In March 20K5, @ coshsetied shoreb erin sees, who will reeaive @ bonus on 3 1 20X75 2 Bs #22 2 increase » Dali Co's shore price from that ot the ois 2 ire shove price 0131 December 20X7, On the advice 7 accounting entries have been made respect of the pio’ ed share-bosed payment plan will be disclosed in the notes The finance director recommended that *he external valuation was performed in June 20K5, resstins ~ 2 2 being recognised in equity. The finonce director has infor e2 ‘ox needs to be provid ions and there is no plan for disposal id be revalued. An $3.5 milion thot no deferred «part of continuing in respect of the voor oper In July 20XS, © government gront of $10 milion was recov subsidise companies which operate in deprived creos compensates the company for wages and salaries incurred s= famaining grant reloles 10 the continued operations in the d grant being thal the manufacturing sie in thot area will semain 1" of © government scheme to ly $2 million of the grant 12 31 December 20X5. The 2 cr20, with @ condition of the onal until July 20¥0. In December 20X5 Dali Co entered into @ new contract for the le machines. The present value of the laase payments is $850 supplior has a substantive right fo substitute alter of several portable cleaning tract is for $ years, and the The ct ive mochines josed of the year end to allow the inventory counts to take ploce, According to the most recent management accounls which ore ovoilable, of 30 November 20K5 work in prograss is valued at $12 milion (20X4 - $9.5 milion) and the mojority of these orders will no! be complete until ofer the year end. In recent weeks several cuslomers have returned equipment due to faults, and Doli Co offers @ warranty to guarantee that defective items will be replaced free of cl All of the company's manufecturing sites will be Dali Co's newly established audit commitlae hos osked jation on the company's defined benefit gension olan. One of the oudit partners is o qualified actuary and has the necessary skills ond expertise 'o perform the service. The pension liability in the 20K4 financial stalements was $255,000. rian & Co to perform an octvarial Exhibit 4 ~ Preliminary analytical review (extract) and other financial information Based on projected Figures to Based on auzlted figures to 31 December 2 31 December 20X4 Operating margin 13% Inventory doys 150 days Receivables collection period 70 doys Trade payables poyment period 55 doys Eomings per share 75 conls per share = Shore price $3 : 20 Zed (P? #5) (amended) 98 mins The Zed Communications Group [ZCG| is an audit client of your firm, Terantino & Co, with financial year ending 31 December 20X6, You are the manager assigned to the forthcoming audit, ZCG is listed entity, one of the largest telecommunications providers in the country and is seeking to expand international, ZCG also provides broadband and fi telephone line services. You have been provided with he following exhibits 1 An email which you have rec m Vi 2 Noles from a meeting held beeen ZCG's finance 3 Bockground information 4 Gullo informRequired Respond to the instructions in the audit engagement poriner's emcil (46 marks) Professional marks will be oworded for the presentation of the briefing notes and the clarity ofthe explonations provided (4 marks) {Total = 50 marks) Exhibit 1 - Email from audit engagement partner To: Audit engagement manager From: Vincent Vago, oudit engagement partner Subject: ZCG audit planning, and Gull Co Holle | We need to begin planning the Final audit of ZCG, which os you know is one of our lorgest audit clients, I mat wih the Group's finance director yesterdoy ond I hove provided you with notes from this meeting olong with extracts from the latest management accounts. We also discussed the possibilty of using the Group's internal oudit team to improve audit eficiency. I have provided you with on extract from the latest report ofthe internal audit depariment | Using al of he information provided, you ore required to prepare briefing notes for my use in which you {a} Evolucte the audit risks relevont to planning the final audit of ZCG; (17 marks) {bl Discuss the matters to be considered in determining the assistance which could be provided by, ond the amount of reliance, if ary, which can be placed on the work of ZCG's internal audit deporiment (7 marks) Ic Desiga the principal audit procedures to be performed on: lil The classificotion of the 50% equity shareholding in WTC os a joint venture; ond i (4 marks) {il The meosurement of he intangible esset recognised in respect ofthe licence to operate in Farland, (6 marks) | Seporately from this work on the ZCG audit, « matter has arisen in relation to another client af ours, Gull Co, The details ore provided in Exhibit 4; I woul like you to provide me with your comments (4) fi) The eticol ond professional mates in relation tothe recruitment requests made by i Gull Co {6 marks) | Gi) The implications the governance structure and proposed listing may have on the audi process {6 marks) Final siwation - with Gull Co ~ should be presented seporately from the | Your comments on | briefing notes Thank you Exhibit 2 ~ Notes from mesting with finance director One of ZCG's strategic aims is to expand internationally, either by cquiring existing telecommunications providers in other counties, or by purchasing licences to operate in foreign counties th Morch 20%6, ZCG purchased 0 50% equily shareholding in Wallace Telecoms Co (WIC), © compory operating in several countries where ZCG previously had no interests. The other 50% is held by Wolf Communications Co. The cost of the 30° equity shareholding was $45 milion, ZCG is plonning to account for its investment in WTC oso jin! venture in the Group finorcialstotementsa naion 3 On 1 January 2045, ZC purchased « licence to operate in Farland, «rapidly expanding economy 1 @ cost of $65m. The licence lests for 10 years from the dote that it was purchased. Since purchasing the licence, ZCG has established ils network coverage in Farland and the network become operational on | July 2X8. The licence was recognised as an intangible asset ot cost in the Grovp statement of financial position at 31 December 20X5, Since the network became operational customer demand has been less than anicipated due Yo @ competitor offering @ special deal to its ‘existing customers o encourage them nol to change providers ‘Most of ZCG's mobile phone customers sign @ canttact under which they pay a fixed amount each month to use ZCG's mobile network, paying extra if they exceed the agreed dato usage ond airime limits. The contract also ellews connection to a fixed landline, ond for internet cccess using broadband. Most cantrocts 1un for two or three years In order to extend its broadband services, ZCG has started to purchase network capacity from third party componies. ZCG enters a fixedierm contract lo use 2 specified amount of the seller's nebwork copacity, with the seller determining which of its network assets are used by ZCG in supplying network services to its customers. In the firs six months of 20X6, ZCG purchosed $17.8 million of network copacity from a range of suppliers, with the contract periods varying from twelve months to three years. The cost has been capitalised as on intangible asset ZCG makes substantial use of Equimal, o credit rating firm which holds the personal information of oll of ZCG's customers for the purpose of providing ZCG with credit ratings for them, During September 20X6 it was reported in the nationa! media the! Equimal was the subject of « large-scale hacking ottack, and that many ofits customers’ data may have been los. tis not known of fis stage precisely which dota were stolen, but itis certein that ct least some of ZCG's customers' dota were ‘among them In February 20X7, an employment tribunal found that for six months ZCG had not been paying the legat minimum wage to some of the new workers in ils customer services call centre. Whenever a worker had been late for work, even by just one minute, ZCG had refused to pay them for the entire shi. This is contrary to the relevont regulations. Its likely that @ fine will be levied agoinst ZCG, but the tribunal is yet 10 determine its mount, In ZCG's jurisdiction, the maximum fine for breaching this legislation is $20,000. In addition to this, he wages that would need to be paid to the workers in ‘uestion total around $210,000. Exhi 3- Internal audit background and report ZCG has « wollestoblished internal oudit department which is tosked with a range of activities including providing assurance to management over internal controls ond assisting the Group's risk management team. The interncl audit deporiment is managed by Jvies Winleld, @ qualified ‘accountant with many years’ experience. An extract from the exaculive summory ofthe latest internal ‘audit report lo the Group finance director is shown below: ‘We are pleosed to report thot ZCG's internal controls are working well and there have been no significant changes to systems and controls during the year. As a result of ovr testing of controls we Uncovered only two financial ircegularities which reloted to * Failure to obtain oppropriote authorisation and oppraval of senior management expense claims, such os travel cnd other reimbursements; the untubstentiated expense cloims amounted to $575,000. + Inadequote access controls over the Group's IT systems: this resulted ino poyroll fraud ‘amounting 10 $750,000."FINANCIAL INFORMATION ~ EXTRACTS FROM LATEST MANAGEMENT ACCOUNTS: 8 months to Audited financial stalemen's 31 August 20%6 0 31 December 20X5 $m Sm Revenue Evrope 106 102 Americas 30 0 Southeast Asia 33 30. Indio 29 20 Total 198 220 A131 August 20%6 At 31 December 20X5 Sm $m Total assets 598 565 Exhibit 4 - Gull Co information You are olso responsible for the audit of Gull Co, a large private company which is currenly owned by the Brenner fomily, who own the mojorty of the company's shores. Following the completion of the audit this year, the finance director, Jim Brenner, contacted you and told you thatthe family is considering listing the company on the stock exchange. They would like fo recruit one of your audit partners for © sixmonth period to help prepare for the Ising. As the board is concerned thot the necessary skills ond personne to support the listing are not currently present within the company, Jim Brenner has olso requested that your frm assist them in identifying ond recruiting new members to ‘he board, Currenlly, most of the executive director roles ore performed by family members, except for the itectors of operations and human resources, who are both long-serving employees. The boord ‘operates no cudit commitlee and there is only one non-executive ditector, who works elsewhere as cen IT consultant. Other than the recruitment of new board members, Gull Co is net planning on making ony changes to its governance structure prior ta or subsequent to listing, Gull Co has a financial year ending 31 March 20X7, and auelt planning is scheduled to toke place in Janvory 20X7. 27 Parker (P7 6/13) 68 mins You are an audit manager in Hound & Co, responsible for the cudit of Parker Co, o new audit client of your firm. You are planning the cudit of Porker Co's financial statements for the year ending 30 June 20X3, and you have just attended a meeting with Ruth Colle, the finance director of Parker Co, where sho gave you the projected resulls for the yeor. Parker Co designs and manufactures health and beouly products including cosmetics.a vistion, ond speciically regarding the ty Boost Co is an audit client of our firm, so we have considerable director has asked for our firm's edvice about the potential a Financing of the transection knowledge of its business. Required Respond tothe email frm the oudit porter (31 marks) 1 The split ofthe mark ollecation is shown within the partner's email Professional marks will be awarded for the presentation, logical flow ond clarity of explanation of the briefing notes. (4 marks) (Total = 35 marks) 28 Stow (P7 12/13) (amended) 68 mins You are an audit manager in Compton & Co, responsible for the audit of the Stow Group [the Group). You ore planning the audit of the Group financial statements for the year ending 31 December 20K3. The Group's proj fit belore tox for the year is $200 milion and projected fotol assots at 31 December are $2,500 million The Group is 0 car manufacturer. Ils operations are divided between o number of subsidiaries, some cof which focus on manufacturing end distributing the cars, while others deal mainly with marketing cond 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 manoger From: Chad Woodstack, audit partner Subject: The Siow Group ~ audit planning Hallo, ‘We need to stort planning the audit of The Stow Group. Yesterday, | met with the Group finance: director, Marta Bidlord, and we discussed some restucturing of the Group, which has taken place this year. A new wholly.owned subsidiary hos been acquired ~ Zennor Co, which is located overseas in Forlond. Ancther subsidiary, Broodwoy Co, wos dispos | have provided you with a summary of issues | discussed with Merlo, ond using this information | would like you to prepore briefing notes for my use in which you! (o}() Evolucte the risks of material misstatement to be considered in planning the Group ‘oud, commenting on their materiality to the Group financial stolements, (12 marks) li) Identify ony further information thot may be needed (4 marks) 2] Design the principal audit procedures to be performed in respect of the disposal of Broodwoy Co. {8 marks) Marta has told me that Zennor Coa has a wallestablished internal audit eam. She hes suggested thot we use the internal audit team as much o& possible when performing ovr audit of Zennor Co os this will reduce the audit fee. The Group audit committee eppreciates that with the audit of the new subsidiary there will be some increase in our costs, but has requested thot the audit fee for the Group ‘a: a whole is not increased from los! year’s fee. | have provided you with some information about the internal audit team and in your briefing notes | would ike you to: {el Discuss how Morto's suggestion impacis on the planning of the audi of Zennor Co's and of ‘he Group's financial statements, and comment on any ethical issue raised. (7 marks) Thonk you.Acqui In order to expand overseas, the Group acquired 100% of the share capital of Zennor Co on 1 Febrwary 20X3. Zennor Co is locoted in Farland, where it owns o chain of cor dealerships. Zennor Co's financial statements are prepared using International Financial Reporling Standards and ore meosured ond presented using the local currency of Farland, the Dingv. At the present time, the exchange rate is 4 Dingu = $1. Zennor Co has the some yecr end as the Group, and its projected profit for the year ending 31 December 20X3 is 90 milion Dingu, with projected assets atthe same date of 800 million Dingu, Zennor Ca is supplied with cars from the Group's manufacturing plont. The cars are sent on cargo ships ond take approximately six weeks to reach the main port in Farland, where they are stored nll delivered tothe deolerships. At iodoy's dote there are cars in transit to Zennor Co with o selling price of $58 milion ‘A locol frm of ouditors was engaged by the Group lo perform a due diligence review on Zennor Co prior ot acquisition. The Group's statement of financial position recognises goodwill at ecquisition oF $60 million Compton & Co was appointed as auditor of Zennor Co on 1 March 20X3, Disposal of Broadway Co ‘On 1 September 20K3, the Group disposed of ils wholly owned subsidiary, Broadwoy Co, for proceeds of $180 million, Broadway Co operated o distibuion centre in this country. The Group's olement of profit or loss includes a proft of $25 milion in respect of the disposal Broadwoy Co was acquired by o retail organisation, the Comwall Group, which wished to bring its disvibution operotions in house inorder to save cosls. Compton & Co resigned as auditor to Broadway Coon 15 September 20%3 to be replaced by the group auditor of the Comwall Grovp. Zennor Co - Internal audit team The internal gudit teom was established several yeors ogo and is headed up by © quolifed ‘ccountant, Jo Evesham, who has © lol of experiance in designing systems ond conttols. Jo and her teom monilor the eflecveness of operating and financial reporting controls, and report tothe boord of directors. Zennor Co does not have an audit committee as corporate governance rues in Fatlend do not require on internal audit function or an ovdit committee 1o be established. During the year, the internal audit teom performed several valve for money exercises such os reviewing the torms negotiated with suppliers Required Respond to the insuctions in the partner's email (31 marks) ‘The mark allocation is shown agains! each of the instructions in the partner's email obove Professional marks will be awarded for the structure ond presentotion of the briefing notes and for the clarity of explanotions. (4 marks) {Total = 35 marks) 29 Cooper (P7 6/14).(amended) 39 mins (el You ore on audit manager in Rose & Co, responsible for the audit of Cooper Co, You ore feviewing the audit working popers relating 10 the financial year ended 31 Jonvary 20XA. Cooper Co is a manufacturer of chemicals used in the agricultural industry. The drat financial stotements recognise profit for the year to 31 January 20X4 of $15 million (20K3 - $20 milion) and total ossets of $240 millon [20X3 ~ $230 milion.The audit senior, Max Turner, has brought several matters to your attention (i) Cooper Co's factories ore recognised within property, plant end equipment at carrying value of $60 million, Half ofthe factories produce o chemical which is used in farm animal feed. Recently the government hos introduced a regulation stipulating thot the chemical is phased out over the next three years. Seles of the chemical are sill buoyant, however, and are projected to account for 45% of Cooper Co's revenve for the yeor ending 31 January 20X5. Cooper Co has started to reyearch @ replacement chemical which is allowed under the new regulation, ond hes spent $1 million on a feasibility study into the development of this chemical {i In October 20K3, Cooper Co's finance director, Hannah Osbourne, purchased 0 cor from the company. The corrying value of the cor at the date of its disposal 1o Hanah was $50,000, and its market value was $75,000. Cooper Co raised an invoice for $50,000 in respect ofthe disposel, which i sll outstanding for poyment (15 marks) Required Comment on the matters to be considered and explain the audit evidence you should expec to find during your review of he audit working papers in respect of each of the issues described above [0] Max noticed that 2 section of the audit file had not been completed on the previous year's oudit. The incomplete section relates fo expenditure incurred in the year to 31 Janvary 20%3, which appears not fo hove been audited at all in the prior year. The expenditure of $1.2 million wos incurred in the development of on internally generated brand name. The amount ‘was copitolised as an intangible asset at 31 Jonuary 20K3, and that amount is sill recognised ot 31 January 20K4. Required Exploin the implications of this mater for the complation of the audit, and any other professional issues raised, recommending any octions to be taken by the auditor, (5 marks) (Total = 20 marks) 30 Grohl (P7 12/12) (amended) 98 mins {el You are @ manager in Foo & Co, responsible for the audit of Grohl Co, o company which produces circuit boards which ores rers of electrical equipment such os computers ond mobile phones. Its the first time that you have menaged this ovdit client, taking over from the previous cudit monager, Bob Holen, last month. The audit planning for the year ended 30 November 20X2 is sbout to commence. You hove been provided with the following exhibits: 1 Anemail which you have received from Mia Vai, the oudit engagement partner 2 Notes from your meeting with Me Satriani, the finance director af Grohl Co, 3. Financial information provided by Mo Sotriani Required Respond to th insruction in the email rom the audit engegement pariner. (38 marks) Nate The spit ofthe mark ollocation is shown within the parner’s emeil (Exhibit 1). Professional marks will be owarded for the presentation ond logical flow of the briefing notes cond the and clarity ofthe explanations provided (4 marks)the problem with the corroded copper. This isnot ye! recognised in the financial statements, bout I want 1 make on edjustment to recogrise the $5 millon os @ receivable os at 30 November. Required Comment on the maters that should be considered, and design the oud procedures to be performed, in respect ofthe insurance claim (8 morks) You ore © moroger in the cusit department of Bison & Co, 9 firm of Chartered Certfed Accountants, responsible for the ud of the Eagle Group (he Group), which hos a financial year ‘ending 3] December 20X8. Your fuen is appointed to cud the paren! company, Eagle Co, ond all ofits subsidiaries, withthe exception of Lynx Co, © newly acquired subsidiary located in o foreign county which i audited by a facal fim of auditors, Vulure Associates All companies in the Group report using IFRSR Standards os the opplicable financial reporting framework end have the same financial year end You ore provided withthe following exhibits 1 An emoil which you have recived from Maya Crag, the audit engagement pariner. 2 Background information about the Group including @ requed from the Group finance diector in expect of « nor-audt engagement 3. Extocts from the Group financial slotements projected 10 31 Decomber 20X8 and comporatves, extracted from the monegement eccounts, and accompanying explanatory notes ‘Management's determination of he goodwill arising on the acquisition of tynx Co. [An exttocl from the oust stetegy document prepared by Vulture Associates relating to lynx Co, Required Respond to the instructions in the email from the audit engagement partner {46 marks) The split af the mark allocation is shown inthe partner's email [Exhibit I). Professional marks will be owarded for the presentation and logical flow of the briafing notes and ‘he clarity of he explonotions provided. (4 marks) (Total = 50 marks) Exhibit 1 - Email from audit engagement partner To: Audit manager From: Moyo Crag, Ault engogement partner Subject: Audit plonning for the Eagle Group Hello | hove provided you with some information in the form of @ number of exhibits which you should use in planning the audi ef he Eogle Group [the Group]. I held « meeting yesterday with the Group lincnce director and representatives from the Group audit committee, and we discussed © number of issues which will impact on the audit planningUsing the information provided, | require you to prepare briefing notes for my use in which you: vote the audit rss to be considered in planning the Group audit. You should use anslytical p 28 fo assist in identifying audit risks, You are not required to consider oudit risks relating to disclosure, os these will be planned for laer in the oudil process. (24 marks) (9) Design the principal audit procedures to be used in the oudit ofthe goodwill orising on the cquistion 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 retvanslation, as these willbe planned later in the oud {6 marks) (c)___Using the information provided in Exhibit 5, evaluate the extract of the audit strategy prepared | bby Vuhure Associates in respect of their ult of lynx Co and discuss any implications forthe Group audi (10 marks) ‘Alter considering the request in Exhibit 2 from the Group finance director in respect of our frm providing advice on the Group's inlegrated report, discuss the ethical and professional implications of this request, recommending any futher actions which should be taken by our fier, {6 marks) , Thonk you. Exhibit 2 - Background inform: finance director about the Group and request from Group Group operational activities The Group, which is a listed entity, operates in distribution, supply chain and logistics management bs operations are worldwide, sponning more than 200 counties. The Group's strategy is 10 strengthen its markel shore and grow revenve in a susteinable manner by expansion inta emerging morkets. There ore over 50 subsidiories in the Group, many of which ate internotional. There ore three main business divisions: post ond parcel delivery, commercial freight and supply chain menogemen', each of which historically hos provided approximately onethid of the Group's A fourth business division which focuses purely on providing distribution channels for the oil and coal sector was established two years ago, and in 20X8 began to grow quile rapidly, It is forecost 10 Provide 12% of the Group's revenve this year, growing to 15% in 20X9. This division is performing particularly wal in developing economies. In recent years, revenue hes grown steadily, based mainly on growth in some locations whore commerce is rapidly developing, This year, revenve is projected ta decline dighly, which the Group jeased compeltion, as c new distribution company has icken some of the Group's mathe! share in o numb tributes to i of countries. However, the Group management team is confident that this is. shortterm drop in revenue, and forecasts a return to grow in 20X9, Innovation The Group hos invested in automating its warehousing facilities, and while i sill employs more than 250,000 off, mary manual warehouse jobs are now performed by robots. Approximately 8,000 sicHt were made redundant early in this finenciel year due 10 automation of their work. Other innovetions include increosed use of auiomated loading and unloading of vehicles, ond improvements in the technology used to moniter and manage inventory levels, Integrated reporting ‘The Group is proud of this innovation ond is keen to highlight these technological developments in its tegrated report. The Group finance director hos been asked to lead o project tasked with producing the Group's fir integrated report.The finance dicector has sent the following request lo the audit engogement pariner: "We would like your firm to assist us in developing our integrated report, and to provide essurance ‘on it, os we believe this will enhance the credibility of the information i contains, Specifically, we ‘would like your input info the choice of key performance indicators which should be presented, how to present them, and how they should be reconciled, whore relevant, to finencial information from the ‘oudited finencial stotements The publication of on integroted report is not o requirement in the jurisdiction in which the Group is headquariered, but there is a growing pressure from stckeholders for an integrated report to be produced by listed reporting entities IF Bison & Co accepts the engagement in relation to the Group's integrated ceport, the work would bbe performed by 0 tleom separate from the audit team Exhibit 3 - Extracts from consolidated financial statements STATEMENT OF FINANCIAL POSITION Note 45.0131 Decomber As at 3) December 20K8 20K7 Projected Actual Sm $m Non current assets Goodwill 1 1,100 Other intangible assets 2 200 Property, plent ond equipment 657 ‘Ober investments fh Total non-curran’ assets 042 Current asses 1,450 Total assots 3,492 Equity and liabilities Equity Share capital 3 1,250 Retoined Eornings 840 Other components of equity 130 Nor:controlling interests 28 Total equity 2,245 Non-current licbilies 4 650 Current liabilities 397 Total equity and liabilities 3,492STATEMENT OF PROFIT OR LOSS Note Yeor to Year to 31 December 31 Decomber 20X68 20K7 Projected Actual $ milion $ million Revenue 5 5,990 Other operating income 180 Operating expenses 7 (5,800) Operating profit 270 Finance charges 30 Prof before tox 240 Tox expense 160) Proft for the yeor 180 Goodwill 1 Goodwill relates fo the Group's subsidiaries, and is tested for impairment on on annval basis, Management will conduct the onnual impairment review in December 20X8, but it is nlicipated that no impairment will nea in revenue which is foes ta be recognised this yecr due to anticipatad growth 1 for the next two years Jn Motch 20X8, the Group acquired on 80% controlling shareholding in lynx Co, a listed company located in a foreign country, for consideration of $351 million Managements determination of the goodwil arising on this acquisition is shown in Exhibit 4 Other rangible assets 2 Cher intangible assets relotes mostly to sofware and other technological development costs During the year $35 milion wos spent on developing @ new IT system for dealing with customer enquiries and processing customer orders. A further $20 million wos. spent on research ond development into robo!s being used in warehouses, and $5 milion on developing new accounting software. These costs have been copitalised as intangible assets and ore all being amorised over a 15:year useful Equity and non-current liabilities 3A shore issue in July 20K8 roised cash of $100 million, wh expenditure was used to fund copital 4 Noncurtent lables includes borrowings of $550 million {20X7 - $500 milion) ond provisions of $100 milion |20%7 ~ $120 milion). Changes in financing during the year hove impacted on the Group's weighted overage cost of capi treasury management team suggess thet average cost of copital is cutrerily 10%. al, Information from the Group's Financial performance 5 Revenue has decreased By 3.7%% over the yaar, due fo @ new competitor in the market taking some of the Group's morke share.6 Other operating income comprises the following items 20%8 20x7 $m Reversal of provisions 40 Reversol of impairment losses on receivables end other assets 20 Foreign currency gains 23 Profit/{los] on disposal of noncurrent assets 3) Tota! 80 7 Operating expenses includes the allowing items: Staff costs Cost of raw materials, consumables ond supplies Depreciation, amortisation and impairment Obher operating expenses Total Exhibit 4 ~ Determination of goodwill on the acq Cosh consideration = paid | March 20x8 Contingent consideration 1 271, Total consideration 351 Foir value of noncontrolling interest 2 4 400 less: Foir value of identifiable net assets 3 1300) Goodwill “100 1 The contingent consideration will be payable four yeors afer the acquisition dote ond is colevoted bosed on « payment of $525 milion, only poyable if Lynx Co teaches revenve and profit targets outlined in the purchase documentation. The omovnt included in the goodwill caleulation hos been discounted 19 present value using @ dicount factor based on on 18% interest rote 2 The noncontelling interest is measured ct fair value, the omoun! being based on Lynx Co's shore price on March 20X8, 3. The asses and lobilties acquired and their fair volues were determined by on independent fim of Chartered Cerified Accountants, Sidewinder & Co, who was engaged by the Grovp to perform due diigence on lynx Co prior to the acquisition taking place. A fair valve vplih of $12 millon was mode in reation to property, plant and equioment Exhibit 5 - Extract from audit strategy - prepared by Vulture Associates of the audit of Lynx Co respect The two points below are en extract from the cudit strategy. Other sections of the audit strategy, including the auditsrisk assessment, have been reviewed by the Group audit lem ond ore considered to be satistactory, Lynx Co is projected to be loss mcking this year, and the Group audit {eam is confident that sufficient procedures on going concern have been planned for. aControls effectiveness We will place reliance on internal controls, which will reduce the amount of substantive testing which needs o be performed. This is justified on the grounds thot in the previous year's audit, controls were tasted and found to be highly effective. We do not plan to retest the controls, as cccording to manogement there have been no changes in systems or the contol environment during the yeor Internal audit Lynx Co has offered the services of is internal audit team to help perform cudit procedures. We are planning to use the internal auditors to complete the audit work in respect of trade receivables, as they hove performed work on this orea during the year. it will be efficient for them to perform and procedures, including the trade receivables i ‘ade receivables, which we will instruct them to carry out conclude on the relevant aud larization, ond evaluation of the allowance for 32 Grissom (P7 6/10} (amended) 74 mins You ate @ senior audit menager in Vegas & Co, responsible for the audit of the Grissom Group, which has been an audit client for severo! years. The group companies cll have @ finonciol yeor ‘ending 30 June 20Y0, and you are currently planning the final audit of the consolidated finonciol stotements. The group's operctions focus on the manufacture ond marketing of confectionery ond savoury snocks. Information about several matters relevant to the group audi is given below. Those matters are al potentially material to the consolidated financial statements, None of the companies i the group is listed Grissom Co This is @ nontrading porent company, which wholly owns three subsidiaries ~ Willows Co, Hodges Co and Brass Co, all of which are involved with the core manufacturing and markeling operations of the group. This year, the directors decided to diversity the group's cctivites in order to reduce risk exposure. Noncontrolling interests representing longterm investments hove been made in to companies - an internetbased travel agent, and a chain of pet shops. In the consolidated statement of Financial position, these investments are accounted for as associates, os Grissom Co is able to ‘exert significant influence aver the companias. |As part of heir remuneration, the directors of Grissom Co receive @ bonus bosed on the profit before tox of the group. In April 20Y0, the group finance director resigned from office ofter a disogreemen’ with the chief executive officer ever changes to accounting estimates, A new group finance director is yet fo be appointed Willows Co This company manufactures and distributes chocolate bars and cakes. In July 20X9, production wos ‘elocoted to a new, very large Factory. One of the conditions of the plonning permission for the new factory is that Willows Co must, at the end of the useful life of he foctory, dismentle the premises ond repair any environmental damage covsed to the land on which iis situated. Hodges Co This company's operations involve the manufacture and distribution of packaged nuts and dried fui The government paid a grant in November 20%9 to Hodges Co, to assist with costs associated wih instaling new, environmentally friendly, packing lines in its foe energy use by 25% os part of the conditions of the grort, and they begon opercting in February 20¥0. q ries, The packing lines must reduce Brass Co This company is @ new ond significant acquisition, purchased in Jenvary 20¥0. It is locoted overseas, in Chocland, © developing country, and has been purchased to supply cocoe beans, a ‘mojor ingredient for the goods produced by Willows Co. lis now supplying opproximotely half of the ingredients used in Willow Co's manufacturing. Chocland hos not adopted InternationalFinancial Reporting Standards, meaning that Brass Co's Financial statements are prepared using local accounting rules. The compony uses local currency to measure and present its financial stotements Further information Your firm audits all components of the group with the exception of Brass Co, which is audited by & small local firm, Sidle & Co, based in Chocland. Audit regulations in Choclond are not based on International Standards on Auditing You have just received the following email fom Worwick Stokes, the audit engagement partner To: Audit monager From: Worwick Stokes Re: Grissom Group ausit planning Hell, | need you lo help me get stated on plonning forthe oudt ofthe consoldoted finencial statements of the Gessom Group, To this end, pleate prepare briefing notes for my attntion in which you |e} Evaluate the principal audit risks 10 be considered in plonning the audi (18 marks) Ignore those risks that relate to reliance on another auditor, as that will be deal with seperately [b} Explain the factors that should be considered, and the procedures thot should be performed, in deciding the extent of reliance to be placed on the work of Sidle & Co. {8 marks) [q)__ Design the principal audit procedures that should be performed on: [il The classification of noncontrolling investments made by Grissom Co [il The condition attached to the grant received by Hodges Co (8 marks) Thanks Required Respond tothe emeil from the engagement pariner (34 marks) Professional marks will be ewarded for the clarity, format and presentation of the briefing notes. (4 marks) (Total = 38 marks) 24 Sunshine (P7 Sep/Dec 17) (amended) 98 mins You are o manager in the audit department of Dove & Co, responsible for the aut of the Sunshine Hote! Group (the Group], which has a financial yeor ending 31 December 20X7. The Group ‘operates a chain of luxury hotels and its planning lo expand its operations ever the nex! three yeors ‘ey opening hatels in countries wih increasingly popular tourist destinations, You have been provided with the following exhibits 1 Anemail which you have received from John Starling, the audit engagement poriner 2 Information obout the Group's general background and activites 3 Notes from a meeting held between John Staring, the Group's finance director ond @ representative of the Group audit commitiee Extract of an email from the Group finonce director Io John Starling, eudit engagement partner it= repair work in edvance, with the balance paid when the repair work is completed. No accounting tenirias have been made as yet in relation tothe hurricane, Exhibit 4 - Extract from email from the Group finance director to John Star audit engagement partner Jobn The Group's lawyer has raceived a latter from Ocean Protection, o multinational pressure group wihich aims to safeguard marine environments. Ocean Pralection is claiming that our hotel using environmental damage to delicate coral reels when scuba diving under the supervision of 12 Group's scuba diving inslructors, (Ocean Protection is pressing charges agains! the Group, ond alleges that our activities are in bre of international environmental pro‘ection legislation which is ratified by all of the countries in which the Group operates. Damages of $10 milion are being sought, Ocean Protection suggesting thot this ‘amount would be used to pratact the coral reefs from furlher domage. The Group is keen ta avoid any media attention, so | am hoping to negotiate o los poyment ond an agreement from Ocean Protection that they will not make the issue knowledge, fom an accounting point of view, we do net want to recognise a liobilty, as the disclosures will draw attention to the matter. We will account for any necessary poyment when itis made, which is ikely to be nex! yeor understand tha! your audit team wal nead to look at this issue, but | ask that you only speck to me ‘abou! it, and do not speak to any ether employees. Also, | do not wont you te contact Oceon Protection as this could impact on our negotiation 34 Laure! (P7 Mar/iun 17) amended) 98 mins You ore @ manager in Holly & Co, @ firm of Chartered Certified Accou fond you are responsible for the audit of the Lourel Group [the Group], with a financial year ending 31 May 20X7. The Group produces cosmetics ond beauty products sold under various brand names which ore globally recognised and which ore sold in more thon 100 countries. You have been provided withthe following exhibits: 1 An email which you have received from Brigie Sanders, the audi! engagement pariner. 2 Extracis ofthe permenent file for he oualt of Group. 3. Extracis of the Group's projected ond actual financial statements, together with associated notes from meeting with Group finanee director 4 Notes on the plonned acquisition of Azales Co by the Group, 5. Notes on the cudit of Bulldog Co. Required Respond to the instructions in the emo from the audit engogement partner. (46 marks) The spli of the mark cllocation is shown inthe partner's emi [Exhibit 1). Professional marks Will be awarded for the presentation ond logical flow of the briefing notes and the clarity of the explanations provides in parts (alc (4 marks) (Total = 50 marks)1 - Email from audit engagement partner te Audit menage: From: igile Sanders, Audi Engagement Porter Subject: Audit plonning ~ the Laueel Group, end Bulldog Co Hello Ise for you to begin plonning he audit of he Lourel Group, | hove provided you wih some information ~ 9 summary of relevan! pein from the permenent audit file, notes from @ meting with the Group finance director and some exteacts from the latest forecast Financial statements with comporative Figures, Using this information, | require you to prepare briefing notes for my use, in which you! [el Evaluate the risks of material misstatement to be considered in planning the Group ovdit, Your evaluotion should uli'se analyticel procedures os @ method for identifying relevant risks, (19 marks) {b) Recommend any additonal information which should be requested from the Group which ‘would allow a more detaied preiminory analytical review tobe performed. (6 marks) {6} Design the principal avi procedures 1o be parformed on | [il The impairment of the Chico brand; and (5 marks) | Ui} The planned acquisition of Azoleo Co (5 marks) | In addition to these briefing notes, there is one futher mater | require your assstonce with. have provided you with some information tht relates to the audit of another, separate audit client, Buldog Co [Exhibit 5), whose audi is about to commence. Using this information, please can you: (4) Explain the matters Holly & Co should have considered before continuing withthe engagement to audit Bulidog Co (3 marks) {6} Discuss why the audi of financial instruments is particulary challenging, and explain he matters re be considered in planning he out of Bulldog Co's forward exchange contracts (8 marks) Your response to these final two requirements need not be in the form of briefing notes. Thank you Exhibit 2 - Points from the permanent audit file Holly & Co was appointed os Group oudior three years ago, and the fizm audits ell components of the Group, which is listed entiy ‘The Group sells its predicts under wellknown brand names, most of which have been acquired with subsidiary companies. The Group is highly acquisitive, ond there are more than 40 subsidiaries and 15 essociates within the Grour, Products include cosmetics, hair care products ond perfumes for men and women. Research into new products is @ significant activity, ond the Group aims to bring new products to market on a regular boss,Exhibit 3 - Extract from projected and actual financial statements and associated notes from meeting with Group finance director CONSOUDATED STATEMENT OF FINANCIAL POSITION Projected Actual Notes 31 May 20X73 May 20% $m $m Assets . Noncurrent ossers Property, piont and equipment 1 92 Intangible assets ~ goodwill 18 Inongible assets ~ ccquired brand names 2 80 Intongible assets ~ development costs 5 Total noncurent assets Current assets Total assels Equity ond liabilities Equity Equily share copital 100 Retained earnings 106 Nonontrlling interest 23 Total equity 229 Non-current labiltes Dabenture loons 3 Dalerred tax 4 Total non current liabilities Current liabilities Total lobiltes Total equity and liabilities CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR TO 31 MAY Notes Projected 20%7 $m Revenue 220 Operating expenses 5 (as) Operating profit 35 Finance costs a Profit before tox 28 Tax expense Profit forthe year Capital expepditure of $20 million has been recorded so for during the year. The Group's ‘accounting policy is to recognise assets ot cost less depreciation, During the year, a review of assets’ estimated useful lives concluded that many were too. short projected depreciation chorge forthe yeor is $5 milion less than the comparative figure. das @ result, the 2 Acquired brand names are held ot cost and not amorlised en the grounds that the ossels hove €n indefinite life. Annual impoirment reviews are conducted on all brand names. In December 20X6, the Chico brand nome was determined to by $30 milion due tocllegotions made in the press and by customers that some ingredients used in the Chico: perfume range can cause skin irttations ond more serious health problems. The Chico products have been withdrawn from sole. 3 A.$20 millon loan was taken out in January 20%7, the cash being used to Finance o specific new produc! development project 4 The deferred tax liobilty elates to timing diferences in respect of accelerated tox depreciation {copital allowances) on the Group's property, plant and equipment. The labiliy has increased following chonges to he esimated usel lives of asses discussed in note T 5 Contracts were signed in February 2037 forthe hire of 5 new machines for use in production Controct payments of $1m have been charged fo operating expenses as they were made, on the basis thatthe machines are of low value 4~ Details of planned acai Group management is currently negotiating the acquisition of Azalea Co, 0 large company which ops and sells a ronge of fine fragrances. I is plonned that the acquisition wil foke place in ceorly June 20X7, and the Group is hopeful thot Azalea Co's products will replace the revenue stream lost from the withdrawal of its Chico perfume range. Due diligence is taking place currently, and Group management is hopeful thot this will support the consideration of $130 milion offered for 100% of Azaleo Co's share copital. The Group's bank has agreed to provide a loan for this mount Exhibit 5 - Bulldog Co audit You are elso responsible forthe audi of another oud client, Bulldog Co, a clothing monuloctrer that has been a client of Holly & Co for mony years, but which hes recently expanded its operations overseas. To monage exposure fo cosh flows denominated in foreign currencies, the company hos sel up 0 treasury management function, which is responsible for entering into hedge Ironsactions such 8 forward exchange contracts. These transactions are likly to be material to the financiol stotement 35 Dasset (PF 12/13) (amended) 39 mins Dosset Co operates in the coal mining industry. The company owns ten mines across the country from which cool is extracted before being sold onto customers who are energy providers. Coal mining companias operate under licence from the National Coal Mining Authority, an organisation that ‘monitors the environmental impact of coal mining operotions, and requires cool mines to be ‘operated in compliance with src! health and safety regulations. Exhi ion of Azalea Co You are an audi! manager in Burton & Co, cesponsible forthe cudit of Dasset Co ond you are reviewing the audit working papers for the year ended 31 August 20X3. The draft finoncial siotoments recognise profit before tox of $18 million and tolal assets of $175 million, The audit senior has left a note for your attention Accident at the Ledge Hill Mine ‘On 15 August 20X3, there was on accident ct the Ledge Hill Mine, where several of the tunnels in the mine collapsed, cousing other tunnels to become flooded. This has resulted in onethird of the mine becoming inaccessible ond for salety reasons, the tunne's will be permanently closed. However, Dasset Co's management thinks that the rest of the mine can remain operational, as long as impravements ore made to ensuie that the mine meets health and safety regulations. Luckily no one wos injured in the accident. However, the collapse caused subsidence which has domaged several cesidential prapertias in 0 village located above the mine. A surveyor has been commissioned to report on whether the properties need to be demolished or whether they can be safely repaired. A group of 20 residents has been relocoted to rental properties in the local oreo and Dassat Co is meeting oll expenses in lotion to this. The Ledge Hill Mine wos acquired several years ‘ogo ond is recognised in the drat statement! of financial positon at $10 million. As no employees4 Exhibit 4 ~ Revenue-raising suggestions for Jen & Co Jen & Co is considering how to generale more revenue, and the following suggestions hove been made by he firm's business development manager 1 An advertisement could be placed in national newspapers to atroct new clien's, The draft advertisement has been given fo you for eview: Jen & Co isthe largest and most professional accountancy and audit provider in the country, We offer a range of services in addition to audit, which ore guaranteed fo improve your business efficiency and sove you tox. If you ore unhappy with your auditors, we can offer a second opinion on the report that hos been given, Introductory offer: fo all new clients we offer 0 25% discount when both audit and tox services are provided. Our rates are opproved by ACCA 2 A new partner with experience in the banking sector hos joined Jen & Co. It hos been suggested that the partner could specialise in offering corporate finance service to cients. In particular, the partner could advise clienls on raising debt finance, and would negotiate with the client's bonk or other provider of finance on behalf of the client. The fee charged for this service would be contingent on the client obtaining the finance with o borrowing cost below market rote 40 Vo You ore an audit manager in Montreal & Co, 2 firm of Chartered Certified Accountents, and you are responsible for the cudit of the Vancouver Group [the Group. The Group operates in the supply chain management sector, offering dstribution, warehousing ond container handling services couver 7 Mar/Jun 16) (amended) 98 mins The Group comprises @ parent company, Vencowver Co, end two subsidiaries, Toronto Co ond Colgary Co. Both of the subsidiaries were acquired as wholly owned subsidiaries many years ago, Montreal & Co audits oll of the individual company financial statements as well os the Group consolidated financial statements You have been provided with the following exhibits 1 Anemail which you have received from Albert Franks, the cudit engagement partner. 2 Notes from a meeting between Albert Franks, the Group fiance direcor and a representative ol the audit commitioe 3. Finance informotion on the Group, provided by the Group finance director Required Respond fo the instucions inthe email kom the audi engagement partner. (46 marks) ‘The split ofthe mark allocation is shown within the partner's email (Exhibit 1) Prolessional marks will be owordes forthe preseniaion ond logical flow of the briefing notes ond ‘he clarly of he explanations provided! (4 marks) (Total = 50 marks)Exhibit 1 - Email from audit engagement partner To: Audit manager From: Alber! Fronks, oud engagement pariner Subject: The Vorcouver Group ~ audit planning, yeor ending 31 July 20X6 Hello | would like you to begin to plon the Group aust forthe financial year ending 31 Jly 20X6. held o meeting yesterday with Hannah Peters, the Group finance director. A representative of the | Group audit commitiee was ols0 at the meeting to discuss hwo issues raised for our attention by the | commitee. Hannch gave me some projected finoneial information for he Group's forthcoming year end, along with comporotives and explonotory notes, and we discussed some maters relevant tothe Group this yeor. | om preparing for the oudit teom briefing nex! week at which there wil be 0 umber of recent rectus into the audit department whose first assignment will be the Vancouver | Group, | hove ottached some notes from my meeting as well os the financial informotion provided by Hannah. Using this information you ore required to prepore briefing notes for vse in the aut team briefing in which you (1 Explain why analytical procedures ore performed as 0 fundamental part of our risk assessment ‘ot the planning stage of the oudit (5 marks) (b) Evaluate the audit risks which should be considered in planning the Group audit. You should ‘ensure tho! you consider oll of the information provided as well os viiising analytical procedures, where relevant, to identify he audit risks, (25 marks) _ (@)__Design the principal audit procedures thot should be performed on the consolidation process. (8 marks) (d) Discuss the ethical issues relevant to Montreal & Co, and recommend ony octions which | should be token by our firm (8 marks) Thank you. Exhibit 2 - Notes from meeting with the Group finance director and audit committee representative The Group hos not changed is operations signiicanlly this year. However, it has completed @ modernisation programme ofits warehousing facilities at ¢ cost of $25 milion. The progromme was financed with cash raised from two sources: $5 milion was raised from a debenture issue, ond $20 milion from the sale of 5% of the share copital of Colgory Co, with the shores being purchased by on institutional investor. The Group fell victim during the year to @ significant cyber atack, which fortunately did not codversey affect is operations. t did, however, result inthe loss of files containing the contact details of many of he Group's employees. ‘An investigation into the Group's tox affairs started in Jonvary 20K6. The tox authorities ove investigating the possible underpayment of toxes by each of the compenies in the Group, claiming that tax laws have been breached. The Group's tax planning was perormed by another firm of accountants, Vicloria & Co, byt the Group's audit committee has asked if our firm will support the Group by looking Jno its tax postion and liaising with the tox authorities in respect of the tax investigation on its behalf. Vieoria & Co has resigned from their engagement 1 provide tax advice to the Group. The matter is to be resolved by 2 tribunal which is scheduled to fake place in September 20K6 The Group cudit committee has also osked whether one of Montreal & Co's audit pariners can be ‘oppointed as « nomexecutve director ond serve on the oudit committee, The oudit commitoe lacks @ 90al Financiel reporting expert, ond the oppoiniment of an audit partner would bring much needed knowledge and experiance. Exhibit 3 - Financial information provided by the Group finance director CONSOUDATED STATEMENT OF FINANCIAL POSITION Notes Projected 3) Joly 20%8 31 July 20K5 Sm $m Assos Noncurrent essels Property, plant and equipment 1 230 187 Intangible asses ~ goodwil 30 30 Deferred tox asset 2 10 15 Total non-current assets 270 232 Current ossets Inventorias 35 28 Trade and other receivables eo 45 Cosh and cash equivalents = 10 Total curren asset 7 83 ola assets 307 315 Equity ond tobilties Equity Equity shore copite 5 50 Retoined earnings 126 103 Non-contaling intrest 3 ss 7 Too! equity ia) Non current ibiltes Debenture 6 55 Provisions 4 oo 12 Tetol non eusren' habiliios 6 a Curcon bili “rade ond other payables 195 95 Overdroh 5 = Total eurceot liabilities 720 3 Total labilties 186 162 Total equity ond liabilies 367 315 CONSOUDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR TO 31 ULY Notes Projeciod Acta! 20x6 $m Revenue 5 375 Operating expenses (348) Operating profit * 7 Pralit on disposal of shares in Calgary Co 10 Finonee costs i4) Profit belore tox 33 Tox expense 0} Profit for the year 231 Several old warehouses were madernised during the year. The modernisation involved the redesign of the layout of each warehouse, the installation of new computer systems, and the replacement of electrical systems. 2 The deferced tox asset is in respect of unused fox losses flax credits) which accumulated when Toronto Co was loss moking for a period of three years from 20W9 to 20X2. 3 The nor-contolling interest has arisen on the disposol of shares in Calgary Co. On I Jonuory 20X6, a 5% eauily shareholding in Calgary Co wos sold, caising cash of $20 milion. The jrolt made on the disposal is separately recognised inthe Group statement of prot or los. 14 The provisions relote to onerous eases in respect of vacant properties which are surplus tothe Group's requirements 5 the Group hes elwoys recognised distribution revenue when a shipment leaves is distribution 21 Bhicholl (P7 12/08) (amended) 70 mins Bluebell Co operates a chain of 95 luxury hotels. This yeor's resuts show a return to profitability for the compory, following several years of losses. Hotel trade journals show thot on average, revenue in the indvstyy hos increased by around 10% this yoor. Despite improved profitability, Bluebell Co hos poor liquidity, ond is cutrenly lying to secure futher longterm finance. You have been the manager responsible forthe audit of Bivebell Co forthe las! four yeors. Extracts from the drof financial stalements forthe year ended 30 November 20X8 are shown below. EXTRACTS FROM THE STATEMENT OF PROFIT OR LOSS Notes 20X68 20x7 $m $m Revenve 1 890 713 Operating expenses 2 (835) (690 ‘Other operating income 3 Jas 10 Operating profit \90 33 Finance chorges (45) {43} Profit/{oss} before tax 145 Ti9) 1 Revenue recognition Revenve comprises soles of hotel rooms, plus conference and meeting rooms. Revenue is recognised when ¢ room is occupied. A 20% deposit is taken when the room is booked. 2. Significant items included in operating expenses zoe 2007 $m $m Shorebosed payment expense 138 ° Damaged propery repat expenses i 100 7 3. Other operating income includes . 20x8 20X7 $m $m Profit on property disposal [il 125 10 22