The Bassett Group (the Group) is a publisher of newspapers and magazines, academic journals, and books. The Group, a listed entity, has a financial year ending 30 April 2018, and your firm, Whippet & Co, was appointed as Group auditor in September 2017. Whippet & Co will audit all Group companies with the exception of Borzoi Co, a foreign subsidiary, which is audited by a local firm of auditors, Saluki Associates. The Group aims to comply fully with the UK Corporate Governance Code.

You are the manager responsible for the Group audit, and the audit engagement partner has just sent the following email to you:

To: Audit manager
From: Kerry Dunker, audit engagement partner
Subject: Bassett Group audit planning

Hello

I have provided some information to help you with planning the Bassett Group audit. I met with the Group finance director yesterday to discuss some aspects of the Group’s business and related accounting issues. One of the audit team members has already performed limited analytical procedures based on the Group’s projected financial statements and comparatives, and I have provided you with the results of this work. I have also provided you with an extract from the communication which we received from Grey & Co, the Group’s previous auditor.

Using the information provided, I require you to prepare briefing notes to be used as part of the audit team planning meeting. Your briefing notes should evaluate the audit risks to be considered in planning the audit of the Group financial statements, and identify and explain the matters which the audit team should approach with a high degree of professional scepticism.

In respect of the audit of Borzoi Co, your briefing notes should also explain the term ‘significant component’ and assess whether Borzoi Co is a significant component of the Group. This will help the audit assistants to understand our audit strategy in relation to this subsidiary.

Finally, your briefing notes should discuss the nature and extent of involvement which our firm should have with the audit risk assessment to be performed by Saluki Associates.

Thank you

Background information and results of analytical procedures
The Group operates globally, with sales being made in over 100 countries. The Group has 20 subsidiaries which have been acquired over the last 30 years. All Group companies are located in the UK, with the exception of Borzoi Co, a foreign subsidiary whose operations focus on the translation of published content into a variety of different languages.

The Group’s publishing activities can be categorised into three operating segments, each of which are cash generating units for the purpose of impairment reviews: newspapers and magazines, academic journals, and books. The revenue and total assets for 2018 (projected) and 2017 (actual) for the Group in total and for each segment is as follows:

During the financial year the Group has invested in software which enhances and extends the Group’s range of digital publications, across all operating segments. The total investment, which is recognised as an intangible asset, was £15 million, of which £5 million relates to purchased software, and £10 million relates to internally developed software.

According to management, the implementation of this software has already led to significant increases in sales of digital publications, and while this accounts for only approximately 20% of Group revenue currently, management is confident that sales of digital publications will quickly grow, and within three years is expected to overtake sales of hard copy publications across all operating segments. Using this justification, management does not consider it necessary to perform impairment reviews on any of the three operating segments this year.

Information on some specific aspects of the Group’s operations and the associated Group accounting policies, and information in relation to Borzoi Co, is given below:

Newspapers and magazines – publication rights
A substantial portion of the Group’s newspaper and magazine publications are protected by publication rights which protect the Group’s exclusive right to publish the relevant newspaper or magazine for specified periods. The Group owns more than 200 publication rights, which range in period of exclusivity from five years to 30 years. The publication rights are recognised as an intangible asset with a carrying amount of £7·9 million. The Group’s accounting policy is to amortise publication rights over an average period of 25 years.

Books – royalty advances
The Group commissions authors to write books for which the Group owns the copyright. When a book is commissioned, the author is paid a royalty advance, the amount of which depends on the expected sales of the book. The Group’s accounting policy is to defer the cost of the royalty advance within current assets until the book is published, at which point the cost begins to be recognised as an expense, spread over a ten-year period. The Group finance director does not have a justification for this ten-year period other than it being ‘industry practice’. The total royalty advance projected to be recognised within current assets at 30 April 2018 is £3·4 million.

Borzoi Co
Borzoi Co is located in Farland, a country which has recently experienced political unrest, leading to significant volatility in the local currency, the Oska. At today’s date, the management accounts of Borzoi Co recognise total assets of 68 million Oska, and the exchange rate is 4 Oska:1£. In the last six months, the exchange rate has fluctuated between 10 Oska:1£ to 3 Oska:1£.

Farland requires the use of IFRS® Standards and therefore Borzoi Co prepares its financial statements using IFRS Standards as its applicable financial reporting framework.

To help with the company’s development of language translation operations, on 1 May 2017, Bassett plc, the parent company of the Group, transferred a piece of translation software to Borzoi Co. The software had been purchased by the parent company for £1·5 million several years ago and prior to transfer to Borzoi Co, it was held at a carrying amount of £1 million, this being its cost less amortisation to date. Immediately prior to being transferred to Borzoi Co, 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, and this amount is still outstanding for payment by Borzoi Co.

Communication from Grey & Co
The previous Group auditor, Grey & Co, states the following in their communication to Whippet & Co:

‘We have acted as Group auditor for the last four years and our audit opinion has been unmodified each year. However, we would like to bring to your attention a matter relating to the Group’s corporate governance arrangements. We found that on several occasions in the last year the Group CFO initially blocked our firm’s access to the Group audit committee, making it difficult for us to discuss matters relating to the audit with the committee.’

Required:
Respond to the instructions in the audit engagement partner’s email. (31 marks)

Professional marks to be awarded for presentation, logical flow, and clarity of explanations provided. (4 marks)