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Question 2a i

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:

(i) In December 2014, a leisure centre complex was sold for proceeds equivalent to its fair value of $35 million, the related assets have been derecognised from the Group statement of financial position, and a profit on disposal of $8 million is included in the Group statement of profit or loss for the year. The remaining useful life of the leisure centre complex was 21 years at the date of disposal.

The Group is leasing back the leisure centre complex to use in its ongoing operations, paying a rental based on the market rate of interest plus 2%. At the end of the 20-year lease arrangement, the Group has the option to repurchase the leisure centre complex for its market value at that time.

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)