Question 3b i

(b) You are the manager responsible for the audit of Awdry Co, a listed entity whose principal activity is the operation of a regional railway network. The audit for the year ended 28 February 20X9 is the first year your firm has audited Awdry Co. The draft financial statements recognise total assets of £58 million and profit before tax of £7·4 million. The detailed audit fieldwork has started and the audit supervisor has brought the following matters to your attention in relation to the testing of key accounting estimates:

(i) Cash-settled share-based payment scheme
On 1 March 20X8, Awdry Co granted 550,000 share appreciation rights to 55 executives and senior employees of the company with each eligible member of staff receiving 10,000 of the rights. The fair value of the rights was estimated on 28 February 20X9 by an external expert using an options pricing model at £4·50 each. Awdry Co prides itself on good employee relations and the senior management team has estimated that all 55 staff will qualify for the rights when they vest three years after the granting of the rights on 1 March 20X8. The company has recognised a straight line expense in this year’s draft accounts of £825,000. (6 marks)

Required:
(i) Evaluate the client’s accounting treatments and the difficulties which you might encounter when auditing each of the accounting estimates described above; and

(ii) Design the audit procedures which should now be performed to gather sufficient and appropriate audit evidence.

Note: The split of the mark allocation is shown against each of the issues above