ended 30 June 2016 and 2017.

(iii) Communication with Crowe Horwath (HK) CPA Limited (“Crowe Horwath”)

Zhonghui sent a professional clearance letter to Crowe Horwath, the previous auditor of the Group, on 18 January 2017, to seek advice as to whether there are any circumstances surrounding the proposed change of which Zhonghui should be aware of. On 20 January 2017, Crowe Horwath advised that Crowe Horwath were not aware of any professional reasons that would preclude Zhonghui from accepting the nomination as auditor of the Group.

In the same clearance letter, Zhonghui sent a professional clearance letter to seek consent from Crowe Horwath in allowing Zhonghui to access Crowe Horwath’s working papers of the Group for the year ended 30 June 2016, and to verify the opening balances of the financial statements of each of the entities of the Group. However, Crowe Horwath did not address such matter in their reply letter.

Further, Crowe Horwath resigned as auditor of the Group on 16 January 2017, whereas the Company was informed by Hou Wan and Hao Cai about the termination arrangements of Hou Wan and Hao Cai on 31 July 2017 and 31 May 2017, respectively. The information regarding the aforesaid termination arrangements was therefore not available to Crowe Horwath. In view of this, Zhonghui considered that it was not necessary to communicate with Crowe Horwath regarding the qualification.

(iv) Company’s response to the qualified opinion

As at 30 June 2017, the carrying value of the intangible assets relating to the Hoi Long Agreement (the “Hoi Long Intangible Assets”) amount to HK$55 million and the Hoi Long Agreement shall remain valid until 28 April 2018. The Company would provide the amortisation to the income statement for the year ending 30 June 2018 based on the aforesaid remaining useful life and the carrying value. It is the intention of the Group to continue the junket business and it is expected that the Hoi Long Agreement will be renewed upon its expiry.

The Company has explored with Zhonghui in relation to how the qualified opinion in respect of the Hoi Long Intangible Assets can be removed in the coming year, and noted that the current view of Zhonghui is that the qualified opinion can only be removed when either (a) the Hoi Long Agreement is expired, terminated, or extended during the year ending 30 June 2018, or (b) the impact of the uncertainties listed in the paragraph above “(ii) Reason for audit qualification” become immaterial to the consolidated financial statements of the Group for the year ending 30 June 2018. Set out below is the discussion of these scenarios:–

(a) If the Hoi Long Agreement is expired

If the Hoi Long Agreement is expired and not renewed during the year ending 30 June 2018, the carrying value of the Hoi Long Intangible Assets would become nil as at 30 June 2018. Given Zhonghui has provided qualified opinion on the carrying value of the Hoi Long Intangible Assets as at 30 June 2017, if the amortization charge in respect of the Hoi Long Intangible Assets (which is calculated based on the carrying value of the Hoi Long Intangible Assets as at 30 June 2017) for the year ending 30 June 2018 is material, Zhonghui would consider qualifying such amortization charge for the year ending 30 June 2018. There would be no qualification regarding the carrying value of the Hoi Long Intangible Assets as at 30 June 2018 as such amount would become nil.

(b) If the Hoi Long Agreement is terminated

If the Hoi Long Agreement is terminated during the year ending 30 June 2018, the Company would provide an impairment loss to the income statement and the carrying value of the Hoi Long Intangible Assets would become nil as at 30 June 2018. Given Zhonghui has provided qualified opinion on the carrying value of the Hoi Long Intangible Assets as at 30 June 2017, if the amortization charge (prior to the termination of the Hoi Long Agreement) (which is calculated based on the carrying value of the Hoi Long Intangible Assets as at 30 June 2017) and impairment loss in respect of the Hoi Long Intangible Assets for the year ending 30 June 2018 are material, Zhonghui would consider qualifying the such amortization charge and impairment loss for the year ending 30 June 2018. There would be no qualification regarding the carrying value of the Hoi Long Intangible Assets as at 30 June 2018 as such amount would become nil.

(c) If the Hoi Long Agreement is extended

If the Hoi Long Agreement is extended with a definite useful life, instead of renewed for a term of one year upon its expiry, during the year ending 30 June 2018, the Company would (aa) recognize the Hoi Long Intangible Assets based on the definite useful life and the valuation of Hoi Long Agreement as at the date of such extension; (bb) provide amortization to the income statement based on the carrying value of the Hoi Long Intangible Assets as at 30 June 2017 (prior to the extension of the Hoi Long Agreement); and (cc) provide amortisation to the income statement based on the Hoi Long Intangible Assets recognized by the Group on the date of the extension of the Hoi Long Agreement (after the extension of the Hoi Long Agreement). Given Zhonghui has provided qualified opinion on the carrying value of the Hoi Long Intangible Assets as at 30 June 2017, if the amortization charge as described in (bb) above for the year ending 30 June 2018 is material, Zhonghui would consider qualifying such amortization charge for the year ending 30 June 2018. Zhonghui would not further qualify the carrying amount of the intangible asset as at 30 June 2018.

(d) The impact of the uncertainties listed in the paragraph above “(ii) Reason for audit qualification” become immaterial to the consolidated financial statements of the Group for the year ending 30 June 2018

If the impacts of the uncertainties listed on in the paragraph above “(ii) Reason for audit qualification” become immaterial to the consolidated financial statements of the Group for the year ending 30 June 2018, no qualification would be made by Zhonghui in respect of the Hoi Long Intangible Assets. As discussed above, it is the intention of the Group to continue the junket business and it is expected that the Hoi Long Agreement will be renewed upon its expiry. Therefore, it is expected the scenarios (a) and (b) as discussed above would not take place for the year ending 30 June 2018.

In order to remove the qualified opinion, the Company has been in discussion with Mr. Tam, the sole owner of Hoi Long and the owner of 80% interest of Essence Gold (a company which is owned as to 20% by the Company and entitled to the profit stream of Hoi Long under Hoi Long Agreement pursuant to the profit sharing agreement entered into among Hoi Long, Essence Gold and Mr. Tam, details of which are set out in the announcement of the Company dated 19 September 2012), to explore the feasibility for the entering into of a new junket representative agreement between Hoi Long and SJM for the extension of the Hoi Long Agreement with a definite useful life. Mr. Tam advised that he has discussed with SJM for such extension.

It should however be noted that it is uncertain as to whether SJM will be willing to negotiate with Mr. Tam to extend the Hoi Long Agreement with a definite useful life. Save as the aforementioned, there are no further actions which can be taken by the Company.

The Company has been exploring various ways to resolve the qualified opinion, but is yet to come up with a concrete solution to address the issue. The Company will publish further announcements to update the Shareholder and potential investor as and when appropriate.

Certain additional information above has been disclosed in the annual report of the Company for the year ended 30 June 2017, which was published on 31 October 2017, and does not affect other information contained in the Announcement.

2017.11 CH NONFERROUS

Company Name: China Nonferrous Metals Company Limited
Stock Code: 08306
Year end: December 31, 2016

Basis for disclaimer of opinion

1 OPENING BALANCES AND CORRESPONDING FIGURES

The consolidated financial statements of the Group for the year ended 31 December 2015 which form the basis for the corresponding figures presented in the current year’s consolidated financial statements were not audited by us. There were no satisfactory audit procedures for us to ascertain the existence, accuracy, presentation and completeness of certain opening balances, corresponding figures and other related disclosures (as further explained in the following paragraphs) shown in the current year’s consolidated financial statements.

2 PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS

We have been unable to obtain sufficient appropriate audit evidence in respect of the cost of property, plant and equipment and intangible assets of approximately RMB491,440,000 (2015: RMB467,191,000) and RMB1,123,998,000 (2015: RMB1,123,998,000), respectively. In addition, as at the end of the reporting period, the management’s assessment of the recoverable amount of the cash generating unit of the Group’s mining business did not take into account that (i) the mining right will expire in 2019 and is subject to approval for renewal by the local authorities; and (ii) the mining right has been subject to a frozen order by court since January 2016 and the Group may lose the mining right. Accordingly, we have been unable to obtain sufficient appropriate audit evidence in respect of the carrying amount of property, plant and equipment and intangible assets of approximately RMB98,096,000 (2015: RMB92,400,000) and RMB252,704,000 (2015: RMB260,191,000), respectively, in the consolidated statement of financial position as at 31 December 2016. There were no other satisfactory audit procedures that we could perform to satisfy ourselves whether the aforesaid balances were fairly stated as at 31 December 2016 and 2015 and the related depreciation, amortisation and provision for impairment losses for the years ended 31 December 2016 and 2015 were properly recorded.

3 ACCRUALS AND OTHER PAYABLES

As at 31 December 2016, included in accruals and other payables is payable to Ruffy Investment Limited (“Ruffy”), the Company’s immediate and ultimate holding company, of approximately RMB322,051,000 (2015: RMB281,356,000) and the related accrued interest of approximately RMB14,796,000 (2015: RMB4,795,000) resulted from the convertible bonds issued by the Company to Ruffy in 2008 which were matured in July 2015. In addition, a gain on settlement of convertible bonds to Ruffy of approximately RMB37,956,000 was recognised as 16 other income for the year ended 31 December 2015 and interest on payable to Ruffy of approximately RMB29,828,000 (2015: RMB12,833,000) was recognised as finance costs for the year ended 31 December 2016. We have been unable to obtain sufficient appropriate audit evidence in respect of the aforesaid balances. There were no other satisfactory audit procedures that we could perform to satisfy ourselves whether the aforesaid balances of payable to Ruffy and the related accrued interest were fairly stated as at 31 December 2016 and 2015 and the aforesaid balance of other income for the year ended 31 December 2015 and the aforesaid balances of finance costs for the years ended 31 December 2016 and 2015 were properly recorded.

4 DEFERRED AND CURRENT INCOME TAXES

We have been unable to obtain sufficient appropriate audit evidence in respect of the deferred tax assets, deferred tax liabilities and current tax liabilities of approximately RMB55,377,000 (2015: RMB54,950,000), RMB53,171,000 (2015: RMB55,050,000) and RMB84,309,000 (2015: RMB84,309,000), respectively, in the consolidated statement of financial position as at 31 December 2016 and in respect of the income tax credit of approximately RMB2,306,000 (2015: RMB152,959,000) for the year ended 31 December 2016. There were no other satisfactory audit procedures that we could perform to satisfy ourselves whether the balances of deferred tax assets and deferred and current tax liabilities were fairly stated as at 31 December 2016 and 2015 and the balances of income tax credit were properly recorded for the years ended 31 December 2016 and 2015.

5 PROVISIONS AND CONTINGENT LIABILITIES ARISING FROM ALLEGED GUARANTEE

As at 31 December 2016, included in accruals and other payables is provision for litigation liabilities of approximately RMB1,234,768,000 in respect of its writs and arbitration cases in which the Group is the defendant as detailed in note 34 to the consolidated financial statements. However, we have been unable to obtain sufficient appropriate audit evidence for the provision for litigation liabilities of approximately RMB1,234,768,000 in the consolidated statement of financial position as at 31 December 2016 and the related expenses of the same amount recognised for the year then ended. There were no other satisfactory audit procedures that we could perform to satisfy ourselves whether the aforesaid balances were fairly stated as at 31 December 2016 and for the year then ended.

In addition, as disclosed in note 34 to the consolidated financial statements, the Group had contingent liabilities of approximately RMB133,078,000 (2015: RMB1,152,898,000) as at 31 December 2016 in respect of a legal case arising in 2015. However, the directors of the Company have not provided us with sufficient documentary evidence to enable us to assess whether it is appropriate for not making provision for the Group’s obligation under the case. There were no alternative audit procedures that we could perform to obtain sufficient appropriate audit evidence in this respect.

6 COMPLETENESS OF PENDING LITIGATIONS, PROCEEDINGS, HEARINGS OR CLAIMS

In 2016 and 2017, the Group made several announcements regarding writs received, and arbitration cases heard and associated claims judged. These writs and arbitration cases relate to transactions conducted with related parties. The Group’s internal procedures could not enable it to properly identify on a timely basis the writs, arbitration cases and associated claims arising in 2014 and 2015. We have not been able to obtain sufficient appropriate audit evidence therefore concerning the completeness and assessment of related consequential impact of pending litigations, proceedings, hearings or claims against the Group. Accordingly, we are unable to determine whether all provisions and contingent liabilities have been properly accounted for and disclosed in the consolidated financial statements in accordance with International Accounting Standard 37 “Provisions, Contingent Liabilities and Contingent Assets”.

7 RECOVERABILITY OF TRADE RECEIVABLES AND OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS

As at 31 December 2016, the Group’s trade receivables and other receivables, deposits and prepayments included past due balances of approximately RMB124,336,000 (2015: RMB116,290,000) and RMB395,281,000 (2015: RMB354,324,000), respectively. As at the date of this report, these balances have not been settled. We were not provided with sufficient appropriate audit evidence to satisfy ourselves as to the recoverability of the balances. Accordingly, we are unable to determine whether the Group’s trade receivables and other receivables, deposits and prepayments were fairly stated as at 31 December 2016 and 2015 and the related provision for impairment losses were properly recorded for the years ended 31 December 2016 and 2015.

8 RELATED PARTY TRANSACTIONS

As described in point 6 above, the Group’s internal procedures in 2015 did not enable it to properly identify and disclose on a timely basis all material related party transactions that occurred during the year. We have not been able to obtain sufficient appropriate audit evidence therefore concerning the completeness of related parties as at 31 December 2015 and related party transactions for the year then ended presented and disclosed in the consolidated financial statements. Accordingly, we have not been able to satisfy ourselves that all related party balances and transactions have been properly presented and disclosed as required by the International Accounting Standard 24 “Related Party Disclosures”.

Any adjustments to the figures as described from points 1 to 8 above might have significant consequential effects on the Group’s results and cash flows for the years ended 31 December 2016 and 2015 and the financial position of the Group as at 31 December 2016 and 2015, and the related disclosures thereof in the consolidated financial statements.

9 MATERIAL UNCERTAINTY RELATED TO GOING CONCERN

As at 31 December 2016, there were conditions which indicate the existence of material uncertainty which may cast significant doubt on the Group’s ability to continue as a going concern and therefore the Group may be unable to realise its assets and discharge its liabilities in the normal course of business.

(a) Default of bank loan with mining right pledged as security

As disclosed in note 26 to the consolidated financial statements, the Company’s subsidiary, 巴盟烏中旗甲勝盤鉛鋅硫鐵礦業開發有限責任公司 (“Jiashengpan”), was in default on repayments of the entrusted loan with principal amount of RMB150,000,000, together with accrued interests and penalties of approximately RMB53,889,000 as at 31 December 2016. Jiashengpan’s mining right of carrying amount of approximately RMB252,704,000 as at 31 December 2016 has been pledged as security of the entrusted loan. The entrusted loan was also secured by guarantees given by the Company’s controlling shareholder (the “Controlling Shareholder”) and by a company controlled by the Controlling Shareholder (the “Corporate Guarantor”). In January 2016, a court order was issued to impound, freeze and distress the assets of Jiashengpan, the Controlling Shareholder and the Corporate Guarantor of value equivalent to approximately RMB176,002,000. The management of Jiashengpan believes that the mining right is subject to the frozen order and the Group may lose the mining right.

(b) Loss for the year and the net current liabilities and net liabilities position

The Group incurred a loss of approximately RMB1,303,943,000 for the year ended 31 December 2016 and as at 31 December 2016, it had net current liabilities and net liabilities of approximately RMB1,304,411,000 and RMB949,650,000, respectively.

(c) Contingent liabilities

The Group had contingent liabilities of approximately RMB133,078,000 as at 31 December 2016 as detailed in note 34 to the consolidated financial statements.

In forming our opinion, we have considered the adequacy of the disclosures made in note 2 to the consolidated financial statements which explains that a proposal for the resumption of trading in the Company’s shares and the proposed restructuring of the Group has been submitted to The Stock Exchange of Hong Kong Limited to pursue a restructuring of the Group.

The consolidated financial statements have been prepared on a going concern basis on the assumption that the proposed restructuring of the Group will be successfully completed, and that, following the restructuring, the Group will continue to meet in full its financial obligations as they fall due in the foreseeable future. The consolidated financial statements do not include any adjustments that would result from a failure to complete the restructuring. We consider that the disclosures are adequate. However, in view of the extent of the uncertainty relating to the completion of the restructuring, we disclaim our opinion in respect of the material uncertainty relating to the going concern basis.

2017.11 PANASIALUM

Company Name: PanAsialum Holdings Company Limited
Stock Code: 02078
Year end: September 30, 2014

Basis for Disclaimer of Opinion

As disclosed in Note 2.1.1 to the Company’s consolidated financial statements, the former Board of Directors of the Company (the “Former Board of Directors”) established an independent committee which had engaged an independent professional advisor to conduct an independent investigation (the “Investigation”) on certain matters brought to the attention of the Former Board of Directors. The Investigation was completed in August 2017. The current Board of Directors (the “Current Board of Directors”), based on the findings of the Investigation, had identified certain matters relating to (i) discrepancies in aluminium ingots receipt and consumption records and recoverability of prepayments to certain suppliers; (ii) transactions with a contractor for the construction of the Group’s new manufacturing facility in Nanyang city, the People’s Republic of China (the “PRC”); (iii) recoverability of receivables from, and possible relationship with, certain customers in Australia; (iv) impairment of investment in and advances to, and possible relationship with, an associated company; and (iv) certain transactions conducted through personal bank accounts. Based on the findings of the Investigation, the Current Board of Directors considered it appropriate to make certain adjustments to the Company’s consolidated financial statements as at and for the year ended September 30, 2014 in respect of these matters.

The Investigation had a number of limitations in respect of the nature and extent of the procedures conducted. In response to these matters and the limitations o f the Investigation, we have planned to conduct extended procedures during the course of our audit of the Company’s consolidated financial statements as at and for the year ended September 30, 2014. However, we also encountered various limitations when we conducted the extended procedures as detailed below.

(1) Discrepancies in aluminium ingots receipt and consumption records and recoverability of prepayments to certain suppliers

(a) As described in Note 2.1.1(A)(a) to the consolidated financial statements, the Investigation identified certain discrepancies between the aluminium ingots receipt records of the finance department and those of the warehouse department, discrepancies between the consumption records of the finance department and the production department for aluminium ingots and aluminium scraps, as well as certain manual modifications to the records of output production rate maintained by the finance department. Based on the findings of the Investigation and the limited information available, the Current Board of Directors of the Company estimated these might have resulted in a loss o f approximately RMB43,592,000 (equivalent to HK$55,356,000) for the year ended September 30, 2014, despite the Group 32 was not able to precisely explain and quantify the discrepancies identified as the relevant supporting documents and records were incomplete. The Current Board of Directors also believed that such estimated loss should have already been included in the cost of sales in the Company’s consolidated income statement for the year ended September 30, 2014 anyway, such that no adjustment to these financials statements was necessary based on the judgements made by the Group. The Current Board of Directors also adopted the same approach to address similar Investigation findings identified in relation to the financial periods prior to October 1, 2013, and therefore made no adjustments to the Company’s consolidated financial statements for those prior periods.

We were unable to obtain satisfactory explanation and adequate documentary evidence from management to verify the nature of and reason for these discrepancies in and manual modifications to the relevant records, nor were we aware or informed of such discrepancies and manual modifications in our prior years’ audits. Management was also unable to provide us with supporting documents to enable us to validate the impact and amounts resulting from these matters. We requested for but were also unable to obtain all the necessary collaborative evidence from the counterparties, including interviews with the suppliers, to substantiate the nature of these discrepancies and manual modifications. Despite our requests, management was also unable to provide us with sufficient appropriate audit evidence to ascertain the amount, nature, completeness and classification of the estimated loss currently recorded as cost of sales. There were no alternative audit procedures that we could perform to satisfy ourselves as to the occurrence, accuracy, completeness, classification, presentation and disclosure of the estimated loss of approximately RMB43,592,000 (equivalent to HK$55,356,000) resulting from the above discrepancies during the year ended September 30, 2014, and whether the effects of these transactions had been properly accounted for, classified, presented and disclosed in the Company’s consolidated financial statements as at and for the year ended September 30, 2014 and the prior financial periods. Consequently, we were unable to determine whether any adjustment to these amounts was necessary.

(b) As described in Note 2.1.1(A)(b) to the consolidated financial statements, as at September 30, 2014, the Group had total prepayments of RMB47,485,000 (equivalent HK$60,184,000 (before write-off) to a new major aluminium ingot supplier of the Group (“Supplier A”), comprising (i) prepayments of RMB31,639,000 (equivalent to HK$40,009,000); and (ii) aluminium ingots in-transit of RMB15,846,000 (equivalent to HK$20,175,000). The Group had written off total prepayments and undelivered aluminium ingots in-transit of RMB25,999,000 (equivalent to HK$33,014,000) to administrative expenses during the year ended September 30, 2014, after taking legal action against Supplier A and considering cash collections and deliveries of aluminium ingots during and subsequent to September 30, 2014.

During the course of our audit, we had obtained a confirmation reply from Supplier A in relation to the balance of aluminium ingots in-transit as at September 30, 2014, but the confirmation result was inconsistent with that obtained by the independent professional advisor during the Investigation process. Management was unable to provide us with satisfactory explanations and adequate documentary evidence for such inconsistency, nor were we able to interview with Supplier A, to ascertain the amount and nature of the prepayments made to Supplier A, the reasons and nature of the inconsistency noted in the confirmation replies, as well as the rationale and basis of the write-off o f the prepayments o f RMB25,999,000 (equivalent o f HK$33,014,000). Management was also not able to provide us with satisfactory evidence about the background of this new Supplier A, as well as the business rationale and commercial substance of the prepayments made to Supplier A. As such, we were unable to obtain sufficient and appropriate documentary evidence to ascertain the nature, occurrence, accuracy, completeness and presentation of the total prepayments made to Supplier A of RMB47,485,000 (equivalent to HK$60,184,000). There were also no alternative audit procedures that we could perform to satisfy ourselves as to whether the total impairment amounts of RMB25,999,000 (equivalent of HK$33,014,000) charged to administrative expenses for the year ended September 30, 2014 and the net prepayment balance of HK$42,565,000 as at the same date were fairly stated. Consequently, we were unable to determine whether any adjustment to these amounts was necessary.

(2) Transactions with a contractor for the construction of the Group’s new manufacturing facility in Nanyang city, the PRC

As described in Note 2.1.1(B) to the consolidated financial statements, the Group had during the year ended September 30, 2014 paid a total sum of approximately RMB42,672,000 (equivalent to HK$54,187,000) to a construction company incorporated in the PRC (the “Nanyang Construction Contractor”) for the construction of a new production plant in Nanyang city, the PRC (the “Nanyang Construction”). The above amounts paid represented construction-in-progress and prepayment of RMB39,936,000 (equivalent to HK$50,713,000) and RMB2,736,000 (equivalent to HK$3,474,000), respectively. The contract with the Nanyang Construction Contractor was subsequently void during the year ended September 30, 2014 without executing a replacement contract.

Based on the findings of the Investigation, payments were made by the Group to a bank account of the Nanyang Construction Contractor and a former finance employee of the Group was able to operate this bank account for a short period during the year ended September 30, 2014. The Investigation also revealed that certain funds were subsequently transferred from this bank account to certain alleged third parties (the “Alleged Third Parties”), including an individual whose name appeared to be the same as a relative of the former chairman of the Company. As described in Note 2.1.1(B) to the consolidated financial statements, the Group 34 subsequently entered into a construction contract with a new contractor in April 2015 for the construction of the same facility, and had written off the total amounts of RMB42,672,000 (equivalent to HK$54,187,000) paid to the Nanyang Construction Contractor during the year ended September 30, 2014.

Management was not able to provide us with adequate evidence to support the nature and amount of the payments to the Nanyang Construction Contractor, including the detailed construction progress report and the supporting for the transfers from the bank account of the Nanyang Construction Contractor to the Alleged Third Parties. We were unable to obtain from management satisfactory explanations or adequate documentary evidence as to the identity of the Nanyang Construction Contractor and the Alleged Third Parties and their relationship, if any, with the Group. We were also unable to obtain all the necessary collaborative evidence from the counterparties, including interviews with the Nanyang Construction Contractor and the Alleged Third Parties, to substantiate the nature of these transactions and their relationship, if any, with the Group. Management was also unable to provide us with adequate documentary evidence to support the impairment assessment of the amounts paid to the Nanyang Construction Contractor that were recorded in construction-in-progress and prepayments.

Because of the above scope limitations, there were no alternative audit procedures that we could perform to satisfy ourselves as to:

(i) the business rationale and commercial substance, occurrence, accuracy, completeness, classification, presentation and disclosure of the payments to the Nanyang Construction Contractor during the year ended September 30, 2014;

(ii) whether the effects of these transactions had been properly accounted for, classified and disclosed, including whether the write off of the construction-in-progress balance of RMB39,936,000 (equivalent to HK$50,713,000) and the prepayment balance of RMB2,736,000 (equivalent to HK$3,474,000) to administrative expenses together with the related cash flows presentation for the year ended September 30, 2014, as well as the remaining balances of construction-in-progress and prepayments as at the same date, were fairy stated; and

(iii) the accuracy and completeness of the disclosure of contingent liability, capital commitment or transactions and balances with related parties, if any, in relation to Nanyang Construction as at September 30, 2014.

Consequently, we were unable to determine whether any adjustment to these amounts and disclosures was necessary.

(3) Recoverability of receivables from, and possible relationship with, certain customers in Australia

A customer in Australia, together with its subsidiaries and affiliates (collectively the “Australia Customers”), was one of the Group’s largest customers. Based on our understanding from management, due to the group restructuring of the Australia Customers, two new Australia companies were incorporated in April 2014 (“Australia Customer A” and “Australia Customer B”). In May 2014, Australia Customer A agreed to assume from the Australia Customers the payment obligations of the trade payables to the Group amounted to HK$319,503,000. Since May 2014, Australia Customer B had begun to act as an import agent for Australia Customer A. The trade receivable balances (before write-off) outstanding from Australia Customer A (including the assignment of the payables originally due by the Australia Customers) and Australia Company B were HK$221,057,000 and HK$156,089,000, respectively, as at September 30, 2014.

Meanwhile, the Group had made sales of HK$38,089,000 to another new customer (“Customer C”) during the year ended September 30, 2014.

As described in Note 2.1.1(C) to the consolidated financial statements, the Investigation revealed possible connections between certain relatives of the former chairman of the Company with Australia Customer A and Australia Customer B. There were also possible connections between some of the Australia Customers and Supplier A. In addition, there was evidence indicating that certain goods sold to Customer C were resold to Australia Customer B.

Furthermore, Australia Customer A and Australia Customer B delayed in settlement and the outstanding trade receivables from them became long overdue as at September 30, 2014. Customer C had delayed its settlement which the Group had continuously demanded for settlement but in vain. After taking into account the subsequent collections and balances recovered from the relevant legal actions described in Note 2.1.1(C) to the consolidated financial statements, total outstanding trade receivables from Australia Customer A and Australia Customer B of HK$69,306,000 and HK$15,056,000, respectively (in relation to the sales executed during the year ended September 30, 2014 and the amounts assigned to Australia Customer A by the Australia Companies for the sales to the Australia Companies during the year ended September 30, 2014) and the outstanding trade receivables from Customer C of HK$15,740,000 as at September 30, 2014, had been written off to administrative expenses in the same year.

Management was not able to provide us with sufficient information and explanations about the background of Australia Customer A and Australia Customer B as well as their relationship with the Australia Customers, and the business rationale to accept the assignment of trade receivables of HK$319,503,000 from the Australia Customers to Australia Customer A (which was newly incorporated in April 2014). We were also unable to obtain satisfactory explanations and adequate evidence from management to ascertain the relationship, if any, between the Group and Australia Customer A and Australia Customer B, 36 and between Customer C and Australia Customer B and/or Australia Customer A (and thus the relationship of Customer C, if any, with the Group), nor were we able to interview the relevant counterparties identified in the Investigation. Management was also not able to provide us with adequate documentary evidence to support the rationale of recognising the write-off of trade receivables from Australia Customer A and Australia Customer B totalling HK$84,362,000 in the accounting period for the year ended September 30, 2014, and of the impairment assessment of the outstanding trade receivables from Customer C.

Because of the above scope limitations, there were no alternative audit procedures that we could perform to satisfy ourselves as to:

(i) whether the Group had any related party relationships with the Australia Customers, Australia Customer A, Australia Customer B and Customer C, and thus the accuracy and completeness of the disclosures of related party balances and transactions in the Company’s consolidated financial statements as at and for the year ended September 30, 2014; and

(ii) whether the write-off of trade receivables from Australia Customer A, Australia Customer B and Customer C totalling HK$100,102,000 recognised during the year ended September 30, 2014 and the balance of outstanding trade receivables (after write-off) from Australia Customer A, Australia Customer B and Customer C totaling of HK$317,071,000 as at the same date were fairly stated; and whether such write-off was recognised in the proper accounting period.

Consequently, we were unable to determine whether any adjustment to these amounts and disclosures was necessary.

(4) Impairment of investment in and advances to, and possible relationship with, an associated company

As described in Note 2.1.1(D) to the consolidated financial statements, the Group had in August 2014 invested an amount of HK$17,524,000 to acquire a 45% equity interest in Leading Sense Limited (“Leading Sense”), which was accounted for an associated company. As at September 30, 2014, the Group had advanced a total balance of HK$26,807,000 to Leading Sense and its subsidiaries (the “Leading Sense Group”).

Based on the findings of a legal adviser of the Company, possible connection between one of the registered shareholders of Leading Sense and the former chairman of the Company was identified.

Management was not able to obtain the financial information of Leading Sense Group nor were they able to contact its other shareholders or management since January 2015. Based on management’s collectability assessment, the Group had written off its investment in and amounts due from the Leading Sense Group totaled HK$42,206,000 in the Company’s consolidated financial statements for the year ended September 30, 2015.

Management was not able to provide us with the details of the background of Leading Sense’s shareholders as well as the business rationale and commercial substance o f the advances to the Leading Sense Group. No satisfactory confirmation reply was obtained from Leading Sense Group in relation to the outstanding advance balance. We were also unable to obtain satisfactory explanations and adequate evidence from management to ascertain whether there are other relationships between Leading Sense Group and the Group, nor were we able to interview with the relevant counterparties in relation to the investment in Leading Sense. Management was also unable to provide us with satisfactory explanations and adequate information to support their impairment assessment of the investment and advance balances as at September 30, 2014, together with the basis and rationale of recognising the impairment in the accounting period for the year ended September 30, 2015.

Because of the above scope limitations, there were no alternative audit procedures that we could perform to satisfy ourselves as to:

(i) the business rationale and the commercial substance of the advances to the Leading Sense Group as at September 30, 2014;

(ii) the existence/occurrence, accuracy, valuation and completeness of the Group’s advances to Leading Sense Group amounted to HK$26,807,000 as at September 30, 2014;

(iii) whether the write-off of the investment in and the amounts due from Leading Sense Group totalling HK$42,206,000, was recognised in the proper accounting period;

(iv) whether the investment in an associated company of HK$15,399,000, and the share of its loss and other comprehensive income of HK$2,130,000 and HK$5,000, respectively, were fairly stated in the Company’s consolidated financial statements as at and for the year ended September 30, 2014; and

(v) whether the Group had any related party relationships with Leading Sense Group before its investment in August 2014, and thus the accuracy and completeness of the disclosures of related party balances or transactions in the Company’s consolidated financial statements as at and for the year ended September 30, 2014.

Consequently, we were unable to determine whether any adjustment to these amounts and disclosures was necessary.

(5) Certain transactions conducted through personal bank accounts

As described in Note 2.1.1(E), the Investigation revealed certain records that contained descriptions of cash withdrawals, transfers and receipts during the period from February 2011 to December 2013 conducted through certain personal bank accounts opened in the names of the chairlady of the Company, a former employee of the Group and individuals related to either the chairlady or the former chairman of the Company. Bank statements of some of these personal bank accounts were provided by certain banks. These personal bank accounts were operated and controlled by an employee in the finance department of the Group. These transactions had never been accounted for or recorded in the Company’s consolidated financial statements.

Based on the findings of the Investigation, these transactions appeared to mainly include (1) receipts from certain aluminium ingots suppliers or other vendors of the Group; (2) cash deposits from other unidentified parties; and (3) withdrawals in cash and alleged payments of salaries and bonuses to employees of the Group. The records indicated that the total amounts received through these personal bank accounts during the period from February 2011 to December 2013 from certain aluminium ingots suppliers and other vendors were approximately RMB43,966,000 (equivalent to HK$55,830,000) and RMB47,317,000 (equivalent to HK$60,085,000) respectively. Moreover, the total alleged payments of salaries and bonuses to employees of the Group made through these personal bank accounts during the period from February 2011 to December 2013 were approximately RMB20,441,000 (equivalent to HK$25,957,000). We were not aware nor were we informed by management or the directors of the Company of these records or possible transactions in our prior years’ audits.

The Current Board of Directors of the Company concluded that there was no solid and persuasive evidence which could clearly indicate that these transactions were attributable to the Group, and therefore no accounting adjustments were made to the Company’s consolidated financial statements with regard to this matter.

The complete set of the records identified in the Investigation and the related supporting documents were reportedly no longer retained by the Group. We were not provided with adequate supporting documents o r explanations from management to enable us to validate whether these personal bank accounts were held by those individuals on behalf of the Group. We were also not able to obtain satisfactory and adequate evidence for the underlying supporting documents from the relevant banks in relation to these transactions, nor were we, despite making our requests through management, able t o arrange interviews with the counterparties of the transferors and transferees identified in these records.

Because of the above scope limitations, there were no alternative audit procedures that we could perform to satisfy ourselves as to:

(i) whether these personal bank accounts were in fact controlled by the Group and thus whether these transactions were attributable to the Group and therefore should have been recorded in the Company’s consolidated financial statements;

(ii) the occurrence, accuracy, valuation, rights and obligations, existence and completeness of the transactions and balances conducted through these personal bank accounts and the related tax impacts, if any; and

(iii) whether the information and documents provided to us for the purpose of our audit were complete and accurate in all material respects, and whether the Company’s consolidated financial statements and notes to the consolidated financial statements as at and for the year ended September 30, 2014, together with the corresponding figures, are free from material misstatements.

Disclaimer of Opinion

Because of the significance of the matters described in the Basis for Disclaimer of Opinion paragraphs, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the consolidated financial statements and as to whether consolidated financial statements have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

2017.11 BOSHIWA INT’L

Company Name: BOSHIWA INTERNATIONAL HOLDING LIMITED
Stock Code: 01698
Year end: December 31, 2011

BASIS FOR DISCLAIMER OF OPINION

  1. Opening balances and corresponding figures

The consolidated financial statements of the Group for the year ended 31 December 2010 which form the basis for the corresponding figures presented in the current year’s consolidated financial statements were not audited by us. There were no satisfactory audit procedures for us to ascertain the existence, accuracy, presentation and completeness of the opening balances, corresponding figures and other related disclosures (as further details explained in the following paragraphs) shown in the current year’s consolidated financial statements.

  1. Limited accounting books and records of the Group

Due to the insufficiency of supporting documentation and explanations for accounting books and records in respect of the Group for the years ended 31 December 2011 and 2010, we were unable to carry out audit procedures to satisfy ourselves as to whether the following income and expenses for the years ended 31 December 2011 and 2010 and the assets and liabilities as at those dates, and the segment information and other related disclosure notes in relation to the Group, as included in the consolidated financial statements of the Group, have been accurately recorded and properly accounted for in the consolidated financial statements:

2011 2010
RMB’000 RMB’000
Income and expenses for the years ended 31 December:
Revenue         1,813,923         1,408,219
Cost of sales       (1,073,924)           (782,497)
Gross profit           739,999            625,722
Other gains and losses          (518,899)              11,287
Distribution and selling expenses          (421,940)           (171,030)
Administrative and general expenses          (104,559)            (76,494)
Interest on borrowings wholly repayable within five years             (8,897)            (21,677)
(Loss)/Profit before tax          (314,296)            367,808
Income tax expense           (42,650)           (116,796)
(Loss)/Profit for the year attributable to owners of the Company          (356,946)            251,012
Other comprehensive income/(loss) for the year, net of tax
Fair value gain/(loss) on available-for-sales investments              2,867              (2,867)
Total comprehensive (loss)/income for the year attributable to owners of the Company          (354,079)            248,145
2011 2010
RMB’000 RMB’000
Assets and liabilities as at 31 December:
Non-current assets
Property, plant and equipment           343,345            190,271
Prepayments for acquisition of property, plant and equipment           142,733              64,639
Prepayments for acquisition of computer software             15,217              24,150
Prepaid lease payments              5,891                6,151
Investment property              3,058                3,178
Intangible assets             15,937              10,727
Deferred tax assets             29,381                9,474
Investment in securities                   –            294,045
Deposits             20,585                7,253
          576,147            609,888
Current assets
Inventories 342,617 354,047           342,617            354,047
Trade and other receivables         1,045,840            480,865
Prepaid lease payments                 260                  260
Loan receivables                   –              19,000
Investments in securities                   –              31,789
Amount due from a related party                   –                2,280
Pledged bank deposits                   –                2,625
Bank and cash balances         1,331,308         1,690,155
        2,720,025         2,581,021
Current liabilities
Trade and other payables           344,210            203,299
Tax liabilities             47,312              71,193
Short-term borrowings           400,000              10,000
Deferred revenue                   –              24,752
          791,522            309,244
Net current assets         1,928,503         2,271,777
Total assets less current liabilities         2,504,650         2,881,665
Non-current liabilities
Deferred tax liabilities                 170                1,500
NET ASSETS         2,504,480         2,880,165
  1. Commitments and contingent liabilities

No sufficient evidence has been provided to satisfy ourselves as to the existence and completeness of the disclosures of commitments and contingent liabilities as at 31 December 2011 and 2010.

  1. Related party transactions and disclosures

No sufficient evidence has been provided to satisfy ourselves as to the existence and completeness of the disclosures of the related party transactions for the years ended 31 December 2011 and 2010 and the related party balances as at 31 December 2011 and 2010 as required by International Accounting Standard (“IAS”) 24 (revised) “Related Party Disclosures”.

  1. Consolidated statement of changes in equity

Except for share capital and share premium, no sufficient evidence has been provided to satisfy ourselves as to the movements and balances of reserves as included in the consolidated statement of changes in equity for the two years ended 31 December 2011 and 2010.

  1. Consolidated statement of cash flows

No sufficient evidence has been provided to satisfy ourselves as to the cash flows as included in the consolidated statement of cash flows for the two years ended 31 December 2011 and 2010.

  1. Other disclosures in the consolidated financial statements

No sufficient evidence has been provided to satisfy ourselves as to the accuracy and completeness of the disclosures in relation to the financial risk management, directors’ and employees’ emoluments, dividends, subsidiaires, share-based payment, operating leases, and events after the reporting period as disclosed in notes 6, 11, 12, 19, 31, 33 and 37.

Any adjustments to the figures as described from points 1 to 7 above might have significant consequential effects on the Group’s results and cash flows for the two years ended 31 December 2011 and 2010 and the financial position of the Group as at 31 December 2011 and 2010, and the related disclosures thereof in the consolidated financial statements.

MATERIAL UNCERTAINTY RELATING TO THE GOING CONCERN BASIS

In forming our opinion, we have considered the adequacy of the disclosures made in note 2 to the consolidated financial statements which explains that a proposal for the resumption of trading in the Company’s shares and the proposed restructuring of the Group has been submitted to The Stock Exchange of Hong Kong Limited to pursue a restructuring of the Company

The consolidated financial statements have been prepared on a going concern basis on the assumption that the proposed restructuring of the Company will be successfully completed, and that, following the restructuring, the Group will continue to meet in full its financial obligations as they fall due in the foreseeable future. The consolidated financial statements do not include any adjustments that would result from a failure to complete the restructuring. We consider that the disclosures are adequate. However, in view of the extent of the uncertainty relating to the completion of the restructuring, we disclaim our opinion in respect of the material uncertainty relating to the going concern basis.

DISCLAIMER OF OPINION

Because of the significance of the matters described in the basis for disclaimer of opinion paragraphs and the material uncertainty relating to the going concern basis as described above, we do not express an opinion on the consolidated financial statements as to whether they give a true and fair view of the state of affairs of the Group as at 31 December 2011 and of the Group’s results and cash flows for the year then ended in accordance with International Financial Reporting Standards and whether the consolidated financial statements have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance.

2017.10 NEPTUNE GROUP

Company Name: Neptune Group Limited
Stock Code: 00070
Year end: June 30, 2017

Basis for Qualified Opinion

1. Investment in an associate and loss on disposal of an associate

We were unable to obtain sufficient appropriate audit evidence to satisfy ourselves as to the assumptions made by the directors in the valuation of the associate’s intangible assets as well as the recoverable amount of the associate’s trade receivables as at 30 June 2016. There are no other satisfactory audit procedures that we could adopt to satisfy ourselves as to the valuation of the interest in an associate as included in the consolidated statement of financial position as at 30 June 2016 and the Group’s share of profit of an associate as included in the consolidated statement of profit or loss and other comprehensive income for the year ended 30 June 2016.

We were unable to obtain sufficient appropriate audit evidence to satisfy ourselves as to the carrying amount of the above associate on disposal for the year ended 30 June 2017. There are no other satisfactory audit procedures that we could adopt to determine whether the loss on disposal of an associate charged to the consolidated statement of profit or loss and other comprehensive income for the year ended 30 June 2017 is appropriate. However, we are satisfied that the investment in an associate is fairly stated as at 30 June 2017.

2. Intangible assets

We were unable to obtain sufficient appropriate audit evidence to satisfy ourselves as to the useful life determination of the intangible assets related to gaming and entertainment business of HK$65,338,000 and HK$571,285,000 as at 30 June 2017 and 2016 respectively. There are no other satisfactory audit procedures that we could adopt to determine whether the carrying amounts of these intangible assets of HK$65,338,000 and HK$571,285,000 as at 30 June 2017 and 2016 respectively are fairly stated, and the accuracy of the impairment loss and amortisation of the intangible assets of HK$450,870,000 and HK$205,416,000 charged for the year ended 30 June 2016 respectively and the accuracy of the impairment loss and amortisation of the intangible assets of HK$397,311,000 and HK$108,636,000 charged for the year ended 30 June 2017 respectively.

Any adjustments to the figures as described above might have a consequential effect on the Group’s financial performance and cash flows for the year ended 30 June 2017 and 2016 and the financial position of the Group as at 30 June 2017 and 2016, and the related disclosures thereof in the consolidated financial statements.

We conducted our audit in accordance with Hong Kong Standards on Auditing (“HKSAs”) issued by the HKICPA. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the HKICPA’s Code of Ethics for Professional Accountants (the “Code”), and we have fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion.

Qualified Opinion

In our opinion, except for the possible effects of the matters described in the Basis for Qualified Opinion section of our report, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 30 June 2017, and of the Group’s consolidated financial performance and consolidated cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) and have been properly prepared in compliance with the Hong Kong Companies Ordinance.

2017.10 CHAMPION TECH

Company Name: CHAMPION TECHNOLOGY HOLDINGS LIMITED
Stock Code: 00092
Year end: June 30, 2017

Basis for Disclaimer of Opinion

(a) Limitation of scope – impairment of available-for-sale investments

As disclosed in note 17 to the consolidated financial statements, as at 30 June 2017, the Group had available-for-sale investments (“AFS Investments”) whose cost and accumulated impairment losses brought forward from prior year amounted to HK$518,480,000 and HK$100,184,000, respectively. The AFS Investments related to investments in unlisted equity securities issued by private entities incorporated outside Hong Kong (the “AFS Investees”) representing holding of strategic investments in the information technology and telecommunications industries. Consistent to prior years, they were measured at cost less any accumulated impairment losses at the end of the reporting period because the range of reasonable fair value estimates was so significant that the directors of the Company were of the opinion that their fair values could not be measured reliably.

As at 30 June 2017, the management of the Group determined that there existed objective evidence that an impairment loss had been incurred on the AFS Investments, after taking into account the significant decline in carrying amounts of net assets of the AFS Investees based on the unaudited financial information of the investees currently available to the management of the Group. Further, the Group did not receive any dividend income from the AFS Investees during the year ended 30 June 2017. In assessing the recoverability of the AFS Investments, the management of the Group tried to establish direct communications with the management of the AFS Investees to understand their latest developments and obtain further and updated financial information of the AFS Investees. However, as at date of this report, the management of the Group represented to us that they have not been able to obtain from the AFS Investees — 16 — the necessary financial and other information nor been able to establish contacts with the management of the AFS Investees. Having considered the general downturn in their respective markets, the management of the Group believed that the AFS Investments should be fully impaired. Accordingly, the Group recognised an additional impairment loss of HK$418,296,000 for the year ended 30 June 2017.

During the course of our audit, we sought to perform alternative audit procedures to satisfy ourselves that the AFS Investments were fully impaired as at 30 June 2017. However the scope of our alternative audit procedures was limited to a set of unaudited financial information for each of the AFS Investees which showed significant write-offs of assets. In particular, as at the date of this report, we have received no response from the AFS Investees to our requests for (i) direct confirmation from the management of the respective AFS Investees that the unaudited financial information provided by the management of the Group to us were consistent to their book and records; and (ii) interviews with the management of the respective AFS Investees.

As a result of the limitations in the scope of our work as explained in the foregoing paragraphs, we were unable to obtain sufficient appropriate audit evidence regarding the impairment assessment of the AFS Investments by the management of the Group. Accordingly, we were unable to satisfy ourselves that the impairment loss of HK$418,296,000 recognised as an expense during the year ended 30 June 2017 and the Nil carrying amount of the AFS Investments as at 30 June 2017 were free from material misstatements. Any adjustments that might have been found to be necessary in respect of these account balances would have a significant effect on the Group’s financial position as at 30 June 2017 and the Group’s financial performance for the year then ended, and the related disclosures thereof in the consolidated financial statements.

(b) Limitation of scope — impairment of inventories resulting from downgradings and reclassifications of cultural products

Included in the Group’s inventories as at 30 June 2017 were cultural products whose cost amounted to HK$8,511,305,000. These cultural products were purchases made by the Group in the second half of the preceding financial year by the former management of the Group in the ordinary course of business for its principal activity of trading of cultural products. Consistent to the impairment review performed as at the end of the preceding financial year, cultural product and jewellery experts (the “Current Experts”) were engaged by the management of the Group to perform an inspection, on a test basis, on the inventories of the cultural products. As a result of the inspection, the Current Experts advised the management of the Group that downgradings and reclassifications were required to be made on a number of the inventory items of cultural products. The findings of the Current Experts were inconsistent with the results of the grading and classification review carried out by the former management of the Group on the cultural products as at 30 June 2016 which had been confirmed by another team of cultural product and jewellery experts (the “Former Experts”) who had performed an onsite inspection, on a test basis, on the inventories of cultural products as at 30 June 2016. As a result of the inconsistencies in the grading and classification of cultural products as at 30 — 17 — June 2017 and 2016, the current management of the Group resolved to arrange another team of cultural product and jewellery experts to conduct a full inspection of the cultural products regarding their grading and classification as soon as practical (the “Full Inspection”). As at the date of this report, the management of the Group is still in the process of identifying and arranging suitable team of experts to conduct the Full Inspection. For the purpose of preparing the current year’s consolidated financial statements, the management of the Group had reassessed the current market values of the inventories as at 30 June 2017 based on the findings of the Current Experts concerning the grading and classification of the cultural products. As a result of the assessment, the management of the Group had determined that the net realisable values of a number of the inventory items of cultural products were lower than their costs and that the shortfalls amounted to an aggregate amount of HK$4,275,921,000. Accordingly, the Group recognised an impairment loss of HK$4,275,921,000 for the year ended 30 June 2017.

Because of the inconsistencies in the written findings of the Former Experts and the Current Experts concerning the grading and classification of cultural products and the unavailability of sufficient appropriate audit evidence available to us as at the date of this report to ascertain the assessment of the net realisable values of the cultural products made by the current management of the Group, we were unable to satisfy ourselves that the impairment loss of HK$4,275,921,000 recognised as an expense during the year ended 30 June 2017 and carrying amount of the cultural products of HK$4,235,385,000 as at 30 June 2017 were free from material misstatements. Any adjustments that might have been found to be necessary in respect of the above would have a significant effect on the Group’s financial position as at 30 June 2017 and the Group’s financial performance for the year then ended, and the related disclosures thereof in the consolidated financial statements.

As a result of these matters, we were unable to determine whether any adjustments might have been found necessary in respect of available-for-sale investments and inventories, and the other elements making up the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows.

Disclaimer of Opinion

We do not express an opinion on the consolidated financial statements of the Group. Because of the significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these consolidated financial statements. In all other respects, in our opinion the consolidated financial statements have been properly prepared in compliance with the disclosure requirements of the Hong Kong Companies Ordinance.

2017.10 KANTONE HOLDING

Company Name: KANTONE HOLDINGS LIMITED
Stock Code: 01059
Year end: June 30, 2017

Basis for Disclaimer of Opinion

Limitation of scope – impairment of inventories resulting from downgradings and reclassifications of cultural products

Included in the Group’s inventories as at 30 June 2017 were cultural products whose cost amounted to HK$3,379,083,000. These cultural products were purchases made by the Group in the second half of the preceding financial year by the former management of the Group in the ordinary course of business for its principal activity of trading of cultural products. Consistent to the impairment review performed as at the end of the preceding financial year, cultural product and jewellery experts (the “Current Experts”) were engaged by the management of the Group to perform an inspection, on a test basis, on the inventories of the cultural products. As a result of the inspection, the Current Experts advised the management of the Group that downgradings and reclassifications were required to be made on a number of the inventory items of cultural products. The findings of the Current Experts were inconsistent with the results of the grading and classification review carried out by the former management of the Group on the cultural products as at 30 June 2016 which had been confirmed by another team of cultural product and jewellery experts (the “Former Experts”) who had performed an onsite inspection, on a test basis, on the inventories of cultural products as at 30 June 2016. As a result of the inconsistencies in the grading and classification of cultural products as at 30 June 2017 and 2016, the current management of the Group resolved to arrange another team of cultural product and jewellery experts to conduct a full inspection of the cultural products regarding their grading and classification as soon as practical (the “Full Inspection”). As at the date of this report, the management of the Group is still in the process of identifying and arranging suitable team of experts to conduct the Full Inspection. For the purpose of preparing the current year’s consolidated financial statements, the management of the Group had reassessed the current market values of the inventories as at 30 June 2017 based on the findings of the Current Experts concerning the grading and classification of the cultural products. As a result of the assessment, the management of the Group had determined that the net realisable values of a number of the inventory items of cultural products were lower than their costs and that the shortfalls amounted to an aggregate amount of HK$1,740,108,000. Accordingly, the Group recognised an impairment loss of HK$1,740,108,000 for the year ended 30 June 2017.

Because of the inconsistencies in the written findings of the Former Experts and the Current Experts concerning the grading and classification of cultural products and the unavailability of sufficient appropriate audit evidence available to us as at the date of this report to ascertain the assessment of the net realisable values of the cultural products made by the current management of the Group, we were unable to satisfy ourselves that the impairment loss of HK$1,740,108,000 recognised as an expense during the year ended 30 June 2017 and carrying amount of the cultural products of HK$1,638,975,000 as at 30 June 2017 were free from material misstatements. Any adjustments that might have been found to be necessary in respect of the above would have a significant effect on the Group’s financial position as at 30 June 2017 and the Group’s financial performance for the year then ended, and the related disclosures thereof in the consolidated financial statements.

As a result of these matters, we were unable to determine whether any adjustments might have been found necessary in respect of inventories, and the other elements making up the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows.

Disclaimer of Opinion

We do not express an opinion on the consolidated financial statements of the Group. Because of the significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these consolidated financial statements. In all other respects, in our opinion the consolidated financial statements have been properly prepared in compliance with the disclosure requirements of the Hong Kong Companies Ordinance.

2017.09 DETAI NEWENERGY

Company Name: DeTai New Energy Group Limited
Stock Code: 00559
Year end: June 30, 2017

Basis for Qualified Opinion

Acquisition of Emission Particle Solution Sweden AB

As disclosed in Note 35 to the consolidated financial statements, during the year, the Group acquired the entire equity interest in Emission Particle Solution Sweden AB (“EPS”) at consideration of SEK239,000,000 (equivalent to approximately HK$202,186,000), in which (i) SEK101,200,000 (equivalent to approximately HK$85,612,000) has been settled by cash on 22 December 2016, and (ii) SEK137,800,000 (equivalent to approximately HK$116,574,000) which was the acquisition date fair value of contingent consideration payable by the Group. The amount of contingent consideration payable is subject to post acquisition adjustment mechanism and will be payable by cash.

EPS is principally engaged in the manufacturing and distribution of a vegetable additive product.

(i) Fair value of intangible assets acquired at the date of acquisition of EPS

As detailed in Note 15 to the consolidated financial statements, the management of the Group determined the fair value of the intangible assets of EPS, being production formula, non-competition agreements and sales backlog agreements, at approximately totalling HK$186,863,000 at the date of acquisition by using respective valuation bases and inputs for each of these intangible assets. Deferred tax liabilities of approximately HK$41,110,000 were recognised at the date of acquisition as a result of the recognition of these intangible assets.

We have performed audit procedures set out in Hong Kong Standard on Auditing (“HKSA”) 540 “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures” including to understand how the estimation of the fair value of these assets was prepared, and test/consider the data based on which the fair value of these intangible assets was estimated. However, we were not provided with sufficient appropriate evidence relating to the completeness and accuracy of the data used in the estimating the fair value of the intangible assets. Due to the limitations on our scope of work, we were unable to evaluate whether the fair value of these intangible assets of EPS were appropriately estimated and whether the related deferred tax liabilities were properly stated at the date of acquisition.

Any adjustments to the fair value of these intangible assets found to be necessary would have consequential effect on the amount of goodwill, if any, and deferred tax liabilities recognised at the date of acquisition and at 30 June 2017, the amortisation charge of the intangible assets and the correspondence deferred tax charge for the year ended 30 June 2017, the net assets of the Group as at 30 June 2017 and the net loss of the Group for the year ended 30 June 2017, and the related disclosure.

(ii) Fair value of financial liabilities at fair value through profit or loss at the date of acquisition

At the date of acquisition, the Group had recognised the fair value of the contingent consideration payable for the acquisition of EPS of approximately HK$116,574,000 as the financial liabilities at fair value through profit or loss. The actual amount of contingent consideration payable is calculated with reference to the net profit after tax of EPS for the period from 1 January 2017 to 31 December 2017 and the profit target agreed in the acquisition of EPS. SEK137,800,000 (equivalent to approximately HK$116,574,000 at acquisition date) represented the maximum amount payable (i.e. the profit target is met) and without taking account of the time value effect.

The fair value of the financial liabilities at fair value through profit or loss at the date of acquisition was determined by the management of the Group by reference to a valuation report prepared by an independent professional qualified valuer based on the forecast of EPS performance for the period from 1 January 2017 to 31 December 2017 prepared by the Group’s management (the “Forecast”). We have performed audit procedures set out in HKSA 540 “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures” including to understand how the Forecast was prepared, and test/consider the data based on which the Forecast was prepared and the fair value of the financial liability was estimated. However, we were not provided with sufficient appropriate evidence relating to the accuracy and relevance of the data used in estimating the fair value of the financial liabilities. Due to the limitations on our scope of work, we were unable to determine whether the fair value of financial liabilities at fair value through profit or loss was appropriately stated at the date of acquisition.

Any adjustments to the fair value of the contingent consideration payable at acquisition date found to be necessary would have an effect on the fair value of the purchase consideration for EPS and the amount of goodwill, if any, at the date of acquisition, and the related disclosure.

(iii) Impairment assessment of goodwill as at 30 June 2017

As at 30 June 2017, the carrying amount of goodwill and intangibles assets acquired arising from the acquisition of EPS amounted to approximately HK$58,602,000 and HK$192,164,000 respectively. In the preparation of the consolidated financial statements, the management of the Group has performed an impairment assessment on the cash generating unit (“CGU”) to which the goodwill and intangible assets belong. According to the Group’s accounting policies, the impairment assessment is by comparing the CGU’s carrying amount to the CGU’s recoverable amount. The recoverable amount of the CGU as at 30 June 2017 was determined by the management of the Group by reference to a valuation report prepared by an independent professional qualified valuer based on a cash flows forecast developed by the Group’s management (“the Forecast”). With reference to the result of the impairment assessment, the management of the Group considered that there is no impairment on the CGU as at 30 June 2017.

We have performed audit procedures set out in HKSA 540 “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures” including to understand how the Forecast was prepared, and test/consider the data based on which the Forecast was prepared and the CGU’s recoverable was estimated. However, we were not provided with sufficient appropriate evidence relating to the accuracy and relevance of the data used in estimating the recoverable amount of the CGU. Due to the limitations on our scope of work, we were unable to determine whether the recoverable amount of the CGU was appropriately estimated and whether recognition of impairment losses on the assets included in the CGU including the goodwill was necessary as at 30 June 2017.

Any impairment loss recognition found to be necessary would reduce the carrying amount of goodwill, and may also reduce the carrying amounts of other assets in the CGU including the intangible assets and the corresponding deferred tax liabilities as at 30 June 2017. The net assets of the Group as at 30 June 2017 and the net loss of the Group for the year ended 30 June 2017 would also be adversely affected.

(iv) Fair value of financial liabilities at fair value through profit or loss as at 30 June 2017

As at 30 June 2017, the Group’s financial liabilities at fair value through profit or loss (see (ii) above) amounted to approximately HK$127,431,000, the fair value which was determined by the management of the Group by reference to a valuation report prepared by an independent professional qualified valuer. The valuation report was based on the forecast of EPS performance for the period from 1 July 2017 to 31 December 2017 prepared by the management of the Group (the “Forecast”). We have performed audit procedures set out in HKSA 540 “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures” including to understand how the Forecast was prepared, and test/consider the data based on which the Forecast was prepared and the fair value of the financial liability was estimated. However, we were not provided with sufficient appropriate evidence relating to the accuracy and relevance of the data used in estimating the fair value of the financial liabilities. Due to the limitations on our scope of work, we were unable to determine whether the fair value of the financial liabilities at fair value through profit or loss as at 30 June 2017 was appropriately stated. – 37 – Any adjustments to the fair value of the financial liabilities as at 30 June 2017 found to be necessary would have an effect on the net assets of the Group as at 30 June 2017 and net loss of the Group for the year ended 30 June 2017.

Qualified Opinion

In our opinion, except for the possible effects of the matters described in the “Basis for Qualified Opinion” section of our report, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 30 June 2017, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and have been properly prepared in compliance with the disclosure requirements of the Hong Kong Companies Ordinance.