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Briefing Notes:

To: Carol Morgan, Audit engagement partner

From: Audit manager
Subject: Audit planning for the Rick Group
Date:1 July 20X5

Introduction:

I have prepared these briefing notes to help with the planning the audit of rick group (the group) for
the financial year ending 30 September 20X5.The briefing notes contains evaluation of the
significant audit risks to be considered in planning the Group on the materiality level calculated
below, Evaluation of the extract from the component auditor’s strategy and commentory on the
audit strategy responses and ethical matters relating to the issues identified.Further, Instruction on
the the principal audit procedures that the component auditor should perform on the sale of
property to the Group chief executive officer and finally discussion on whether it is appropriate for a
joint audit to be performed on Michonne Co or not.

1. Audit Risks:

Materiality:

The overall materiality for the audit of the group is to be based on the profitability of the group. The
benchmark for materiality as per profitability is 5% ($3.005m) to 10% ($6.01m) of Profit Before Tax
(PBT). The overall materiality has been set at 8% of PBT which is $4.8m. The materiality is set at
8% i.e $4.8m as the company is an existing client and the audit firm has experience working with
client but there are number of significant audit risk in the Financial statement so the middle of the
range is chosen as suitable materiality level to obtain sufficient and appropriate audit evidence.

This is the field of significant judgement which can be ammended during the audit of the group as
per the audit findings on the work performed.

Evaluation of the significant audit risks

Group revenue

The Revenue is the material component of the group, Thus material to the financial statement. The
group has billed its member in advance of the start of their monthly membership and revenue is
recognised when the bill is sent to the customer.

The revenue should only be recognized when the performance obligation of the group is met i.e the
streaming services are provided to the members of the monthly membership plan and can only be
recognized at the end of the monthly service they subscribed for.

There is the risk that the revenue and profit is overstated and the deffered income (liability) is
understated.

The Revenue has increased by 25.64% from 20X4 to 20X5 which is inline with the increase in the
monthly user of the group which has increased by 30.11% from 20X4 to 20X5. However, the
average revenue per consumer has decreased by 3.48% which is $7.77 per month on average in
20X5 from $8.05 per month on average in 20X4 even though the price of a regular subscription has
remained at $8·20 per month throughout 20X4 and 20X5. This could have been affected by the
Group introduction of a new premium subscription package, which allows customers to add two
family members to their subscription for an additional fee of $5 per month only.

This is the most significant audit risk as the materiality is set on the basis of revenue and there are
significant judgement used in the recognition of Revenue.

Foreign Subsidiary- Daryl Co:

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Atlanta & Co audits all of the subsidiaries with the exception of Daryl Co, one of the Group's
foreign subsidiaries, which is audited by a local firm called Neegan Associates. It is one of the
largest subsidiary having total assets of $140m which is 29 times the materiality set, 17.95% of
total assets of the group, Thus material to the financial Statement.

The subsidiary Daryl co is only the subsidiary in the group having different year end and uses local
accounting standards. The figures used in the consolidation process may be misstated either due
to use of wrong year end figures or the treatment of particular area/figure being omitted as the
result of using local accounting standard.

This increases risk of the financial statement being materially misstated either on financial
statement or notes to disclosures.

Legal case:

The amount of legal claim made by Glenn co is not obtained from the finance director of the group
so the materiality on the issue can not be determined.

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 Contingent liability should be recognized when there is possible economic outflow as a result
of legal claim made by the Glenn Co against the group.

The contingent liability may be understated and profit may be overstated.

The Provision should be recognized if there is probable economic outflow as a result of legal claim
made by the Glenn Co against the group.

The Provision may be understated and profit may be overstated.

As, the legal claim is the matter of public interest and the reputation of the company also depends
on the proceedings there is risk that the adequate disclosures are also not made in relation to legal
claim.

Finance Director

The Group finance director is not willing to recognise the legal claim within the financial statements
as he is confident that 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, is not willing to recognise the legal claim.

The attitude of finance director is not communicating properly with the audit team members. The
Finance director seems reluctant to recognize the legal claim without even having discussion with
the Group legal team and has no documentation on his claim that the claim made by Glenn will not
be successful.

The Finance director attitude suggest that the finance director has something to hide from the audit
team and scrutiny over the decisions and estimates made by the finance directors should be
considered as the finance director is responsible for preparing Financial statements this leads to
the risk that the overall financial statement might be materially misstated as the risk of creative
accounting is increased due to the finance directors reluctancy to provide information to the audit
team.

Intangible assets – licences- $580 million

The Intangible assets of the group relating to the licences is $580 million which is 120.8 times the
materiality and 74.35% of the total assets of the group. Thus, Material to the financial statement.
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The content licences are each for a fixed time period, varying between three and five years and the
Group policy is to amortise licences over a five-year period.

The intangible assets relating to the asset having defined useful life should be amortized on the
basis of the useful life of an asset which means that the individual licence should be amortized
based on it's useful life and not wholesale policy of five years. The licence having useful life of 3
years should be amortized over 3 years and not over 5 years as per group policy.

There is the risk that the intangible assets- licences is overstated and amortization expenses is
understated, overstating the profit of the group.

Intangible assets – Goodwill- $135 million

The Intangible assets of the group relating to the Goodwill is $135 million which is 28.12 times the
materiality and 17.30% of the total assets of the group. Thus, Material to the financial statement.
The group has not recognized any impairment to the goodwill due to the strong performance of the
Group.

The Group should impair the goodwill as the external indicator is present in the current scenario as,
daryl co, a significant subsidiary is projected to make a loss this year.

There is the risk that the impairment expenses may be understated and profit and goodwill maybe
overstated.

Post Year end- Disclosures

The Group is planning the acquisition of a new foreign subsidiary, Michonne Co, which is located in
Farland. The negotiations are at an advanced stage, and it is likely that the acquisition will take
place in October 20X5.

This is the event after the reporting date and is non- adjusting event to the financial statement. The
disclosures should be made about the new acquition that is going to take place in october 20X5.

There is the risk that the disclosures relating to the new acquistion may not be made in the financial
statements.

Conclusion:

The two of significant audit risk identified and evaluated are Group revenue and Intangible assets –
licences as revenue is the most important single line figure which affects the financial statement as
a whole and intangible asset is considered second on the basis of materiality on the financial
statement. All other items where materiality can be calculated are in order of significance and risk
identified not having defined material impacts are placed on the last of priority list.

2. Evaluation of the component auditor’s strategy

Payroll:

The payroll of the Daryl Co is $6m which is above the materiality set by the component auditor
Negaam Associates at $1.4m. Thus, the payroll is material to financial statement.

The only audit procedure performed by the component auditor, Neegam Associates is to agree the
total payroll figure, estimated to be $6 million, from the statement of profit or loss to the payroll
reports generated by Neegan Associates is not adequate.As, The payroll is material in nature,
sufficient and appropriate audit evidence should be collected to obtain reasonable assurance on
the payroll figure. The component auditor should perform procedures to verify the assertions
relating to the profit and loss figures.

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The payroll service is provideed by the Neegam Associates, Component Auditor. The non- audit
services are strictly prohibited by the Code of ethics followed by the group under IFRS reporting for
the auditor of listed company.

The non audit services also restricts the independence of the Neegam Associates to perform audit
of the Daryl Co. As the payroll service is provided by the Neegam Associates, The self interest
threat arises as they will be relunctant to find issue within the payroll.

The Audit engagement partner should communicate with those charged with governance of rick
group to remove daryl co as non audit service provider as soon as possible as they compromise
the independance of the auditor and alternative service provider should be sought during the
process.

Sale of Property:

Daryl Co sold a small, unused building located on the coast to the Group’s chief executive officer
(CEO) in February 20X5, for $50,000. As The Group CEO is related party to the Subsidiary, Daryl
Co, it is related party transaction. Thus, it is material to financial statement by nature to group
financial statement.

The Component auditor has not done adequate audit procedures as it is not material for individual
Financial statement and disclosure of the transaction is also not obtained in the notes to the
financial statement. As per group accounting standard (IFRS), The related party transaction should
be disclosed in notes to the financial statement of the group so the component auditor should
obtain evidence to help group auditor obtain sufficient and appropriate audit evidence.

The Component auditor should obtain details relating to the related party transaction as clauses of
sales,reasonableness of the profit and loss calculation basis and they also should enforce
management to make disclosures on relation to the related party on nature of transaction, total
transaction and closing balances on the transaction separately for the disclosure in group financial
statement.

3. Principal audit procedures on the sale of property to the Group chief executive officer

1. Review the board minutes to confirm the decision was made to sale the property to Group
CEO.
2. Review the Non- current assets register to verify the unused building is removed from the
register.
3. Discuss with management on the basis of obtaining fair value and any other estimates used
on the calculation of recoverable amount and determine its legitimacy and reasonableness.
4. Recalculate the recoverable amount and profit and loss from sale of unused building to
confirm the accuracy of profit and loss figure calculated by the management
5. Review the post year end bank/cash book to verify the receivable balance of $50,000 exists.
6. Review the schedule of receivables to confirm the receivable balance of $50,000 is included
in current assets.

4. Joint Audit

Advantages of Joint Audit:

Due to the distant location the joint audit is viable for the audit of michonne co located at the farland
because the audit will be cheaper as compared to the audit done by Atlanta co as they don't have
to travel and stay at farland.

As this is the new acquisition, the local firm Lucille Associates will have better knowledge of the
local law and regulation that michonne should oblidge to.

The local audit firm also will help to understand the clients working and create a synergy effect on
the work and will increase the quality of the work done. As two engagement partner work together,

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it will be easier to form and opinion.

Disadvantage of Joint audit:

As the audit report will have both the auditors opinion on it, there may be potential disputes on the
opinion which may affect the audit of Michonne Co.

Engagement of two Audit partner will cost the company adversely as they have to pay for the time
spent by both the auditors on the same matter and if there is lack of communication/ understanding
during the audit duplication of the work may further increase the cost of Audit.

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