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Question 2b

You are responsible for performing Engagement Quality Control Reviews on selected audit clients of Crocus & Co, and you are currently performing a review on the audit of the Magnolia Group (the Group). The Group manufactures chemicals which are used in a range of industries, with one of the subsidiaries, Daisy Co, specialising in chemical engineering and developing products to be sold by the other Group companies. The Group’s products sell in over 50 countries.

A group structure is shown below, each of the subsidiaries is wholly owned by Magnolia Co, the parent company of the Group:

ACCA AAA (P7) Past papers Questions Q2

Crocus & Co is engaged to provide the audit of the Group financial statements and also the audit of Hyacinth Co and Magnolia Co. Geranium Co, a new subsidiary, is audited by a local firm of auditors based near the company’s head office. Daisy Co is audited by an unconnected audit firm which specialises in the audit of companies involved with chemical engineering.

The Group’s financial year ended on 31 December 2016 and the audit is in the completion stage, with the auditor’s report due to be issued in three weeks’ time. The Group’s draft consolidated financial statements recognise profit before tax of $7·5 million and total assets of $130 million.

The notes from your review of the audit working papers are shown below, summarising the issues relevant to each subsidiary.

(b) Geranium Co – new subsidiary
This subsidiary was acquired on 30 September 2016 and is audited by Fern & Co. The Group audit strategy contains the following statement in relation to the audit of Geranium Co: ‘Geranium Co will only be consolidated for three months and the post-acquisition profit for that period to be included in the Group financial statements is $150,000. On that basis, Geranium Co is immaterial to the Group financial statements and therefore our audit procedures are based on analytical procedures only.’

Other than the analytical procedures performed, there is no documentation in respect of Geranium Co or its audit firm Fern & Co included in the Group audit working papers.

The draft statement of financial position of Geranium Co recognises total assets of $30 million. (7 marks)

Required:
In respect of each of the matters described above:

(i) Comment on the quality of the planning and performance of the Group audit discussing the quality control and other professional issues raised; and

(ii) Recommend any further actions, including relevant audit procedures, to be taken by your firm, prior to finalising the Group auditor’s report.

Note: the split of the mark allocation is shown next to each of the issues above.