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.