General points

20 subsidiaries (19 local + 1 foreign i.e. Borzoi Co.)

3 segments
15 mn intangibles (5mn purchased + 10 mn internal)
Digital publications 20% of revenue, not disclose as separate segments + rapid growth (weak controls and cut-off re
200 publication rights (5-30 years); $7.9 mn intangibles; avg amortisation period 25 year
Royalty advance $3.4 mn in current assets; (10 year expense period, no justification provided by FD rather than bei

Foreign subsidiary
Political unrest
Total assets 68 mn oska
Ex Rate RD 4 Oska:$1, avg 6 months 3 oska:$1
IFRS ---> AFRF
Translation software purchased by P $1.5 mn (CA $1mn prior to transfer to S; revalued at the date of transfer $5.4 m

Previous Auditor
1st year audit
Group CFO blocked access to audit committee of previous auditor

Analytical
Decline in revenue of newspaper and books
Increase in total assets of all operating segments

AR = IR X CR X DR
IR + CR = Risk of Material Misstatement (Non-compliance with IFRS)
DR = 1st time audit or Tight reporting deadline
h (weak controls and cut-off revenue risks) + no impairment testing considered due to growth in this business

rovided by FD rather than being said 'industry practice')

d at the date of transfer $5.4 mn)

Done
DR New Audit Client

This is the first year of audit of Bassett Group and this give rise to detection risk that our firm might not be able to d
However, detection risk could be mitigated through rigorous audit planning and thorough understanding of the bus
In addition, there is a risk that opening balances and comparative information might not be correct and therefore w
510

IR Operating Segments
As the Group is a listed Entity, it will be required to disclose information in the notes as per IAS 8. There is a risk tha
which does not fulfill the conditions of being reported as a separate segment or vice versa.
In addition, if management is monitoring separately the performance of digital and non-digital sources of income, a
then this may need to be disclosed as a separate operating segment.

Professional skepticism should be applied to the audit of operating segments; due to management bias, the allocati
could be subject to manipulation e.g. to mask the declining performance of the book and newspaper & magazine o
management and this judgement should be approached with skepticism, especially given the potential lack of integ
communication from Grey & Co.

IR Internally Developed Software

During the year $10 mn has been capitalised as intangible assets which represents 10.5% of Group financial statem
financial statements.

As per IAS 38, the cost of internally developed software can only be recognised if it meets the recognition criteria sp
to complete the asset, ability to sell or use the asset, probable outflow of economic benefit, cost is reliably measure
phase have been capitalised which should be expensed out or vice versa.

This is an area where professional skepticism should be maintained both in relation to management's assertion whe
capitalisation and in relation to distinction, if any which has been made between research and development costs.
amount if the accounting treatment is incorrect.

Fraud Impairment testing

Management has no intention to carry out impairment testing regardless of impairment indicators which rise to a s
impairment indicators, goodwill must be tested for impairment each year. Given the fact that group has 20 subsidia
consolidated financial statements and allocated among cash generating units must be tested for impairment on an
Further, the reduction in revenue for the Group as a whole, particuarly in newspaper & magazine and books segme

Again this is an area of professional skepticism where the audit team must challenge the management's assumption
Management's reluctance to carryout impairment review could possibly be due to incentive/pressure to show bette

Publication Rights
The publication rights are recognised as an intangible asset with a carrying amount of $7.9 mn, representing 8.3% o
statements.
It is correct to amortise publication rights as it has a finit life, however the average period of 25 years over which pu
It means some rights are being amortised over too much long a period thus overstating intangible assets and profit

The audit team need to be skeptical here as the accouting policy of amortisation for an average period of 25 years i
for the appropriateness of the accounting policy.

Author Royalty Advances

The royalty advances within current assets amounting to $3.4 mn constitutes 3.6% of total assets and material to th
Deferring the cost, treating it as a prepayment seems appropriate. However, the Group accounting policy should be
cost over a 10 year period.

Though industry practice may be used to develop accounting policies, the Group must consider the specific period o
shape its accounting policy simply based on the action of its competitors in the market, who might have very differe
over a different period. Presumably some books published by the Group must have a shorter life than 10 years, in w
spread over a shorter period.

Similar to the point raised previously in relation to the accounting treatment of the publication rights, management
smoothing profits and managing earnings. Again, the accounting policy may not be appropriate and the audit team
appropriateness of the policy and challenge management on its use.

Transfer of Software
The transfer of software gives rise to several audit risks.

First, there is a risk that software was overvalued when it was transferred from Bassett Co. to Borzoi Co. The fair va
accounts immediately prior to the transfer of the asset was determined by Group management and while evaluatio
asset exists, this fair value could be inappropriate. In the absence of an active market, it is unlikely the revaluation s
There is a significant difference between the carrying amount of the software and the fair value determined by man
our firm might not be able to detect material misstatements due to lack of experience.
ough understanding of the business of the group.
not be correct and therefore we should plan the audit carefully in accordance with ISA

as per IAS 8. There is a risk that management has given an inadequate disclosure
versa.
on-digital sources of income, and if digital sales become significant in their own right,

management bias, the allocation of revenue, assets and expenses between segments
and newspaper & magazine operating segments. Allocation is determined by
ven the potential lack of integrity displayed by the CFO as indicated by

.5% of Group financial statements and the amount is therefore material to the

eets the recognition criteria specified in IAS 38 such as technical feasibility, intention
enefit, cost is reliably measureable etc. There is a risk that cost pertains to research

o management's assertion whether software cost meets the necessary condition for
arch and development costs. There is a profit may be overstated by the material

ent indicators which rise to a significant audit risk. IAS 38 requires that regardless of
act that group has 20 subsidiaries and the goodwill must have been recognised in the
e tested for impairment on an annual basis.
& magazine and books segments indicates a potential impairment.

the management's assumption that an impairment review is not needed.

centive/pressure to show better results or healthy profits to shareholders.
 $7.9 mn, representing 8.3% of total assets. This is material to the financial

riod of 25 years over which publication rights are being amortised is not appropriate.
ng intangible assets and profits and understating expenses.

n average period of 25 years is not appropriate and therefore challenge management

total assets and material to the financial statements.

up accounting policy should be challenged by the audit team for expensing out the

t consider the specific period of amortisation relevant to its publications and not
et, who might have very different types of publications providing economic benefit
shorter life than 10 years, in which case the advance royalty payment should be

ublication rights, management could be used this 10 year average period as a way of
ppropriate and the audit team will need to be skeptical in relation to the

tt Co. to Borzoi Co. The fair value which was recognised in the parent company
nagement and while evaluation is permitted by IAS 38 where an active market for the
, it is unlikely the revaluation should have been recognised at all.
fair value determined by management, $1 mn and $5.4 mn respectively, giving rise to a revaluation of $4.4 mn which was recognised by
 24260
y

mn which was recognised by Bassett Co. immediately prior to the transfer. The audit risk is that in the parent company, the revaluation sh
nt company, the revaluation should not have been recognised, or, if revaluation is appropriate, the amount recognised was based on an ina
ecognised was based on an inappropriate value. Any overstatement of the
Introduction
Year ended31 Mar 20X5 Division
Revenue 108 Revenue 13 12%
PBT 9.3 PBT 1.4 15%
Total Asset 150 SP-CTS 42
VIU - RA 41
Matters to consider CA 45
Brainstorm Impairment 4
MARE
- Materiality
- IFRS
- Risk
- Evidence

Materiality
The PBT of the division represents 15% of company's PBT and therefore material to the FS.

IFRS

IFRS 5 defined discontinued operation as a component of entity that has either been disposed of or classified as an
- a separate major line of business or geographical area of operations; or
- a part of single co-ordinated plan to dispose of a separate major line of business; or
- a subsidiary acquired with a view to resale.

If discontinued operations meet the definition and recongition criteria should be classified as held for sale and to be
- initially at lower of carrying amount or fair value less cost to sell; and
- subsequently be tested for impairment losses.
Note that, reversal of impairment losses should not exceed the combined impairment loss previously recognised un
disposed of or classified as an held for sale and represents either

sified as held for sale and to be measured

t loss previously recognised under IAS 36 and IFRS 5.