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Question 3a

Clooney Co is one of the world’s leading leisure travel providers, operating under several brand names to sell package holidays. The company catered for more than 10 million customers in the last 12 months.

Draft figures for the year ended 30 September 2010 show revenue of $3,200 million, profit before tax of $150 million, and total assets of $4,100 million. Clooney Co’s executives earn a bonus based on the profit before tax of the company.

You are the manager responsible for the audit of Clooney Co. The final audit is nearing completion, and the following points have been noted by the audit senior for your attention:

In July 2010, thousands of holiday-makers were left stranded abroad after the company operating the main airline chartered by Clooney Co went into liquidation. The holiday-makers were forced to wait an average of two weeks before they could be returned home using an alternative airline.

They have formed a group which is claiming compensation for the time they were forced to spend abroad, with the total claim amounting to $20 million. The items which the group is claiming compensation for include accommodation and subsistence costs, lost income and distress caused by the situation.

The claim has not been recognised or disclosed in the draft financial statements, as management argues that the full amount payable will be covered by Clooney Co’s insurance.

One part of the company’s activities, operating under the Shelly’s Cruises brand, provides cruise holidays. Due to economic recession, the revenue of the Shelly’s Cruises business segment has fallen by 25% this year, and profit before tax has fallen by 35%.

Shelly’s Cruises contributed $640 million to total revenue in the year to 30 September 2010, and has identifiable assets of $235 million, including several large cruise liners. The Shelly’s Cruises brand is not recognised as an intangible asset, as it has been internally generated.

On 15 November 2010, Clooney Co acquired Craig Co, a company offering adventure holidays for independent travellers. Craig Co represents a significant acquisition, but this has not been referred to in the financial statements.

Required:

Comment on the matters that you should consider, and state the audit evidence you should expect to find in your review of the audit working papers for the year ended September 2010 in respect of the compensation claim. (8 marks)