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Question 2c

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.

(c) Daisy Co – restriction on international trade
As well as being involved in chemical engineering and supplying chemicals for use by the other Group companies, Daisy Co specialises in producing chemicals which are used in the agricultural sector, and around half of its sales are made internationally.

Daisy Co is audited by Foxglove & Co, and the Group audit working papers contain the necessary evaluations to conclude that an appropriate level of understanding has been obtained in respect of the audit firm.

Foxglove & Co has provided your firm with a summary of key audit findings which includes the following statement: ‘During the year new government environmental regulations have imposed restrictions on international trade in chemicals, with sales to many countries now prohibited. Our audit work concludes that this does not create a significant going concern risk to Daisy Co, and we have confirmed that all inventories are measured at the lower of cost and net realisable value.’

The Group audit manager has concluded that ‘I am happy that no further work is needed in this area – we can rely on the unmodified audit opinion to be issued by Foxglove & Co. This issue was not identified until it was raised by Foxglove & Co, it has not been mentioned to me by the Group board members, and it has no implications for the consolidated financial statements.’

The draft statement of financial position of Daisy Co recognises total assets of $8 million and the statement of profit or loss recognises profit before tax of $50,000.

The draft consolidated financial statements recognises goodwill in respect of Daisy Co of $3 million (2015 – $3 million). (9 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.