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Star Beauty Limited is a small private company incorporated in Hong Kong. The company has a retail shop selling cosmetics at Tsuen Wan. The Ho family owns 100% of the equity of the company and manages the company by themselves. The Ho family intends to expand the business; as a result, more capital is needed for this purpose. After careful discussion, the Ho family decided to raise additional capital through issuing new shares and debentures. The issuance of shares will reduce the Ho family’s equity interest to 50%. In order to cope with the quick expansion of the business, a managing director will be appointed to oversee the financial reporting and daily operations of the company. The Ho family together with other members will concentrate on issues at the strategic level.
Required:
(a) Discuss three reasons why Star Beauty Limited should have an independent audit of its financial statements.
(b) Discuss whether there will be agency risk when the Ho family delegates certain authority to the manager. If there could be agency risk, explain the nature of the agency costs that could arise.
(c) According to Companies Ordinance, who is eligible to act as an auditor for statutory audits.
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