The Accounting and Financial Reporting Council publicly reprimanded Grant Thornton Hong Kong Limited and two practising directors, Yu Chi Fat and Shi Lei, and fined them a combined HK$910,000 over serious audit deficiencies in Sand International's 2014 audit, according to ETNet.
The regulator said the auditors knew the 2014 audit involved fraud risks related to opening bank balances, but failed to properly control confirmation procedures or design and perform sufficient work to verify whether those balances existed. It said the firm lacked professional scepticism and did not diligently carry out its audit duties.
The penalties included HK$490,000 for Grant Thornton Hong Kong, HK$350,000 for Yu and HK$70,000 for Shi. The case stemmed from a complaint received by local regulators in 2016 after a short-seller report. Sand International's former auditor had already found a cash discrepancy of as much as RMB 2 billion between the company's books and bank balances before resigning, and had flagged potential fraud risk.
When Grant Thornton took over as first-year auditor in July 2015, it knew about the short-seller report and the risks, but major flaws remained in its verification of the 2014 opening bank balances. Of 129 bank confirmations obtained, 126 had no source record in the audit working papers and no evidence of authenticity checks, even though they covered more than 99% of the group's opening bank balances.
The regulator also said Grant Thornton's claimed visits to banks and calls to switchboards were not practical and were not documented with dates, times or locations. It added that the firm failed to understand management's construction revenue estimates and did not include construction progress reports or summaries of key contract terms in the working papers.