Procedures

Question 1

Audit Procedures for Holiday Pay Obligation:

Answer 1

• Discuss estimation methods and assumptions with management.
• Ensure techniques align with IAS 19.
• Assess control over accrual calculation and approval.
• Verify pay rise and staffing changes against HR records.
• Reconcile payroll records with holiday accruals.
• Create an independent estimate based on HR policies, employee contracts, manual holiday records, and outstanding leave.
• Obtain management representations on assumptions.
• Review previous year’s accrual for estimation accuracy.

Question 2

Principal Audit Procedures for Classification of the Investment in LPS Co

Answer 2

Obtain Legal Documentation:
- Verify the legal documentation supporting the investment.
- Confirm the rights and obligations of the investing parties to understand implications for Winberry Co’s financial reporting.
- Verify the investment date.
- Confirm the number of shares purchased and the associated voting rights to understand control dynamics.
- Assess the profit-sharing arrangement between Winberry Co and Durian Co.
- Understand the terms of access to LPS Co’s assets.
- Communicate with the auditors of LPS Co, if not Quince & Co.
- Ensure there are no restrictions on Winberry Co’s shared control of LPS Co.

Review Board Minutes:
- Examine board minutes to understand the business rationale for the investment.
- Assess the level of control or joint control in the venture.

Review Meeting Minutes with Durian Co:
- Analyze minutes from relevant meetings between Winberry Co and Durian Co.
- Confirm shared control and understand the nature of the relationship and decision-making processes, especially any veto rights.

Obtain Documentation on LPS Co’s Organizational Structure:
- Verify that Winberry Co has successfully appointed members to LPS Co’s board.
- Ensure those members have equal power compared to the members appointed by Durian Co.

Question 3

**Audit Procedures for Impairment of Rides
**

Answer 3

• Review Safety Inspection Report:
  
  • Obtain the safety inspector’s report.
  • Identify specific rides of concern.
  • Understand maintenance failings as potential indicators of impairment.
• Understand Regulatory Obligations:
  
  • Obtain and review regulations regarding ride maintenance and upgrades.
  • Assess the company’s obligations to assist in evaluating value in use.
• Examine Maintenance Reports:
  
  • Obtain The Infinite Co’s maintenance reports.
  • Compare the maintenance schedule with regulations to identify any non-compliance or defects.
  • Identify indicators of impairment for specific rides.
• Review Management’s Impairment Analysis:
  
  • Obtain and verify the calculations in management’s impairment review.
  • Assess the assumptions against the auditor’s understanding.
• Independent Impairment Calculation:
  
  • Calculate an auditor’s estimation of impairment.
  • Alternatively, engage an expert to value the rides.
  • Compare the expert’s valuation with management’s impairment review to corroborate calculations.
• Evaluate Auditor’s Expert:
  
  • If an expert is used, assess the reasonableness of their assumptions.
  • Ensure the completeness of the information they reviewed.
  • Assess the expert’s competence, scope, and independence.
• Physical Inspection:
  
  • Physically inspect the rides to verify they are operational.
  • Confirm customer demand for rides to support value in use calculations.
• Review Usage and Closure Statistics:
  
  • Obtain ride usage and closure statistics from management.
  • Ensure the rides are operational to justify a value in use valuation.

Answer 4

• Review Board Minutes:
  
  • Examine board minutes for the purchase rationale.
  • Confirm board approval of the transaction.
• Verify Payment:
  
  • Match the $15 million payment to the company’s bank ledger account, cash book, and bank statements.
• Confirm Carrying Amount:
  
  • Agree the property’s carrying amount to Gruber Co’s non-current asset register.
  • Ensure the initial value is recorded appropriately.
• Proof of Ownership:
  
  • Obtain title deeds and legal documents to verify ownership of the building.
• Physical Verification:
  
  • Visit the building to confirm its existence and occupancy by retail establishments.
  • Ensure proper classification as an investment property.
• Inspect Rental Agreements:
  
  • Review rental agreements for retailers occupying the Nakatomi Building.
  • Confirm the property generates rental income and is not owner-occupied.
• Consistency in Accounting Treatment:
  
  • Inquire if the company holds other investment properties.
  • Confirm all investment properties are held at fair value.
• Rationale for Accounting Policy:
  
  • Discuss with management the rationale for measuring the property at fair value.
  • Confirm the financial statement notes reflect this accounting policy.
• Evaluate Valuation Expert:
  
  • Verify the expert’s experience and qualifications.
  • Confirm the expert’s independence from Gruber Co and its management.
  • Review instructions given to the expert and ensure compliance with IFRS.
  • Assess the expert’s final valuation report:
    
    • Check assumptions and methods used.
    • Ensure conclusions align with the auditor’s understanding.
    • Verify the expert’s valuation is recognized in the financial statements.
    • Investigate any discrepancies.
  • Confirm the valuation date aligns with the reporting date and accounting policy.
  • If the valuation date differs, assess the reasonableness of the reflected valuation.
  • Reperform calculations in the expert’s working papers.

Answer 5

• Review Expert’s Report:
  
  • Understand and evaluate the methodology and assumptions used in the valuation.
  • Confirm the geographical extent of the storm damage.
  • Verify the criteria for determining whether trees are completely destroyed or damaged.
• Discuss Methodology with Management:
  
  • Ensure the expert’s methodology and assumptions comply with IAS 41 Agriculture.
  • Understand the rationale behind the expert’s valuation.
• Verify Expert’s Credentials:
  
  • Confirm the expert’s qualifications and experience in assessing storm damage to timber plantations.
  • Ensure the expert’s independence from Pale Co and its management.
• Site Visit:
  
  • If feasible, visit the storm-damaged site to assess the extent of destruction.
  • Evaluate whether other assets besides trees were damaged.
• Management Actions:
  
  • Discuss with management the steps taken post-storm, including clearing destroyed trees and harvesting damaged ones.
• Documentation of Damaged Trees Sale:
  
  • Obtain customer orders or other documentation to confirm the realizable value of damaged trees.
• Confirm Carrying Amount:
  
  • Verify the carrying amount of the standing trees from the non-current asset register before any fair value change is recognized.
• Consider Need for Auditor’s Expert:
  
  • Evaluate if an auditor’s expert is necessary based on the materiality of the figures involved.
• Estimate Fair Value:
  
  • Develop an auditor’s estimate of the fair value of the timber plantation in accordance with IAS 41.
  • Compare this estimate to management’s calculation of the change in fair value.
• Review Insurance Policy:
  
  • Obtain and review the company’s insurance policy to determine coverage for storm damage.

Question 6

Audit Procedures on Sale of Property

Answer 6

• Board Minutes Review:
  
  • Examine board minutes to confirm the property sale has been deliberated, discussed, and formally approved by the board.
• Agree Sale Price:
  
  • Match the $50,000 sale price to the legal documentation related to the sale of the property to the Group CEO.
• Confirm Carrying Amount:
  
  • Verify the carrying amount of the property at the disposal date against the underlying accounting records and the non-current asset register.
• Asset Removal Confirmation:
  
  • Ensure the asset has been removed from the company accounts as of the disposal date.
• Profit or Loss Calculation:
  
  • Obtain management’s calculation of profit or loss on disposal, reperform the calculation using supporting evidence, and confirm the profit or loss is appropriately recognized in the company’s statement of profit or loss.
• Fair Value Estimation:
  
  • Obtain an estimate of the property’s fair value, for example, by comparing to current market prices of similar properties, and assess the reasonableness of the transaction and sale price.
• Written Representations from Management:
  
  • Secure written representations from company management confirming that all matters related to this related party transaction have been disclosed to Group management and the Group audit team.
• Written Representation from Group CEO:
  
  • Obtain written representation from the Group CEO regarding the transaction, confirming the outstanding amount and the likely timescale for payment.
• Review Post-Reporting Date Cash Receipts:
  
  • Check cash receipts after the reporting date to confirm whether the $50,000 has been received from the Group CEO.

Question 7

Additional Information Required to Plan the Audit of the Disposal of Primal Burgers Co

Answer 7

• Financial Statements:
  
  • Obtain the individual financial statements of Primal Burgers Co to ascertain the details of the amounts recognized, assisting in auditing compliance with IFRS 5 and confirming the materiality of the balances involved.
• Vendor’s Due Diligence Report:
  
  • Acquire a copy of the vendor’s due diligence report produced by Usami & Co to identify key findings, such as valuations of assets and liabilities, aiding in auditing the measurement of the disposal group and determining if any impairment should be recognized.
• Board Minutes on Disposal:
  
  • Review Group board minutes to understand the reasons for disposal and management’s rationale, and how the disposal aligns with the Group’s overall restructuring.
• Information on Potential Acquirers:
  
  • Gather details on potential acquirers of Primal Burgers Co and the current stage of negotiations to develop expectations regarding the likelihood of the disposal occurring after the year-end and the potential sales price.
• Preliminary Profit or Loss Determination:
  
  • Obtain any preliminary determinations by management of the anticipated profit or loss on disposal and any expected impairment to the value of assets held in the disposal group.
• Impact on Group Financial Position:
  
  • Obtain a copy of management’s assessment or calculations of the impact on the Group’s financial position from the sale of Primal Burgers Co and the overall effect of the Group’s restructuring.

Question 8

Principal Audit Procedures in Respect of the Classification of the Investment in Peppers Co

Answer 8

• Legal Documentation:
  
  • Obtain and review legal documentation supporting the investment.
  • Verify the details of the investment, including:
    
    • The date of the investment.
    • Amount paid.
    • Number of shares purchased.
    • Voting rights attached to the shares.
    • Nature of the profit-sharing arrangement between the Group and Smiths Co.
    • Nature of access to Peppers Co’s assets under the terms of the agreement.
    • Confirmation that there is no restriction on the Group’s shared control of Peppers Co.
• Board Minutes:
  
  • Review board minutes to confirm the approval of the investment.
  • Understand the business rationale for the investment.
• Meeting Minutes:
  
  • Review minutes of relevant meetings between the Group and Smiths Co.
  • Confirm that control is shared between the two investors.
  • Understand the nature of the relationship and the decision-making process.
• Organisational Structure:
  
  • Obtain documentation such as Peppers Co’s organisational structure.
  • Confirm that the Group has successfully appointed members to the board of the company.
  • Ensure that those members have equal power to the members appointed by Smiths Co.

Question 9

Principal Audit Procedures in Respect of the Government Grant Received

Answer 9

• Review Grant Documentation:
  
  • Obtain the documentation relating to the grant.
  • Review to understand:
    
    • Terms of the grant including the amount received.
    • Specific requirements for the use of the funds.
    • The deadline by which the funds must be utilized.
    • Clauses regarding potential repayment conditions.
• Verification of Amount Received:
  
  • Agree the amount received to bank statements.
  • Cross-check with Ryder Co’s bank ledger account/cash book.
• Asset Expenditure Forecast:
  
  • Obtain and review the Group’s asset (capital) expenditure forecast.
  • Confirm the planned expenditure on assets related to environmental matters.
• Use of Grant for Advertising:
  
  • Discuss the planned use of the grant for an advertising campaign with an appropriate person, such as the Group marketing director.
  • Review plans to ensure the campaign aligns with the government’s intention, particularly emphasizing recycling.
• Marketing Plans and Expenditure Timing:
  
  • Confirm through agreement to marketing plans whether any funds will be spent during the current financial year.
• Management Representation:
  
  • Obtain a written representation from management confirming that the grant will be used for the specific purposes required by the government.

Question 10

Summary: Audit Procedures for Research and Development Costs

Answer 10

• Understand Project Scope:
  
  • Discuss the new packaging development project with management to understand its purpose, stage of development, and potential need for additional funding.
• Review Progress Reports:
  
  • Obtain and review progress reports and correspondence from ProPack to assess the current status of the project.
• Examine Contractual Terms:
  
  • Obtain and review the contract with ProPack to verify that Margot Co will own and control the asset and that ProPack will not have any continuing interest after completion.
• Discuss with ProPack:
  
  • With client’s permission, discuss the project with ProPack to gain insights into technical feasibility and prototype testing results.
• Evaluate Company’s Use:
  
  • Discuss with production and marketing directors to understand how the company plans to utilize the new packaging.
• Financial Budget Review:
  
  • Obtain and review financial budgets related to the project to confirm approved expenditure and ensure costs are clearly distinguishable.
• Assess Funding Sufficiency:
  
  • Evaluate Margot Co’s cash position and available finance to ensure sufficient funds are available to complete the development.
• Prototype Verification:
  
  • Obtain samples of the prototype packaging from ProPack to confirm its existence.
• Verify Expenditure:
  
  • Agree the amount spent to date to invoices from ProPack and reconcile with the company’s cash records.

Question 11

Summary: Principal Audit Procedures on the Goodwill Arising on the Acquisition of Lynx Co

Answer 11

• Legal Documentation:
  
  • Obtain and review acquisition documents to confirm accuracy and completeness of consideration figures, including contingent consideration targets.
  • Confirm the Group’s 80% shareholding grants control with voting rights and no restrictions.
• Verification of Payments:
  
  • Agree the $80 million cash paid to the bank statement and bank ledger of the acquiring company.
• Board Approval:
  
  • Review board minutes for acquisition discussions and board approval documentation.
• Contingent Consideration:
  
  • Obtain and evaluate management’s present value calculation of $271 million, focusing on assumptions and the probability of payment using Lynx Co’s revenue and profit forecasts.
  • Discuss and justify the use of an 18% interest rate with management, ensuring its appropriateness compared to the Group’s weighted average cost of capital (10%).
• Non-Controlling Interest:
  
  • Confirm fair value calculation of the non-controlling interest based on externally available share prices at the acquisition date, and agree the share price to stock market records.
• Due Diligence Report:
  
  • Obtain and review Sidewinder & Co’s due diligence report to verify acquired assets, liabilities, and their fair values.
• Fair Value Evaluation:
  
  • Evaluate methods used for determining the fair value of acquired assets and liabilities, ensuring compliance with IFRS 3 and IFRS 13.
• Net Assets Calculation:
  
  • Review the calculation of net assets acquired to confirm the application of Group accounting policies.

Question 12

Procedures for Cash Flow

Answer 12

Summary: Lavenza Co Due Diligence Review

i) Matters to Consider Before Accepting the Review Engagement

1. Intended Use of the Information:
   
   • Consideration: Determine if the cash flow forecast and assurance report will be used solely for increasing Lavenza Co’s overdraft or for other purposes like securing new loan finance.
2. Distribution of Information:
   
   • Consideration: Assess who will receive and rely on the report. A limited distribution (e.g., solely for the bank) reduces risk, whereas general distribution increases it.
3. Period Covered and Key Assumptions:
   
   • Consideration: Evaluate the period of the forecast and the assumptions. Short-term forecasts are easier to verify. Ensure assumptions are realistic and the forecast is appropriate for its intended use.
4. Scope of Work:
   
   • Consideration: Clarify the terms of engagement, the level of assurance required, and whether the report covers just the cash flow forecast or other prospective financial information (PFI). Confirm the engagement is for negative assurance.
5. Resources and Skills:
   
   • Consideration: Ensure the firm has sufficient skilled staff and can meet deadlines, considering the urgency of Lavenza Co’s need for extended overdraft facilities.
6. Client Integrity:
   
   • Consideration: Assess the integrity of Lavenza Co’s management and reasons for choosing a different firm from its auditors. Address potential biases in the forecast preparation.
7. Ethical Matters:
   
   • Consideration: Ensure independence from Lavenza Co and assess any threats to objectivity. Understand why the auditors were not engaged and confirm permission to contact them for relevant information. Decline the engagement if assumptions are unrealistic or the PFI is inappropriate.

ii) Examination Procedures on Cash Flow Forecast

1. Mathematical Accuracy:
   
   • Procedure: Cast the cash flow forecast to confirm accuracy.
2. Consistency of Accounting Policies:
   
   • Procedure: Confirm consistency with the last audited financial statements.
3. Opening Cash Position:
   
   • Procedure: Agree the opening cash position to the bank ledger/cash book and bank statement.
4. Key Assumptions:
   
   • Procedure: Discuss assumptions with management, verify growth rates, receivables collection periods, and ensure assumptions are reasonable.
5. Analytical Review:
   
   • Procedure: Compare forecast trends with historical cash flow statements and sector data, investigating significant differences.
6. Receivables Ledger:
   
   • Procedure: Agree the predicted collection period to the receivables ledger.
7. Recalculation of Cash Flows:
   
   • Procedure: Recalculate based on historical credit sales analysis.
8. Sensitivity Analysis:
   
   • Procedure: Perform sensitivity analyses on key assumptions and assess impact on forecast cash position.
9. Salary Payments:
   
   • Procedure: Agree salary payments to payroll records and bank ledger/cash book.
10. Overhead Payments:
    
    • Procedure: Review overhead payment breakdown, compare with historical accounts and budgets, and ensure non-cash items are excluded.
11. Supporting Documentation for Overhead Costs:
    
    • Procedure: Review invoices, utility bills, and agree amounts to bank ledger/cash book.
12. Budgets and Costs for New Shops and Marketing Campaign:
    
    • Procedure: Ensure forecast includes all budgeted costs, review supporting documents, and check costs are not already incurred.
13. Board Minutes Review:
    
    • Procedure: Review board minutes for discussions on new shops and marketing.
14. Past Forecast Accuracy:
    
    • Procedure: Assess accuracy of previous management forecasts against actual data.
15. Potential Cost Omissions:
    
    • Procedure: Discuss with preparer any omitted costs like finance costs, tax payments, and capital expenditures.
16. Written Representations from Management:
    
    • Procedure: Obtain confirmation on the reasonableness of assumptions and provision of all relevant information.
17. Bank Confirmation of Finance Terms:
    
    • Procedure: Confirm interest rate and potential terms of additional finance with the bank.
18. Reasonableness of Finance Charge:
    
    • Procedure: Evaluate the reasonableness of the finance charge in the forecast.

These considerations and procedures ensure that the engagement is thoroughly evaluated and the cash flow forecast is appropriately reviewed.