AuditFocusfor2025year-endaudits

Inspection3October2025

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Introduction

Navigatethedynamicriskenvironmentof2025

Thechallengingeconomicconditionsof2025,coupledwithnewandincreasinglycomplexbusinessmodels,presentsignificantchallengesforbothcompaniesandtheirauditors.

Ongoinggeopoliticalandeconomicuncertaintiescontinuetoaffectbusinessoperations,withfluctuatinginterestratesandshiftingconsumersentimentfurtherexacerbatingchallengesrelatedtoprofitability,liquidity,andanentity’sabilitytocontinueasagoingconcern.Meanwhile,therapidtechnologyadvancements,suchastheadoptionofartificialintelligence(AI),arefundamentallytransformingbusinessprocessesandintroducingnewriskstooperationalreliability,datasecurity,andcybersecurity.Thesefactorsarenotonlytestingbusinessresiliencebutalsoincreasingtheriskofmaterialmisstatements—whetherduetoerrororfraud.

Theimperativeofauditqualityandheightenedprofessionalscepticism

High-qualityauditsareacornerstoneofmarketintegrity.Theroleofanauditorextendsbeyondsimplyensuringcompliance;theyarecriticalforbuildinginvestortrustandensuringthatfinancialstatementsprovideanaccurateandreliablereflectionofacompany’sperformanceandposition.Thisresponsibilitybecomesevenmoreimportantduringuncertaintimes,whencapitalmarketsrelyheavilyoncredibleinformation.

Atypicalauditapproachisinsufficientintoday’srapidlyevolvingrisklandscape.Auditorsmustcombinestrongtechnicalcompetencewithheightenedprofessionalscepticismtoidentifyandassesstheriskofmaterialmisstatementinfinancialstatements,andtoplanandperformauditproceduresinresponsetotheserisks.Additionally,auditorsmustensurethatsufficientdocumentationismaintainedtoclearlydemonstratetheworkperformed,particularlyinareasinvolvingtheexerciseofprofessionaljudgement.

Purposeofthispublication

Thispublicationoffersanoverviewofthemacroeconomicandmarketlandscapein

2025.Ithighlightskeyfocusareasfor2025year-endauditsandfirm-levelconsiderationstoensurethedeliveryofhigh-qualityauditsamidstacomplexandevolvinglandscape.

However,itisimportanttonotethatthispublicationisnotintendedtoserveasacomprehensiveguideforauditorspreparingfortheir2025year-endaudits.Auditorsshouldexerciseprofessionaljudgementandconsiderthespecificfactsandcircumstancesoftheirauditclientswhendeterminingtheappropriateauditapproachandresponses.

Tableofcontents

Page

Section1Auditimplicationsofthecurrentmacroeconomic1-2

andmarketlandscape

Section2Engagement-specificfocusareas

I.Riskassessment3

II.Impairmentofnon-currentassets4

III.Goingconcernassessment5

IV.Addressingfraudrisks6

V.Groupaudit7

VI.First-yearaudit8

Section3Firm-specifickeyconsiderations

I.Settherighttoneatthetop9

II.Buildcompetenceintheevolvingauditprofession10

III.Closelymonitorauditpartners’workloadandtheir11

involvementinaudits

ANNEXAdditionalguidanceandresources12

Section1

1

Section1

Auditimplicationsofthecurrentmacroeconomicandmarketlandscape

Challengingmarketandeconomicconditionscreateanenvironmentwherecompaniesmayexperienceextendedfinancialpressure,increasingtheirsusceptibilitytomanagementbiasorfraud.Auditorsshouldcarefullyconsidercurrentmarketandeconomicconditionsandincorporatethemintotheriskassessmentandauditplanningprocess.

Thissectionhighlightskeydevelopmentswithinthecurrentmacroeconomicandmarketlandscape.Itprovidesinsightsintoareaswhereauditorsshouldexerciseheightenedprofessionalscepticismandadapttheirauditstrategiesaccordingly.Specificfocusareas,indicatedby,willbediscussedindetailinSection2.

Geopoliticaluncertainty

Ongoinggeopoliticaltensionsandtariff-drivenuncertaintiesintroduce

complexitiesforbusinesses,whichmayaffecttheiroperations,profitability,liquidity,aswellasfinancialreporting.

Matterstoconsider:

·Inventoryvaluation:Assesswhetherwrite-downsofinventoriesare

necessaryduetorisingsellingcostsand/orweakenedcustomerdemand.

·Revenuerecognition:Evaluatewhetherandhowtariffsmayaffectcontractswithcustomers,e.g.,transactionprice,andmeasurementofprogresstowardsatisfactionofaperformanceobligationunderacost-to-costinputmethod.

·Onerouscontracts:Ensureadequateprovisionsaremadeforonerouscontractswheretheunavoidablecostsoffulfillingthecontractexceedtheexpectedeconomicbenefits.

·Subsequentevents:Evaluatetheoccurrenceofsubsequenteventsthatmayrequireadjustmentsto,and/ordisclosuresin,thefinancialstatements.

Impairmentofnon-currentassets

Goingconcernassessment

Liquiditypressures

Externalfactors,suchasgeopoliticalandeconomicuncertaintiesandweakmarketsentiment,mayresultinliquiditychallengesandfinancialdistressfor

someentities.Thesepressuresmaybefurtherintensifiedbytighteningcredit

availability.

Matterstoconsider:

·Classificationofliabilities:Dulyreviewloanagreements,repaymentrecords,andcorrespondencewithlenderstoidentifyanypotentialbreachesofcovenantsorcross-default.Evaluateliabilityclassificationasatthefinancialyear-enddate.

Goingconcernassessment

2

Section1

Persistentheadwindsintheretailandrealestatesectors,withsignsofslowrecovery

HongKong’sretailindustryhasfacedpersistentchallengesduetosluggishdomesticconsumption,drivenbynorthboundtravelandashifttowardonlineshoppingplatforms.Theprovisionaltotalretailsalesvalueforthefirstsevenmonthsof2025declinedby2.6%comparedtothesameperiodin20241.

HongKong’spropertymarkethascontinuedtoexperienceadownwardtrend overthepastsevenmonthsin2025,withtheofficeandretailsectorsadjusting tochangingdemandandpricingdynamics.Theprovisionalpriceindicesfor privateofficesandretailinJuly2025havedecreasedby9.1%and7.3%,respectively,comparedtoDecember20242.

Matterstoconsider:

·Propertyvaluation:Evaluatemanagement’sselectionofcomparabletransactions.Challengemanagementonanyadjustmentsmade,orthelackofadjustments,suchastheabsenceofadjustmentstoreflectthedateoftransactionsinasofteningpropertymarket.

·Expectedcreditlosses:Evaluatewhetherthecreditrisksrelatedtoaccountsreceivableorotherfinancialassets,particularlythosewithdirectorindirectexposuretotheretailandrealestatesectors,havesignificantlyincreasedsinceinitialrecognition.

·Inventoryvaluation:Evaluatewhethercurrentmarketconditionshaveaffectedproductdemand,indicatingpotentialrisksofobsolescenceortheneedforinventorymarkdowns.

·Impairmentofnon-currentassets

.—

Goingconcernassessment

Advancementsintechnologies

TopromotethedevelopmentofthelocalAIecosystem,theHongKongSARGovernmenthasallocatedHK$3billionforthelaunchofathree-yearAISubsidy

Schemetosupportlocaluniversities,researchinstitutes,enterprisesandmoreinleveragingthecomputingpowerofCyberport’sAISupercomputingCentre3.

Matterstoconsider:

·Thoroughunderstanding:Obtainathoroughunderstandingoftheauditclients’ITenvironment,withaparticularfocusontheadoptionoftechnologies,suchasAI,intheirbusinessprocessesandfinancialreporting.

·ITrisksassessment:Assesstheauditclients’ITrisksarisingfromtheadoptionoftechnologies,andevaluatetheeffectivenessofthemeasuresandcontrolstheyhaveimplementedtoaddressthem.

·Competenceandcapabilitiesofauditors:Considertherisksarisingfromtheadoptionoftechnologiesanddeterminewhetherspecialisedskillsorexpertiseareneededtoassessandaddressthem.

1

ProvisionalstatisticsofretailsalesforJuly2025

,CensusandStatisticsDepartmentoftheHKSAR,September2025

2

PropertyMarketStatistics

,RatingandValuationDepartmentoftheHKSAR,September2025

3

ArtificialIntelligenceSubsidyScheme

,DigitalPolicyOfficeoftheHKSAR

Section23

Section2

Engagement-specificfocusareas

I.Riskassessment

Arobustriskassessmentisthecornerstoneofaneffectiveandefficientaudit.Nevertheless,someauditorsapproachthisprocessasamerecheckboxexercise,failingtounderstandtheirauditclients’businessesandoperatingenvironmentthoroughly.Suchasuperficialapproachcanleadtomisplacedauditfocusandresultinmaterialmisstatementsgoingundetected.

Keyreminders

Stayrelevant:Theriskassessmentshouldreflectthespecificcircumstancesofanentity,includinganychangesinitsbusinessandoperatingenvironment.Itshouldalsoconsidertheimpactofemergingtechnologies,suchasAI,onthebusinessprocessandtransactionflows.

Reflecttheriskassessmentresultsinauditplanning:Theengagementpartnershouldtakeanactiveroleindesigningtheappropriateauditapproachtoensurethenature,timing,andextentofauditproceduresareappropriatelydesignedtoaddresstheassessedrisks,ratherthandefaultingtoprior-yearauditapproaches.Theengagementqualityreviewer(EQR)shouldperformanobjectiveevaluationoftheengagementteam’sidentificationandplannedresponsestoassessedrisks,particularlysignificantrisks.

Riskassessmentdoesnotstopatauditplanning:Whileriskassessmentdecisionsaregenerallymadeduringauditplanning,theprocessshouldbedynamicanditerative.Auditorsshouldregularlyre-evaluatetheassessedriskstoensuretheyappropriatelyreflecttheevolvingbusinesslandscapeandtheentity’sadaptationstothesedevelopments.

TurningscepticismintoactionwiththeICCapproach

TheInquiry,Challenge,andCorroboration(ICC)approachprovidesauditorswithastructuredframeworktoapplyprofessionalscepticismeffectively.Belowaresomeillustrative,non-exhaustiveexamplesofitsapplicationinpractice.

Inquire

management

Corroborate

Howdidthecurrenteconomiclandscapeandassociatedchallengesaffectanentity’sbusinessoperationsandfinancialperformance?

·Havetherebeenanychangestotheentity’sbusinessmodeloroperationssincethelastaudit,particularlyinrelationtotechnologyadoption?

·Whatspecificsourcesordiscussionscanbepursuedtoenhancetheunderstandingofthesedevelopments?

·Whydidthefinancialperformanceofyourcompanydiffersignificantlyfromyourpeers?

·Whydidthenewbusinessnotbringanynewriskstoyourcompany’sfinancials,governance,andinternalcontrols?

·Identifyandassesshowindustry,regulatory,andotherexternalfactorsrelevanttotheauditclientmayhavegivenrisetospecificrisksofmaterialmisstatement.

·Evaluatewhethertheengagementteamhadappropriatelyidentified,assessed,andrespondedtotheITrisks.

Challenge

management

Section24

II.Impairmentofnon-currentassets

Assetimpairmentassessmentmayinvolvesignificantmanagementjudgementandestimatesthatcanbesubjecttoahighdegreeofsubjectivityandcomplexity.Challengingmarketandeconomicconditions,combinedwithongoinggeopoliticaluncertainties,furtherheightenthedifficultyofauditingtheseaccountingestimates.Auditorsmustexerciseheightenedprofessionalscepticismandobtainsufficientcorroborativeauditevidencetosupporttheappropriatenessofkeyassumptionsunderlyingtheassetimpairmentassessments.

Keyreminders

?·

Understandmanagement’sestimationprocess:Understandhowprevailingmarketandeconomicconditionsimpacttheentity’sbusinessperformanceandcashflowprojections.Performaretrospectivereviewtoassesstheeffectivenessofmanagement’sestimationprocess.

Evaluateinputsanddataused:Verifythereliabilityofhistoricaldataandthecarryingamountofthecash-generatingunit(CGU).Challengetherelevanceandreliabilityofinformationandkeyinputsadoptedbymanagement.

Criticalchallengeofoptimism:Corroboratemanagement’srepresentationwithappropriatesupportingevidence,suchasindustryforecastsandtheentity’shistoricalfinancialperformance.Considerandaddresscontradictoryorinconsistentevidenceobtained.

Comparelikewithlike:EnsurethatthecashflowsusedtodeterminetherecoverableamountareconsistentwiththeassetsincludedinthecarryingamountoftheCGU.Specificallyconsidercorporateassets,workingcapital,incometaxes,andliabilities.

☆--R-I☆

Takeownershipoftheauditor’sexpertwork:Evaluatetherelevanceandreasonablenessofthesignificantassumptionsandmethods,andtherelevance,completeness,andaccuracyofsignificantsourcedatausedbytheexpert.Addressanycaveats,findings,orobservationsreportedbytheexpert.

Inquire

management

Inquiry,Challenge,andCorroboration

·Howwereuncertaintiesarisingfromchangesinthebusinessenvironmentincorporatedintothediscountedcashflowmodel?

·Whatevidencesupportedtheoptimisticprojectionofrevenuegrowth,despitelowdemand?

·Weremultiplecashflowscenariosconsideredtoaddressthesignificantuncertaintiesrelatedtofutureeventsorthetimingofcashflows?

·Whatspecificevidencesupportedtheappropriatenessofyourassumptions,whichappearedtobeinconsistentwithyourcompany'shistoricalperformanceandthecurrentmarkettrends?

Challenge

management

·Whywastheweightedaveragecostofcapitalfromanothercompanyuseddirectlyasyourcompany’sdiscountratewithoutanyadjustments?

·ComparehistoricaldataandcarryingamountoftheCGUwiththeauditedfinancialinformation.

Corroborate

·Corroboratesignificantassumptionsagainstexternaldata(e.g.,industryandeconomicforecasts)andinternaldata(e.g.,historicalperformanceandcommittedsalesorders).

·Considereventsoccurringaftertheendofthereportingperiodthatmayindicateaneedtoadjustkeyassumptionsandinputs.

Section25

III.Goingconcernassessment

Keyreminders

Currenteconomicheadwindsandsoftmarketsentimentintheretailandrealestatesectorsareplacingentitiesatriskoffinancialdistressandliquiditychallenges.Auditorsactasgatekeepersinassessingtheappropriatenessofmanagement’suseofthegoingconcernbasisofaccountinginthepreparationofthefinancialstatementsandinevaluatingtheadequacyofrelateddisclosures.Thisprovidesusersoffinancialstatementswiththetransparencyneededtomakeinformeddecisionsabouttheentity’sgoingconcern.

Extendtheassessmentbeyondthe12-monthhorizon:Criticallyassesswhethereventsorconditions,suchasamaterialdebtrepaymentin12to18months,requireextendingthegoingconcernassessmentbeyond12monthsfromthedateofthefinancialstatements.

Considertheimpactofexternalfactors:Remainalerttochangesinthemacroeconomicenvironment,suchastariffsandinterestratemovement,thatcouldadverselyaffecttheentity’soperations,liquidity,orabilitytorepayandrefinancedebts.

Assesscompliancewithloancovenantsandcreditavailability:Criticallyevaluatehowthecurrenteconomicenvironmentandtheentity’sfinancialconditionimpactitscreditavailability,keepinmindthatpastprecedentsdonotguaranteefutureoutcomes.

PLAN

Evaluatemanagement'splans:Challengethefeasibility,timing,andoutcomesofproposedplans(e.g.,disposalofassetsorcostreductions).Obtainevidencetoassessmanagement’sintentandabilitytoimplementtheseplans.

Completeandaccuratedisclosures:Evaluatetheadequacyoffinancialstatementdisclosuresregardingeventsorconditionsthatmaycastsignificantdoubtaboutanentity’sabilitytocontinueasagoingconcern,aswellasmanagement’splantoaddressthemandwhetheranymaterialuncertaintiesexist.Assesstheneedfortheinclusionofanemphasisofmatterparagraphintheauditor’sreportortheissuanceofamodifiedopinion.

Inquiry,Challenge,andCorroboration

Inquire

management

Whatevidencesupportedyourintentandabilityoftheforecastassetrealisations,particularlyregardingthetimingandamountsinvolved?

·Howdidyouforecasttheexpectedpatternsofcashreceiptsandpaymentsonamonthlybasis?

·Whywastheassessmentofgoingconcernlimitedtoaperiodof12months,eventhoughamaterialborrowingmaturesin15months?

Challenge

management

·Whatevidencedemonstratedyourentity’sabilitytoreneworsecureadditionalfinancingfollowingacreditratingdowngradeanddeterioratingfinancialconditions,andwhatsupportedtheprogressmadeindiscussionswithlenders?

·Performanindependentsearchforcomparablemarkettransactionstoassessthereasonablenessoftheforecastedassetrealisationvaluesandtimelines.

Corroborate

·Reviewthecorrespondencebetweentheentityanditslendersregardingthefacilitynegotiations.Assessanyevidenceindicatingthebank’sreluctancetolendtotheentity.

Section26

IV.Addressingfraudrisks

Theincreasingcomplexityofbusinessoperationsandpressurestomeetfinancialtargetshavecreatedgreateropportunitiesandpressuresforfraudulentactivitiesandrequiresauditorstoadjusttheirapproachtoeffectivelyidentifyandrespondtofraudrisks.Auditorsmustexerciseheightenedprofessionalscepticismanddesignandperformauditproceduresthatareresponsivetopotentialfraudrisks.

Keyreminders

Scepticismisnotoptional:Heightenprofessionalscepticismforanyindicatorsofpossiblemanagementbiasorpotentialfraud.Thisincludescriticallyevaluatingevidencethatcontradictsmanagement’sresponsestoinquiries,unusualtransactions,previouslyunidentifiedrelatedparties,andarrangementswithcontractualtermsthatdeviatefromtheentity’sornormalindustrypractices.Considertheriskoffraudusingthefraudtriangle.

Challengethebusinessrationale:Criticallychallengethebusinessrationale(orlackthereof)forsignificantnon-routinetransactions.Corroboratemanagement’srepresentationwithevidencefromindependentthirdpartiesandevaluatetheassociatedriskoffraud.ImmediatelyreportanysuspicioustransactionstotheJointFinancialIntelligenceUnit4

Maintaincontroloverthesend-and-receiveconfirmationprocesses:Evaluatethereliabilityofresponses,particularlythosereceivedelectronicallyorwherethereareindicationsthattheresponsemaynothavecomefromtheoriginallyintendedconfirmingparty.

Responsetopossiblemanagementbias:Evaluatemanagement’sidentificationanddeterminationofcomparabletransactionsorcompaniesusedinthevaluationsorimpairmentassessment.Criticallychallengetheexclusionofanytransactionsorcompaniesthatappeartobemorepertinent.

Assigntherightstaff:Assignexperiencedengagementteammemberstocomplexandhigh-riskareas.Ensurecloseandappropriatesupervisionandthoroughreviewoftheworkperformedintheseareas.

Inquiry,Challenge,andCorroboration

·Howhadongoingbusinesschallengesandsoftmarketsentimentaffectedmanagement’sabilitytomeetfinancialtargetsandinfluencetheircompensation?

·Howwerecomparabletransactionsandcompaniesidentified,andhowwasitdeterminedthattheyarecomparable?

·Whatwasthebusinessorcommercialrationaleforthesignificantnon-routinetransaction,andwhatwastherelationshipbetweentheentityandthecounterparty?

·Whatwastherationaleforexcludingamorerecenttransactionthatappearedtoqualifyasacomparablefrommanagement’sanalysis?

·Avoidover-relianceonmanagement’srepresentations.Obtainand

evaluatemultiplesourcesofevidencetoformindependentconclusions.

·Considerallavailableauditevidence,includingbothcorroborativeand

contradictory.Documenttheexerciseofprofessionalscepticism,

particularlytheauditproceduresperformedtoaddressanyinconsistentorcontradictoryinformation.

Challenge

management

management

Inquire

Corroborate

4

HowtoidentifyaSuspicion?

JontFnancaIntegenceUntiiilllii

Section27

V.Groupaudit

Thegroupauditor’soverallobjectiveistoensuresufficientappropriateauditevidenceisobtainedbythegroupandcomponentauditorstosupportthegroupauditopinion.Assuch,thegroupauditor’sresponsibilityindirectingandsupervisingcomponentauditorsandreviewingtheirworkisimperativetotheoverallqualityofagroupaudit.

Keyreminders

Timelyandproactiveinvolvement:Clearlycommunicatethescopeofworkandexpectationstocomponentauditorsinatimelymanner.Besufficientlyandappropriatelyinvolvedindirecting,supervising,andreviewingthecomponentauditors’workthroughongoinginteractions,asevidencedbyminutes/notesfromdiscussionswithcomponentauditors.

Evidenceyourreview:Maintainsufficientdocumentationtodemonstrateyourevaluationofthesufficiencyandappropriatenessofauditevidenceobtainedbythecomponentauditortoaddresssignificantmattersarisingfromthegroupaudit.Simplycreatingaboilerplatereviewmemorandumwithgenericconcludingstatementsisnotenough.

Auditworkonconsolidatedfinancialstatements:Evaluatewhetherthefinancialinformationidentifiedinthecomponentauditor’scommunicationisthesameasthefinancialinformationincorporatedinthegroupfinancialstatements.

Don’toverlookconsolidationadjustments:Consolidationadjustmentsrepresentahigh-riskareathatmayconcealerrorsormanipulations.Theirauditrequiresexperiencedstaffwithathoroughunderstandingofgroupoperations.

Inquiry,Challenge,andCorroboration

Inquire

·(Tocomponentauditors)Whatwerethekeylocaleconomic,regulatory,andexternalfactorsthatinfluencedthecomponentanditsenvironment?Howdidthesefactorsimpactyourriskassessmentofthecomponent’sfinancialinformation?

·(Tomanagement)Howdidyouensurethatallsubsidiarieshadbeenscopedinforconsolidation,andtheaccuracyandcompletenessoftheconsolidationadjustments?

Challenge

·(Tocomponentauditors)Whatspecificevidencesupportedyourconclusionregardingtheappropriatenessofthesignificantassumptionsusedbythecomponentmanagementinmakingaccountingestimates?Whatalternativescenariosdidyouconsider?

·(Tomanagement)Whatadjustmentsweremadetothecomponent’sfinancialinformationbeforebeingincorporatedintothegroupfinancialstatements,andwhatevidencesupportedtheseadjustments?

·Corroboratethesufficiencyofthecomponentauditor’sworkthroughongoinginteractionsandareviewoftheirauditworkingpapers.Ensurethatthegroupengagementauditfilescontainsufficientdocumentation,includingbutnotlimitedtothenature,timing,andextentofauditproceduresperformedbythecomponentauditors,conclusionsreached,andhowthegroupauditorevaluatedorchallengedanysignificantprofessionaljudgementmadeinarrivingatthoseconclusions.

Corroborate

Section28

VI.First-yearaudit

First-yearauditsareinherentlychallengingasauditorsmuststartfromthegroundup.Theyneedtounderstandtheclient’sbusiness,operations,andaccountingpoliciestoperformarobustfirst-timeriskassessment.Additionally,theymayneedtoaddressunresolvedmattersfromoutgoingauditorsandperformprocedures,suchastestingtheopeningbalances,thatarenottypicallyrequiredforrecurringaudits.Thesefactorshighlighttheneedforadditionaltime,resources,andtheextensiveinvolvementofexperiencedteammemberstoensureauditquality.

Keyreminders

?

Criticallyassessyourcompetenceandcapabilities:Ensureyouhavetheappropriatecompete