Case Study 2

Case Wai Lins Florist The Kwok family started Wai Lins Florist in Mongkok in the mid 1970s. Every morning, Mr and Mrs Kwok would go to the flower wholesalers and choose the freshest blooms for their store. They would then bring them back to the store and arrange them into bouquets using their personal style and flair. They also arranged for some special flowers to be sent directly to them from overseas. Through the years, Wai Lins Florist gained a good reputation for providing original and unique arrangements at a modest price. Customers were now not just limited to Mongkok residents but people were coming from all areas. The Kwoks have three children. The eldest son, Sam and youngest daughter, Amy joined the family business after they finished Form 5 while the middle daughter, Jodi went on to study for a BBA degree in University. In 2003, the Kwoks opened another branch of Wai Lins Florist in Causeway Bay As a result of persistent urging from their Hong Kong island customers. The store was largely managed by Sam and Amy although they do have some part-time help. Luckily, Sam and Amy had inherited their parents flair with flowers. In 2006, after Jodi completed her second year of studies in the BBA program, she convinced her family that it was in their best interest to incorporate the company. Thus the Wai Lins Florist Ltd. was established. It is now mid 2007. Jodi has graduated with a BBA degree. She has prepared a business plan for Wai Lins Florist Ltd. for the next five years which includes an expansion of the number of stores to five, namely one in Shatin, one in Tsim Sha Tsui and one in Tseung Kwan O. Mr and Mrs Kwok would like to significantly cut back the number of hours they put in so that they have more time for traveling. Thus, the plan is to hire five managers for the five stores with Sam and Amy retaining the purchasing function as well as the creative functions to ensure uniformity across all the stores. Jodi will act as the general manager as well as oversee the accounting functions. The family will need to raise finance to fund such an ambitious expansion plan. They plan to approach both venture capitalists as well as private investors. Jodi explained to her family that the first thing they need to do is to look for some auditors to audit the 2006/2007 accounts. One of Jodis accounting professors has suggested one of the Big Four firms, like Price Waterhouse Coopers. Mr and Mrs Kwok do not agree. We have been running the business on our own for thirty years. I dont see why we need to hire outsiders now, especially such an expensive one like Price Waterhouse Coopers.

Required: a. Assume Jodis parents are not satisfied that an audit is necessary. Provide them with at least three justifications for the necessity of an audit. b. Mr and Mrs Kwok are finally convinced that an audit is necessary. A son of an old neighbour is a CPA and runs his own practice as a sole practitioner. He has provided them with a quotation of HK$20,000 for the audit work. A similar quotation from Price Waterhouse Coopers shows fees of HK$40,000 plus expenses. Explain to Mr and Mrs Kwok what they should consider in choosing auditors and why the Big Four firms charge so much more. c. The audit opinion that is usually given by an audit firm normally concludes that the financial statements are true and fair. Is this a guarantee given by the auditors that the financial statements are free from material error and fraud? If this isnt a guarantee, why cant a guarantee be given? d. Auditors need to exercise their professional judgment during the course of an audit and arriving at conclusions. Why is judgment so important in auditing?