ACCA AAA ^INT Syllabus D. Audit of Historical Financial Information - Group accounting audit - Past Papers ^{32 / 41}

The Adder Group (the Group) has been an audit client of your firm for several years. You have recently been assigned to act as audit manager, replacing a manager who has fallen ill, and the audit of the Group financial statements for the year ended 31 March 2015 is underway. The Group’s activities include property management and the provision of large storage facilities in warehouses owned by the Group. The draft consolidated financial statements recognise total assets of $150 million, and profit before tax of $20 million.

(a) The audit engagement partner, Edmund Black, has asked you to review the audit working papers in relation to two audit issues which have been highlighted by the audit senior. Information on each of these issues is given below:

(ii) In January 2015, the Group acquired 52% of the equity shares of Baldrick Co. This company has not been consolidated into the Group as a subsidiary, and is instead accounted for as an associate. The Group finance director’s reason for this accounting treatment is that Baldrick Co’s operations have not yet been integrated with those of the rest of the Group. Baldrick Co’s financial statements recognise total assets of $18 million and a loss for the year to 31 March 2015 of $5 million.

Required:
In respect of the issues described above:
Comment on the matters to be considered, and explain the audit evidence you should expect to find in your review of the audit working papers.

Note: The marks will be split equally between each part. (16 marks)

You are an audit manager in Compton & Co, responsible for the audit of the Stow Group (the Group). You are planning the audit of the Group financial statements for the year ending 31 December 2013. The Group’s projected profit before tax for the year is $200 million and projected total assets at 31 December are $2,500 million.

The Group is a car manufacturer. Its operations are divided between a number of subsidiaries, some of which focus on manufacturing and distributing the cars, while others deal mainly with marketing and retail. All components of the Group have the same year end. The Group audit engagement partner, Chad Woodstock, has just sent you the following email.

To: Audit manager
From: Chad Woodstock, audit partner
Subject: The Stow Group – audit planning

Hello

We need to start planning the audit of The Stow Group. Yesterday I met with the Group finance director, Marta Bidford, and we discussed some restructuring of the Group which has taken place this year. A new wholly-owned subsidiary has been acquired – Zennor Co, which is located overseas in Farland. Another subsidiary, Broadway Co, was disposed of.

I have provided you with a summary of issues which I discussed with Marta, and using this information I would like you to prepare briefing notes for my use in which you:

Recommend the principal audit procedures to be performed in respect of the disposal of Broadway Co. (8 marks)

Thank you.

Acquisition of Zennor Co

In order to expand overseas, the Group acquired 100% of the share capital of Zennor Co on 1 February 2013. Zennor Co is located in Farland, where it owns a chain of car dealerships. Zennor Co’s financial statements are prepared using International Financial Reporting Standards and are measured and presented using the local currency of Farland, the Dingu.

At the present time, the exchange rate is 4 Dingu = $1. Zennor Co has the same year end as the Group, and its projected profit for the year ending 31 December 2013 is 90 million Dingu, with projected assets at the same date of 800 million Dingu.

Zennor Co is supplied with cars from the Group’s manufacturing plant. The cars are sent on cargo ships and take approximately six weeks to reach the main port in Farland, where they are stored until delivered to the dealerships. At today’s date there are cars in transit to Zennor Co with a selling price of $58 million.

A local firm of auditors was engaged by the Group to perform a due diligence review on Zennor Co prior to its acquisition. The Group’s statement of financial position recognises goodwill at acquisition of $60 million.

Compton & Co was appointed as auditor of Zennor Co on 1 March 2013.

Disposal of Broadway Co

On 1 September 2013, the Group disposed of its wholly-owned subsidiary, Broadway Co, for proceeds of $180 million. Broadway Co operated a distribution centre in this country. The Group’s statement of profit or loss includes a profit of $25 million in respect of the disposal.

Broadway Co was acquired by a retail organisation, the Cornwall Group, which wished to bring its distribution operations in house in order to save costs. Compton & Co resigned as auditor to Broadway Co on 15 September 2013 to be replaced by the principal auditor of the Cornwall Group.

Zennor Co – Internal audit team

The internal audit team was established several years ago and is headed up by a qualified accountant, Jo Evesham, who has a lot of experience in designing systems and controls. Jo and her team monitor the effectiveness of operating and financial reporting controls, and report to the board of directors. Zennor Co does not have an audit committee as corporate governance rules in Farland do not require an internal audit function or an audit committee to be established.

During the year, the internal audit team performed several value for money exercises such as reviewing the terms negotiated with suppliers.

Required:

Respond to the instructions in the partner’s email.

You are a senior audit manager in Vegas & Co, responsible for the audit of the Grissom Group, which has been an audit client for several years. The group companies all have a financial year ending 30 June 2010, and you are currently planning the final audit of the consolidated financial statements.

The group’s operations focus on the manufacture and marketing of confectionery and savoury snacks. Information about several matters relevant to the group audit is given below. These matters are all potentially material to the consolidated financial statements. None of the companies in the group are listed.

Grissom Co

This is a non-trading parent company, which wholly owns three subsidiaries – Willows Co, Hodges Co and Brass Co, all of which are involved with the core manufacturing and marketing operations of the group. This year, the directors decided to diversify the group’s activities in order to reduce risk exposure.

Non-controlling interests representing long-term investments have been made in two companies – an internet-based travel agent, and a chain of pet shops. In the consolidated statement of financial position, these investments are accounted for as associates, as Grissom Co is able to exert significant influence over the companies.

As part of their remuneration, the directors of Grissom Co receive a bonus based on the profit before tax of the group. In April 2010, the group finance director resigned from office after a disagreement with the chief executive officer over changes to accounting estimates. A new group finance director is yet to be appointed.

Willows Co

This company manufactures and distributes chocolate bars and cakes. In July 2009, production was relocated to a new, very large factory. One of the conditions of the planning permission for the new factory is that Willows Co must, at the end of the useful life of the factory, dismantle the premises and repair any environmental damage caused to the land on which it is situated.

Hodges Co

This company’s operations involve the manufacture and distribution of packaged nuts and dried fruit. The government paid a grant in November 2009 to Hodges Co, to assist with costs associated with installing new, environmentally friendly, packing lines in its factories. The packing lines must reduce energy use by 25% as part of the conditions of the grant, and they began operating in February 2010.

Brass Co

This company is a new and significant acquisition, purchased in January 2010. It is located overseas, in Chocland, a developing country, and has been purchased to supply cocoa beans, a major ingredient for the goods produced by Willows Co. It is now supplying approximately half of the ingredients used in Willow Co’s manufacturing.

Chocland has not adopted International Financial Reporting Standards, meaning that Brass Co’s financial statements are prepared using local accounting rules. The company uses local currency to measure and present its financial statements.

Further information

Your fi rm audits all components of the group with the exception of Brass Co, which is audited by a small local fi rm, Sidle & Co, based in Chocland. Audit regulations in Chocland are not based on International Standards on Auditing.

Required:

Recommend the principal audit procedures that should be performed on the classifi cation of non-controlling investments made by Grissom Co; (4 marks)