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HKSI Paper 16 practice questions

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Question 1Role knowledge and relevant financial foundations

In the context of Hong Kong's IPO regime, what is the primary regulatory role of a sponsor?

  1. To underwrite the entire offering and guarantee the share price
  2. To advise the listing applicant and conduct due diligence to ensure the suitability and accuracy of the listing Correct answer.
  3. To act as the registrar maintaining the register of shareholders
  4. To set the offer price independently of the issuer and investors

Explanation

A sponsor's central role is to advise the listing applicant on the listing process and to conduct reasonable due diligence so that the listing application and prospectus are accurate, complete and the applicant is suitable for listing. The sponsor is a gatekeeper for market integrity.

Question 2Role knowledge and relevant financial foundations

Sponsor work in Hong Kong falls under which type of regulated activity (RA) requiring SFC licensing?

  1. Type 1 (dealing in securities)
  2. Type 4 (advising on securities)
  3. Type 6 (advising on corporate finance) Correct answer.
  4. Type 9 (asset management)

Explanation

Sponsor work is carried out under Type 6 regulated activity, advising on corporate finance. Firms and individuals performing sponsor work must be licensed for Type 6 RA and meet the additional sponsor competence requirements.

Question 3Role knowledge and relevant financial foundations

Which two regulators have primary oversight of new listings on the Main Board in Hong Kong?

  1. The Hong Kong Monetary Authority and the Insurance Authority
  2. The Securities and Futures Commission (SFC) and The Stock Exchange of Hong Kong Limited (SEHK) Correct answer.
  3. The Financial Reporting Council and the Companies Registry
  4. The Mandatory Provident Fund Schemes Authority and the SFC

Explanation

The SFC is the statutory securities regulator with powers under the Securities and Futures Ordinance, while the SEHK administers the Listing Rules and vets listing applications. Both have central roles in regulating new listings.

Question 4Role knowledge and relevant financial foundations

Which code sets out the standards of conduct and competence that apply specifically to corporate finance advisers, including sponsors, in Hong Kong?

  1. The Code on Takeovers and Mergers
  2. The Corporate Finance Adviser Code of Conduct Correct answer.
  3. The Fund Manager Code of Conduct
  4. The Code on Share Buy-backs

Explanation

The Corporate Finance Adviser Code of Conduct sets out the SFC's expected standards of conduct and competence for those advising on corporate finance, including sponsors. Sponsors must comply with it when performing sponsor work.

Question 5Role knowledge and relevant financial foundations

A 'compliance adviser' is appointed by a newly listed issuer. What is the main purpose of this role?

  1. To act as the issuer's external auditor
  2. To advise the listed issuer on its ongoing compliance with the Listing Rules after listing Correct answer.
  3. To replace the sponsor during the IPO process
  4. To underwrite future share placements

Explanation

A compliance adviser advises a newly listed issuer on its continuing obligations and compliance with the Listing Rules for a period after listing. This supports good post-listing corporate behaviour.

Question 6Role knowledge and relevant financial foundations

Under the SFC sponsor regime, a sponsor that fails to discharge its due diligence obligations may be subject to which of the following?

  1. Only a private reminder with no public record
  2. SFC disciplinary action, including fines, suspension or revocation of licence Correct answer.
  3. Automatic transfer of the mandate to another sponsor with no penalty
  4. A reduction in the issuer's share price set by the SEHK

Explanation

Sponsors that fail to meet their obligations may face SFC disciplinary action, which can include public reprimands, substantial fines, suspension or revocation of their licence. This reflects the gatekeeper accountability of sponsors.

Question 7Role knowledge and relevant financial foundations

What term describes the process by which a private company offers its shares to the public for the first time and becomes listed?

  1. A rights issue
  2. An initial public offering (IPO) Correct answer.
  3. A scheme of arrangement
  4. A share buy-back

Explanation

An initial public offering (IPO) is the first sale of a company's shares to the public, accompanied by a listing on a stock exchange. This is the core transaction in which a sponsor advises the applicant.

Question 8Role knowledge and relevant financial foundations

Which body administers the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the Listing Rules)?

  1. The Securities and Futures Commission
  2. The Stock Exchange of Hong Kong Limited (SEHK) Correct answer.
  3. The Hong Kong Monetary Authority
  4. The Companies Registry

Explanation

The Listing Rules are administered by The Stock Exchange of Hong Kong Limited (SEHK), a subsidiary of HKEX. The SFC has statutory backing and oversight but the SEHK is the front-line administrator of the Listing Rules.

Question 9Role knowledge and relevant financial foundations

An 'overall coordinator' in a Hong Kong IPO is best described as which of the following?

  1. An intermediary appointed at an early stage to lead and coordinate the offering and bookbuilding Correct answer.
  2. The independent non-executive director chairing the audit committee
  3. The legal adviser to the listing applicant
  4. The reporting accountant preparing the financial statements

Explanation

An overall coordinator is an intermediary appointed at an early stage to lead and coordinate the offering, including bookbuilding and placing activities, under the SEHK's regime introduced to improve accountability in syndicates.

Question 10Role knowledge and relevant financial foundations

Which statement best describes the relationship between a sponsor's work and market integrity in Hong Kong?

  1. Sponsor work has no bearing on market integrity, which is solely the SFC's responsibility
  2. Sponsors act as gatekeepers whose due diligence helps protect investors and maintain confidence in the market Correct answer.
  3. Sponsors guarantee the future performance of listed shares to protect investors
  4. Sponsors are responsible only to the listing applicant and not to the wider market

Explanation

Sponsors are gatekeepers to the public markets. Their due diligence and advisory work help ensure that only suitable applicants list and that disclosure is accurate, which protects investors and maintains overall market confidence.

Question 11Role knowledge and relevant financial foundations

Which legislation provides the statutory framework for the regulation of securities and futures, including the licensing of intermediaries, in Hong Kong?

  1. The Companies Ordinance
  2. The Securities and Futures Ordinance (SFO) Correct answer.
  3. The Banking Ordinance
  4. The Inland Revenue Ordinance

Explanation

The Securities and Futures Ordinance (SFO) is the principal statute regulating securities and futures markets in Hong Kong, including the licensing and conduct of intermediaries such as sponsors. It underpins the SFC's powers.

Question 12Role knowledge and relevant financial foundations

A sponsor representative is asked by a colleague to ignore an unfavourable due diligence finding to keep an IPO on schedule. What is the appropriate response?

  1. Ignore the finding because the timetable takes priority
  2. Escalate the finding and ensure it is properly investigated and, if material, disclosed, regardless of timetable pressure Correct answer.
  3. Quietly remove the finding from the working papers
  4. Disclose the finding only if the client agrees

Explanation

A sponsor representative must act with integrity and exercise professional scepticism. Material findings must be investigated and, where relevant, disclosed. Timetable or commercial pressure cannot justify suppressing due diligence findings.

Question 13Role knowledge and relevant financial foundations

In a public offering, what is the function of an underwriter?

  1. To audit the listing applicant's financial statements
  2. To agree to purchase or procure purchasers for securities that are not taken up, helping ensure the offer raises the intended funds Correct answer.
  3. To administer the Listing Rules
  4. To act as the issuer's company secretary

Explanation

An underwriter agrees to buy, or procure purchasers for, any securities not taken up by investors, thereby helping ensure the offering raises the intended proceeds. This transfers placement risk away from the issuer.

Question 14Role knowledge and relevant financial foundations

Which of the following is a core licensing requirement that applies to all persons engaged in sponsor work?

  1. They must hold a Type 6 licence and satisfy the SFC's fit and proper and competence requirements Correct answer.
  2. They must personally own shares in the listing applicant
  3. They must be qualified solicitors
  4. They must be resident outside Hong Kong

Explanation

Persons engaged in sponsor work must be licensed for Type 6 regulated activity and meet the SFC's fit and proper and competence requirements, including the relevant examinations. This ensures only qualified persons perform sponsor work.

Question 15Role knowledge and relevant financial foundations

The SFC's powers under the sponsor regime include all of the following EXCEPT:

  1. Inspecting a sponsor's records relating to sponsor work
  2. Taking disciplinary action against a sponsor for failures
  3. Setting the market price at which listed shares must trade Correct answer.
  4. Imposing licensing conditions on intermediaries

Explanation

The SFC can inspect records, take disciplinary action and impose licensing conditions, but it does not set the market price of listed shares, which is determined by supply and demand in the market.

Question 16Role knowledge and relevant financial foundations

Which document is the principal offering and disclosure document used in a Hong Kong IPO of equity securities?

  1. The annual report
  2. The prospectus (listing document) Correct answer.
  3. The circular to shareholders
  4. The notice of annual general meeting

Explanation

The prospectus, also called the listing document, is the principal disclosure document in an IPO. It must contain the information investors need to make an informed decision and complies with prospectus requirements under the Companies (Winding Up and Miscellaneous Provisions) Ordinance and the Listing Rules.

Question 17Role knowledge and relevant financial foundations

Under the Main Board Listing Rules, which of the following is one of the alternative financial eligibility tests a listing applicant may need to satisfy?

  1. The profit test based on a required level of aggregate profit over the track record period Correct answer.
  2. A guarantee that the share price will rise after listing
  3. A minimum number of employees test
  4. A requirement that the company has never paid a dividend

Explanation

The Main Board offers alternative financial tests, including the profit test, which requires the applicant to have achieved a specified aggregate level of profit over the track record period. Other tests include the market cap/revenue tests.

Question 18Role knowledge and relevant financial foundations

What is a 'secondary listing' on the SEHK?

  1. A listing of a company already primarily listed on another recognised overseas exchange Correct answer.
  2. A second tranche of shares issued by a Main Board company
  3. A listing reserved exclusively for debt securities
  4. A listing that takes place during the second half of the year

Explanation

A secondary listing is where a company that already has a primary listing on another recognised overseas exchange seeks an additional listing on the SEHK. The rules provide a regime, including certain accommodations, for such issuers.

Question 19Role knowledge and relevant financial foundations

The 'clawback' mechanism in a Hong Kong IPO with both a public offer and a placing tranche generally operates to:

  1. Increase the size of the public offer (retail) tranche when retail demand is high Correct answer.
  2. Cancel the entire offering if demand is weak
  3. Allow the issuer to claw back shares already allotted to investors after listing
  4. Reduce the offer price automatically once trading begins

Explanation

Clawback reallocates shares from the placing tranche to the public offer tranche when retail subscription levels are high, increasing the proportion available to retail investors. This protects retail participation in heavily subscribed offers.

Question 20Role knowledge and relevant financial foundations

What is the purpose of a 'price stabilisation' mechanism following an IPO?

  1. To support the market price of the newly listed shares for a limited period within permitted rules Correct answer.
  2. To permanently fix the share price at the offer price
  3. To allow the issuer to issue unlimited new shares
  4. To prevent any trading in the shares for one year

Explanation

Price stabilisation allows a stabilising manager, within strict rules and a limited period, to support the share price after listing, typically using an over-allotment option. It is a permitted activity designed to smooth early aftermarket trading, not to fix prices permanently.

Question 21Role knowledge and relevant financial foundations

Which SEHK publication consolidates guidance to help new listing applicants and their advisers understand and meet listing requirements?

  1. The Guide for New Listing Applicants Correct answer.
  2. The Companies Ordinance
  3. The SFC Annual Report
  4. The Takeovers Code

Explanation

The Guide for New Listing Applicants consolidates Exchange guidance materials to assist applicants and their advisers, including sponsors, in understanding and applying listing requirements. Sponsors should determine the relevance of this guidance to each application.

Question 22Role knowledge and relevant financial foundations

Which of the following is a typical requirement imposed on the directors and board of a listing applicant under the Listing Rules?

  1. Directors must collectively and individually accept responsibility for the accuracy of the listing document Correct answer.
  2. Directors must personally guarantee the company's future profits
  3. Directors must each hold at least 10% of the shares
  4. Directors must all be Hong Kong residents

Explanation

Directors of a listing applicant must collectively and individually accept full responsibility for the accuracy and completeness of the information in the listing document. This responsibility statement underpins disclosure accountability.

Question 23Role knowledge and relevant financial foundations

In the IPO process, what is the document submitted to the SEHK at the time of the formal application that is published on the Exchange's website (often called the 'Application Proof')?

  1. A near-final draft of the listing document submitted with the Form A1 application Correct answer.
  2. The signed annual report of the issuer
  3. A private memorandum never made public
  4. The issuer's tax returns

Explanation

The Application Proof is a substantially complete draft of the listing document submitted with the listing application (Form A1) and published on the Exchange's website. It allows early public scrutiny of the proposed disclosure.

Question 24Role knowledge and relevant financial foundations

Which of the following best describes 'offer for subscription' as a method of listing?

  1. New shares are offered by the issuer directly to the public for subscription Correct answer.
  2. Existing shareholders sell their shares to the public
  3. Shares are placed only with a small number of selected investors
  4. Shares are introduced to the market without any new shares or sale

Explanation

In an offer for subscription, the issuer offers new shares directly to the public to subscribe for, raising new capital for the company. This contrasts with an offer for sale, where existing shares are sold.

Question 25Role knowledge and relevant financial foundations

A 'listing by introduction' is most appropriate where:

  1. The securities for which listing is sought are already widely held and no new shares are being issued or sold Correct answer.
  2. The company needs to raise a large amount of new capital
  3. The company is selling a controlling stake to a single buyer
  4. The company has no existing shareholders

Explanation

A listing by introduction is used where securities are already widely held, so listing can proceed without an offer of new or existing shares to the public. No capital is raised at the point of listing.

Question 26Role knowledge and relevant financial foundations

Which of the following is a key consideration when assessing whether a PRC issuer (excluding Hong Kong, Macau and Taiwan) is suitable for listing?

  1. Whether special rules and additional disclosure applicable to PRC issuers are satisfied Correct answer.
  2. Whether the company uses simplified Chinese characters in its name
  3. Whether the company's offices face south
  4. Whether the chairman speaks English fluently

Explanation

Special rules and additional requirements apply to PRC issuers, covering matters such as their articles, dispute resolution and regulatory approvals. Sponsors must assess whether these are met as part of suitability assessment.

Question 27Role knowledge and relevant financial foundations

What is the principal purpose of a sponsor's engagement letter with a listing applicant?

  1. To set out the scope of the sponsor's work, fees, and the terms governing the relationship Correct answer.
  2. To transfer ownership of the applicant's shares to the sponsor
  3. To guarantee the success of the IPO
  4. To replace the applicant's board of directors

Explanation

The engagement letter defines the scope of the sponsor's services, fee arrangements and the terms of the relationship between the sponsor and the applicant. It should be consistent with the sponsor's regulatory obligations.

Question 28Role knowledge and relevant financial foundations

Why is a sponsor's independence from the listing applicant important?

  1. It helps ensure the sponsor's advice and assessment of suitability are objective and not compromised by conflicts Correct answer.
  2. It allows the sponsor to charge higher fees
  3. It guarantees the issuer a higher valuation
  4. It exempts the sponsor from due diligence duties

Explanation

Sponsor independence supports objective advice and an unbiased assessment of the applicant's suitability. Where independence is impaired, the impartiality of the sponsor's gatekeeper function may be compromised, so independence is regulated.

Question 29Role knowledge and relevant financial foundations

A 'Transaction Team' on an IPO is best described as:

  1. The group of staff within the sponsor responsible for executing the sponsor work on a specific IPO Correct answer.
  2. The board of directors of the listing applicant
  3. The retail investors who subscribe for shares
  4. The panel of SFC officers who approve the listing

Explanation

A Transaction Team is the team within the sponsor firm assigned to perform the sponsor work on a particular IPO, led by Principals and supported by Representatives. Its formation and functions are part of how sponsor work is organised and controlled.

Question 30Role knowledge and relevant financial foundations

Why might more than one sponsor be appointed on a single IPO?

  1. To share the workload and responsibilities, though each sponsor remains subject to its sponsor obligations Correct answer.
  2. So that one sponsor can be blamed if anything goes wrong
  3. To avoid having to do any due diligence
  4. To reduce the total fees to zero

Explanation

Multiple sponsors may be appointed to share the work on a large or complex IPO, but each appointed sponsor remains independently subject to its sponsor obligations and accountable for its work.

Question 31Role knowledge and relevant financial foundations

Which of the following parties is normally appointed alongside the sponsor in connection with an IPO?

  1. Reporting accountant, legal advisers and overall coordinator(s) Correct answer.
  2. The issuer's external public relations agency only
  3. The retail subscribers as advisers
  4. The SFC as the issuer's legal adviser

Explanation

A typical IPO involves a team including the sponsor, reporting accountant, legal advisers to the issuer and to the sponsor, and overall coordinator(s) for the offering. Sponsors coordinate with these parties during the process.

Question 32Role knowledge and relevant financial foundations

The ESG-related obligations expected by HKEX of listed issuers primarily concern:

  1. Environmental, social and governance reporting and related disclosure obligations Correct answer.
  2. The issuer's logo design standards
  3. Employee uniform policies only
  4. The colour scheme of the prospectus

Explanation

HKEX expects issuers to meet environmental, social and governance (ESG) standards and to make associated disclosures, including ESG reporting. Sponsors should understand these expectations when preparing an applicant.

Question 33Role knowledge and relevant financial foundations

What standard of information is expected in the materials a sponsor includes in a listing application?

  1. Accurate, complete and not misleading information that supports the disclosure in the listing document Correct answer.
  2. Only information favourable to the applicant
  3. Information that the sponsor believes the regulator already knows
  4. Marketing material with no factual basis required

Explanation

Information in a listing application must be accurate, complete and not misleading. Sponsors must ensure the application materials properly support the disclosure and do not omit material adverse information.

Question 34Role knowledge and relevant financial foundations

A sponsor's obligations regarding communications with the regulators in the listing process require that the sponsor:

  1. Deals with the SEHK and SFC openly, promptly and honestly, and does not withhold material information Correct answer.
  2. Communicates only through the issuer's PR firm
  3. Provides information only when audited
  4. Avoids all contact with the regulators until after listing

Explanation

Sponsors must communicate with the regulators openly, promptly and honestly, and must not conceal or fail to disclose material information. This duty of candour is fundamental to the sponsor's gatekeeper role.

Question 35Role knowledge and relevant financial foundations

Which of the following correctly describes the obligations a sponsor gives to the regulators when it submits a listing application?

  1. A sponsor declaration confirming it has complied with its obligations and that the application materials are in order Correct answer.
  2. A promise that the share price will not fall
  3. A guarantee of dividends for five years
  4. An undertaking to buy back all unsold shares personally

Explanation

A sponsor provides a declaration to the regulators confirming, among other things, that it has complied with its sponsor obligations and that, to the best of its knowledge, the information in the application is accurate and complete. This declaration carries serious accountability.

Question 36Role knowledge and relevant financial foundations

What is 'due diligence' in the context of sponsor work?

  1. The reasonable investigations a sponsor carries out to verify the listing applicant and the accuracy of the disclosure Correct answer.
  2. A tax filing made to the Inland Revenue Department
  3. The process of choosing the IPO date
  4. A marketing roadshow for investors

Explanation

Due diligence is the reasonable investigation a sponsor undertakes to satisfy itself about the applicant and to verify that the information in the listing document is accurate and complete. It is central to the sponsor's gatekeeper duties.

Question 37Role knowledge and relevant financial foundations

Which document under Hong Kong law principally governs the content requirements for a prospectus offering shares to the public?

  1. The Companies (Winding Up and Miscellaneous Provisions) Ordinance together with the Listing Rules Correct answer.
  2. The Employment Ordinance
  3. The Stamp Duty Ordinance
  4. The Road Traffic Ordinance

Explanation

Prospectus content and liability are principally governed by the Companies (Winding Up and Miscellaneous Provisions) Ordinance, supplemented by the Listing Rules. Sponsors must ensure the prospectus complies with these requirements.

Question 38Role knowledge and relevant financial foundations

What does 'professional scepticism' require of a sponsor representative conducting due diligence?

  1. A questioning mind, alertness to information that may indicate misstatement, and not accepting representations at face value without corroboration Correct answer.
  2. Distrusting every person involved in the transaction without basis
  3. Accepting all management statements as true to save time
  4. Refusing to communicate with the listing applicant

Explanation

Professional scepticism means maintaining a questioning mind, being alert to conditions that may indicate misstatement, and critically assessing evidence rather than accepting representations at face value. It requires corroboration of key claims.

Question 39Role knowledge and relevant financial foundations

What is 'verification' in the IPO process?

  1. The systematic process of confirming the accuracy of statements in the listing document against supporting evidence Correct answer.
  2. The process of registering the company with the Companies Registry
  3. The act of printing the prospectus
  4. The selection of the placing syndicate

Explanation

Verification is the systematic process of checking statements in the listing document against documentary or other evidence to confirm their accuracy. It supports the directors' responsibility statement and the sponsor's due diligence.

Question 40Role knowledge and relevant financial foundations

When a sponsor relies on an expert (such as a property valuer) for part of the prospectus disclosure, the sponsor should:

  1. Assess the expert's competence, scope and independence, and make reasonable enquiries rather than relying blindly Correct answer.
  2. Accept the expert's report without any assessment
  3. Replace the expert's conclusions with its own opinion
  4. Refuse to include any expert reports in the prospectus

Explanation

Special requirements apply to the use of experts. The sponsor should assess the expert's qualifications, competence, scope of work and independence, and make reasonable enquiries about the basis of the expert's conclusions rather than relying blindly.

Question 41Role knowledge and relevant financial foundations

What does 'MD&A' stand for in the context of a listing document?

  1. Management Discussion and Analysis of financial information and condition Correct answer.
  2. Mandatory Disclosure and Auditing
  3. Market Demand and Allocation
  4. Member Default and Arbitration

Explanation

MD&A means Management Discussion and Analysis, the narrative section in which management discusses and analyses the applicant's financial information and condition. It helps investors understand the figures and the business trends.

Question 42Role knowledge and relevant financial foundations

Which of the following is a primary objective of conducting a thorough due diligence exercise on a listing applicant?

  1. To ensure the listing document does not contain any material misstatement or omission Correct answer.
  2. To increase the offer price as much as possible
  3. To minimise the number of pages in the prospectus
  4. To avoid paying professional fees

Explanation

A core objective of due diligence is to ensure that the listing document is accurate and complete, with no material misstatement or omission, so that investors are not misled. This protects investors and the sponsor.

Question 43Role knowledge and relevant financial foundations

When planning a due diligence exercise, a sponsor should ensure that:

  1. The scope, responsibilities and timetable are clearly defined and documented, and key risks are prioritised Correct answer.
  2. Only the cheapest checks are performed regardless of risk
  3. All work is left to the issuer's management
  4. No records of the work are kept

Explanation

Proper planning of due diligence involves defining and documenting the scope, allocating responsibilities, setting a timetable and prioritising key risk areas. This ensures the exercise is effective and capable of being evidenced.

Question 44Role knowledge and relevant financial foundations

A sponsor representative discovers during due diligence that a major customer of the applicant has just terminated its contract. The applicant's draft prospectus still presents this customer as a stable revenue source. The sponsor should:

  1. Ensure the prospectus is updated to reflect the loss and assess its materiality to the business and disclosure Correct answer.
  2. Ignore it because it occurred after the first draft
  3. Allow the misleading statement to remain to protect the timetable
  4. Inform only the underwriters and keep it out of the prospectus

Explanation

Material developments must be reflected in the prospectus so that disclosure is accurate and not misleading. The sponsor should assess materiality and ensure the loss of a major customer is properly disclosed, even if it changes the timetable.

Question 45Role knowledge and relevant financial foundations

Which of the following is an example of due diligence on the financial information of a listing applicant?

  1. Reviewing the reporting accountant's report and discussing key accounting judgements and trends with management and the accountants Correct answer.
  2. Reading the applicant's social media posts only
  3. Relying solely on the chairman's verbal assurance
  4. Examining the colour of the corporate brochure

Explanation

Financial due diligence includes reviewing the reporting accountant's work, understanding key accounting policies and judgements, and discussing financial trends and the MD&A with management and the accountants to test the reasonableness of disclosure.

Question 46Role knowledge and relevant financial foundations

Why must a sponsor keep proper records of the due diligence it performs?

  1. To evidence that it discharged its obligations and to satisfy record-keeping requirements and possible regulatory review Correct answer.
  2. To increase the weight of the file
  3. Because records are never reviewed by regulators
  4. To replace the need for the prospectus

Explanation

Sponsors must maintain proper records of their due diligence to demonstrate that they discharged their obligations, to comply with record-keeping requirements, and because the SFC may inspect such records during supervision or enforcement.

Question 47Role knowledge and relevant financial foundations

Which of the following best describes the role of site visits in due diligence?

  1. They allow the sponsor to observe operations first-hand and corroborate management's representations about the business Correct answer.
  2. They are purely ceremonial and serve no due diligence purpose
  3. They replace the need for financial statements
  4. They are prohibited under the Listing Rules

Explanation

Site visits help a sponsor observe the applicant's operations directly and corroborate management's representations, for example about production facilities or inventory. They are a recognised part of effective due diligence.

Question 48Role knowledge and relevant financial foundations

What is the purpose of interviewing major customers and suppliers during due diligence?

  1. To corroborate the applicant's business model, revenue sustainability and key relationships Correct answer.
  2. To negotiate the offer price with them
  3. To recruit them as IPO investors
  4. To replace the reporting accountant's audit

Explanation

Interviewing major customers and suppliers helps the sponsor corroborate the applicant's business model, the sustainability of its revenues and the reality of its key commercial relationships. This is a standard due diligence step for revenue verification.

Question 49Role knowledge and relevant financial foundations

Under the sponsor due diligence guidelines, a sponsor's reliance on third-party professional reports should be:

  1. Reasonable and accompanied by appropriate enquiries into the basis and scope of those reports Correct answer.
  2. Unquestioning, since professionals are always correct
  3. Avoided entirely because third parties cannot be trusted
  4. Limited to reports written in English

Explanation

A sponsor may rely on third-party professional reports but must do so reasonably, making appropriate enquiries into the basis, assumptions and scope of those reports and the competence and independence of the professionals.

Question 50Role knowledge and relevant financial foundations

A sponsor representative finds that the audited track record record-keeping of the applicant is incomplete for one financial year. The most appropriate action is to:

  1. Investigate the gap, assess its impact on the reliability of disclosure, and escalate to the Principals Correct answer.
  2. Disregard it because it relates to only one year
  3. Fill in the missing records using estimates without telling anyone
  4. Proceed to listing without any further action

Explanation

Incomplete records raise questions about the reliability of disclosure. The representative should investigate the gap, assess its impact, document the findings and escalate to the Principals so the issue can be properly resolved before proceeding.