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.