Question 2a ii

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)