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Internal Control and Risk Management
The Board has conducted a review of the effectiveness of the Group’s system of internal control to ensure the effective and adequate internal control system. The Board convened meetings regularly to discuss financial, operational and compliance controls and risk management functions.
The Board has performed evaluation of the Group’s accounting and financial reporting function to ensure that there is adequacy of resources, qualifications and experience of staff of the function, and their training programmes and budget.
As required by Rule 3.21 of the Listing Rules, the Company has established an audit committee (the “Audit Committee”) with written terms of reference, which deal clearly with its authority and duties. Its principal duties are to review and supervise the Group’s financial reporting process and internal control systems.
The internal audit function monitors compliance with policies and standards and the effectiveness of internal control structures across the whole Group. Findings regarding internal control matters are reported to the Audit Committee. The external auditors have access to the full set of internal audit reports.
The Audit Committee reviewed the Group’s consolidated financial statements, interim and annual reports, the accounting principles and practices adopted and internal control systems. The Audit Committee also reviewed and approved the external auditors’ remuneration and terms of engagement and recommended the Board for re-appointment of the external auditors.
The Audit Committee considered that the existing proposed terms in relation to the appointment of the Group’s external auditors are fair and reasonable.
FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
The Group’s principal financial instruments, other than derivatives, comprise cash and time deposits. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial assets and liabilities such as accounts and bills receivable, other receivables, accounts and bills payable and other payables, which arise directly from its operations.
The Group also enters into derivative transactions, including principally forward currency contracts. The purpose is to manage the currency risks arising from the Group’s operations. It is the Group’s policy that no trading in financial instruments shall be undertaken.
The main risks arising from the Group’s financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk. The board of directors reviews and agrees policies for managing each of these risks and they are summarised below.
Interest rate risk
The Group has no material interest-bearing borrowings and believes that its exposure to cash flow interest rate risk is minimal.
Foreign currency risk
The Group’s monetary assets, liabilities and transactions are principally denominated in Hong Kong dollars, Renminbi or United States dollars. Given that the Hong Kong dollar is pegged to the United States dollar, the Group does not have a foreign currency hedging policy on it. However, considering the appreciation of RMB, the Group has entered into forward currency contracts to manage the foreign currency risk arising from the Group’s operations. Moreover, the majority of the Group’s operating assets are located in the Mainland China and denominated in RMB. As the Group’s financial statements are reported in Hong Kong dollars, there will be a translation credit/(charge) to exchange fluctuation reserve as a result of the RMB appreciation/(depreciation).
The Group trades only with recognised and creditworthy customers. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis and on an individual basis. Each of the customers has been attached with a trading limit and any excess to the limit must be approved by the general manager of the operation unit. Besides, certain accounts receivable are covered by credit insurance. Under the tight control of the credit term and detailed assessment of the creditworthiness of individual customers, the Group’s exposure to bad debts is maintained as minimal.
The credit risk of the Group’s other financial assets, which comprise cash and cash equivalents, restricted bank balance, available-for-sale investments, other receivables and derivative instruments, arises from default of the counterparty, with a maximum exposure equal to the carrying amounts of these instruments. The Group is also exposed to credit risk through the granting of financial guarantees.
None of the Group’s other receivables is either past due or impaired. The financial assets are included in other receivables for which there was no recent history of default.
The Group monitors its risk to a shortage of funds using a recurring liquidity planning tool. This tool considers the maturity of both its financial instruments and financial assets (e.g., accounts and bills receivable) and the projected cash flows from operations.
The Group maintains a balance between continuity of funding and flexibility through maintaining sufficient cash and available banking facilities. The directors have reviewed the Group’s working capital and capital expenditure requirements and determined that the Group has no significant liquidity risk.