Audit Planning

AUDIT PLANNING
#
:.f÷i ÷ ÷i ÷f
AuisiTPNG Examtechnique dijgicultforco.tt/phatoinnouateeJjectiue#
1.5 marks I risk
=
30€arKs
that
In Audit
Planning auditor has to plan entire
Identify the risk
from
scenario
Identify wheat
- -
engagement
which include Risk Evaluation ,
Planning -
Impact of Risk -5 How it will is the business
composition affect that situation

of procedures ,
calculation
of Materiality ,
Team ,
-
Evaluation
of
Risk
profit , risk in .
Environment if CFS E. Gc position

Understanding of client 's business 3 .
to.5markper-T.mandatorypho.se#
€nd!pa↳
per Auditing standards Factors
As Audit is
planning a
from
scenario
- -
which increase OE decrease relevant calculation

Riskfualuation -
20 s
intensity of
that risk '
-
As External Audit is a risk based audit ,
therefore #
Risk Evaluation is an
important phase . Auditor has
EEF Drafting
.
Legal
case →
then to evaluate their

to
identify risks E. he has
Ongoing Legal case against Alpha Co .
creates a
intensity .
risk
of
Loss
of Reputation 9 Penalties
being imposed .
of Reputation
Auditor evaluates loss customers reluctant to
3
types of risks :
may
make
-
:÷i÷÷÷÷÷÷÷÷ :i÷÷÷÷÷÷÷÷
i÷÷÷÷÷÷÷÷
Example default if it
If
fails
in interest
payments
repayment
of in
capital
then
fails
Co
is
Legal
case
repayment Alpha of loan
. .
in
1
2
, New Law
Regulation bank
may increase the covenants OE may enforce
its
3 Loss directors
This
affect goodwill company
customer
of Major mortgages . will
of
a
to short term
4 , loss
of key employee may
have
focuscurrent on survival
Declining
.
transactions
Foriegn
5
affect organization
co 's
profits of
in will
,
year
.
↳ Bank
abilitytopayfixedintereIIYfetpirfai.in?iisaItIent
Loan
'i÷ig
ftp.aa?n9edineaiste7nnd9Tobiie
.
>
Dejected product phone industry an
Reliance inherent
9, on one
supplier risk
of technological obedience .
Due to
technological
Political losses Further
inventory failure
Co
lo , issues
of
a
country obedience
Alpha .
may face
.
competition to innovate lead to loss customers

High lb
may of a
further
bschangeintechnology.ee decline in revenue
,
which has
already fallen by g .
loss
Falling Cash balances ER of key
staff makes it
Dec-2o#
technological
Pinhead
risk
-
②
I
-
I
-
- - - -
I Iggy
-
.
- - -
- -
- -
* - ⑤ ⑥ ¥
'
€÷
iii.ii.iii.
F==E÷÷÷÷÷te If:# Helier
- -
.¥
on
⑨ - -
ED IT -5 =
onto
-
-
I '
o.EE#-E----e---o---T----&/
IO
I -
FI E- -
I
¥1 ¥II→izntTTosses4montd
EEE
-
geaE# SE -
#
I term
F- -
→
go
con in to
Tong
-
0am →
liquidity issues .
-
→ - - -
TES
-
Page 201
Z
⇐
-
I Is I
- -
e - e- e - - 2-
=
-
7-
-
T T -
_ia
- 4-1 .
- 721
.
÷ :# =
Page 202
:/ ÷ ÷ f ÷ ÷ ÷ ÷
Groth Leadtime production of defected
in November 2012 because
To, Mia Audit partner Foo Ee Grohl Co imports its material

key goodss#
Vai
, ,
Company . raw
copper wiring
From transit If due to
. Audit Audit
manager which creates a risk
delay
of bad
in .
Defectedcopper
Subject Grohl Audit Natural disaster like weather lead to
planning corroded
co import will Grohl 6
:
any if copper supplied to
-
.
.
then stop circuit

Introduction
get delayed production production
of defected
Grohl co will as boards which will
of
.
In relation to Grodd the material As Grohl Co bound to supplied

Audit
planning for
.
for copper is
key raw -
. is lead
inventory loss .
Dejected circuit boards
ended 32
following information
with one sole supplier only therefore this risk will
aduersly affect reputation of
Grohl co If
year
.
Business Risks it purchase

is relevant
for evaluation of risks ,
increases as cannot raw material
from any new
supplier dont take
responsibility of corroded
ofMaterialmisstatementGEthicalissu# othersuppliertoauoidpauseofproducl.io# copper then this loss will

affect Grohl co .
profits .
(a) Business Risks New supplier Loss increased because

further
was corrosion
-
-
cost
identifiable through
selected
Techndogicalobsolence for material
New
supplier key raw was on
was not human
eye therefore
Grohl
Company faces
electricaltestingwasdoneobselence
of technological cutting for quality
inherent
defected
risk basis , which creates a risk .
If
supplied reputational
circuit
develops
Newtegulatorgrequirement
it boards then it create
for
as
copper mobile is will issue
co its circuit
get affected
will
phone E.
computer industry If Grohl Co circuit boards
forThis Grohl boards
regulatory to
force
as will
New
requirement
in
.
. .
.
come
to
will
get obsolete due to innovation in computer E. risk materialized during the
year
when due in March 2013 G current
year
end is November
mobile phone industry then

inventory losses will arise -
corroded copper supplied Grohl co . circuit board
suffered 2012 . As
per comments
of
Mo Satriani work on
÷÷÷÷÷i÷÷÷÷÷÷÷÷÷ :÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷i:÷÷ ÷ :÷ ÷ ÷ ÷ ÷ ÷i
:÷÷÷÷÷÷÷÷i÷÷÷÷÷÷
Grohl
÷
Co .
imports its
.
key raw material

, copper wiring cost
cutting measures which will
it
affect quality .
If Grohl co . able to
comply
:÷ ÷ ÷ ÷ ÷ ÷ ÷:÷ :÷ ÷ :÷ ÷ :÷
with new
to
regulatory requirement
:
.
which creates an
exposure of foriegnco currency donot reduce its
price then will lose market share .
It
may
either lead penalties being imposed
movement .
If
Exchange rate
of
Grohl country -
Deployment of cost
cutting measures
during current
year oisuspensionogproduction
This
depreciates then import cost will increase .
will in
April 2012 was net
successful as new supplier
supplieddefectedcopperinnouemberzfded.in
profit already
to
fall
lead in which have
margins ,
Purchases 41 denominated
Dependencyonjewcustomers
72% to
from
are
ed .
.
forward
in
Foriegn currency G despite
of that Domestic market
of
Grohl Co .
which
generates
50 't
of
contracts dependent If
of Hedging
not Lack is customers
exchange
are used .
revenue on
only zo .
any
.doneincreasestheri# of the customer switches
away from
Grohl Co .
then
it will create a material impact on revenue .

Revenues
by therefore any further

declined 10.41
have
already ,
create burden Risk customer loss

decline will
of of
. in
domestic market increased halt due to

have
of
Dec -
014
-
②
# E - -
G
- -
Ig I =
-
-
Tre -
- I
= I
-
=
-
e-
II
' to
÷g=⑤-
- - -
"
¥-2
Idt
-
G-
- - .
= I
-
= = = ③
-
I
€5
-=To¥¥⇐¥k%e -
F-
I I -
-
= 0=-2
✓
⇐ 2¥ -#ejea.io?gYgaa#ase4O
e -
*
-_⑥- To €0 Ta
q -238-3 ⇐ ¥utatiT
✓ II tI← -9--8-5-5 t
-¥newm_✓o
-- - -
FEE TIE ⇐
E-
I
②
-
- - -
=
- -
E
-
Page 398
Te Te - T -
-
- -
= =
- -
mx8Et=$E€÷
105k€
$40 ②
-
-
[ 23
-
I .
# -
-
-
-
- #
Page !"#
:÷f ÷ ÷ :÷f
Further Risk
Connolly
#
Co. be wasted .
Connolly
G . will not be able to in
development phase .
is also
higher because
Audit Partner to
To ,
Ali Stone , compete in innovative market
if
its new
drugs are
Connolly co . lacks
funds pay possible penalty amount
from ,
Audit
manager not launched due to license cancellation .
Accident G dependent
is bank loan
for
it failure to pay
on .
occurred clinical
subject Audit planning
: -
Connolly co .
in trails in 2013 increases risk
penaltymayleadtolicensesuspene.io#
regulator scrutinizes results
Introduction license
rejection Animaltlealthpsusiness
of
as
In relation to audit
planning for Connolly co for the
-
.
of
clinical trails .
Connolly Company
's new business
segment of Animal health
due to lack
ended
following information Legatcase faces inherent losses
an
of
risk
of
3 4 is
year ,
market As
for
relevant
of
evaluation
of Connolly Business Risks
,
Risk material Co.
industry have a
practice of Legal
claims
knowledge in new .
Connolly co .
industry
misstatement.principalauditproceduree.GE/hicaliss# for patent rights
create
for Connolly highly regulated therefore any done
which a risk co is error
may
.
(a) Business Risks

+
also to
face any legal claim .
If products developed lead to license
legal penalties G suspension .
Risk is
Regulations
Advertising by Connolly
co -
matches with someone else

higher for Connolly
co . as now it has a
significant
Restrictions to
Advertising countries create
registered patent then Connolly co has incur a
on in some ,
.
:
÷÷÷÷÷÷i i
÷i÷÷÷÷÷÷÷÷
Connolly
÷÷÷÷ :÷÷÷::÷ ÷ ÷÷ ÷÷÷i÷ i÷ ÷:÷÷÷÷÷
÷ ÷ ÷ ÷ ÷
Co.
industry is
competitive G involves rapid considering negative cash flow position of Connolly
co .
product innovation ,
which creates a risk
of product if its loan application of
Islam
rejected then is
If it has to suspend product development

of your drugs
Co. to
obsolesce .
Connolly fails innovate timely ,
then its ability to compete

it will lose market share .
Further
inventory losses which is
ongoing It will
affect
.
will lead in innovative market

will be
high
as new innovative products High gearing of o 8 will increase
-
v.
.
medicine
to loss
of
old stocks . Cash
flow issues chances
of
loan
rejection OE if approved then at
of Connolly
co will
affect its
ability to innovate as
highinteree.tw#
.
Accidentinclini.ca/trailstocompleteitsongoingdeuelopmentofgou
it is
currently dependent
of
on
approval bank loan
Accident occurred in 2013 in clinical trails create
Rejectionojlicense a risk
of
loss
of reputation q penalties being imposed
Connolly Company faces
a risk that
regulator may by regulator .
If
legal
claim
against Connolly co .
is
not drugs If license

its license then customers reluctant to
approve for successful be
new
may
.
further
of four new drugs being developed
not this creates
is use
Connolly G .
products .
a risk
approved then amount invested in development

will
for successful launch
of your new
drugs which are
Forseti
→IdwtiNYhII①
10¥ .
I t
- t.ms =
6€ =
Page 0Page
of 126
Page 0Page
of 127
Dec=2
-
-
EE -
E-
→
T
- e -
TTT
- -
To
To
= To =
-
- -
F- =
-# EI ⑤
# -
etsi
"
- e-
I I =
- -
IF
-
E -
-
=
e- = I -
F =
-
-
- - -
EEF
=Eoggo⑤g
- -
↳
egcahfenge
- - -
Page 0Page
of 126
23M
-
898€
1575Mt
liquidity
= I I → ⇐ hmiargheting
I I I -7 =
rag't:D
mosaic're
- - -
-=oEEE_±g
-
I -
T T e - I
Raggi:
¥987
→
I
E
-
= = .nu .
4135751 .
= # T -
I Him
@IoZ.a.ru#aEo@-
-
I I e-
- -
-
= -
I
= = -
I =
-
F -
Ee I
-
-
- I I
- I T
f- - -
=
- -
-
- - -
- -
-
- I -
I
# II I
-
I - - - -
-
-
- -
-
= -
I
- -
I
-
= =
-
- =
-
-
Page 0Page
of 127
:÷ ¥ ÷ i ÷ ÷ ÷
Dove co
#
.
Bad investments
I
Liquidity position
#
$98m
To John
,
Starling Audit Engagement ,
Partner The Group has invested
during the
year
in The
Group only holds cash balance
of slum
after making
from Audit doriot return Investment
manager investments which
generate any huge drains of cash
flows during the
year
on
.
subject Audit :
planning
The Sunshine - Hotel
Group of
$75m in
politically instable country may
lead Moulin Blanche Resto rants G investments in new land
Introduction to loss on invested amount also

if any negative 9 Hotel complex .
Liquidity issues
may
arise
considering
will decline
In relation to audit
planning for these that country ROCE The
Group facing recently
of egg outflows
which
policy in one
group
is in
.
ended to these bad investments It

Hotels for the year 31DEcembe7, due . will become
form of Repair
cost
of damaged
hotel 9 claim
of
ocean
following information
is relevant
for
evaluation
of Business
difficult for group to attract investors with this
protection .
Repair cost is insured but still

group has to
Risks Risks Material Misstatement and Email history of investments These bad investments represents invest 501 amount $12 .sn start which will be paid
of
. .
i in ,
,
The total The

high liquidity
offinancedire.cl#$98m of Group assets 9
by
which 281 co later also
is insurance
Group requires
.
.
.
Business Risks
(a)
therefore creates a
significant concern due to its
marketing strategy 4
refund policy
.
.
I #
Economic
-
Recession New
-
Loan
The
Group of default
Sunshine Hotel luxurious brand $45 m create
of will
is a New loan a risk
inherent in fixed cost

therefore it
faces an risk
of
economic G increase
for The Group .
Considering
downturn In times The 's
past bad investments will invest
of
Economic
if group
recession
group
.
loan amount bad location then

suffer highest
Sunshine it will make
Hotel
Group will as also in
reduce their it to
people espending most
luxury difficult for group repay
loan
Gearing of group
in .
products in times
of recession .
The Group will is
currently 25T .
therefore it can
easily accommodate
losses doe its assets

suffer high
time loan $45 m will be
recession
of
121
of
which
of
in
. .
:÷i÷÷÷i÷÷÷÷÷÷÷÷÷÷÷÷
in
÷÷÷÷÷÷÷÷÷÷÷÷
which it is
investing then its license
may with loss to assets
of
Hotel ,
group
also
faced
investment
get restricted G in hotel
infrastructure an additional expense
of
relocation
of
customers
Further
may get stuck .
Group has to incur

high compliance in
affected hotel . burden was created
for
flow perspective offered
G cost to with customers
monitoring compliance cash
ensure as were
countries Further Exchange to

different regulations . adverse
refunds .
Losses will increase
further in relation
to closed
rate
fluctuations will also cause loss
Joriegn affected hotels as
they will be
result
for
investment 2 months repair works which in loss
-
for
ofreuenu#
Hw
Drafting
→
d-I I I
-
= =
I I #
-
-
2-
-
-
-0€
e)
'
#
at.
.ae#aentEdretafiEsawiiobedisqqnduea;iEede÷ance"
'
=/
= I = = -
① - ÷⇐#Fo
.int#--------------spegieiewini gtii.dsitye-F-TI:OTI
ouggeefdr -
II.gig :*
.gg
.EE#-F=EonJ---
Ease
7 - - T -
=
FIFE
compliance
- - -
-
TO -
twingestrategy
to open Iffley .
Page 401
Tiree ⑧
-
in cost
#② # -
T
-
⑨
- -
- -
[ = =
:#
- ② -0
Page 402
Dec8
ALL THREE questions are compulsory and MUST be attempted
1 You are a manager in the audit-

department of Huntsman & Co, a firm of Chartered Certified Accountants, responsible
a
=
for the audit of several companies e
and for evaluating -decisions in respect of potential new audit clients.
the acceptance
One of your audit clients is Redback Sports Co, which operates a chain of sport and leisure centres across the country.
=
The -7=-5
company has a financial year ending 28 February 20X9, and you are about
-
F -the audit. Stella Cross,
to start planning -
the audit engagement partner, met with the company’s finance director last week to discuss business developments in
-
the year=
.
-
-
and recent financial performance.

-
In addition, Stella has been approached by Mick Emu, the managing director of Emu Gyms Co. Mick has enquired
- -
-
- -
regarding whether Huntsman & Co can provide the company with an audit or limited assurance review, and Stella
=
-
would
= =
like you to evaluate this request. Huntsman I
& Co already provides a payroll service to Emu Gyms Co and has
assisted Mick with his personal tax planning in the past. Mick also has a suspicion that several employees are carrying
out = = and he has asked whether an = =
-
a fraud at the company, audit or limited assurance review would have alerted him
earlier to the situation.
€
You are provided with the following exhibits:
-1. I
An email you have received from Stella Cross, in respect of both Redback Sports Co and Emu Gyms Co.
- -
-2. Notes of a meeting which Stella held recently with the finance director of Redback Sports Co.
- -
-
3. Extracts from the latest management accounts of Redback Sports Co.

= 4.
-
-
Notes of a telephone conversation which Stella had yesterday with Mick Emu, managing director of Emu Gyms
Co.
Required:
Respond to the instructions in the email from the audit engagement partner. (46 marks)
Se
Note: The split of the mark allocation is shown in the partner’s email (Exhibit 1).
Professional marks will be awarded for the presentation and logical flow of the briefing notes and the clarity of the
②
-
explanations provided. (4 marks)
(50 marks)
2
Exhibit 1 – Email from audit engagement partner
t.EE#,T---
To: Audit manager
From: Stella Cross, Audit engagement partner for Redback Sports Co
Subject: Audit planning for Redback Sports Co, and evaluation of accepting Emu Gyms Co as a potential audit client
-
f-
Hello
I have provided you with some information in the form of a number of exhibits which you should use to help you with
-
- 2 £
-
planning the audit of Redback Sports Co for the financial year ending 28 February 20X9.
¥-58
Using the information provided in Exhibits 2 and 3, I require you to prepare briefing notes for my own use, in which
T=⑤→t5
-
you:
✓(a) Evaluate the business risks to be considered in planning the company’s audit. (8 marks)
Fo EEE I
(b) Evaluate the risks of material misstatement to be considered in developing the audit strategy and audit plan.
(18 marks)
-
II
(c) Design the principal audit procedures to be used in the audit of the grant received from the government in
September 20X8. (6 marks)
In Exhibit 4, I have also provided you with some information relating to Emu Gyms Co. In respect of this, in your briefing
EgggII
notes←you should also:
(d) Evaluate the matters to be considered in deciding whether to accept an engagement to provide Emu Gyms Co with
an audit or limited assurance review. (8 marks)
EI
(e) In relation to the suspicion of fraud being carried out at Emu Gyms Co:
a
Discuss whether an audit or limited assurance review of financial statements in previous years could have
uncovered the fraud. (6 marks)
Thank you.
3 [P.T.O.
Exhibit 2 – Notes of a meeting held on 30 November 20X8
- #
Meeting attendees:
=
Stella Cross, audit engagement partner, Huntsman & Co

-
Aneta Bay, finance director, Redback Sports Co

① non¥iae
-
-
→
Business background
EE¥¥
I
Redback Sports Co operates -
EE
sport and leisure centres around the country. Each centre has a large gym and a
-
swimming pool, and many also have tennis and badminton courts. Given the nature of the company’s = operations, it
has to comply with health
g-
and safety regulations set by the national
IT
regulatory body, and its facilities
-
are inspected
regularly to ensure that all regulations are being followed, and for the company to retain its operating licence.
-
-②I
=
- -
The company is not listed and therefore does not need to comply with local corporate governance regulations. However,
-
-
the company’s chief operating officer and chairman consider it good practice to have independent input to the board,
and there are two non-executive directors. T Idirectors is a leisure
One of the non-executive E industry expert who was ②
chairman of a rival company, Lyre Leisure Co, for ten years. The second non-executive director is an academic who
I
= in organisational behaviour and who- a- I
-
specialises has written several books on performance management in the sport

-
and leisure industry.

€
The company’s board has approved a plan to expand through acquiring other leisure and sport facility providers. The
-
-
-
- -
strategy is not likely to be implemented for another two years, when the board would like the first acquisition to take
Epotential target companies will be
place. However, -
I =
identified in the next I
12 to 18 months. Ultimately, the board would
-
like
T
to seek a flotation of the company within five years, and they consider that expanding the company would improve
-
I
- - -
profits and make a stock exchange listing more feasible.

-
Redback Sports Co has a small internal audit department with two staff who report to the finance director, as the board
.EE#oEEI---=------I-----I----O----
does not have an audit committee.
The company offers a membership scheme whereby, for an annual subscription, members can use the facilities at any
of the centres. Customers who are not members can pay to access a centre for a day under the company’s ‘pay as you
go’ plan. The membership scheme accounts for approximately 85% of the company’s revenue, with the remaining
revenue resulting from ‘pay as you go’ sales.
Business developments in the year
The industry is competitive and the company’s strategy is to encourage customers to renew their membership and
to attract new members by offering a range of new activities. According to the finance director, a successful initiative
which started in March 20X8 is the ‘Healthy Kids’ campaign; this offers children two hours coaching per week in a
range of sports including swimming and tennis. This coaching is provided free as part of their parents’ membership,
-
-
- ②=
and it has proved to be very successful – the finance director estimates that it has led to 3,000 new members since it
-
was launched.
- -
←
In June 20X8, the company opened a new coastal sport and leisure centre which, as well as offering the usual
TEG
- -
facilities, also has a scuba diving centre and offers other water sports facilities. An investment of $12 million was also
- T
2£
-
made in new gym equipment across all centres, to ensure that the company offers the most modern facilities to its
-
customers.
,
glow
=L
An advertising campaign has been launched, to promote the company brand generally, and to make customers aware
EEE
-
of the investments in the facilities which have been made. As part of this campaign, the company paid $1 million to
e-
a famous athlete to endorse the company for a period of two years. The athlete will appear at the opening of the new
coastal sports centre and has agreed to feature in poster advertisements for the next two years.
r#--
-
I ①
Redback Sports Co is also involved with a government initiative to help unemployed people have access to sport facilities.
The company received a grant of $2 million in September 20X8, under the terms of which it allows unemployed people
E-IIE.ae#=tI@--sbugsaeko-
three hours of free access to its facilities per month. By the end of November, 33,900 free hours of facility use have
been provided under this scheme. The government intends the initiative to run for three years, to promote long-term
30°€dmont" =376
health of participants.
knowledge 3.930%1%2
A new data management system has been introduced, which integrates membership information with accounting
IF TO
software. This allows more efficient management of the customer database which is used extensively for marketing
purposes, as well as providing more timely information on financial performance to#
-_-⇐e management. Data from the
4
previous system was transferred
- -
to the new system in July 20X8, and the two systems ran in parallel for two months
- -
-
while training was given to staff and the new system was monitored. One feature of the new system is that it records
-
=
and ⑦ E-
reports on the free hours of access provided
-
I
to unemployed people, which I
the company has I
to report on a monthly
basis to the government.
-
risk
on
Compliance
⑧ eat governance over -
occupied
out initiative ← members
\ loss get annoyed
.
may
✓
sgstis↳mwrongdmecaisi onng
↳ new revenues
of pay you go
, as
marketing campaign
risk
of wrong reporting
to
wrong gov
.
New
reporting
6,
liquidity 9 over
trading
7, over
occupied gyms
5 [P.T.O.
Exhibit 3 – Extracts from management accounts of Redback Sports Co
-¥←F#an
Note Based on Based on
projected figures to audited figures to
28 February 20X9 28 February 20X8
Revenue 1 $53 million $45 million
Income from government grant 2 $2 million –
Operating margin 3 15% 10·7%
Profit before tax $6·9 million $4·6 million
##€@75t
Capital expenditure and associated borrowings 4 $32 million $20 million
Cash $1·4 million $5·6 million
Total assets $130 million $110 million
Number of sport and leisure centres 5 20 18
Number of members 6 38,000 33,800
Number of ‘pay as you go’ entry tickets sold 108,000 102,600
Notes
1. Revenue is forecast to increase significantly this year. This is largely due to the success of the advertising campaign
#
-
featuring the celebrity athlete and the ‘Healthy Kids’ programme (referred to in Exhibit 2).
-
2. The grant received of $2 million, the details of which are explained in Exhibit 2, has been recognised in full as
income for the year.
3. The company’s operating expenses includes the following items:
20X9 20X8
$’000 $’000
Staff costs 15,300 14,300
Marketing 8,500 8,500
Maintenance and repairs of facilities 5,500 5,300 sat
O
4. Capital expenditure was mostly financed through borrowings. On 1 March 20X8, a ten-year $30 million loan was
received from the company’s bank. The loan does not bear interest and is repayable at par value of $34 million. As
well as the bank loan, a loan of $1 million was advanced to the company from its managing director, Bob Glider,
-
-
on 1 July 20X8. The terms of this loan include 3% interest paid to Bob annually in arrears, and the capital will be
repaid in seven years’ time in 20Y5.
-
5.
E-
Two new sport and leisure centres were opened this year. As well as the coastal sport and leisure centre (referred
affluent urban area in the=
to in Exhibit 2), a new centre was opened in an = capital city.
-
6.
per week.
-
-
-
②
The management information system shows that members visit a sport and leisure centre on average three times
_--
6
Exhibit 4 – Notes of a telephone conversation between Stella Cross and Mick Emu, managing director of Emu Gyms
-
-
Co
Notes taken by Stella Cross:
Mick Emu phoned me this morning to discuss developments at Emu Gyms Co and to enquire whether our firm could
carry out either an audit of the company’s financial statements, or a limited assurance review of them. This would be
the first time that the financial statements have been subject to audit or limited assurance review.
Business background
The company was founded by Mick in 20X5, and since that time our firm has provided a payroll service for the
company’s staff, which now number 35 employees working in the company’s four gyms, all located in urban areas.
We have also provided Mick with advice on his personal tax position and financial planning in respect of his retirement,
as he wants to sell the company in a few years’ time. Mick runs the company with his son, Steve, who is a qualified
personal trainer, and with his daughter, Siobhan, who is the marketing director. The company employs one accountant
who prepares the management and financial accounts and who deals with customer memberships.
The company has grown quite rapidly in the last year, with revenue of $8 million for the financial year to 30 September
20X8, and with total assets of approximately $5·5 million. The comparative figures for 20X7 were revenue of
$6·5 million and total assets of $4·8 million.
Loan application
Mick thinks that it will be difficult to attract more members for his gyms in existing locations, and would like the
company to expand by constructing a new gym. He has discussed a loan of $4 million with the company’s bank to
fund the necessary capital expenditure. The bank manager has asked for the company’s financial statements for the
year to 30 September 20X8 and comparative information, and has also requested a cash flow and profit forecast for
the next three years in order to make a lending decision within the next two months.
Mick has asked whether a representative of the firm can attend a meeting with Mick and the company’s bank manager,
to support the loan application and answer questions from the bank manager, assuming that we are engaged to
perform either an audit or a limited assurance review on the financial statements.
Suspected fraud
Mick mentioned that one of the reasons he would like an audit or limited assurance review of the financial statements
is because he has noticed some unusual trends in the company’s financial information. This has led him to suspect that
several employees are carrying out a fraud. Each gym has a small shop selling gym wear and a café, where customers
can buy light meals, drinks and snacks. Mick has noticed that the cash receipts from sales in the shops and cafés
have reduced significantly in the last year, however, there has been no reduction in purchases from suppliers. As a
consequence, the gross margin for these sales as reported in the management accounts has fallen from 32% to 26%.
This indicated to him that staff members could be giving away items for free to customers, or they could be taking
inventories from the shops and cafés for their personal use or to sell.
The shops and cafés keep a relatively small amount of inventory which is replenished on a regular basis. Until this
year, sales in the shops represented approximately 5%, and café sales represented approximately 8% of the company’s
revenue. The figures for this year are 3% and 6% respectively.
Mick wonders whether the potential fraud would have been uncovered earlier, had the financial statements been
subject to audit or limited assurance review in previous years.
7 [P.T.O.
:÷ ÷: ÷ :÷ ÷i : ÷
Huntsman .
weakcorporateeouernance this new

system for marketing purpose . This risk is
board
Audit Red back sports
Company has only two significant Red back
high
its
To Stella Cross
Engagement partner for and also
sports has
NEDS in as co
very
.
,
,
Governance
marketing
audit This If
company lacks an committee .
weak corporate spending which is 16%
of
revenue .
wrong
From Audit
management data is this then
,
manager structure creates risk
of
weak controls G in
produced by new
system whole
lead to wasted Red back G

subject : Audit
planning for Red back sports co . and evaluation
company .
Lack
of good governance may fraud in
spending may get
.
However sports .
this extent
of
Emu
Gyms for acceptance as potential audit
company
as Neos their committees
G are
responsible
Director
has
mitigated
risk
by some
by using this
auditor
client .
for oversight
.
Internal reporting to finance

software
in
parallel with old
software to ensure
Introduction
monitoringeastafjtraining.IN frauds finance department may
creates that
a risk in
relation to Audit
planning for Redbacksportsompany uncovered This risk
currently net significant Reportingtogouernment
remain . is a
Red unlisted Redback

for the
year
ended
28February9 following ,
back sports
Company
issue as
Sports Company report to government
co .
free
is on
Business Risks
information relevant evaluation
of therefore following corporate governance not
legal hours used
by unemployed people through its is
for
is ,
a new
Risks
of
Material misstatement and
principal audit procedures
requirementforthem.cat management system . which
of a
,
carries a risk
Further evaluation done relation to

is
acceptancein Gouernmentinitatiuee
wrong
data
reporting due to
flaws system If in new .
of
Emu
Gyms potential audit client a fraud
as a Red back sports co
joining Government imitative to help wrong
data .
reported to government then government is

,
happenedatEmuGym# unemployed people creates risk

for loss of may
recall its
grant of 42M Further reputational
a revenue .
issues
Caz Businesslike from members G pay you go may may government

as will
investigate G sales .
members also arise when
÷ i÷ ÷ ÷ ÷ :÷ ÷ ÷ ÷ ÷ ÷: ÷ ÷ ÷ :÷ ÷ ÷: ÷ ÷ ÷ ÷ ÷ :÷ ÷ ÷ ÷ ÷ ÷ ÷ ÷ ÷ :÷ ÷:÷ ÷ ÷ ÷ ÷ ÷ ÷
'
ER suspend the license

of through Pay
also
fine model use
go
services now
may as
a
you may
Red back sports co . Decline in cash balances
during gouernmentiniti.at#
the
Newmanagementsgstemsporls
difficult for it
year by
75 't will make Red back
Co to Further Red back sports

pay Company faces fine decision
number
increasing a a risk
of wrong
-
.
to
of members 9 visitors , increase health Er
safety concerns
making due new data
management system deployed
maintenance increased
as
repair G cost has
by during the
year If
. new
system has any flaws 0¥
u-lowpercentageascomparedtoit.it staff lacks
knowledge to use it then data
produced
This to
by this
system may
have errors .
may lead
decision
making by management it be
as will
wrong ,
based
wrong financial information generated by system
on .
Further also diverted

marketing spending may get
to
Red back data

wrong
areas as sports co .
uses
from
egg
Page 399
O
-
Page 400
a t
Page 403
-
Page 404
:/ if:#
Risks Material Misstatement ( Romm) Risks Material misstatement
+
of #
of
-←
ROMM materially
are
factors which can
-
misstate the FS . These include issues which
related to E FS
are
accounting .
Analytical
Ratio General factors
factors create that Fs
Accounting standard Abnormal movement Heads
Analysis
-3
which a risk issues in Procedures
may
-
=
- - -
- -
misstated FS Ratios Fs Fs misstated

be materially may get materially
misstated because In this
type of Romm
og
be also
get
-
may may
.
- - -
treatment
Eff -
fair value
adjustment management may have applied of heads
of
Fs
may
be
showing abnormal
movement .
due to
general issues such
Provisions
accounting standard wrongly moving abnormally
E
Inventory days as
-
.
.
-
:
Estimation provide detail detail

of impairment
loss Examiner will
of of
Heads
may net
be Debtor
days New Finance Director
- - -
- -
different accounting transactions G students Change controls

Debtor Allowances
moving as per the in sales weak
-
- -
Actuarial valuation have to discuss treatment change

risk in
adjustments done in
profit margins
new
software
- -
.
-
RED capitalization of outflows Exam-15marklri.sk ROLE

of those transactions
G to
is
planning
-
- -
-
.
.
-
Share based
payment marking-2marr.es/risk-
-
Identify 9 Explain the -
gearing get listed

-
inventory valuation
Accounting treatment of that transaction ③ Correct abnormal movement -
Interest cover -
co . is
planning to get
-liJeestimat# ⑦ Comment management treatment OE Discuss possibility of Effective tax rate a loan
-
-
on
:÷÷÷i÷÷÷÷÷÷÷:÷÷ :÷ i÷ ÷ ÷ ÷ ÷ ÷: ÷ ÷ ÷ ÷ ÷
:
:i÷ ÷ ÷ ÷ ÷ ÷ :÷ iii.
÷ ÷ ÷ ÷ ÷ i÷ ÷
""
t÷÷÷÷÷÷÷÷÷÷
have over -
estimated lives to reduce the -
depreciation charge They may

.
also have done

£g Laurel
Group should write
off
Chico
retrospective adjustment of change in

life
estimation Brand
inventory as
per IAS 2 because
to estimation its to zero due to its

wrong life depreciation fallen
Due NRU has
withdraw market Further

charge will reduce which will overstate
profits from
. as
per IAS 37
{ assets .
Adjustment in depreciation charge provision should be made

for probable claims
PBT
of
45M
represents 178% Of :
o
material
of affected
customers .
A risk exist that
toF#inventory may net have been written

off
as current assets have increased
during
$107 m to $143m Further another
-
the
year from .
|
risk is that
provision for claims
may
not have been made
as current liabilities reduced

from $25 to 1519am IF inventory
m
.
off
is not written
Further if
then
not
inventory 's iiabilitieswillbeuls
made then Gpl?:#its Wwii! Yee 09 ' s
provision is
I -7€ -
-
-
-
- -
=L #
-
-
- - - -
- -
- -
- -
✓
Tq ②
-
III
== - - -
I
- -
- I
= =
-
=
-
Page
Page 111 of 1135
-
- -
I÷ie
÷÷÷::±
-
-→0
::
FE testing
.
→
-
?
i
o
- .
:i ÷
7-
⇐
Eo
-
T.ee#EFFTEeIOEE
=
Page 11Page
of 1136
- -
-
-0 - -
- -
¥#⇐-Ea¥-_
E-
- -
-
÷_
-
✓ d - - - -
# TAIBA
-
-
Z se
- I ± → TaxaD
t
②
Page 11Page
of 1137
:÷ ÷ f:÷ ÷t ÷ ÷ ÷ ÷
Brand
Laurel
I Group movement
-
of Names → I -5
products .
Decline in current liabilities
from 825am
To Sanders Audit Partner Brand $35 m $19 on the that

Brigitte Engagement head declined
by provision is
, .
names in soft' whereas to increases irish
,
from Audit movement Notes to FS decline not recorded Failure to record

provision will Ols
Manager only explained of
in is .
Subject : The Laurel

Group - Audit
planning 153am due to impairment
of
Chico Brand Acquired brand
.
prgitshulsliabilil.ie#
Introduction not amortized Group policy Retaining balance
Laurel
names are as
per .
=
for Retained $8m

to TheGroop detail provided of disposal of any brand
Earning
Audit increased
In relation planning for
No is .
only
by ,
the decline that is

year
ended
21*017 following ,
information Un
Explained of
$5m creates a risk that some
despite profit for the
year
$25 m
Discerpancg of
.
Brand dividend paid

is relevant
for
evaluation
of Risks
of Material misstatements , adjustment may be
wrongly recorded in names slam in RE can be due to
any
.
heady However data is provided notes In absence

Additional
information required for
detailed
Analytical nnp such
in .
reuiewazdprincipalauditprocedluoperatingfxpenc.es 5+05=2
I dividend this 417am
→
of discerpancy raises a risk
of
-
(a)
Risksogmaterialmisstatement Operating expenses increased
by 427M
,
whereas impairment wrongrecordingoganyexpensedirectly.int#
ReviewoJAssetuseJulh
→ 21-1--3
charged during the year is
of
430M
Operating expenses Load 2
-
The taken
life of assets under Iasb should have
$30 m
Laurel
Group can review shown a rise
of more than as New loan
by Laurel Group is
specific to
to rise
got different from
actual lives should due development project therefore borrowing
if
have
operating expenses also increase per IAS 23 its
as
remaining
estimated
useful
lives used in
depreciation calculation
revenueby-12.SI Apparently operating expenses have cost should be capitalized in
project of
it is
-
. . a
amount
As
per IAS -8 change in
life
is an estimation
change by less than expected
increased
,
which
may qualifying project which will take substantial time in
:÷i ÷ ÷ ÷ :÷ ÷ : :÷ ÷ ÷ ÷ ÷ ÷ ÷: ÷ ÷ :÷ ÷:÷ ÷ :÷ ÷ ÷: ÷ ÷÷÷ ÷ i÷ ÷ :÷:÷

÷
Adjustment in
depreciation
off inventory
worth 45M
represents not written because current asset balance
:÷ ÷ ÷: ÷: ÷ ÷ ÷ ÷: ÷ ÷ ÷ ÷ i÷ ÷ ÷ :÷
wronglycapitaligedthenitwillolsprogitsesae.se#
.
H8tgPBToomaterialtof# has increased

from
$107 m to 4143M .
Profits 3
inventory
Goodwill balance will to write
2+1=3
get overstated due being
→ not
off
The Laurel
Group should test
goodwill balance
for recorded
2
impairment each
year
as
per IAS -36 A risk exist
Legalclaims
-
The Group
that
management may not have done
yearly impairment As
per IAS 37 , Laurel should record
provision
review
of goodwill
as its balance is constant at 818M .
for legal claims which

may
be
filed by affected
Failure to overstate
calculate
goodwill
will
profits G customers who have
suffered
skin irritation 8 other
balance Goodwill brand due to Chico Brand A exist that

goodwill balance 418M represents health products risk
of
.
.
5tgae.se/sthereforematerialtoF# provision may

not have been recorded despite that
outflow chances probable Laurel
are .
Group has accepted

the Brand
allegations apparently by withdrawing
Chico
March 2019
I
Section A – This ONE question is compulsory and MUST be attempted
1 You are a manager in the audit department of Snow & Co, a firm of Chartered Certified Accountants, and you are
-
responsible for the audit ofI =
-
Margot Co. The company has a financial year ending 30 June 20X9, and you are about to
e-
start planning the audit.
Margot Co produces fruit-based food products using agricultural produce grown on its farms. Ben Duval, the audit
F - =
- - -
engagement partner, met with the company’s finance director last week to discuss business developments in the year
and recent financial performance.
-1. I
An email you have received from Ben Duval, in respect of the audit of Margot Co.
-
-
2. Notes of a meeting which Ben held recently with the finance director of Margot Co.
IE =
-
3. A reference document prepared by Snow & Co containing an overview of the accounting requirements applied in
- -
the agriculture sector.
- 4. Extracts from the latest management accounts of Margot Co and accompanying notes, including the results of
-
=
preliminary analytical procedures, which have been performed by a member of the audit team.
- -
-5. An email which the audit engagement partner received from Len Larch, a production manager working at one of
-
-
To
-
- -
the company’s olive farms.
Required:
→
Respond to the instructions in the email from the audit engagement partner.
- -
(46 marks)
-
-
2 -
⑦ (50 marks)
2
Exhibit 1 –d
Email from
- Ben Duval
✓ To: Audit manager
E- From: Ben Duval, Audit engagement partner for Margot Co

Subject: Audit planning for Margot Co
-
Hello
I
- -
planning the audit of Margot Co for the financial year ending 30 June 20X9.
-
Using the information provided, I require you to prepare briefing notes for my own use, in which you:
.
00=0-2
(a) Evaluate the significant risks of material misstatement to be considered in planning the company’s audit. You
should not include risks of material misstatement relating to the valuation of the company’s bearer plants or
-00
-
biological assets, which will be evaluated separately. (20 marks)
-
(b) Design the principal audit procedures to be used in the audit of:
=
(i) The impairment of the factory, and

(ii) The development cost capitalised in respect of the new packaging. (10 marks)
(c) Discuss the matters to be considered in planning to use an auditor’s expert in the audit of the fruit, which are
-
recognised as biological assets of the company. (6 marks)
In Exhibit 5, I have provided you with an email I received from Len Larch, one of the company’s production managers.
E- I
In respect of this, in your briefing notes you should also:
⇐
(d) Discuss the audit implications of the email from Len Larch, recommending any further action to be taken by our
firm. (10 marks)
Thank you.
3 [P.T.O.
Exhibit 2 – Notes
T
of a meeting held on 28 February 20X9
-
Meeting attendees:
-
=Ben Duval, audit engagement partner, Snow & Co

Ayana Easton, finance director, Margot Co
Business background
#
Margot Co was established 30 years ago by Jim Margot, who began processing the fruit grown on his family farm to
=including a
- -
make a small range of food products

-
canned fruit and = fruit juice. The business was relatively small until ten
-
years ago, when the company began to expand by acquiring more farmland with different crops, and building new
=
-
Ithe range of food products which could be processed, which now includes =
-
production facilities. This extended - - -

olive oil,
packaged nuts and frozen fruit. The company sells its products under the ‘Fructus Gold’ brand name, and the goods
I and online on theI
-
areF-
sold in major supermarkets -
company’s website.
The company is not listed, and the Margot family members are the company’s majority shareholders. Jim Margot
I
retired several
-
I
years ago, his daughter, Mia
-
-chief
Margot, is the company’s 2
executive T
officer, and otherI
family members
hold positions in senior management.
-
-
Business developments in the year

Online sales
E- IE¥¥EZEI=
In the last year, sales made through the company’s website grew significantly. The finance director believes that
this was in response to an advertising campaign costing $225,000, which promoted the ‘Fructus Gold’ brand and
coincided with the launch of a new online sales portal on the company website designed to make online ordering
easier. To encourage online sales, the company has regular special offers, with discounts periodically offered on a
# -7g t f
-
selection of product lines, and offers such as ‘Buy One Get __*_--
One Free’ for a limited time on some products.
Research and development
Recently, concern over the level of plastic used in packaging has encouraged food producers to investigate the use
- -
-
-
-
of plastic-free packaging for their products. In July 20X8, the board approved a budget of $400,000 to be spent on
I-II -#q-o=EEe#0
research and development into new packaging for its products. By 28 February 20X9, $220,000 has been spent,
with this amount being paid to ProPack, a firm of packaging specialists, to design and develop a range of plastic-free
bottles, bags and containers. It is anticipated that the packaging will be ready for use in two years’ time at which point
Fo =
-⇐=gge
-
the company will introduce it for use across its product range. ProPack is currently testing prototypes of items which
- -
have been developed, with encouraging results.

- -
Loan
F -
←_②② --②⇐
A loan of $375,000 was taken out during the year to support the company’s research and development plans.
e-
--#
Factory damage
One of the company’s several factories, used to process fruit and produce fruit juice, was damaged in August 20X8
- c o - - -
when a severe storm occurred. High winds destroyed part of the factory roof, and heavy rain led to flooding and damage
IOI
-
I
-
I
to machinery and processing equipment. The factory has not operated since the storm, and the = finance director has
②
-
performed an impairment review on the building and plant and equipment; details of the impairment review are given
-
inI F-
-
the extract from the management accounts (Exhibit 4).

Use of an auditor’s expert
The fruit growing on trees and the harvested agricultural produce are biological assets which were recognised at
€
g---I
-
fair value of $3·1 million in the 20X8 Tassets,

audited financial statements. Due to the specialised nature of these o
¥*
.
an auditor’s expert will be used to provide evidence relating to their valuation. A resource document containing an
=
overview -2
of the accounting requirements ¥
in relation to the company’s
⇐ activities is provided in Exhibit 3.
4
Exhibit 3 – Reference document – Extract from Snow & Co’s internal technical guidance for audit staff working with
-7
- - -
clients in the agriculture sector

IAS® 16 Property, Plant and Equipment – Bearer plants
X
-
Definition: A bearer plant is defined under IAS 16 as ‘a living plant that:

– is used in the production or supply of agricultural produce;
– is expected to bear produce for more than one period; and
– has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.’
In line with the requirements of IAS 16, bearer plants are recorded at accumulated cost until they reach maturity and
then they are depreciated over their useful life.
IAS 41 Agriculture – Biological assets
T
Produce growing on bearer plants, and harvested agricultural produce are biological assets and should be accounted
for under IAS 41. Biological assets are measured on initial recognition and at subsequent reporting dates at fair value
less estimated costs to sell, unless fair value cannot be reliably measured. A gain or loss arising on initial recognition
of agricultural produce at fair value less costs to sell shall be included in the statement of profit or loss for the period in
which it arises.
IAS 2 Inventories – Agricultural produce
-
When agricultural produce enters the production process, it should be accounted for under IAS 2.
Fruit trees Growing and Fruit being

– Bearer plants harvested processed
– IAS 16 fruit – Inventory
– Biological assets – IAS 2
– IAS 41
5 [P.T.O.
.FI#Yiad.cYrrratfEafit
current ratio
Current liab .
3,33%-7%1
Exhibit 4 – Extract from management accounts and results of preliminary analytical procedures
I
-
Note As at 30 June As at 30 June

20X9 20X8
Projected Actual
$’000 $’000
Extract from statement of financial position:
Total assets →12,500 11,900
Included in total assets:
← -_8
Intangible assets 1 525 50
§⇐ ⇐¥÷÷÷÷:÷*
-
Property, plant and equipment 2 6,150 6,470

Total current assets 3,350 2,190
Cash included in current assets 760 750
Current ratio 2·6 1·4
FaaGearing ratio
Extract from statement of profit or loss:
28% 32%
Total revenue 35,600 32,750 " '" " "

Online
on
sales included in total revenue 2,495 1,310
=EE¥¥÷÷
Operating margin 28% 26%
Return on capital employed 5% 4.5%
Profit before tax 2,100 1,900
..
Extract from statement of changes in equity:
'B§o%Bgd-
Dividend payments - 1,200 1,000
-
- I one
Notes:
1. Intangible assets includes the following items:
- -
20X9 20X8
-
martinets
$’000 $’000
① Software development costs
②
-
# 80 50
IE
Advertising costs relating to ‘Fructus Gold’ brand 225 0
③ ¥0
Development costs in respect of new packaging 220
––––
0
–––
Total 525 50
–––– –––
o r
€② a - ②
Software development costs of $30,000 were capitalised during the year, which relate to development of the
- e =
online sales portal. The finance director suggests that both the software development costs and the advertising
IT For
IEEE
E-
costs should be capitalised because the IS
increased sales in the year are a direct result of the advertising campaign
and improvements in the online sales portal.
T
The ‘Fructus Gold’ brand name is not recognised in the statement of financial position, as it is an internally
- -
generated asset. This accounting treatment has been confirmed as correct and in accordance with IAS 38
if
Intangible I
Assets. The notes I
to the 20X8 financial statements =
disclosed that the estimated fair value of the=
brand
name is $18 million.
2. Property, plant and equipment
The carrying amount of $6·15 million includes $880,250 relating to the storm-damaged factory (referred to
- - = -
in Exhibit 2) and its fixtures and fittings. The factory is a cash-generating unit for the purpose of impairment
I #I@e
-
testing. The finance director has provided a summary calculation, detailing the following impairment review which
indicates that an impairment loss of $210,250 needs to be recognised:
6
$
Carrying amount at 31 August 20X8
→ 880,250
––––––––
⇐ Recoverable amount
Higher of: Fair value less costs to sell 135,000
Value in use #670,000
Impairment loss (880,250 – 670,000) 210,250 -
-
––––––––
The fair
T
value less costs to sell has been estimated based on the sales proceeds which could be generated from
T 2 - - - -
selling the damaged machinery. The value in use is estimated based on the future sales which could be generated
=¥⑧I=I⑤ Ion
if the damage to the building is repaired and new machinery is put into the factory. The company is planning
--aE②
-
carrying out the restoration and buying new machinery, at a total estimated cost of $450,000. This amount has
been provided for within current liabilities, with a corresponding entry accounted for as a prepayment.
- -
Exhibit 5 – Email sent from Len Larch, employee of Margot Co, to Ben Duval, audit engagement partner
-
To: Ben Duval

From: Len Larch
Subject: Business practices
Hello Ben
I obtained your contact details from your firm’s website, I hope you don’t mind me approaching you directly. I am
I = =
- -
emailing to voice some concerns over recent =

business practices at Margot Co.
-
In my role as production manager in one of the company’s factories, I inspect samples of the fruit which comes into
= -===- I
the factory from the company’s farms, and speak to the farmers on a regular basis. Recently, several farmers told me
that they have been instructed to use certain chemicals to spray the fruit trees, which should increase the fruit yield.
I of these chemicals are prohibited for use in this=
- -
-
However, some country because they can be toxic to humans.

While talking to one of my friends who is a production manager from another factory, it transpired that he had also
e- =
-
=
become suspicious that banned chemicals are being used in the farms. He raised the issue with one ⇐
of the company
②
-
directors, who allegedly gave him $10,000 and asked him not to discuss it with anyone. My friend said that I should
- -
- -
ask for the same sum of money, but I felt uncomfortable and thought I should tell someone from outside the company
about what is going on.
Please do not mention my name if you decide to investigate this further.
Thank you, Len.
7 [P.T.O.
: ÷ ÷ ÷ i ÷ ÷ :/
Snow co Research Development
I
.
-
Ei
outflows 2*1--3 recoverable amount as it was
greater than FV less
To ,
Ben Duval ,
Audit
engagement partner for Margot co .
Margot co . should split its

spending on development cost to sell .
wrong
recoverable amount has Us
From Research
profits 9 property
Audit
.
manager of new
packaging in 3
Development head .
impairment charge
which will Ols
,
Audit
Subject :
planning for Margot co .
As
per IAS -38
spending of Research
phase should
plantGequipme#
Introduction be expenses out .
Further
spending of Development phase Curreutliabilityrecordd → 2
In if capitalization
relation to out criteria is
Audit
planning for Margot for should also be expenses Margot Company can only recognize liability when
the
year
ended
information
30ox9
following
not
satisfied Management has capitalized whole spending there obligation them to
pay Management is an on .
.
it recorded
is relevant
for evaluation
of
Risks
of
material amount
of
$220.000 which
may
be
wrong
has
wrongly as
liability for purchasing
is a
misstatement Principal audit , procedures matters to ,

highly unlikely that capitalization criteria
satisfied machine the is basis
of
their
plan It a
wrong on .
is
consider
for using auditor 's expert 9 Implication
an
of from very start
of spending
Further
currently Pro pack Ltd
.
obligation exist entity the basis

as
of no on on
LenLarchEma# that development to liability Management

is
testing prototypes which
,
in
means
plan Due
wrong recognised
is .
(a)RisksoymaterialMisstatemen# early stages 4 criteria

may
not be
satisfied If wrong hasolscurrentliabilitieshprepayme.rs#
.
1.5
capitalized then G assets current Assets I -5
Owner
managed Company outflows are
profits intangible
-
-
I -
I
Margot lo . is
majorly owned G
managed by will be Ols .
Amount capitalized as Development asset current Assets have shown an increase
of
791 . in heads
Margot family members . This creates a risk

of
material
worths220.ooorepresenk.io/.gPBToimaterialtor# other than cash
,
which creates a risk
of
obsolete
misstatement in FS as
usually in owner
managed Softwaretsevelopment 21-1=3 stock era
doubtful
debtors
getting piled up Increase
-
controls doriot sales 79't includes

companies operate effectively as owners As per IAS -38 spending development of online on in current assets by also a
wrong
FS
bypass the controls . Further in owner
managed portal can
only be capitalized by Margot Company if prepayment recorded
of
$450.000
against plan to purchase
companies are also not independent as

they are at the time
of spending it has
satisfied capitalization machine .
Even
if that
prepayment is excluded then also
÷÷i÷÷÷÷÷÷÷÷÷÷÷
per
÷ :÷÷÷÷÷÷÷÷÷÷÷:÷÷÷÷÷÷÷:÷÷÷÷÷÷÷i÷÷÷÷÷÷÷÷÷÷ :÷÷÷÷÷÷÷÷÷÷i÷
IAS 38 because
:÷÷÷÷÷÷÷÷:÷÷i÷÷÷÷
benefit generated from outflows
are
capitalized then it will overstate
profiles as
usually when current assets rise
,
current liabilities
.
advertising can never be measured

separately .
Management E intangible during the

assets . also Amount
show similar capitalized
trend A that
any
a . risk exist
has
wrongly capitalized advertising outflows the on
year
worth $30.000 represents 14 't
of PBT
therefore current asset 012 any current liability wrongly is
basis that its sale increased

after advertising It .
immaterialtofsindiuidually.classijied,whichhasresultedinabnormalmoueme#
2
attributed
Impairmentoffactory Gearing
is in sale cannot be → 15
as increase
-
wrong
estimate ratio
to advertising specifically wrong capitalization of advertising
.
As
per IAS Margot
-
36
,
co .
should recoverable
Gearing of Margot
co . has reduced
from
32 't
its current
of damaged factory
amount to
outflows
has overstated
profits G
intangible assets . in
position that is in 28 't .
This creates a risk that new loan
of
Amount capitalized worth 4225.000
represents 10.71 .
damaged position .
Management of Margot G .
estimated $375.000
may
have been recorded
wrongly Usually .
gPBTthereforematerialtofs.ua/ue in use on the that assumption factory

is when new loan is taken
gearing of the co .
increases
repaired and the cash

flows it will
generate after ratherthandecl.in#
repairs This wrong
.
value in use is then used as
: ÷ ÷ ÷ ÷ ÷y
÷ ÷i÷ ÷ ÷ ÷ :÷ ÷ ÷
Dec2
.ie#- I- -=-EgYnsfEE-E-=- ==--E- - - - -

1 You are a manager in the audit department of Huntsman & Co, a firm of Chartered Certified Accountants, responsible
for theI I = =
-
Ia
-
audit of several companies and for evaluating the acceptance decisions in respect of potential new audit clients.
k¥9
One of your audit clients is Redback Sports Co, which operates a chain of sport and leisure centres across the country.
The company has a financial year ending 28 February 20X9, and you are about to start planning the audit. Stella Cross,
the audit engagement partner, met with the company’s finance director last week to discuss business developments in
the year and recent financial performance.
In addition, Stella has been approached by Mick Emu, the managing director of Emu Gyms Co. Mick has enquired
regarding whether Huntsman & Co can provide the company with an audit or limited assurance review, and Stella
would like you to evaluate this request. Huntsman & Co already provides a payroll service to Emu Gyms Co and has
assisted Mick with his personal tax planning in the past. Mick also has a suspicion that several employees are carrying
out a fraud at the company, and he has asked whether an audit or limited assurance review would have alerted him
-
earlier to the situation.
-
1. An email you have received from Stella Cross, in respect of both Redback Sports Co and Emu Gyms Co.
= 2. Notes of a meeting which Stella held recently with the finance director of Redback Sports Co.
3. Extracts from the latest management accounts of Redback Sports Co.
= 4. Notes of a telephone conversation which Stella had yesterday with Mick Emu, managing director of Emu Gyms
Co.
Required:
Respond to the instructions
-
in the email from the audit engagement partner. (46 marks)
-
-
-
(50 marks)
2
=
To: Audit manager
From: Stella Cross, Audit engagement partner for Redback Sports Co
=
Subject: Audit planning for Redback Sports Co, and evaluation of accepting Emu Gyms Co as a potential audit client
Hello
I Sports Co for the =
financial year ending=
-
=
-
planning the audit of Redback 28 February 20X9.
EO
÷•[#
Using the information provided in Exhibits 2 and 3, I require you to prepare briefing notes for my own use, in which
"
-
- -
-
you:
(a) Evaluate the business risks to be considered in planning the company’s audit. (8 marks)
(b) Evaluate the risks of material misstatement to be considered in developing the audit strategy and audit plan.
# (18 marks)
(c) Design the principal audit procedures to be used in the audit of the grant received from the government in
September 20X8. (6 marks)
In Exhibit 4, I have also provided you with some information relating to Emu Gyms Co. In respect of this, in your briefing
-
-
notes you should also:
(d) Evaluate the matters to be considered in deciding whether to accept an engagement to provide Emu Gyms Co with
an audit or limited assurance review. (8 marks)
(e) In relation to the suspicion of fraud being carried out at Emu Gyms Co:
Discuss whether an audit or limited assurance review of financial statements in previous years could have
uncovered the fraud. (6 marks)
Thank you.
3 [P.T.O.
Exhibit 2 – Notes of a meeting held on 30 November 20X8
- T -
Meeting attendees:
I
Stella Cross, audit engagement partner, Huntsman & Co
Aneta Bay, finance director, Redback Sports Co
- -
Business background
Redback Sports Co operates sport and leisure centres around the country. Each centre has a large gym and a
E e I I
-
swimming pool, and many also have tennis and badminton courts. Given the nature of the company’s operations, it
has to comply with health and safety regulations set by the national regulatory body, and its facilities are inspected
I to ensure that= = =
-
regularly all regulations are being followed, and for the company to retain its operating licence.
-
The company is not listed and therefore does not need to comply with local corporate governance regulations. However,
I -=====
-
== I #
-
the company’s chief operating officer and chairman consider

-
it good practice to have independent input to the board,
and there are two non-executive directors. One of the non-executive directors is a leisure industry expert who was
chairman of aI
-
rival company, LyreI I
Leisure Co, for ten years. = I
The second non-executive director is an academic who
-
specialises in organisational behaviour and who has written several books on performance management in the sport
and leisure industry.
The company’s board has approved a plan to expand through acquiring other leisure and sport facility providers. The
②
strategy is not likely to be implemented for another two years, when the board would like the first acquisition to take
e-
place. However, potential I
target companies will be identified in the€ I
next 12 to 18 months. Ultimately, the board would
-
like to seek a flotation of the company within five years, and they consider that expanding the company would improve
I
- - -
=
profits and make a stock exchange listing
⇐ more feasible.
- -
does not have an audit committee.

② ②
Redback Sports Co has a small internal audit department with two staff who report to the finance director, as the board
IS
The company offers a membership scheme whereby, for an annual subscription, members can use the facilities at any
of the centres. Customers who are not members can pay to access a centre for a day under the #
IF company’s ‘pay as you
go’ plan. The membership scheme accounts for approximately 85% of the company’s revenue, with the remaining
-
=
- -
revenue resulting from ‘pay as you go’ sales.
Business
#
developments in the year
The industry is competitive and the company’s strategy is to encourage customers to renew their membership and
I
to attract F
new members by offering a range of - I to the finance
new activities. According I director, a successful initiative
-
which started in March 20X8 is the ‘Healthy Kids’ campaign; this offers children two hours coaching per week in a
EE=-I#¥
range of sports including swimming and tennis. This coaching is provided free as part of their parents’ membership,
and it has proved to be very successful – the finance director estimates that it has led to 3,000 new members since it
was launched.
In June 20X8, the company opened B liaµwIy
a new coastal sport and leisure centre which, as well as offering the usual
@
- - -
facilities, also has a scuba diving centre and offers other water sports facilities. An investment of $12 million was also
-
- - -
made in new gym equipment across all centres, to ensure that the company offers the most modern facilities to its
-
Ig
-
T N T -
-
customers.
An advertising campaign has been launched, to promote the company brand generally, and to make customers aware
E I = €0
-
of the investments in the facilities which have been made. As part of this campaign, the company paid $1 million to
and
-
a famous athlete to endorse the company for a period of two years. The athlete will appear at the opening of the new
@
-
E
-
coastal sports centre and has agreed

-
to feature in poster advertisements for the next two years.
Redback Sports Co is also involved with a government initiative to help unemployed people have access to sport facilities.
==¥EE@←Eg__Ee##
The company received a grant of $2 million in September 20X8, under the terms of which it allows unemployed people
three hours of free access to its facilities per month. By the end of November, 33,900 free hours of facility use have
_÷
been provided under this scheme. The government intends the initiative to run for three years, to promote long-term
health of participants.
To
d o
-
A new data management system has been introduced, which integrates membership information with accounting
EE ZITI IF
software. This allows more efficient management of the customer database which is used extensively for marketing
purposes, as well as providing more timely information on financial performance to management. Data from the
4
previous system was transferred to the new system in July 20X8, and the two systems ran in parallel for two months
while
I training was given toTIE
staff and the new system was monitored. OneI featureTof the new system is that>
it records
and reports on the free hours of access provided to unemployed people, which the company has to report on a monthly
- - -
I
-
basis to the government.

-
5 [P.T.O.
Exhibit 3 – Extracts from management accounts of Redback Sports Co
Note Based on Based on
projected figures to audited figures to
28 February 20X9 28 February 20X8
€ 8E€EEt⇐
Revenue 1 $53 million $45 million
Income from government grant 2 $2 million –
Operating margin 3 15% 10·7%
Profit before tax $6·9 million $4·6 million
Capital expenditure and associated borrowings
Cash
-0
4 # $32 million
$1·4 million
$20 million
$5·6 million
-80=8
Total assets $130 million $110 million
Number of sport and leisure centres 5 20 18
Number of members -
6 38,000 33,800
Number of ‘pay as you go’ entry tickets sold 108,000 102,600
.
Notes
1. Revenue is forecast to increase significantly this year. This is largely due to the success of the advertising campaign
Ithe celebrity 2-
-
-
featuring -_ athlete and =
the ‘Healthy Kids’ programme (referred to in Exhibit 2).
2. -
income for the year.

e -
I s ②
The grant received of $2 million, the details of which are explained in Exhibit 2, has been recognised in full as
- I
=
3. The company’s operating expenses includes the following items:
20X9 20X8
$’000 $’000
Staff costs -
15,300 14,300
=#¥
Marketing
Maintenance and repairs of facilities
8,500
5,500
8,500
5,300
-50*9 ==E€o*Tg
-4. Capital expenditure was mostly financed through borrowings. On 1 March 20X8, a ten-year $30 million loan was
FE
received from the company’s bank. The loan does not bear interest and is repayable at par value of $34 million. As
well as the bank loan, a loan of $1 million was advanced to the company from its managing director, Bob Glider,
on 1 July 20X8. The terms of- this loan include 3% interest paid to Bob annually in arrears, and the capital will be
repaid in seven years’ time in 20Y5.
•
- -
↳ Related Party
5. Two new -
sport and leisure centres were opened this year. As well as the coastal sport and leisure centre (referred
-
to in Exhibit 2), a newIcentre was opened in=

-
an affluent urban area inI the capital city.
6. The management information system shows that members visit a sport and leisure centre on average three times
- -
-
-
-
per week.
6
Exhibit 4 – Notes of a telephone conversation between Stella Cross and Mick Emu, managing director of Emu Gyms
Co
Notes taken by Stella Cross:
Mick Emu phoned me this morning to discuss developments at Emu Gyms Co and to enquire whether our firm could
carry out either an audit of the company’s financial statements, or a limited assurance review of them. This would be
the first time that the financial statements have been subject to audit or limited assurance review.
Business background
The company was founded by Mick in 20X5, and since that time our firm has provided a payroll service for the
company’s staff, which now number 35 employees working in the company’s four gyms, all located in urban areas.
We have also provided Mick with advice on his personal tax position and financial planning in respect of his retirement,
as he wants to sell the company in a few years’ time. Mick runs the company with his son, Steve, who is a qualified
personal trainer, and with his daughter, Siobhan, who is the marketing director. The company employs one accountant
who prepares the management and financial accounts and who deals with customer memberships.
The company has grown quite rapidly in the last year, with revenue of $8 million for the financial year to 30 September
20X8, and with total assets of approximately $5·5 million. The comparative figures for 20X7 were revenue of
$6·5 million and total assets of $4·8 million.
Loan application
Mick thinks that it will be difficult to attract more members for his gyms in existing locations, and would like the
company to expand by constructing a new gym. He has discussed a loan of $4 million with the company’s bank to
fund the necessary capital expenditure. The bank manager has asked for the company’s financial statements for the
year to 30 September 20X8 and comparative information, and has also requested a cash flow and profit forecast for
the next three years in order to make a lending decision within the next two months.
Mick has asked whether a representative of the firm can attend a meeting with Mick and the company’s bank manager,
to support the loan application and answer questions from the bank manager, assuming that we are engaged to
perform either an audit or a limited assurance review on the financial statements.
Suspected fraud
Mick mentioned that one of the reasons he would like an audit or limited assurance review of the financial statements
is because he has noticed some unusual trends in the company’s financial information. This has led him to suspect that
several employees are carrying out a fraud. Each gym has a small shop selling gym wear and a café, where customers
can buy light meals, drinks and snacks. Mick has noticed that the cash receipts from sales in the shops and cafés
have reduced significantly in the last year, however, there has been no reduction in purchases from suppliers. As a
consequence, the gross margin for these sales as reported in the management accounts has fallen from 32% to 26%.
This indicated to him that staff members could be giving away items for free to customers, or they could be taking
inventories from the shops and cafés for their personal use or to sell.
The shops and cafés keep a relatively small amount of inventory which is replenished on a regular basis. Until this
year, sales in the shops represented approximately 5%, and café sales represented approximately 8% of the company’s
revenue. The figures for this year are 3% and 6% respectively.
Mick wonders whether the potential fraud would have been uncovered earlier, had the financial statements been
subject to audit or limited assurance review in previous years.
7 [P.T.O.
:÷ ÷ ÷ ÷: ÷ i±:÷f
Red back sports Government Grant asset substantial
=
-
→ 2+1=3
=
that
project is
qualifying takes
→ Bm Grant received
II Risks Material misstatement $2m should be spread 3 time construction A exist that Red back sports
of
as
of
over in risk
years
.
= .
sports to
InternalauditorsreportingtofinanceD.ru# II grant condition of government that Redback capitalized borrowing cost related
co
is G has
riot
.
- .
Internal audit department

of
Red back sports co .
is should provide
of gyms
access to unemployed people for construction period despite that capital projects are
reporting to finance Director which that means

Years .
In
year
ended 28
February 20×9
only 6 months
portion qualifying .
If borrowing cost is not capitalized G
internal auditors are not
recognized
independent They . income 9 rest should be
will notrecorded can
wrongly expensed then it will Uls profits 9
be as is
be able to
identify finance department as deferred income Management wrongly recognized whole asset
issues in has .
they have to report to finance director $2m current This has Ols
profits G Loanpremium 2+1=3
year
as income in who as .
-
-
himself will be Uls

liability Grant received of 42M Redback sports Co should spread redemption premium
responsible for those deferred
Control issues .
income . .
material 44M of loan loan

G
system dejeciencies overlooked by
recognized represents 289% PBT period of loyears
will :
of
which
Of
be as income o
over
.toF# interest
Internal auditors
finance department
create
through effective rate
of
A exist
in will . risk
that
riskojmaterialmisstatement.int# NewDatamanagementsyst#
15 Redback sports co not be
recording
-
may
.
11.5 Red back sports co

Laekogauditcommittee Audit deployed
new data
management system yearly
interest
expense through effective rate
of
interest
-
.
.
One
of the role which Committee
performs during the
year
which
integrates data with
accounting software This . will Ols
profits q uls liability balance .
It 430M
is that they review Fs
before it is sent to creates a risk that
if new data
management system loan balance
of represents 23-1 .
of
assets
a listed Co .
therefore having
.
:÷ ÷ ÷ ÷ ÷:÷ ÷ ÷ i÷ :
÷ ÷ ÷ ÷ :÷ ÷ ÷ ÷ ÷ :÷ ÷ ÷ i÷:÷ ÷ ÷ ÷ :÷÷÷÷÷÷÷i÷÷÷÷÷÷÷÷ :÷÷÷÷÷÷÷÷÷÷÷ an audit committee
famous
athlete .
A risk exist
Further
that expense is
net recorded it is on arms
length basis ER not 9 loan due
not
current Red back
isno±mandator# correctly another date sports
in issue exist in A risk exist that co has
year
. .
Amount to famous Athlete →

maintenance increased notes to the
-
paid 2+1=3
.
repair G expenses which only by given
its disclosure
,
which will misstate
As
per Accounting standard Red back sports co . 3.71 .
despite that new members increased

by 12.41 .
9
Pay of
amount to Famous customers increased 52 't In addition to
should spread expense of
as
you go by .
two E customers visitors

Athlete over
years
as he will appear in increase in members
pay as
you go
due to attended
company Advertisements
for two
years
amount under
gout
.
scheme have also
gyms
3 kids are
initiative
paid . A risk exist that
management may not have also
attending gyms under Healthy kids .
Considering
spread amount has this understatement exist G maintenance
expense over 2.
years q risk
of
in
repair
recognized whole
If
amount
of
slim as an
expense in
outflowsabtheyincreasedu.IE#
amount
Capitaligationofpsorraoingcost
current whole
wrongly recognized
is 2
year
-
debt
current
if capital project
then it
financed through profits As IAS
Us is
as
expense in
year
will
per 23
,
Amount
borrowing cost of debt which relates
assets slim then to construction
q
paid of
.
represents 14.49%
ftp.omaterialtof# period of that capital project should be capitalized if

:/ /
Audit Risks
-
It to lead audit
factor
is which can
anywrong
opinionbeingexpressedbyaud.it#
Audit Risk = Inherent Risk × Control Risk × Detection
Risk
#
Inherent means that a transaction carries
due to its nature transactions

risk
inherently This
.
have misstatement
of
risk .
valuation
EI -
Debtor Allowances -
Actuarial
-
Provisions - Cash transactions
-
Fair valuation -
Impairment calculation
-
Related Party transaction
Inherent risk is
usually contained in transactions
-
w:h÷ichin÷÷÷i
Ef
volue stima:t÷es:o÷÷i÷idare÷÷÷÷÷
. -
÷com÷÷÷÷:plextreatm÷ents.fi
Sampling
New Audit
Risk
team
-
members
Audit
Insufficient procedures
-
-firstyeargaud#
element Audit auditor 's
→
Only of risk
,
which is in
direct control is Detection Risk .
Risk
when Inherent risk 9 Control is
high
-
then auditor audit detail

performs
in more so
,
that detection risk can reduce which will

,
reduceh-uditRisr.at
AUDIT Risks
: /
Riskojmaterialmisstatement
# -
General Audit issues are

Generalauditissues
those which
if : ÷ f ÷ : ÷ i
are other than ROMM but still create
Analytical
,
Accountingstandardissues Abnormalmouementinteads
Ratioanalysis Procedures Generalfactors risk
for auditor .
FS Ratios Fs Fs misstated first audit

may get materially
misstated because In this
type of Romm
og
be also
get E¥ year of
-
may may
- - - -
treatment heads Fs be movement to New Audit team

management may
members
have
applied of of
-
due
showing abnormal
such
may general issues
.
Lack Audit Committee at client

accounting standard
wrongly moving abnormally
E
Inventory days of
-
.
.
-
as :
detail Auditor
Examiner will provide detail of of
Heads
may net
be Debtor
days New Finance Director
Different component
- -
- -
-
different accounting transactions G students Change controls

moving as per the in sales weak
-
-
have to discuss treatment change

risk in
adjustments done in
profit margins
new
software
-
.
-
transactions Exam-15marklri.sk ROLE to Exam

of those G 15marked issue
planning
-
-
. is →
.
marking-2marr.es/risk-
-
Identify 9 Explain the -
gearing get listed Explain the issue that how it will

affect
movement Interest get
auditopiniono
Accounting
② Correct treatment that transaction abnormal co to
of planning cover
-
is
-
.
management possibility
:÷ ÷ ÷ ÷ ÷ ÷ i÷ :÷ ÷ ÷
Comment treatment OE Discuss a loan
of
-
on
÷ ÷ ÷ ÷i ÷ ÷ ÷ ÷:÷ ÷: ÷ ÷ ÷ ÷ ÷
⑧
::
•
risk .
Specimen →
Septa
1 You are a manager in Dando & Co, a firm of Chartered Certified Accountants responsible for the audit of the Adams
E entity. T
The e = =
-
Group, a listed
-
I in the
Group operates textile industry, buying cotton, silk and other
- -
raw materials to
manufacture a range of goods including clothing, linen and soft furnishings. Goods are sold under the Adams brand
=
name, =
which was acquired =
by the Group many years ago. Your= Ias auditor in⑤
firm was appointed -
January 20X6.
You have been provided with the following exhibits:
-
-
1.
- An email which you have received from Joss Dylan, the audit engagement partner.
2. Information about the Group’s general background and activities.
I
3.
4.
Extracts from the draft Group financial statements for the -
year ending
- -
31 May 20X6.
Notes from a meeting held between Joss Dylan and the Group’s finance director and representatives from its audit
committee.
Required:
-
(46 marks)
-
-
E
-
-
-

*
(50 marks)
-
2
-
- -
- To: Audit manager

From:-
Joss Dylan
=Subject: Adams Group audit planning
- -
-
Hello
I need you to begin planning the audit of the Adams Group (the Group) for the year ended 31 May 20X6. As you
-
know, we have= been appointed to auditT theo T

Group financial statements, and we have also been appointed to audit
@
- -
the financial statements of the parent company and of all subsidiaries of the Group except for a foreign subsidiary,
-
=
Lynott Co, which is audited= -
by a local firm, Clapton & Co. 2 =
All components of the Group have the same year end of
31 May, report under IFRS® Standards and in the same currency.
-
a- =
Using the information provided, I require you to prepare briefing notes for my use, in which you:
-
(a) Evaluate the audit risks to be considered in planning the audit of the Group. Your evaluation should utilise
T
analytical procedures for identifying relevant audit risks.
-
-0 (20 marks)
(b) Explain the matters to be considered, and the procedures to be performed, in respect of planning to use the
work#
-
- -
of Clapton & Co. (8 marks)
(c) Design the principal audit procedures to be performed in respect of the following balances recognised as non-
÷
current assets in the Group statement of financial position:

(i) $12 million recognised as investment in associate, and (5 marks)
(ii) $8 million recognised as a brand name. (5 marks)
(d) Using the information provided in Exhibit 4, identify and evaluate any ethical threats and other professional
issues which arise from the requests made by the Group audit committee.
-
(8 marks)
Thank you.
3 [P.T.O.
Exhibit 2 – Background and structure of the Adams Group
T
-
The Group structure and information about each of the components of the Group is shown below:
• Adams Co EquityA9
COI xxx 14500
Janx6=coI= 115
Stewart Co
.
Yddj.sh.fi#d8dAqaidf%e5gD
:÷g:i÷i:÷÷:
ten
i ③ -
Ross Co Lynott Co Beard Co
Ross Co, ②
② Lynott Co and②
-0
Beard Co are all wholly owned, acquired subsidiaries which manufacture different textiles.
-0*0*0=0
- -
-
Adams Co also owns 25% of Stewart Co, a company which is classified as an associate in the Group statement of
-
-
I
financial position at a value of $12 million at 31 May 20X6. The shares in Stewart Co were acquired in January 20X6
- -
for a consideration of $11·5 million. Other than this recent investment in Stewart Co, the Group structure has
remained unchanged for many years.
Information relevant to each of the group companies
T
-3
Adams Co is the parent company in the group and its main activities relate to holding the investments in its
-
T
subsidiaries and also the o
brand name which wasI I
purchased many years ago. Adams Co imposes an ② annual
o_0
management charge of $800,000 on each of its subsidiaries, with the charge for each financial year payable in the
-
=
subsequent August.
Ross Co manufactures luxury silk clothing, with almost all of its output sold through approximately 200 department
TI
I Ross Co’s draft statement of financial position recognises assets of $21·5 million at 31 May 20X6. Any silk
-
stores. -
clothing which has not been sold within 12 months is transferred to Lynott Co, where the silk material is recycled in
-
IS
its manufacturing process.
I
Lynott Co is located in Farland, where it can benefit from low cost labour in its factories. It produces low price fashion
clothing for the mass market. A new inventory system was introduced in December 20X5 in order to introduce
z
stronger controls over -9 I
the movement of inventory between factories and stores. Lynott =
Co is audited by Clapton & Co,
and its auditor’s reports in all previous years have been unmodified. Clapton & Co is a small accounting and audit
Co’s draft statementE
-
firm, but is a member of an E -

-
-
international network of firms. Lynott
-
of financial position recognises
-
assets of $24 million at 31 May 20X6.

Tp
Beard Co manufactures soft furnishings which it sells through an extensive network of retailers. The company is
#
= and surplus cash is invested in a large portfolio of investment properties, which generate rental income.
cash-rich,
②
- -
The Group’s accounting policy is to measure investment

#
properties at fair value. Beard Co’s draft statement of financial
-
- -
position recognises assets of $28 million at 31 May 20X6, of which investment properties represent $10 million.
bots:dd→TTT①
-
-
4
Exhibit 3 – Extracts from draft Group consolidated financial statements
Draft consolidated statement of profit or loss and other comprehensive income
I - _
Year ended Year ended

31 May 20X6 31 May 20X5
→ns
#
$’000 $’000
Draft Actual
Revenue 725,000 650,000
-
-
I
Cost of sales (463,000) (417,500)
- -
–––––––– ––––––––- *
Gross profit 262,000 36.131 232,500 35.7%

.
-
-
Other income – rental income 200 150

Operating expenses#
-
(250,000) e (225,000) -
–––––––– ––––––––
Operating profit 12,200 7,650
Net finance cost - 0 (1,000)
––––––––
@ (1,000)
–––––––– Effective taff
,
,
Profit before tax 11,200 6,650

-=
'
Income tax expense (1,500) (1,000)
Ei
;apff
-
-
–––––––– –––––––– 100

.
Profit for the year 9,700 5,650
t-
Other comprehensive income:
Total comprehensive income

#@#
Gain on investment property revaluation 1,000
––––––––
10,700
3,000
––––––––
8,650
–––––––– ––––––––
Draft consolidated statement of financial position
-
31 May 20X6 31 May 20X5

$’000 $’000
Draft Actual
Non-current assets -
Property, plant and equipment 45,000 45,000

-
Investment property (recognised at fair value) 10,000 = 7,500 -
I
Intangible
#
asset – brand name (recognised at cost) 8,000
I 8,000
Inventory
-
Investment in associate 12,000 –

–––––––– –––––––
75,000 60,500
is
:*
.
Current assets
Inventory ③
12,000 6,000
€
Receivables
Cash
←
10,500
-
10,000 e
← 6,600
=
22,000 ¥¥÷x365=d#
–––––––– –––––––
32,500
––––––––
34,600
–––––––
Debtor days
0
;7÷¥
Total assets 107,500 95,100 'd:p
––––––––
–––––––– –––––––
–––––––
Equity and liabilities
Share capital
Retained earnings
35,000
34,000 I
35,000
= 24,600 ¥?÷' :-p '
365=8
–––––––– –––––––
69,000 59,600
Non-current liabilities
Bank loan 20,000e -
20,000
Current liabilities
Trade payables 16,000 g
-
13,500
Tax payable 2,500 - 2,000
–––––––– –––––––
-
18,500 15,500
–––––––– –––––––
Total equity and liabilities 107,500 95,100
––––––––
–––––––– –––––––
–––––––
5 [P.T.O.
Exhibit 4 – Notes from discussion with Group audit committee and finance director
ET
Recent publicity
During the year, the Group attracted negative publicity when an investigation by a well-known journalist alleged that
T - - - -
②
child-labour was being used by several suppliers of raw materials to Lynott Co. The Group refuted the allegations,
-
claiming that the suppliers in question had no contract to supply Lynott Co, and that the Group always uses raw
-
I from ethically
materials E responsible
- TE
suppliers. The media coverage of the issue- has nowI ended. The Group I finance
director is confident that the negative publicity has not affected sales of the Group’s products, saying that in fact sales
=
-
=
-
-
are buoyant, as indicated by the increase in Group revenue in the year.
-
Systems and accounting policies
FI
The Group has a policy of non-amortisation of the Adams brand name. The brand name was acquired many years
ago and is recognised at its original cost. The previous
# I
audit firm accepted the policy I
due to the strength of the brand
name and the fact that the Group spends a significant amount each year on product development and marketing
=-3
aimed at supporting the brand. The Group has maintained
I a good market shareI in the last few years and management
=
is confident that this will continue to be the case.
IET
As part of management’s strategy to increase market share, a bonus scheme has been put in place across the Group
under which senior managers will receive a bonus based on an increase in revenue.
goes ②
The Group’s accounting and management information systems are out of date, and the Group would like to develop
I
and implement new systems next year. The audit committee would like to obtain advice from Dando & Co on the new
systems as they have little specialist in-house knowledge in this area.
- -
-
Financing
It
In addition, the audit committee requests that the Group audit engagement partner attends a meeting with the Group’s
-
bank, which is planned to be5 held the week after I
the auditor’s report is issued. The purpose of-=
-
the meeting is for the

Group to renegotiate its existing lending facility and to extend its loan, and will be attended by the Group finance
director, #
I a representative of the audit committee, as wellI as thes I
bank manager. The Group I
is hoping that the audit
partner will be able to confirm the Group’s strong financial position at the meeting, and also confirm that the audit
-←_=_
included procedures on going concern, specifically the audit of the Group’s cash flow forecast for the next two years,
-
I
which the bank has requested as part of their lending decision.
-
6
:÷ ÷ ÷ i÷ ÷:/
Adamseiroup Inuestmentinstewartco.at I =3
Intragrouptrading 2
-
TO , Joss Adams can

only classify investment Stewart co Adams should eliminate Unrealized profit from
Dylan group in
group
.
From Audit it stock which relates to items which

,
manager
as an Associate
if it
significant influence
holds over .
lynot Co
Closing .
Subject : Adams
Group - Audit
planning Apparently at 251 .
shareholding significant influence

should exist
,
it
purchased through intra group transaction from Ross
Introduction however it restriction G and exist that
unsold at end
is
riot necessary .
Due to in .
was
year
.
A risk
In relation to Audit the Association Stewart to have eliminated URP

from
planning for Adam#p for Articles
of of
co ER
.
due
any
Adams
group may riot
Stewart
year
ended
31+20×6 following information ,
is
agreement between shareholders ,
co .
may
not
Lynott co .
inventory .
This will Ols
group profits
3
relevant
for
evaluation
of
Audit Risks ,
Matters to be have
significant influence despite of 251 .
Shareholding If .
inventory
considered
of
while
relying on work Clapton Co.
,
Significant influence donet exist E then also
classification Newinventorgsgstem
-
15+1=25
principalh-uditproceduree.GE/hicalissu# as Associate it is done then will misstate
Profits New
inventory system deployed in Lynott co . carries
Investment Stewart valued

Audit Risks investment
recording inventory movement
9 G
EI -
→ 20 marks
-
asset .
in . is a risk that it
may
be
Firstyearojaudit
15 at slum
of wrongly in soft which
represents lilt assets so Flaws in new
system may
be
unidentified
-
Dando E lo . will audit Adams Group for first time materialist start in . Further
staff may
also lack in
expertise
ended In audit
Shareojprofitojstewartco start to
Inventory days of Adams
31 15
first year of operate system
20×6
in
year May new
-
.
.
audit risk auditor has to Investment Stewart have increased to 9.4

usually
is
high as
rely on in co .
was made
of
$115m
,
but
group from
52
days days
relation at investment at current that
previous auditor in to
opening balances ,
as
year
end this is valued 412M
,
which in
year
. This increases risk
inventory
stock
previous audit not done
by firm Secondly that 5105M Share
of profit
earned
by
data be
wrongly recorded
closing
means is as
year
was
may
our .
by
÷÷÷÷i÷÷:÷÷÷÷÷÷:* ÷÷÷÷÷÷÷i÷÷÷÷÷÷÷÷ :÷:÷÷÷i
÷÷i÷÷÷÷÷÷÷÷ a
different
:÷:÷ ÷ ÷ ÷ ÷ ÷ ÷ ÷ ÷÷÷÷÷÷÷:*
auditor
, Clapton 6 . It creates an As
per IFRS -
3
,
Adams
.
Group should cancel intra

group revaluation
of
investment
$lm
property in Oct .
This has
.
Audit risk
for
Dando co as a
group
auditor because receivable G
payable
balance at
year
end
Management Us
group profits by Gain
of
slim
represents
.
. .
it has to must be
outstanding 89tgPBToimaterialto
co relation books
rely on work
of Clapton in
charge
an receivable in
of
-
to while audit Consolidated at end 9 Adamstsrandname

Lynott co .
re
doing of
Adam Co .
year
a
payable in
sobsidary -
2
Fb the
.
If Clapton G . has net done audit with care books
,
as it is
paid after year
end in
August .
As
per IAS -
36
,
Adams Group should test Adams
then it will create Dando co A risk exist that Adams co not have cancelled Brand impairment each year it not
for
also Name
for
-
risk as a as is
may
. .
groupaudi intra
group
receivable G
payable
.
This will overstate amortized Further .
Negative publicity during year

the
payable
G FS Amount impairment Apparently
receivables in
group .
of
intra also increases
for need
testing .
group management charge

is $800000
lsubsidarg x 3 Adams
group management
has not done impairment
$24 m assets the basis
subsidiaries represents 221
of testing It
: sales
of increasing
is
wrong
e
= on .
materialist as asset which is

net amortized should be tested
for impairment each year irrespective of Indicator This may .
ouerstategroopprorite.ca/3randNam#
September
1 You are a manager in the audit department of Bison & Co, a firm of Chartered Certified Accountants, responsible for the
Iof the z
audit Bee
Eagle Group (the Group), which has -
a financial year ending 31 December 20X8. Your E firm is appointed
F-E.FI
-
to audit the parent company, Eagle Co, and all of its subsidiaries, with the exception of Lynx Co, a newly acquired
⇐located in a foreign country which is audited by a local firm of auditors, Vulture Associates.
subsidiary
All companies in the Group report using IFRS® Standards as the applicable financial reporting framework and have the
- -
- -
-
same financial year end.

=3 1.
2.
I
An email which you have received from Maya Crag, the audit engagement partner.
a t - -
Background information about the Group including a request from the Group finance director in respect of a
non-audit engagement.
3. Extracts from the Group financial statements projected to 31 December 20X8 and comparatives, extracted from
I
the management accounts, and accompanying explanatory notes.
4. Management’s determination of the goodwill arising on the acquisition of Lynx Co.
5. An extract from the audit strategy document prepared by Vulture Associates relating to Lynx Co.
Required:
- - ②
(46 marks)
=

-
(50 marks)
2
-
-
✓ To: Audit manager
-From: Maya Crag, Audit engagement partner

Subject: Audit planning for the Eagle Group
- -
Hello
I have provided you with some information in the form of a number of exhibits which you should use in planning the
- t - -
- -
audit of the Eagle Group (the Group). I held a meeting yesterday with the Group finance director and representatives
t
=
from the Group audit committee, and we T o a number
discussed T ofo I
issues which T
will impact on the audit planning.
Using the information provided, I require you to prepare briefing notes for my use in which you:
Ise I =
(a) Evaluate the audit risks to be considered in planning the Group audit. You should use analytical procedures to
¥0
a
assist in identifying audit risks. You are not required to consider audit risks relating to disclosure, as these will be
•
- -
planned for later in the audit process.

-
(24 marks)
(b) Design the principal audit procedures to be used in the audit of the goodwill arising on the acquisition of Lynx
-
Co. Management’s calculation of the goodwill is shown in Exhibit 4. You do not need to consider the procedures
relating to impairment testing, or to foreign currency retranslation, as these will be planned later in the audit.
(6 marks)
=
in respect of their audit
•
-
÷----
(c) Using the information provided in Exhibit 5, evaluate the extract of the audit strategy prepared by Vulture Associates
of Lynx Co and discuss any implications for the Group audit.
②
(10 marks)
(d) After considering the request in Exhibit 2 from the Group finance director in respect of our firm providing advice
-
#④
on the Group’s integrated report, discuss the ethical and professional implications of this request, recommending
any further actions which should be taken by our firm. (6 marks)
-
Thank you.
3 [P.T.O.
Exhibit 2 – Background
*
information about the Group and request from Group finance director
-
--#
Group operational activities
The Group, which is a listed entity, operates in distribution, supply chain and logistics management. Its operations are
-
- - - T
worldwide, spanning more than 200 countries. The Group’s strategy is to strengthen its market share and grow revenue
Imanner s
-
=
-
in a sustainable I
by expansion into emerging markets. There are over =
50 subsidiaries in the Group, many of
which are international. There are three main business divisions: post and parcel delivery, commercial freight and
I
-
→
-
supply chain management, each of which historically has provided approximately one-third of the Group’s revenue.
A fourth business division which focuses purely on providing distribution channels for the oil and coal sector was
- T -
-5
-
established two years ago, and in 20X8 began to grow quite rapidly. It is forecast to provide 12% of the Group’s revenue
-
I
-
T
this year, growing o
to 15% in 20X9. This division isI
performing particularly I
well in developing economies.
In recent years, revenue has grown steadily, based mainly on growth in some locations where e-commerce is rapidly
I
-
I This year, revenue is projected toE-

-
developing. -
decline slightly, which the Group attributes to increased competition, as a
new distribution company has taken some of the Group’s market share in a number of countries. However, the Group
= I
management team is confident E
that this is a short-term -
drop in I
revenue, and forecasts a return to growth
-
in 20X9.
Innovation
¥--¥=⑤=E=⑧②
The Group has invested in automating its warehousing facilities, and while it still employs more than 250,000 staff,
many manual warehouse jobs are now performed by robots. Approximately 5,000 staff were made redundant early in
this financial year due to automation of their work. Other innovations include increased use of automated loading and
unloading of vehicles, and improvements in the technology used to monitor and manage inventory levels.
Integrated reporting
The Group is proud of this innovation and is keen to highlight these technological developments in its integrated report.
- - - - -
-
Id
-
The Group finance director has been asked to lead a project tasked with producing the Group’s first integrated report.
I
The finance =
director has sent the following request to the audit engagement partner:
‘We would like your firm to assist us in developing our integrated report, and to provide assurance on it, as we believe
=L
this will enhance -=_
the credibility of the information it contains. Specifically, we wouldTE =of
like your input into the choice
key performance indicators which should be presented, how to present them, and how they should be reconciled,
-
where7 -
relevant, to financial information from the = audited financial statements.’
there is=
-
E
The publication of an integrated report is not a requirement in the jurisdiction in which the Group is headquartered, but
-
-
a growing pressure from stakeholders for an integrated report to be produced by I

-
listed reporting entities.
If Bison & Co accepts the engagement in relation to the Group’s integrated report, the work would be performed by a
- -
-
teamE -
separate from the audit team.
4
Exhibit 3 – Extracts from consolidated financial statements
→
Statement of financial position

Note As at 31 December As at 31 December
TopangaEgo
F- 20X8 20X7
Projected Actual
$ million $ million
Non-current assets
=⇐¥=€
'
Goodwill 1 1,100 970 's "
Other intangible assets 2 200 170

Property, plant and equipment 657 600
Other investments = 85
––––––
=
100
––––––
Fig
Total non-current assets 2,042 1,840
–––––– ––––––
Current assets 1,450 1,420
–––––– ––––––
Total assets 3,492 3,260
-
––––––
–––––– ––––––
––––––
Equity and liabilities
¥o÷i¥÷
Equity
Share capital
←
3 1,250 1,150
-
Retained Earnings 840 780

Other components of equity 130 140
Non-controlling interests 25 23
–––––– ––––––
Total equity 2,245 2,093
–––––– ––––––
-
Current liabilities
_#E=
Non-current liabilities 4 650
597
620
-
547
–––––– ––––––
Total equity and liabilities 3,492 3,260
––––––
–––––– ––––––
––––––
Statement of profit or loss
=
Note Year to 31 December Year to 31 December

g
20X8 20X7
Projected Actual
$ million $ million
Revenue -
Other operating income

D-
5
6
5,770
-
120
-
5,990
-
80
-3
Operating expenses - 7 (5,540)
––––––
= (5,800)
––––––
Operating profit 350 270
Finance charges -
(28) (30)
I
–––––– ––––––
Profit before tax 322 240
Tax expense (64) (60)
–––––– ––––––
Profit for the year
• 258
––––––
––––––
o
180
––––––
––––––
Notes to the extracts from financial statements
Goodwill
Tf
1. Goodwill relates to the Group’s subsidiaries, and is tested for impairment on an annual basis. Management will
#--EZz€I I
-
conduct the annual impairment review in December 20X8, but it is anticipated that no impairment will need to be
-2
recognised this year due to anticipated growth in revenue which is forecast for the next two years.
In March 20X8, the Group acquired an 80% controlling shareholding in Lynx Co, a listed company located in a
②⇐ z
-
foreign country, for consideration of $351 million. Management’s determination of the

-
goodwill arising on this
-
acquisition is shown in Exhibit 4.
5 [P.T.O.
spent-capitah.IS software development
E¥* ⇐7iEiEiE_#
Other intangible assets
2. Other intangible assets relates mostly to software and other technological development costs. During the year
$35 million was spent on developing a new IT system for dealing with customer enquiries and processing customer
orders. A further $20 million was spent on research and development into robots being used in warehouses, and
$5 million on developing new accounting software. These costs have been capitalised as intangible assets and are
all being amortised over a 15-year useful life.
Equity and non-current liabilities
- -
- -
3. A share issue in July 20X8 raised cash of $100 million, which was used to fund capital expenditure.
⑤ -7¥
4. Non-current liabilities includes borrowings of $550 million (20X7 – $500 million) and provisions of $100 million
*
(20X7 – $120 million). Changes in financing during the year have impacted on the Group’s weighted average
¥ It ¥
¥p
cost of capital. Information from the Group’s treasury management team suggests that the weighted average cost
of capital is currently 10%.
Financial performance
0 -
market share.
②
5. Revenue has decreased by 3·7% over the year, due to a new competitor in the market taking some of the Group’s
6. Other operating income comprises the following items:

- - -
20X8 20X7
$ million $ million
Reversal of provisions 60 40
Reversal of impairment losses on receivables and other assets 30 20
Foreign currency gains 28 23
→
Profit/(loss) on disposal of non-current assets 2 (3)
–––– –––
Total 120 80
–––– –––
7. Operating expenses includes the following items: risk → sooo people rweredeonmdaandf
⑥
-
20X8 20X7
Staff costs #
Cost of raw materials, consumables and supplies
$ million
3,650
1,725
=
$ million
3,610
1,780
- atgseatgs.to
Depreciation, amortisation and impairment 145 140
=
Other operating expenses -7=0 925k£ 20
––––––
270
––––––
Total 5,540 5,800
–––––– ––––––
6
unjgdddgoonf-lsztl=¥m
mxbt.tl/123canahre6Eni d i e draert'ftionmghgapifo
'
PULI '
.
snares
Interested .
Is
Exhibit 4 – Determination of goodwill on the acquisition of Lynx Co
n' Iifhf%'%eartiaf.hu?Iliability
pIg8oogYoVwowxProbabilitj@
→
- -
Note $ million
Cash consideration – paid 1 March 20X8 80
Contingent consideration 1 271
-
––––
Total consideration 351
-# &
Fair value of non-controlling interest
2 49
––––
400
Less: Fair value of identifiable net assets 3 (300)
⇐
Goodwill
––––
100
•.Eb It
.
––––
Notes:
5
1. The contingent consideration will be payable four years after the acquisition date and is calculated based on a
OT
,
- -
payment of $525 million, only payable if Lynx Co reaches revenue and profit targets
-
- e- -#
←
outlined in the purchase -
documentation. The amount included in the goodwill calculation has been discounted to present value using a
I
discount
#
factor based on an 18% interest rate. A T
2. -
1 March 20X8.
-
EEE
The non-controlling interest is measured at fair value, the amount being based on Lynx Co’s share price on
-
-
3.
-
Te
The assets and liabilities acquired and their fair values were determined by an independent firm of Chartered
-
-
- -
Certified Accountants, Sidewinder & Co, who was engaged by the Group to perform due diligence on Lynx Co
-②③-
-
E
prior to the acquisition taking place. A fair value uplift of $12 million was madef-
in relation to property, plant and
⇐
*
equipment.
Exhibit 5 – Extract from audit

T
strategy – prepared by Vulture Associates in respect of the audit of Lynx Co
o r
- -
The two points below are an extract from the audit strategy. Other sections of the audit strategy, including the audit risk
assessment, have been reviewed by the Group audit team and are considered to be satisfactory. Lynx Co is projected to
②
-
-
be loss making this year, and the Group audit team is confident that sufficient procedures on going concern have been
planned for.
-
Controls effectiveness
We will place reliance on internal controls, which will reduce the amount of substantive testing which needs to be
performed. This is justified on the grounds that in the previous year’s audit, controls were tested and found to be highly
effective. We do not plan to re-test the controls, as according to management there have been no changes in systems
or the control environment during the year.
Internal audit
Lynx Co has offered the services of its internal audit team to help perform audit procedures. We are planning to use the
internal auditors to complete the audit work in respect of trade receivables, as they have performed work on this area
during the year. It will be efficient for them to perform and conclude on the relevant audit procedures, including the
trade receivables circularisation, and evaluation of the allowance for trade receivables, which we will instruct them to
carry out.
7 [P.T.O.
÷ ÷ : ÷ :÷i ÷: f ÷
EagkGp
to make a loss in current
year
.
This means
impact Fairvalueadjustment 2ft =3
of probability percentage
reduced
Engagement Partner
Eagle Group
have As
To Audit would value
per IFRS identify
Maya Crag of
,
-
3 should all net

, ,
from Audit assets

acquisition
,
manager contingent consideration ,
as
target in consideration is
of Lynx G .
on date G then value
to to fair This
Subject : Audit
Planning -
Eagle Group to achieve certain

profit target .
Due over valuation them their value .
work was done
by
Introduction
of contingent get independent
consideration liabilities Sidewinder behalf
firm
will
goodwill
G co
an
,
.
on
of
In relation to Audit
planning for Eagle Group for overstated .
Contingent consideration valued at 4271M

Eagle Group A .
risk exist that Sidewinder G .
may
the
year
ended 31
relevant
December 20×8
,
following represenls7.FI#ethereforemateriatofs
Present value
.
not have
identified net assets on acquisition
information is
for evaluation
of
Audit Risks ,
of atcontingent
consideration
of
$27 'm
correctly ER
may
not have valued them properly .
If
Principal Audit Procedures Evaluation of Vulture Associates ,

was discounted 18T .
rate on 1 March 20×8 .
Net assets are
net correctly valued then it will
AuditstrategyGC-thicalise.ve# At end
of
31 December 20×8 Interest Expense misstate
goodwill balance G
property plant G Equipment
year Fu recorded 412M
,
calauditR.is#-24mar-ks should be recorded as

unwinding of discount
of balance .
uplift of represents 031 .
ogassetstherejoreimmaterialtofsindiuidually.ae
$271 m 0/12=5140
Diferentcomponen-Aud.to
'
this Pv
Currently
18 -65ns 15 't
of
r
-
x x .
of Eagle Group
Finance $28
of the which
group subsidiary Lynx
G .
is audited cost is
just m means
Goodwill -
is t 15 =
Z
auditor It Goodwill SOAP
different unwinding of discount of
creates that $40.65 either not increased 413am
by a
,
vulture Associates .
an is balance on
by ,
Audit risk
for
Bison co . as a
group
auditor because
recordedotiswronglyclassijied whereas
goodwill created on
acquisition of Lynx
G .
i÷÷÷÷÷÷÷÷÷÷÷ :÷÷÷i÷÷÷÷÷÷÷÷
:
:÷÷÷i÷÷÷÷÷÷÷÷ :÷i÷ :÷ ÷ ÷ ÷ ÷:÷:÷ impairment

:i÷÷÷÷÷÷÷÷÷ Revenue
.
for discounting of
at 427hm consideration This
Contingent consideration valued is
payable rate
of group by contingent .
valuation .
has reduced
after
4g ears
,
therefore it should be
classified may
have been done to reduce Pv 3.71 but
management of group expects
as that which is
,
no
Non current
liability Apparently Eagle Group management recordedasliability.im/sairment
.
will be required the basis
of forecast on
years It
recorded current
has not it in Non liabilities as
Noncontrollingtnterest 15 revenue
growth in next two creates
-
,
.
a
breakup of NCL shows that it

only includes Ncl valued on
acquisition of Lynx co .
was
of
$49 m
,
risk that
management may
be
taking optimistic
growthassomptiontoauoidimpairmentcharge.ec
$550M Bloom This soft at
G provisions of
borrowings of
whereas balance end
year Ncl
appearing
. on
consideration
reata
liability a
contingent
risk
just that
opening Researcheatsevelopment 21-1=1 is $25 m out which 823am is the -
of , of
is
recordedinwronghead balance .
It creates a risk that Net on acquisition As per IAS 38 ,
Eagle Group should expense out
recorded head Research development outflows also which
contingent consideration should be valued at Pu
of of Lynx
G .
was in
wrong ,
as
outflows G
Cfs
adjusted by probability percentage of that
apparently closing balance do not include impact are spent before
the capitalization criteria is satisfied .
Contingent consideration
getting matured .
Management ogncicreatedduringtheyearogs49m.LA/ynaranHy management

has
capitalized all outflows ,
consideration
outflows they
of Eagle Group only valued contingent
has which include research also as have
,
at IPU
of
Cfs
They did not consider impact of
.
capitalized whole spending done RGD

of
420M Due on .
to capitalization G intangible
probability percentage Lynx co currently expected
.
.
is
of wrong outflows profile
:÷ f /
assets will be Ols . Amount capitalized worth
420M assets
represents 05T ooo
individually
of
.
immaterial to Fs .
Software
Eagle Group can
only capitalize those
spending of
Software development
criteria
after satisfaction
which is made
of capitalization Management of Eagle Group has

.
capitalized whole done

software development
spending
on
$4 om This creates made

of . a risk that
outflows
before satisfaction of capitalization
criteria are also
:÷÷÷÷÷i
lives
÷i÷÷÷÷÷
÷i÷÷÷÷÷÷÷:
.
÷÷÷÷
Wrong amortization charge calculated will
misstateprogitse.in/-angibleasse#OtherIncome-
-
15
Other the include 159am based

incomes
during year
estimates It includes Ibom
on . reversal
of provisions of
These both
of impairment
G reversal losses $30m
of
.
reversals based estimates 9

are
carry
on an
inherent manipulation Management may

of
risk .
have
recordedthemtosupporttheirjallingreuenueimpa#
December2o
1 It is 1 July 20X5. You are a manager in the audit department of Squire & Co, a firm of Chartered Certified Accountants,
Ta
responsible for the audit of the#

- -
Ryder Group (the Group), which has a financial year ending 30 September 20X5. The
I
Group, a listed entity, operates in
-
I
the hospitality sector, running I
restaurants, coffee shops and hotels.
Squire & Co audits the Group consolidated financial statements, and the individual financial statements of each Group
company. AllI # I
-
companies in the Group use IFRS® Standards as their financial reporting framework.
t
I
=
1. An email which you have received from Mo Iqbal, the Group audit engagement partner.
-
2. Background information about the Group’s current structure and business activities.
3. Notes taken at a recent meeting between Mo Iqbal and the Group finance director.
E 4.
5.
Selected financial projections to 30 September 20X5 and comparative financial information.
Notes taken by Mo Iqbal during a phone call with a representative of the audit committee.
Required:
TT
-
(50 marks)
2
To: Audit manager
From: Mo Iqbal, Group audit engagement partner
Subject: Ryder Group audit planning
Date: 1 July 20X5
Hello
You need to start planning the Ryder Group (the Group) audit, and to help with this I have provided you with some
F-
I
-
relevant
7-
information. I met with the Group finance director yesterday to discuss a number of matters including some
-
gfrom the Group audit committee regarding several

recent business developments. I also spoke with a representative
issues.
⑥
Using all the information provided, I require you to prepare briefing notes for my own use, in which you:
①
-
-
- _
EE÷
(a) Evaluate the significant audit risks to be considered in planning the Group audit for the financial year ending
-
€-0
30 September 20X5. Given the planned Group restructuring, you should evaluate audit risks relating to disclosure
- -
issues at this stage in the audit planning. (24 marks)
(b) Identify the additional information which should be requested from management in order to effectively audit the
-
T€③
-
disposal of Primal Burgers Co, and explain why this information is required. (4 marks)
(c) Design the principal audit procedures to be performed in respect of:

(i) The classification of the $48 million investment in Peppers Co, and
(ii) The government grant of $20 million received in January 20X5. (8 marks)
audit, and recommend appropriate actions to be taken by our firm.

E.
(d) Using the notes from the audit committee phone call in Exhibit 5, discuss any ethical issues relevant to the Group
(10 marks)
Thank you.
3 [P.T.O.
Exhibit 2 – Background information about the Group
- -
The Ryder Group is one of the country’s leading hospitality providers. Over the last 15 years, the Group has grown
I
-
I
steadily and has a range of successful hospitality brands, each brand being operated
-
by a separate, wholly owned,
- - -
subsidiary of the Group.

T
The Group is planning some restructuring, which is discussed in the notes from the client meeting (Exhibit 3). The
-
g-
- -
Group structure shown below is the Group’s existing structure, before

-
any restructuring takes place.
Existing Group structure:
-
Ryder Co
T
Mondays Primal Inspiral

- -
- Coffee Co Burgers Co Hotels Co
Information about each of the Group companies is given below:

I I -
I -0
Ryder Co is the parent company of the group, a listed company, which does not trade, and holds the shares in each
-
subsidiary company.
Mondays Coffee Co operates one of the leading coffee shop chains in the country under the ‘Mondays Coffee’ brand. It
-77
-
I
enjoys a strong market share and operates more than 1,200 coffee shops across the country.
Primal Burgers Co operates over 150 fast food restaurants. In recent years, revenue from Primal Burgers Co has
-②0•
←
-7-0=-2
-
declined, but it still provides approximately 30% of Group revenue.

-
Inspiral Hotels Co is a successful hotel business, with over 75 hotels across the country. The Group acquired Inspiral
- -
Hotels Co three years ago, as part of a growth strategy based on diversification.
4
Prirnaf.rs?FEIci sEi8asters-#EEEE
Exhibit 3 – Notes from client meeting
Group restructuring
"
i':# imaging
a
E=#==E⑧¥=
@-⇐⑤e¥←⇐⇐==€←Eo
The Group is restructuring, as part of a strategy for continued growth in revenue and profitability. As part of this strategy,
the Group is investing $48 million in a newly formed company, Peppers Co, representing 50% of the share capital
of the company. The remaining 50% shareholding is owned by Smiths Co, a property development company. The
contract behind this investment states that the Group and Smiths Co will work together to develop six new hotels, all
e
based at the country’s major- E in Peppers
airports. The investment ECo is likely to take place in August 20X5.
Partly to provide some of the finance needed for the restructuring, and partly because of its declining revenue, the
Group is planning to dispose of Primal Burgers Co. The board approved this disposal in MarchEE 20X5. Vendor’s due
diligence has been carried out by Usami & Co, a firm of Chartered Certified Accountants. Usami & Co conducted an
IZ
independent II €T-__g- -2
review of the company’s financial position and future prospects and produced a report on their findings,
which is made available to potential buyers. At today’s date, several potential buyers have expressed an interest and
¥I€EEE€Eo⑧EE#E€ -5
the Group expects that the disposal will take place just after the financial year end.
Due to the success of the Inspiral Hotels brand, the Group plans to expand its hotel offering, and a target company
=E¥-E=_€EE⇐E0F
for acquisition has been identified. The Group aims to acquire Valentine Co, which operates the successful Valentine
Hotel chain. Negotiations are underway, and it is likely that the acquisition will go ahead in the first quarter of the
next financial year. The purchase price has yet to be agreed, but is likely to be around $100 million. Due diligence
performed on Valentine Co indicates that the fair value of its identifiable net assets is $85 million.
Mondays Coffee drive-through
E- E-
The Group has previously trialled 20 drive-through coffee shops situated on busy roads, which offer customers the
convenience of purchasing coffee without= =
leaving their cars. This year -e②#
the Group opened 50 new drive-through coffee
shops, open 24 hours a day, seven days a week, which have proven to be extremely popular with customers. The
=Z=T€=⑤_Jz
associated capital expenditure recognised in property, plant and equipment was $43 million, which, according to the
Group finance director, includes the cost of constructing the coffee shops amounting to $28 million, and the cost of
€E#tT⑥$£F¥ I
acquiring three-year licences to allow 24-hour trading, at a cost of $15 million. The Group’s accounting policy is to
depreciate property over 20 years, and a full year’s worth of depreciation will be charged in the year to 30 September
20X5 in respect of the $43 million capitalised.
IEEE
According to the Group finance director, the new drive-through coffee shops are projected to account for almost all of the
%--⇐ increase in revenue generated from the Mondays Coffee brand in the year. His comment is based on data produced from
the management information system which separately records revenue generated from the drive-through coffee shops
445M£
-
Government grant
-
s o
€
so that management can assess its performance and determine the return on the -
$43 million of capital expenditure.
-
E-
The government provides grants to organisations which commit to investing in properties to reduce carbon emissions
IFT
-
and energy consumption. Grants areg also available to organisations to promote the benefits of recycling to their
customers.
②
In January 20X5, Ryder Co received a grant of $20 million. The only condition attached to the grant is that half of the
- - - - 0
amount must be used to upgrade existing assets to make them more environmentally friendly. None of the amount
-0=7 -
tag
received has yet been spent, but it is planned that it will be used to finance capital expenditure -=
E
property portfolio. The other half of the grant will be used to fund an advertising campaign.
across the Group’s -
IofT
statement
②
profit or loss for the year (Exhibit 4).
-E②
According to the Group finance director, the full $20 million is included within operating profit in the projected Group
-
5 [P.T.O.
§45znmx 100
l4%gRnue
=
Exhibit 4 – Selected financial projections
-0 Projected to
30 September 20X5
Projected to
O
30 September 20X5
Actual to
O
30 September 20X4
Actual to
O
30 September 20X4
EF
$ million $ million $ million $ million
Subsidiary Revenue Assets Revenue Assets
Mondays Coffee Co 155 200 110 160
-
E-
Primal Burgers Co
Inspiral Hotels Co
99
66
––––
110
140
––––
103
62
––––
113
125
––––
Total 320 450 275 398
–––– –––– –––– ––––
E-
-±→
The table above is based on management information which forms the basis of the segmental reporting disclosed in
-
the notes to the financial statements.

-
⇐
Other financial information for the Group as a whole is given below:
Projected to Actual to
30 September 20X5 30 September 20X4
$ million $ million
Operating profit 76 - 72
¥
Profit before tax 20 18
Total assets 475 450
6
Exhibit 5 – Notes from audit committee call
-50k€
-
The Group currently has three non-executive directors, who form the Group audit committee. Until January 20X5,
SET I
there was a fourth non-executive director who was also the financial reporting expert of the Group audit committee.
-
The Group is looking to find a replacement, but is finding it difficult to recruit for this position, and has requested that a
senior partner from Squire & Co become a member of the Group audit committee while a replacement is being sought.
-
= ←I I
t.EE#-E=
-
In addition, the Group audit committee

-
is looking to appoint a firm of professional accountants to perform corporate
finance work in relation to the planned Group restructuring. The audit committee understands that Squire & Co cannot
L I
-
g-
-
provide -
this non-audit 2
service -
as it would create a2significant threat to auditor objectivity. However, the audit committee
has asked if our firm can recommend another firm to perform the work.
- - -
Following the call, the managing partner of Squire & Co has suggested that the firm recommend Ranger Associates, an
unconnected firm, to carry out the work. 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.
In addition, the audit committee has asked Squire & Co to work with the Group internal audit team to design internal
controls over the part of the accounting system which deals with revenue, and also evaluate the operating effectiveness
of the internal controls.
7 [P.T.O.
:÷i ÷ f :÷i f ÷
RyderGro# depreciation of Primal
Burger Co .
asset should stop on
give
disclosure about acquisition 9 disposal
of
sobsidaries
Iqbal Audit Engagement Partner

To, to should be valued it
Mo
,
classification Hfs . Further assets done in
subsequent period ,
as is a non
adjusting event .
From
failuretogiuedisdosurewillmisstatenotestoffbubje.at
Audit at lower CV G FV less cost to sell Lastly
.
manager of
.
Ryder Group Audit Planning

they
:
classified Classigicationojlicense
-
should be as current Asset .
Failure → 21-1=3
Introduction to
apply Hfs treatment on Primal Burger G .
will License to
operate day intangible
24 hours a is an
In relation to Audit
Planning for RyderG for the agyectprogitsE.ua/uationogassel# asset 9 it should be
classified head
of Intangible
in
year
ended
30-september205.jo/lowing information Primal
Burger co . is a separate revenue
generating assets in soft
Ryder Group management
. has
wrongly
This
is relevant
for evaluation of Audit Risks Additional ,
stream
therefore as
per IFRS -5 ,
it should be
classified included it in
Property ,
Plant 3 Equipment .
has Ols
PPE Uls
Intangible assets
information required to audit disposal of Primal Burger as Discontinued operation since it
satisfies conditions by 1515am 8
by 815am .
License
G.,PrincipalAuditproeeduresGEthicdissc of HFS also . A risk exist that

Ryder Group has not worth slim represents 3151 .
of
assets
therefore material
÷: :÷ ÷i÷ ÷ ÷:÷ ÷ ÷ ÷ ÷i ÷ ÷ :÷ ÷: ÷ ÷ ÷ ÷i: ÷ ÷ ÷ ÷ ÷ :÷ i÷ ÷ ÷ ÷ ÷ i÷ :÷÷÷÷÷÷÷÷÷÷÷÷i

then investment should be
classifiedhave
:i÷ ÷ ÷ ÷ ÷ ÷÷
as
Sobsidarg . A
willmisstatepresentationeadiselosoresofflicence.at 3years would be $5m G at 20 years it
.
would be $075
risk exist that
Ryder Group may classified this As
per IAS -10 Ryder Group should give disclosure of
,
It represents 21251
of PBT therefore
m .
.
treatment Primal materialist

investment
wrongly wrong
.
of
investment will
Burger co disposal if it . done
shortly ,
is
consolidation treatment FS within

subsequent period
affect its the
Mondaycoffeelsriuethroughbhops
→ 15 +2=35
end that
in whole
after
is
year
. .
=
,
Investment $48 m Pepper co

represents exist that
Ryder Group may fail to finance 50
A As
through
Director Drive
of
in . risk
give per new
shops
about despite
Ditgassetsthergorematerialtor# disclosure disposal of G
Primal Burger .
.
opened by Monday coffee co .
at Cost
of $43m has
being done subsequent period Failure

DisposalgprimalBurgerco.rs 21-2+2
E g disposal in
generated revenue
of
445M in
first year This is
very
- .
- .
Ryder
to disclosure IAS
As
per IFRS -5
, Group should
classify give of
will be non
compliance 10
high rate
of return on
any
investment
,
as
usually
Primal Gitwillmisstatenotee.to#
Burger disposal group of
co .
as asset as in
first year
revenues are net that much
high It.
that records
Acquisitionojvalentineco
→ 2
it
apparently satisfies Held
for sale classification creates
management system which a risk
conditions Board approval

.
obtained
during Ryder Group should give disclosure about acquisition
was
of these drive through shops separately any revenue
,
has
the
errorERmayunctioning.ua/uer acquisition
and valuation Valentine Co FS its
done
by external
if
done is
year of
was . in
Further potential further

.
buyers having within subsequent period

are
Usually first quarter of
next
if generated by .
through shops revenue 50 drive
correspondence G management expects it within it to report

Ryder group should
to within lies A that $45 consider
sell subsequent period exist then risk is
year
. m
disclosure about Valentine co

12 months A risk
. exist that
Ryder Group has Ryder group fails to give separate segment under IFRS -8 Revenue of .
as a .
445am
classification This will misstate several acquisition of acquisition

not done Hfs FS despite done in which exceeds segment in is
of group
.
14 't revenue
heads
of
FS under Hrs
,
classification
as subsequent period It requirement of IAS to
reporting threshold old 0J lot of
. is If Drive through 10 revenue .
:/ /
Shops have separate financial data available which
is
supervised by a chief operating then it satisfies

officer ,
of Reportable segment Apparently Ryder Group

condition .
has not
reported through shops as a
Drive
This to FS
separate segment .
has misstated Notes
whichshooldeontainseperatedetailojsegmentree.IE
-
ouernment
grant
→
=
2
Ryder Group should

classify grant received as unearned
FS current condition
income in in
year
as
of
the
grant is riot satisfied Management has
wrongly
.
recorded despite that condition

it as income
of
sending
review
:÷ ÷ ÷ :i÷ ÷
÷÷i:÷÷i÷÷÷÷÷
÷÷÷÷÷÷÷
by
it
for approval
Audit committee
to Board
will
.
create
Lack
of effective
risk
of
misstatement's
Section A – BOTH questions are compulsory and MUST be attempted
1 The Bassett Group (the Group) is a publisher of newspapers and magazines, academic journals, and books. The Group,
#
a listed entity, has a financial year ending 30 April 2018, and your firm, Whippet & Co, was appointed as Group auditor
in September 2017. Whippet & Co will audit all Group companies with the exception of Borzoi Co, a foreign subsidiary,
which is audited by a local firm of auditors, Saluki Associates. The Group aims to comply fully with relevant corporate
governance requirements.
You are the manager responsible for the Group audit, and the audit engagement partner has just sent the following
email to you:
To: Audit manager

From: Kerry Dunker, audit engagement partner
Subject: Bassett Group audit planning
Hello
I have provided some information to help you with planning the Bassett Group audit. I met with the Group finance
director yesterday to discuss some aspects of the Group’s business and related accounting issues. One of the
audit team members has already performed limited analytical procedures based on the Group’s projected financial
statements and comparatives, and I have provided you with the results of this work. I have also provided you with
an extract from the communication which we received from Grey & Co, the Group’s previous auditor.
Using the information provided, I require you to prepare briefing notes to be used as part of the audit team planning
meeting. Your briefing notes should:
(a) (i) Evaluate the audit risks to be considered in planning the audit of the Group financial statements, and
-
(14 marks)
-
(ii) Identify and explain the matters which the audit team should approach with a high degree of professional
scepticism. (9 marks)
(b) To assist the audit assistants’ understanding of our audit strategy in respect of Borzoi Co:
(i) Explain the term ‘significant component’ and assess whether Borzoi Co is a significant component of the
Group, and
(ii) Discuss the nature and extent of involvement which our firm should have with the audit risk assessment
to be performed by Saluki Associates. (8 marks)
Thank you
Background information and results of analytical procedures

The Group operates globally, with sales being made in over 100 countries. The Group has 20 subsidiaries which have
been acquired over the last 30 years. All Group companies are located in the same country, with the exception of
Borzoi Co, a foreign subsidiary whose operations focus on the translation of published content into a variety of different
languages.
The Group’s publishing activities can be categorised into three operating segments, each of which are cash generating
units for the purpose of impairment reviews: newspapers and magazines, academic journals, and books. The revenue
and total assets for 2018 (projected) and 2017 (actual) for the Group in total and for each segment is as follows:
Operating segment Year to 30 Year to 30 % As at 30 As at 30 %
April 2018 April 2017 Change April 2018 April 2017 Change
Revenue Revenue in Total assets Total assets in total
projected actual revenue projected actual assets
$ million $ million $ million $ million
Newspapers and magazines 64 67 (4·5) 45 42 7·1
Academic journals 47 46 2·2 18 15 20
Books 42 45 (6·7) 32 28 14·3
–––– –––– ––– –––
Group total 153 158 (3·2) 95 85 11·8
–––– –––– ––– –––
2
During the financial year the Group has invested in software which enhances and extends the Group’s range of digital
publications, across all operating segments. The total investment, which is recognised as an intangible asset, was
$15 million, of which $5 million relates to purchased software, and $10 million relates to internally developed software.
According to management, the implementation of this software has already led to significant increases in sales of digital
publications, and while this accounts for only approximately 20% of Group revenue currently, management is confident
that sales of digital publications will quickly grow, and within three years is expected to overtake sales of hard copy
publications across all operating segments. Using this justification, management does not consider it necessary to
perform impairment reviews on any of the three operating segments this year.
Information on some specific aspects of the Group’s operations and the associated Group accounting policies, and
information in relation to Borzoi Co, is given below:
Newspapers and magazines – publication rights
A substantial portion of the Group’s newspaper and magazine publications are protected by publication rights which
protect the Group’s exclusive right to publish the relevant newspaper or magazine for specified periods. The Group
owns more than 200 publication rights, which range in period of exclusivity from five years to 30 years. The publication
rights are recognised as an intangible asset with a carrying amount of $7·9 million. The Group’s accounting policy is
to amortise publication rights over an average period of 25 years.
Books – royalty advances
The Group commissions authors to write books for which the Group owns the copyright. When a book is commissioned,
the author is paid a royalty advance, the amount of which depends on the expected sales of the book. The Group’s
accounting policy is to defer the cost of the royalty advance within current assets until the book is published, at which
point the cost begins to be recognised as an expense, spread over a ten-year period. The Group finance director does
not have a justification for this ten-year period other than it being ‘industry practice’. The total royalty advance projected
to be recognised within current assets at 30 April 2018 is $3·4 million.
Borzoi Co
Borzoi Co is located in Farland, a country which has recently experienced political unrest, leading to significant volatility
in the local currency, the Oska. At today’s date, the management accounts of Borzoi Co recognise total assets of
68 million Oska, and the exchange rate is 4 Oska:1$. In the last six months, the exchange rate has fluctuated between
10 Oska:1$ to 3 Oska:1$.
Farland requires the use of IFRS® Standards and therefore Borzoi Co prepares its financial statements using IFRS
Standards as its applicable financial reporting framework.
To help with the company’s development of language translation operations, on 1 May 2017, Bassett Co, the parent
company of the Group, transferred a piece of translation software to Borzoi Co. The software had been purchased by
the parent company for $1·5 million several years ago and prior to transfer to Borzoi Co, it was held at a carrying
amount of $1 million, this being its cost less amortisation to date. Immediately prior to being transferred to Borzoi Co,
the software was revalued in the parent company’s financial statements to $5·4 million, this being its estimated fair
value at the time of the transfer. The estimate of fair value was determined by Group management, and this amount is
still outstanding for payment by Borzoi Co.
Communication from Grey & Co
The previous Group auditor, Grey & Co, states the following in their communication to Whippet & Co:
‘We have acted as Group auditor for the last four years and our audit opinion has been unmodified each year. However,
we would like to bring to your attention a matter relating to the Group’s corporate governance arrangements. We
found that on several occasions in the last year the Group CFO initially blocked our firm’s access to the Group audit
committee, making it difficult for us to discuss matters relating to the audit with the committee.’
Required:
Respond to the instructions in the audit engagement partner’s email. (31 marks)
Note: The split of the mark allocation is shown within the email.
Professional marks to be awarded for presentation, logical flow, and clarity of explanations provided. (4 marks)
(35 marks)
3 [P.T.O.
f-
Page Page
of 152
Page Page
of 153
Page Page
0 of 154
Marchi
1 It is 1 July 20X5. You are a manager in the audit department of Atlanta & Co, a firm of Chartered Certified Accountants.
Iyear I e
e -
You Z -
F
are working on the audit of the Rick Group- (the Group), which has a financial ending 30 September 20X5.
The Group, a listed entity, offers an internet television network, with over 10 million subscription members in eight
g-
T - T T T T T
countries.
F- I
1. An email which you have received from the Group audit engagement partner.
- -
2. Background
✓ #
information and matters relevant to audit planning.
TI 3.
4.
Selected
#
financial information from the Group management accounts.
one of the Group’s subsidiaries.

-
An extract from the audit strategy document prepared by Neegan Associates, the component auditor which audits
-
5. Details of the planned

✓ -
acquisition of a new foreign subsidiary, Michonne
-
-
Co, and a possible joint audit arrangement.
Required:
a -
-

-
(50 marks)
2
- - -
•
To: Audit manager
From: Carol Morgan, Audit engagement partner
ISubject: Audit planning for the Rick Group
-
-
-
Date: 1 July 20X5
-
Hello
.
I have provided you with some information in the form of a number of exhibits which you should use to help you
-
with planning
⇐ = -
the audit of the Rick Group (the Group) for the financial
I require you to prepare briefing notes for my own use, in which you:
ease
year ending 30 September 20X5.
-②
(a) Using the information in all exhibits, evaluate the audit risks to be considered in planning the Group audit.
if
②
- Te d
(24 marks)
← (b) Using the information provided in Exhibit 4:
.
(i)
I 2-
Evaluate the extract from the component auditor’s strategy, commenting on the audit strategy responses
and ethical matters relating to the issues identified; and
-
(10 marks)
(ii) Design the principal audit procedures which you will instruct the component auditor to perform on the sale
=/
of property to the Group chief executive officer. (6 marks)
(c) Using Exhibit 5, discuss whether it is appropriate for a joint audit to be performed on Michonne Co, commenting
-
on the advantages and disadvantages of a joint audit arrangement. (6 marks)

Thank you
3 [P.T.O.
Exhibit 2 – Background information
- -
The Group started to offer an internet streaming service for films and TV programmes ten years ago. The Group’s
Te Cf I T F - #
business model is to acquire licences for films and TV programmes and customers pay a monthly subscription fee to
-
I
-5
- -
access them and watch online.

- -
The Group has a subsidiary in each country in which it offers its subscription service. Atlanta & Co audits all of the
⑦ I # I
-
subsidiaries with the exception of Daryl Co, one of the Group’s foreign subsidiaries, which is audited by a I
local firm
called Neegan Associates. All companies within the Group have the same financial year end, and with the exception
of= =
Daryl Co, which #
reports under local I
accounting standards, the Group =
companies all use IFRS ® Standards as their
-
financial reporting framework.

-
Matters relevant to audit planning

I F-
Following a discussion between the Group audit engagement partner and a representative of the Group audit committee,
- -
several matters were noted as being relevant to the audit planning:
II
qtingentr#atia
- -
Annual incentive scheme

For several years, the Group has operated an annual incentive scheme for staff, under the terms of which employees
FIL
are eligible to receive an annual incentiveET I
payment linked to the achievement I
of selected targets. The scheme
-
operates across all Group companies, with0€

- e - ②
some employees’ targets linked to profitability, while others are aligned to
- -
non-financial measures including customer satisfaction. Participants in the scheme are entitled to earn a maximum
-
I incentive payment ofI I salary.e ⑧

-
annual 5% of their Approximately 6,590 employees, including the senior executive

-
directors, are entitled to participate in the annual incentive scheme. Last year the average bonus payment was $1,250
z
- -
- - -
per participant.
Legal case
I #@#=
In January 20X5, a legal case was initiated against the Group by Glenn Co, a film production company. Glenn Co
claims that the Group has infringed copyright by streaming a film in specific countries for which a licence has not been
acquired. The Group insists that the film is covered by a general licence which was acquired several years ago. The
②
Group finance director is not willing toI I
recognise the legal claim within the I =
financial statements as he is confident that
E
-
the claim against the Group will not be successful, and he does not want to discuss it further
- with the audit team,
=
-
emphasising that there is= no relevant documentation available for evaluation at this time.
-
Daryl Co
I
Neegan Associates provides the audit service to Daryl Co, one of the Group’s
- - - -
foreign subsidiaries. Daryl Co is one of
-
-
the Group’s larger subsidiaries, it is a listed company in its home jurisdiction, with total assets of $140 million. Daryl
CoI a-
-
is the only subsidiary which does= not follow IFRS Standards, as in its local jurisdiction companies
-
must follow local
accounting rules. It uses the same currency as the rest of the Group.
=I@
Daryl Co was acquired several years ago, and goodwill of $38 million is recognised in the Group financial statements
in respect of the company.
4
Exhibit 3 – Selected financial information
I f I
Note Projected to Actual to

30 September 20X5 30 September 20X4
$ million $ million
Group revenue
- .
1 980 780
Operating profit 78·4 70·2
÷
'
Profit before tax I60·1
–––––
–––––
I
58·7
––––
––––
.
Total assets
⑧780
–––––
––––– -
600
––––
––––
Included in total assets:
Intangible assets – licences -
2
- 8--0
580 420
⇐EEEE¥÷o
Intangible assets – goodwill 3 135 135
Number of subscription customers 10,500,000 8,070,000
Notes:
1. The Group’s main source of revenue is from monthly membership fees. Members are billed in advance of the start
-
⇐ I and revenue isI 2-

-
of their monthly membership recognised when the bill is sent

-
to the customer, all of whom pay by
credit card. The price of a regular subscription has remained at $8·20 per month throughout 20X4 and 20X5.
Z T e - -
Occasionally, the Group offers a free trial period to new customers. This year, the Group also introduced a new
Ta
-
premium
⇐ e for an
subscription package, which allows customers to add two family members to their subscription
- -
additional fee of $5 per month.

2. II
The Group acquires content licences per title in order to stream film and TV content to its subscribers. The content
⑤ Ex
-
- - - -
licences are each for a fixed time period, varying between three and five years. The Group capitalises the cost per
-
-5--5-5 =
title as an intangible asset. Group policy is to amortise licences over a five-year period, the finance director justifies
this as being ‘the most prudent’ accounting treatment.
3.
-
o@FeE.E
Goodwill arising on business combinations is tested annually for impairment in accordance with IAS® 36
Impairment of Assets. Due to the strong performance of the Group, no impairment of -
-
in recent years.
s
I
goodwill has been recognised
5 [P.T.O.
Exhibit 4 – Extract from component auditor strategy document
- I T T
The three points below are an extract from the audit strategy prepared by Neegan Associates in relation to their audit
-
- T
T -
-
of Daryl Co. Other sections of the audit strategy, including the audit risk assessment, have been reviewed by the Group
-
- - -
audit
= team and are considered
I satisfactory so you do not need to consider them.
-
Issue identified by Neegan Associates

T
T
Audit strategy response by Neegan Associates
Materiality Materiality will be based on total assets for the first

-
Dar#o . -
-
-
time this year due to the significant reduction in

-
Internet services in the country have been subject

I and profit.
T
- - -
revenue
to considerable disruption. As a result of this, a -
E #⑤=
significant number of customers have cancelled their
subscriptions and the company is projected to make a
Based on 1% of assets, materiality is determined at
-
$1·4 million.
-
-
e-
loss this year.
In the previous year, materiality based on revenue was -
e-
determined =
to be $1·2 million.
Payroll Planned audit procedures:

I
From 1 October 20X4, payroll accounting services – Agree the total payroll figure, estimated to be
F-
FE
are provided to Daryl Co by Neegan Associates as an $6 million, from the statement of profit or loss
additional non-audit engagement. to the payroll reports generated by Neegan
Associates.
– No further audit procedures are considered
necessary.
Sale of property
I -
¥edPartyD
Daryl Co sold a small, unused building located on
the coast to the Group’s chief executive officer (CEO)
Planned audit procedures:
– Confirm $50,000 is included in receivables
within current assets.
③_##
in February 20X5, for $50,000. The amount is still
– No further audit procedures are considered
outstanding for payment.
necessary because the transaction is not material
The Group CEO is planning to use the property as a to the financial statements, and local accounting
I
-
holiday home. rules do not require disclosure of the transaction.

-
Exhibit 5 – Potential new subsidiary
¥=Q_- £d④i#⑤
The Group is planning the acquisition of a new foreign subsidiary, Michonne Co, which is located in Farland. The
⑧=
as
negotiations are at an advanced stage, and it is likely that the acquisition will take place in October 20X5.
The Group’s audit committee has suggested that if the acquisition goes ahead, due to the distant location of the
company and the fact that I I
Atlanta & Co has no offices in Farland,
-
F
a joint audit could be performed -Co’s
with Michonne
yEL2ot5②
current auditors, Lucille Associates, a small local firm of Chartered Certified Accountants.
-
t -
-
6
:i÷ ÷¥÷ ÷ ÷: ÷ i÷ ÷
Rick Revenue-015
I Group their annual incentive . As this scheme also includes Senior
-
Increase in to -51-0.5+1=35
=
Audit
Engagement Partner
To , Carol Executive Revenue increased
Morgan ,
Directors
therefore they may have
influence over
for
the
year
has
by 2566% ,
which is
from Audit
,
Manager projitseatheycanmanipolate.it# a considerable rise 9 carry
's risk
of manipulation
done
Subject Rick Group Audit Planning further Rick has to

:
Group also consider
Implications of by management as it is abnormal increase However
-
.
Introduction Accrual Concept it record it that

, according to which has to can be
argued increase in revenue can be
Bonus its calculation

In relation to
planning for the Ricker for
Audit Expense in current
year despite
,
that
supported by increase in number
of
customers
by 3¥ .
.
the exist that Rick

year
ended ¥r2ox5 following information ,
9
payment is made in next
year
.
A risk Revenue per customer shows a decline on annual
relevant Evaluation recorded Bonus current $96651215933 basis

is
for of Audit Risks Evaluation
group may act
have Expense basis
from and
monthly
in on
,
of component strategy Principal Auditor 's Audit

,
Audit
year
9
may
record it in next
year according
from $8$ It is arguable to cash it declined as
proceduresegjointauditis.su# Basis.ThiswiH0bprogitsGUbliabilit# due to introduction of premium subscriptions revenue ,
Ca)AuditRisks→ 24 marks
Legatos → 21-15=35
persubscribedcustomershouldhaueincre.ae#
Rick should record
Digferentcomponenthuditor-315 Group provision for legal case
if chances
Amortizations -021-1=3
audited
One
of
the
group subsidary Daryl
G .
is
of outflow are probable 0¥ higher legal claim filed As per IAS -38 Rick Group should amortize eash
,
as
,
by Glenn
creates Co creates the
by different firm Neegan Associates
a
,
which .
present obligation If chances of content license according to its ouen license period Management
-
Audit Risk Auditor then disclosure will

required
for Atlanta Co
be
an as a
group outflow
are
possible is
wrongly charging amortization for all licences at period
-
a
.
.
to
Atlanta Co. has
rely Apprantly Rick has net evaluated
of outflow of years despite
that some licences have 3
chances
of Meegan group
work 5- licence
on
,
years
Associates in relation to
Daryl G . FS
,
while as Finance Director insist that he is
confident that period By using greater life for amortization it has UK
.
÷÷÷÷:
÷÷÷i÷÷÷:÷÷÷÷÷÷÷
Daryl
÷÷÷÷÷÷÷÷÷i:÷÷÷÷÷÷i÷÷÷÷÷÷÷÷
G .
Fs
according
:÷÷÷i÷÷÷÷÷÷÷÷÷÷:÷ ÷÷
:÷ ÷i÷ ÷ ÷ ÷:÷ :÷÷÷÷:÷÷÷÷÷i to IFRS for consolidation claim which creates risk
of
misstatement It . also creates loss
for the
year It
.
creates
→
an
2+1=3
impairment indicator
purpose ,
as
Daryl G .
separate Fs is made under

onoverallintegritygdataprovided.fr Daryl G goodwill Management of Rick group argues .
.
reporting standards
local .
A risk exist that Rick Group Reuenuetdecognitionpolicy-32 that due to strong
performance of group goodwill
not is
to translate FS Rick Group to This

may fail
to IFRS ER may not should per IFRS required be
impaired argument not valid
for
as 15 when is
recognize revenue .
to translate to IFRS This it

provided to its declined
be able
correctly .
risk can has services customers .
Management of
Dare l G .
as its
performance
has .
Each Co .
misstate entire consolidated FS FS Rick Group should

as
Daryl co . as records revenue at the start
of every goodwill be evaluated
for impa
irment
separately
asubsidarywillaffectallheadsgconsolidatedfs.nonth when
they send advance
payment invoice It is as each
group
co is a
separate cash Generating Unit .
.
.
Annualtncentiuescheme → 15+2=35 at stark month Failure to

impairment will Ols profits Er
wrong point
record
of recognizing
revenue as
of goodwill
Annual Incentive linked not This Goodwill worth $38
employees yet provided Rick asset
of Daryl
co
some as
Group represents
of
service
of
is is . revenue .
. m
to
profit targets
asreuenueisbookedearlier.pe 48toftotalassetsoimateria.to#
,
which create a risk
of manipulation
to
those
'
manipulate employees may profit earn
!
: ÷ ÷: ÷ ÷ ÷ ÷ ÷
Related Business
-
Party transaction -32 .

Risk
Daryl co . sold a
property to Group
during the CEO classier
It Grohl
year
.
will be
regarded Related
Party transaction
as 1, 6 .
as
Group CEO is
key Management Personnel of the 3
Connolly co .
31
group
.
Disclosure will be required in
Group FS which will Dove co .
include details 4, Red back sports co

following
: .
Relationship with RP that is CEO

of
the
group Homeworld
-
-
Details
of
transaction 1
, Champers co .
Amount transaction 3 Jolie co

of
-
.
3
whether transaction of not Mitchel Co
was
length ,
-
arms .
Risksojmaterialmisstatementn
at end
Amount
outstanding year
-
:÷÷÷÷÷÷:÷÷÷÷÷÷÷:÷÷i÷: :÷ ÷ ÷ :÷ ÷ ÷ ÷ ÷
Ryder Group
3,
4, Rick Group
HomeworklBassett
, Group
2
, Vancouver
Group
-
.fi :/
Audit ' Audit Plan
= planning
- Theoretical areas Audit
.
strategy
Audit
.
Program
It document
Auditing
is a made
during In this phase
of
audit
planning
- -
audit audit auditor auditor detail 9 he

further
Audit
planning initial phase
of planning in which in
goeseach
-
is
auditor entire client level Focus

which
mandatory for
is an
plans of plans at head level
.
.
.
audit audit this Audit Ek Audit

planning auditor two phase Plan
In to
program
look
prepares planning
in is is
,
Audit at client detailed

documents which include
strategy issues
of
overall a
plan the a phase
of
audit
Audit
q Program .
audit .
activity when auditor plans each
In Audit client 's head account

auditor plans Obtain
understanding of
1,
planning of
-
.
audit business
activity by doing several tasks ,
9 Environment 1, obtain
understanding of
÷ ÷ ÷ ÷ ÷ ÷ ÷ ÷ ÷ :÷ ÷ ÷ ÷:÷ ÷ ÷ ÷ :÷ "÷:÷ :÷ ÷i÷: ÷ ÷ ÷ ÷ ÷:÷:÷÷

"
"
.
:
within head
Planning the
materiality level Audit
strategy first phase
ofaudit
each .
is
-
-
level
Plans audit procedures audit
planning which overall 5 Allocates
materiality on
-
. in ,
Performs
eaehheadofaccount.fr
Analytical Procedures planned is at client level
-
.
Risk Evaluation
Xderstandinggontrosg.ee
:÷ ÷€ :÷ i÷: ÷: ÷ ÷:f
DocumentsQRAdditionalinformal.io# thosecontrolslsystems.ee For soft items
materiality
-
is
requiredfo.tt#itPanning5maIkL Materiality calculated

through threshold
financial Statements current threshold which Assets
Draft of Materiality after of
1, -
is a
.
year
G previous
year
FS in order audit
changed modifies his audit opinion .
-
IF a transaction
affects
both
to there statement G SOFP

perform Analytical review - As
per auditing standard are income
required two
Industry of materiality then
aspects its be
2, data will be ,
materiality will
which is
published by competitors G t, Quantitative materiality evaluated
through threshold
of
Qualitative both to note
regulator ,
so that auditor can
identify 2
,
materiality . statements .
It is
movements to
abnormal .
Quantitatively that material

any
one
÷÷÷÷÷÷÷÷÷÷÷÷÷÷:÷÷÷÷
5) List Applicable laws PBT
:÷÷÷÷÷÷÷÷÷÷÷÷÷÷i÷÷÷÷ :
of
on
Organization II lot
judgement according to risk
-
= .
- .
so that auditor can evaluate risks -

Assets =
It
-
2% assessment .
If auditor thinks that
For statement items 9 client then

non-compliance income revenue is
high he
of risk
. -
PBT used threshold select side

↳ List
of ongoing legal
cases so are as
for will lower
of
that auditor can measure
of materiality . It is to note that material threshold so that
greater transactions
threshold 9 audit
due to
losing from will be
get material
greater
risk cases
any one
.
7 Detail controls G Standard considered material to FS done However client low

of whole
if
, as . is .
is
risk then auditor

operating auditor
that selects
procedures so
around side threshold

can
plan his audit
activity higher of in which
:÷ ÷ : ¥÷i ÷ ÷ . ÷ ÷ ÷ ÷
lessertraneaetionswillgetmateriat-Qualitatiuemateriah.ly allocating Performance materiality to
head B audit
-
Materiality level is
initially determined -
Qualitative materiality means that a each
of
is that
Audit it transaction material due to its done head wise

planning phase E.
in is
-
is is
called
planning materiality As per Auditing . nature , irrespective
of
amount .
-
while allocating performance materiality
Standards it material to amount each head
get due auditor looks at
An
mandatory for of
issue
is
may
-
auditors its shareholders in each head

to review
materiality level impact on G risk
. .
audit It that audit

during
Reason
for For⇐g is to note opinion
of
review
-
.
.
Related due to head

materiality level is that
during Party transactions doriot
gets affected
-
:÷÷÷"÷÷÷÷:ii÷
÷ ÷ ÷ ÷ ÷ ÷ ÷ ÷ :÷
may get recorded G as a results while
while
performing
performing
audit
audit ,
activity
auditor
.
Revenue G
of Profit materiality level to 80% to
amounts ,
assets reduces his
Reason
may get changed of reducing materiality
As result
of
.
a .
Revenue G Assets
change Profit
in ,
level while
performing
audit ,
is that
materialityamountmagakochange auditor can have some

margin
while
forming opinion .
-
Once this
Performance materiality
is calculated then auditor allocates it to
,
FS Reason
each head
of of
.
Eof PlanningMateriality=E5m→Income5tateme# RiskfvaluationGRiskRespone.es#
Performance Materiality Esm BE Elim One the important task audit
→
of
x in
'
= = -
Pergormancematerialiym planning
is risk evaluation .
While
doing
at:*.mg#tormedi: tae.ideantitie:e
" "
in: . .
evaluates those
he
significance of risk .
Sala Ces operate otherinrne taxexpenses order to determine

In
significance of
.
f- 15M Elm to em to -4M to auditor

following factors
-
-
3M risk considers :
I, Amount the
of issue
÷ :÷÷÷÷:÷÷÷÷÷÷" ÷:÷÷÷:÷÷÷÷÷÷:* .. .
4, other income to Lim -

E O -
3m -
Once the auditor has evaluated
5taxtxp.t-o.sn#m* then auditor plans
of
risk
E 4M
significance ,
Performance materiality E45m *

responses to the risk .
Different responses
ReserueE# that can be planned for significant
Total materiality 7€ risk include :
I
, Allocate more experienced) seniorembers
to that area .
Reduce
2
,
materiality level
for
that
Head .
3, plan
greater specific procedures for
:÷ ÷: ÷f
that head
deadline that head

4 ,
Allocate
greater for
5, Mark that area as one which will
besubjecttoeecondreuiew.commonicationswhichGrouph-udi.to
÷: ÷ ÷ ÷ ÷ ÷ ÷ ÷:÷ ÷
that component Group Auditor
3, Discuss
by
deadline allocated to
.
that component by Group Auditor

any specific procedures
4 communicate
,
which
Group auditor wants to
be
performed component
on .
5,
Group auditor also
request component
Auditor to communicate
any auditor
issue
of risk which component

faces during component Audit to
Groupauditor.ee

Audit Planning

Uploaded by

Copyright:

Available Formats

You might also like

Audit Planning

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Audit Planning

Uploaded by

Copyright:

Available Formats

AUDIT PLANNING

Impact of Risk -5 How it will is the business

composition affect that situation

Environment if CFS E. Gc position

which increase OE decrease relevant calculation

then to evaluate their

competition to innovate lead to loss customers

To, Mia Audit partner Foo Ee Grohl Co imports its material

then stop circuit

In relation to Grodd the material As Grohl Co bound to supplied

Dejected circuit boards

Business Risks it purchase

ofMaterialmisstatementGEthicalissu# othersuppliertoauoidpauseofproducl.io# copper then this loss will

(a) Business Risks New supplier Loss increased because

mobile phone industry then

key raw material

it will create a material impact on revenue .

by therefore any further

create burden Risk customer loss

domestic market increased halt due to

(a) Business Risks

matches with someone else

If it has to suspend product development

Connolly fails innovate timely ,

then its ability to compete

will lead in innovative market

Accident occurred in 2013 in clinical trails create

not drugs If license

approved then amount invested in development

Introduction to loss on invested amount also

ended to these bad investments It

Repair cost is insured but still

The total The

inherent in fixed cost

loan amount bad location then

losses doe its assets

Group has to incur

countries Further Exchange to

1 You are a manager in the audit-

and recent financial performance.

3. Extracts from the latest management accounts of Redback Sports Co.

explanations provided. (4 marks)

Stella Cross, audit engagement partner, Huntsman & Co

Aneta Bay, finance director, Redback Sports Co

specialises has written several books on performance management in the sport

and leisure industry.

profits and make a stock exchange listing more feasible.

weakcorporateeouernance this new

lead to wasted Red back G

Internal reporting to finance

Red unlisted Redback

Further evaluation done relation to

reported to government then government is

happenedatEmuGym# unemployed people creates risk

Caz Businesslike from members G pay you go may may government

ER suspend the license

Co to Further Red back sports

Further also diverted

Red back data