Question-1

(A)

Investment in peppers co.

The investment in pepper co. is 10% of total asset, hence material to the financial statement.

The group obtained 50% of shares which gives him joint control over the pepper co. This is a joint
venture where two parties control a single entity.

Therefore, this investment needs to be equity accounted, there is a risk that this will not be properly
followed which will lead to the inappropriate accounting treatment.

Disposal of primal burger co.

The company is planning to dispose of primal burgers co. for which suitable buyers has been identified,
as per IFRS-5, the disposal of any subsidiary should be recorded as a discontinued operation when the
suitable buyer is found and the transaction is probable to be completed within 12 months. Therefore,
the primal burgers co. needs to be shown as discontinued operations separately int he financial
statements. There is a risk that the primal burger co. is not shown separately which is contrary to the
accounting standard.

Further, there should be proper disclosure for the disposal of primal burger co. so that the shareholder
is aware of the changes in structure of company, there is a risk that the disclosure is not being made
which will materially misstate the disclosure.

Acquisition of valentine co.

The valentine co. investment is 21% of group's total assets, hence material to the financial statements.

The acquisition of valentine co. need to be accounted as under IFRS-2, where the consideration paid
need to be deducted from the net assets of the company to arrive at goodwill which need to be
recorded as asset in the financial statement. there is a risk that the Goodwill is incorrectly calculated
which can materially misstate the financial statement.

Capital expenditure

The amount of $43m capital expenditure is 9% of total assets, hence material to the financial
statements.

As the new drive through were purchased at cost of $23m, these are correctly capitalized as asset.
However, the purchase of license is an intangible asset under IAS 38 which need to be separately
recognized from Property plant and equipment. Therefore, there is a misclassification in the tangible
and intangible Assets.

Further, the depreciation policy is same for the license and property plant and equipment, whereas the
license has 3 year useful life. The total depreciation expense is currently recorded at $2.15, where as it
should have been recorded at $6.4m, therefore, there is an understatement of depreciation expense by
$4.25m and assets are overstated by same amount.

This misstatement is 0.84% of total assets and 25.55 of PBT, hence the financial statements are
materially misstated.

Government grant

Ryder Co received a grant of $20 million which is 6.25% of total asset and 100% of PBT, hence material and
pervasive to the financial statements.

The government grant should only be recognized when the conditions attached to it are completed, as per IAS-20.
In the case of ryder co. , half amount of grant must be used in upgrading assets which has not been done and there
is no planning to do so. Therefore, the grant should not have been recognized, this has led to the overstatement of
PBT and assets

Since, the amount will be liable to be paid to government as the conditions has not been fulfilled, therefore it has
also understated the liabilities.

(B) Additional information

1- Approval by board for the disposal of primal burger co. To confirm it has been authorized.

2- Due diligence report by Usmani & co to confirm the valuation and assumptions used and to carry out further
procedures.

3- Quotations of buyers which has been forwarded for the purchase of primal burger co. In order to confirm the
requirement of IFRS-5

4- Draft financial statements to confirm the primal burger co. Is included as the discontinued operations in the
financial statements.

(C) Audit procedures

(I) Investment in peppers co.

1- Obtain the recent contact with peppers co. And confirm the smith co. Will be working in corporation with the
group

2- Review the board meeting minutes to check what are the plan/reason behind the purchase of pepper co.

3- review the agreement between the group and peppers co. To confirm the investment in the joint venture and
both entities have joint control.

4- Review board minutes to confirm the approval of the investment and to understand the business rationale for the

investment.

5- Obtain the share agreement between the group and peppers co. To confirm the number of shares purchased
and joint controls obtained.

(ii) Government grant

1- Obtain the government grant agreement to check the conditions attached to the grant.

2- Confirm the government grant amount received through bank statement.

3- Confirm only half amount of grant need to be used in the assets to make it environmental friendly.

4- Discuss the treatment of IAS 20 with finance director to aware him the requirements of IAS-20

5- Discuss with finance director why the amount has not been used in the assets to fulfill the conditions.

6- Advice the finance director to record a government grant liability in the financial statements and remove the
amount of credit made in the financial statement.

(D) Ethical issues

Audit partner

The group has requested to replace the audit partner as a non executive director in the group. This will create the
familiarity threat as the audit partner has worked with square and co. and when audit team will be working in the
same group as the partner, this create threats to objectivity and will compromise the quality og audit.

Referral fee

If Ranger Associates is appointed, Squire & Co will charge Ranger Associates a referral fee equivalent to 10% of the
fee for the corporate finance engagement. This will increase the income of Squire and co. Which can create te self
interest threat to objectivity. However, this service is allowed.

Internal audit

The Design and evaluation of internal controls is the responsibility of the company as these internal controls will
be made over the financial reporting which will create familiarity and self-review threat as the auditors will be
known to the internal controls and they will be reluctant to test the internal controls for any deficiency.
Further, if the auditor is involved in the creation of any internal controls, they will be assuming the management
responsibilities which should be carried out by management.

Actions

The audit partner cannot serve as an director in the group as it is disallowed by the IAESBA board. Therefore, the
request should be declined

Our firm should be more aware of any dependency risk on one client so that it does not cross the given fee
percentage.

The creation and evaluation of internal controls are the management respectability which are not allowed for te
auditors and the request should be clearly declined.

Question-2- (A)

(I) Sale and leaseback

As per IFRS-16, when tehre si any sale and leaseback transaction, it should be first be confirmed whether
the sales is in accordance with IFRS-15 where the control has been passed to the buyer.

In this case, the property has the useful life in excess of 50 years and it has been leased for 40 years
which covers the most of useful life and therefore, it seems that the reisks and rewards has been
transferred and the sale is in accordance with IFRS-15.

The property should be correctly derognised with the carrying value and the profit/ loss should be
recognised based on the fair value.

Evidence

1- notes for the recalculation the carrying amount of property to the date of sale and leaseback.

2- Confirmation for the useful life of property that it is in excess of 50 years.

3- copy of contract between the buyer and the Lifeson co. For the sale and leaseback transaction to
confirm it is lease for above 40 years.

4- Draft financial statements and breakup of property portfolio to confirm the sold property has been
correctly derecognized.

5- notes for the recalculation of profit/loss on the sale of property

(ii) investment property

The fair value gain on the warehouse is 2.6% of total assets, hence material to the financial statement.

There is the reclassification of warehouse from property under IAS-16 to investment property under IAS-
40, such change is allowed under IFRS. On 1 April 20X4 Management decided to keep the building in
order to rent it out as a storage facility to local businesses and to benefit from any increases in property
valuations, this is a valid change. However, it should be confirmed that all inventory has been moved
and the warehouse is in condition to be rented.

As per IAS-16, on the date of reclassification, the property should be valued to fair value and any change
should be taken to other comprehensive income, the initial change of $25,000 should have been taken
to OCI and further change of $5000, ($348000-353000) should be taken to P&L.

However, full gain is taken to p&L which has overstated the profits by $25000 and undersatted the
equity by same amount.

Evidence

1- Notes for the confirmation that the warehouse has been vacated and it was properly cleaned for
renting out

2- Recalculation of carrying amount at the date of reclassification

3- Exteral valuer report to confirm the fair value of warehouse.

4- Notes to the discussion with finance director how the fair value at the date of reclassification was
arrived.

(iii-) shopping mall

The carrying amount of the shopping mall represents 64·1% ($8·85 million/$13·8 million) of Lifeson Co’s
total assets at the reporting date and is therefore highly material to the company’s financial statements.

The determination of value in use should be considered as it is calculated by the management which can
include the management bias in order to manipulate the financial statement in the desired period
through reversal of impairment.

Lifeson Co has incorrectly recognised the full impairment reversal of $1·034 million in profit for the year.
As per IAS 36, the reversal of an impairment loss should not exceed the carrying amount which would
have been determined had no impairment loss been recognized. Based on depreciation over a 20-year
useful life, the carrying amount of the asset should be capped at $8·550 million and the reversal of the
impairment to be recognized at $0·734 million ($8·550 million – $7·816 million). Assets and profit are
currently overstated by $300,000 representing 2·2% of total assets and 14% of profit before tax which is
material to both the statement of financial position and statement of profit or loss.
(B) Implications on the Audit report

The profit of $25,000 has been recognised in PBT for investment property which is incorrect and the
amount of $300,000 of impariement reversal has been credited, therefore there is total misstatement of
$325,000 which has Overstated the profits and assets.

This amount is 15.11% of pbt, hence material to the financial statement.

If these misstatements are not corrected by management, the auditor will issue qualified opinion and
the audit report will also be modified which will include the basis of qualified opinion.

Question-3