Q3 Bassett group (1.

5 m for applying professional skepticism)

No Issue Accounting std Risk/Incorrect Impact

treatment
1 First year of auditing Our firm are unfamiliar Increase detection
the group (0.5m) with the client risks (0.5m)
accounting policies,
account balances,
higher risk of unable to
detect MM (0.5m)
2 Risk that opening Increase ROMM on
balances and opening balances
comparative and comparative
information may not be information (0.5m)
correct since PY figures
not audited by firm
(0.5m)
3 Listed entity, Risk that mgt use Increase inherent
pressure from SH creative accounting risk (0.5m)
for better methods/may
performances manipulate figures to
(0.5m) create a healthier
picture of FP (0.5m)
Professional audit team should apply professional scepticism to areas of the audit
scepticism where the accounting is subject to management’s judgement especially if
it will results to increasing revenue or reducing expenses

4 Operating segment IFRS 8 requires Risk that disclosure is MM in group FS

(0.5m) operating segments to incomplete (0.5m) (0.5m)
be disclosed separately
when criteria has been
met such as if its
represents 10% or more
of the total revenue
(0.5m)
5 Software IAS 38, costs can only be Risks that criteria are Research costs
development costs capitalised if they meet not met, has understated, IA
capitalised as IA the capitalization capitalised research overstated (0.5m)
(0.5m) criteria such as future costs (0.5m)
economic benefit can be
demonstrated and
technical and
commercial feasibility of
the asset has been
established (0.5m)
Professional area where professional scepticism should be applied, both in relation to
scepticism management’s assertion that the software costs meet the necessary
conditions for capitalisation, and in relation to the distinction, if any,
 which has been made between research and development costs
6 Management not IAS 36, when there is an FTC, management If an impairment
planning to test for indicator of impairment justification for not review is not
impairment on any on the operating testing for impairment conducted, profits
operating segments, segment, they need to is inappropriate as and assets will be
confident that sales be tested for there is a reduction in overstated when
of digital impairment (0.5m) revenue for the two of impairment loss
publications will the operating segments necessary is not
quickly grow and (0.5m) recognized (0.5m)
overtake sales of
hardcopy
publications (0.5m)
Professional audit team will need to apply professional scepticism, and challenge
scepticism management on their assumption that an impairment review is not
needed. Management’s reluctance to conduct an impairment review
could be due to management bias and the pressure to return a healthy
profit to shareholders
7 Amortisation of IAS 38, requires FTC, correctly IA overstated,
publication rights intangible assets to be amortised the expenses
(0.5m) amortised over their publication rights, understated (0.5m)
useful lives if they have however, period over it
a finite life (0.5m) is amortised may be
inappropriate, some
rights may be
amortised for too long
(0.5m)
Professional The accounting policy may not be appropriate, and the audit team will
scepticism need to be sceptical in relation to the appropriateness of the policy, and
challenge management on its use.
8 Royalty advances FTC, treated as understatement of
costs spread over prepayment is expenses and
ten years (0.5m) appropriate, however, overstatement of
releasing cost over 10 assets (0.5m)
year period seems to
be quite simplistic, as
different types of
publications provides
economic benefits over
a different period,
some costs may need
to be spread over a
shorter period (0.5m)
Professional Similar to the point raised previously in relation to the accounting
scepticism treatment of the publication rights, management could be using this ten-
year average period as a way of smoothing profits and managing earnings.
Again, the accounting policy may not be appropriate, and the audit team
will need to be sceptical in relation to the appropriateness of the policy,
 and challenge management on its use.
9 Borzoi Co is located IAS 21, Assets and Risk that retranslations MM in the group FS
in Farland, a country liabilities need to be may prone to contain (0.5m)
which has recently retranslated using errors as the currency
experienced closing rate at the has been volatile and
political unrest, reporting date and could remain volatile
leading to significant (0.5m)
volatility income and expenses
in the local need to be translated
currency, the Oska, using average rate/ spot
will need to be rate at the date of
translated to $ transactions (0.5m)
when consolidated
(0.5m)
10 Immediately prior to Risk that the FV Overvaluation of
being transferred to determined is not software (0.5m)
Borzoi Co, appropriate (0.5m)
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,(0.5m)
Professional The audit team should approach this issue with appropriate professional
scepticism scepticism – the revaluation of the software will need to be justified by
management as it could be a mechanism being used by Group
management to inflate the assets of Borzoi Co and the Group as a whole.
11 Bassett Co, the IFRS 3/10, Intragroup Risk that intragroup Overstatement of
parent transactions need to be transactions have not payable and
company of the eliminated during been eliminated (0.5m) receivables in group
Group, transferred a consolidation (0.5m) FS (0.5m)
piece of translation
software to Borzoi
Co (0.5m)
Materiality calculation for: (3 marks)

 Internally developed software 10.5% of group TA 1m

 Publication rights 8.3% of group TA 1m
 Royalty advances 3.6% of group TA 1m

Total marks: a(i) 22 marks, max 18 marks

a(ii) 9 marks