The Board is responsible for maintaining a sound and effective system of risk management and internal controls in Li & Fung and for reviewing its effectiveness. Such system is designed to manage the risk of failure to achieve corporate objectives. It aims to provide reasonable but not absolute assurance against material misstatement, loss or fraud.

The Board has delegated to executive management the design, implementation and ongoing assessment of such systems of internal controls, while the Board through its Audit Committee oversees and reviews the adequacy and effectiveness of relevant financial, operational and compliance controls and risk management procedures that have been in place. Qualified personnel throughout the Group maintain and monitor these systems of controls on an ongoing basis. Set out below are the main characteristics of our internal control framework.

Control Environment
The Group operates within an established control environment, which is consistent with the principles outlined in Internal Control and Risk Management - A Basic Framework issued by the Hong Kong Institute of Certified Public Accountants. The scope of internal control for the Group relates to three major areas: effectiveness and efficiency of operations; reliability of financial reporting; and compliance with applicable laws and regulations.

The Group maintains a tailored governance structure with defined lines of responsibility and appropriate delegation of authority. This is characterized by the establishment of an Operation Support Group centralizing the function and control exercised over global treasury activities, financial and management reporting, human resources functions and computer systems, and is supplemented by written policies and Key Operating Guidelines (KOG) tailored to the need of respective operating groups in the countries where the Group operates. These policies and KOG cover key risk management and control standards for the Group's operation worldwide.

Financial and Capital Risk Management
The Board approves the Group's Three-Year financial budgets and reviews the Group's operating and financial performance and key performance indicators against the budget on a semi-annual basis. Executive management closely monitors actual financial performance at the Group and operating groups levels on a quarterly and monthly basis.

The Group adopts a principle of minimizing financial and capital risks. The Group's financial and capital risk management covers market risk (including foreign exchange risk, price risk, cash flow and fair value interest rate risk), credit risk and liquidity risk.

Investment Management
The Group Investment Committee (comprising the Group Non-executive Chairman, Executive Directors and Senior Management) develops investment control procedures, monitor and approve the Group's major investments and acquisitions. Significant investments and acquisitions (with consideration above a threshold as pre-set by the Board) also require Board's approval.

Management also monitors the integration process of the newly acquired companies through a structured post-acquisition integration program focusing on the alignment of operational and financial controls with the Group's standards and practices.

Regulatory Compliance Control Management
The Corporate Compliance Group (comprising Corporate Governance Division and Corporate Secretarial Division), under the supervision of the Group Chief Compliance Officer, in conjunction with our designated internal and external legal advisors regularly reviews our adherence to relevant laws and regulations, listing rules compliance, public disclosure requirements and our standards of compliance practices.

Risk Management Functions
The Risk Management and Sustainability Committee in conjunction with the Audit Committee monitors and updates the Group's risk profile and exposure on a regular basis and reviews the effectiveness of the Group's system of internal control in mitigating risks. Key risk areas covered by the Committees include reputation, business credit, financial and operational risks of our supply chain operations, investment and acquisitions, taxation, inventory and receivable management, Group-wide insurance, human resources, contingency plan and disaster recovery, IT governance structure, corporate responsibility and sustainability.

Internal Audit
The Group's Internal Audit team within the Corporate Governance Division (CGD), under the supervision of the Group Chief Compliance Officer, independently reviews the internal controls and evaluates their adequacy, effectiveness and compliance. Our Group Chief Compliance Officer reports major findings and recommendations to the Audit Committee on a regular basis.

The three-year Internal Audit Plan of CGD is strategically linked to the Group's Three-Year Plan and is reviewed and endorsed by the Audit committee. The principal features of the tasks of CGD include:

• Internal Audit plan as prepared under a risk based assessment methodology that covers the Group's significant operations over a three-year cycle period;
• An audit scope which covers significant controls including financial, operational and compliance controls, and risk management policies and procedures;
• Unrestricted access to all the information needed for review of all operations, controls and compliance with KOG and corporate policies, rules and regulations;
• Review on the special areas of concerns or risks as raised by Audit Committee, Risk Management and Sustainability Committee or Senior Management.

Major audit findings and recommendations from CGD, and management response to their findings and recommendations are presented at the Audit Committee meetings. The implementation of all recommendations as agreed with management is being followed up on a three-month basis and reported to the Audit Committee at each Committee meeting.

As part of the annual review of the effectiveness of the Group's internal control and risk management systems, management conducts an Internal Control Self-Assessment for the business operations and relevant accounting functions. The Group's CGD has independently performed post-assessment review on the findings noted in the self-assessment programs and considers that sound internal control practices are in place.

External Audit
Our external auditor, PricewaterhouseCoopers, performs independent statutory audits on the Group's accounts. As part of its audit engagement, our external auditor also reports to the Audit Committee any significant weaknesses in the Group's internal control system which might come to its notice during the course of audit.