The Accounting and Financial Reporting Council (AFRC) in Hong Kong has publicly reprimanded Gary Cheng CPA (GCCL) and two of its practicing directors, imposing total fines of $147,284 (HK$1.16m) for independence breaches and audit deficiencies.
The sanctions stem from failures in the 2021 audit of Hong Kong-listed eBroker Group.
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The regulator fined GCCL HK$700,000, engagement director Cheng Faat Ting Gary HK$350,000 and engagement quality control reviewer Chow Yiu Tai HK$105,000.
According to an AFRC statement, a consultancy company within GCCL’s network conducted an internal control review for eBroker Group alongside the 2021 audit.
The review covered revenue and receivables of two key subsidiaries.
The AFRC said: “As matters covered by the review overlapped with part of the scope of the 2021 Audit, the circumstances may lead the auditor to rely on the consultancy firm’s work or fail to maintain sufficient professional scepticism in the overlapping areas, thereby potentially compromising the auditor’s objectivity.”
It added that providing both services is prohibited under the Code of Ethics for Professional Accountants in public interest entity audits when the work involves areas with a higher risk of material misstatement or internal controls over financial reporting.
GCCL wrongly concluded that the risk had been addressed by keeping the audit and review teams separate and preventing the audit team from relying on the review’s findings.
The regulator added that Chow’s dual role created further conflicts. He signed the review’s engagement letter and the cover letter accompanying its report, which raised concerns about his objectivity and independence.
The AFRC identified further deficiencies in the auditor’s work on trade receivables and journal entry testing.
The auditor failed to obtain sufficient appropriate evidence to support the recorded receivables balances. This was particularly important because the 2021 audit was the company’s first-year audit and recoverability of the receivables was a key audit matter.
The auditor also failed to confirm that the journal-entry population was complete.
AFRC Investigation and Compliance head Denis Cheng and AFRC Discipline head Hester Leung said: “Audit quality ultimately depends on auditors’ ability to exercise independent judgment in the face of uncertainty and risk.
“Audit practitioners must remain vigilant to actual, potential and perceived threats to independence, including those arising from relationships with network firms.”
