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Question 1a i (part 2)

You are a senior audit manager in Suki & Co, a firm of Chartered Certified Accountants. This morning you have been re-assigned to the audit of Bill Co, a long-standing audit client of your firm, as the manager previously assigned to the client has been taken ill.

Bill Co has a year ending 30 June 2011, and the audit planning has been largely completed by the previously assigned audit manager, Tara Lafayette, who had been recruited by your firm four months ago.

Bill Co is a property development company, specialising in the regeneration and refurbishment of old industrial buildings, which are sold for commercial or residential use. All property developments are performed under specifically negotiated fixed-price contracts. The company was founded 35 years ago by two brothers, Alex and Ben Bradley, who own the majority of the company’s share capital.

Alex and Ben are nearing retirement age, and are planning to sell the company within the next two years. The forecast revenue for the year ending 30 June 2011 is $10•8 million, and the forecast profit before tax is $2•5 million. The forecast statement of financial position recognises total assets of $95 million.

You have just received the following email from the audit engagement partner:

To: Audit manager
From: Audit partner
Regarding: Bill Co – audit planning

Hello

Thanks for taking on the role of audit manager for the forthcoming audit of Bill Co.

(i) I have just received some information on two significant issues that have arisen over the last week, from Sam Compton, the company’s finance director. This information is provided in attachment 1.

I am asking you to prepare briefing notes, for my use, in which you explain the matters that should be considered in relation to the treatment of these two issues in the financial statements, and also explain the financial statement risks relating to them. I also want you to recommend the planned audit procedures that should be performed in order to address those risks. (16 marks)

(ii) In addition, please critically evaluate the planning that has been completed by the previously assigned audit manager. Relevant details are provided in attachment 2, which contains notes made by her, and placed on the current year audit file. Make sure you include discussion of any ethical matters arising from the notes, and recommend any actions you think necessary. (11 marks)

Thanks.

Attachment 1: Information from Sam Compton, finance director of Bill Co

In the last week, two significant issues have arisen at Bill Co. The first issue concerns a major contract involving the development of an old riverside warehouse into a conference centre in Bridgetown. An architect working on the development has discovered that the property will need significant additional structural improvements, the extra cost of which is estimated to be $350,000.

The contract was originally forecast to make a profit of $200,000. The development is currently about one third complete, and will take a further 15 months to finish, including this additional construction work.

The customer has been told that the completion of the contract will be delayed by around two months. However, the contract price is fixed, and so the additional costs must be
covered by Bill Co.

The second issue concerns one of Bill Co’s specialist divisions, which trades under the name ‘Treasured Homes’ and which deals exclusively in the redevelopment of non-industrial historic buildings such as castles and forts.

These buildings are usually acquired as uninhabitable ruins, and are then developed into luxury residences for wealthy individuals. The management of Bill Co decided last week to sell this division, as although it is profitable, it generates a lower margin than other business divisions.

‘Treasured Homes’ operates separately from the rest of the business, and generates approximately 15% of the total revenue of the company. In a board minute dated  1 June 2011, it was noted that ‘interest has already been expressed in this division from a potential buyer, and it is hoped that sale negotiations will soon commence, leading to sale in August 2011.

There is a specific office building and some other tangible assets that will be sold as part of the deal. These assets are recorded at  $7•6 million in the financial statements. No redundancies will be necessary as employees’ contracts will transfer to the new owners.’

Attachment 2:

Planning Summary: Bill Co, year ending 30 June 2011, prepared by Tara Lafayette, manager previously assigned to the audit

The planning for the forthcoming audit is almost complete. Time has been saved by not carrying out procedures considered unnecessary for this long-standing audit client. Forecast accounts have been obtained and placed on file, and discussions held with management concerning business developments during the year.

Analytical procedures have been performed on the statement of comprehensive income, but not on the statement of financial position, as there did not appear to be any significant movements in assets or liabilities since last year.

Management confirmed that there have been no changes to accounting systems and controls in the financial year. For this reason we do not need to carry out walk-through tests or review our documentation of the systems and controls.

Management also confirmed that there have been no changes to business operations, other than the potential sale of ‘Treasured Homes’. All divisions are operating normally, generating sufficient profit and cash. For this reason, the business risk of Bill Co is assessed as low, and no further comments or discussions about business operations have been placed on file.

The matter that will demand the most audit work is the valuation of properties currently under development, especially the determination of the percentage completion of each development at the reporting date. Historically, we have engaged a property valuation expert to provide a report on this area.

However, Bill Co has recently employed a newly qualified architect, who will be happy to provide us with evidence concerning the stage of completion of each property development contract at the year end. Using this person to produce a report on all properties being developed will save time and costs.

Bill Co has recently completed the development of a luxury new office building in Newtown. Several of the office units are empty, and the management of Bill Co has offered the office space to our firm for a nominal rent of $100 per year.

Required:

You are a senior audit manager in Suki & Co, a firm of Chartered Certified Accountants. This morning you have been re-assigned to the audit of Bill Co, a long-standing audit client of your firm, as the manager previously assigned to the client has been taken ill.

Bill Co has a year ending 30 June 2011, and the audit planning has been largely completed by the previously assigned audit manager, Tara Lafayette, who had been recruited by your firm four months ago.

Bill Co is a property development company, specialising in the regeneration and refurbishment of old industrial buildings, which are sold for commercial or residential use. All property developments are performed under specifically negotiated fixed-price contracts. The company was founded 35 years ago by two brothers, Alex and Ben Bradley, who own the majority of the company’s share capital.

Alex and Ben are nearing retirement age, and are planning to sell the company within the next two years. The forecast revenue for the year ending 30 June 2011 is $10•8 million, and the forecast profit before tax is $2•5 million. The forecast statement of financial position recognises total assets of $95 million.

You have just received the following email from the audit engagement partner:

To: Audit manager
From: Audit partner
Regarding: Bill Co – audit planning

Hello

Thanks for taking on the role of audit manager for the forthcoming audit of Bill Co.

(i) I have just received some information on two significant issues that have arisen over the last week, from Sam Compton, the company’s finance director. This information is provided in attachment 1.

I am asking you to prepare briefing notes, for my use, in which you explain the matters that should be considered in relation to the treatment of these two issues in the financial statements, and also explain the financial statement risks relating to them. I also want you to recommend the planned audit procedures that should be performed in order to address those risks. (16 marks)

(ii) In addition, please critically evaluate the planning that has been completed by the previously assigned audit manager. Relevant details are provided in attachment 2, which contains notes made by her, and placed on the current year audit file. Make sure you include discussion of any ethical matters arising from the notes, and recommend any actions you think necessary. (11 marks)

Thanks.

Attachment 1: Information from Sam Compton, finance director of Bill Co

In the last week, two significant issues have arisen at Bill Co. The first issue concerns a major contract involving the development of an old riverside warehouse into a conference centre in Bridgetown. An architect working on the development has discovered that the property will need significant additional structural improvements, the extra cost of which is estimated to be $350,000.

The contract was originally forecast to make a profit of $200,000. The development is currently about one third complete, and will take a further 15 months to finish, including this additional construction work.

The customer has been told that the completion of the contract will be delayed by around two months. However, the contract price is fixed, and so the additional costs must be
covered by Bill Co.

The second issue concerns one of Bill Co’s specialist divisions, which trades under the name ‘Treasured Homes’ and which deals exclusively in the redevelopment of non-industrial historic buildings such as castles and forts.

These buildings are usually acquired as uninhabitable ruins, and are then developed into luxury residences for wealthy individuals. The management of Bill Co decided last week to sell this division, as although it is profitable, it generates a lower margin than other business divisions.

‘Treasured Homes’ operates separately from the rest of the business, and generates approximately 15% of the total revenue of the company. In a board minute dated  1 June 2011, it was noted that ‘interest has already been expressed in this division from a potential buyer, and it is hoped that sale negotiations will soon commence, leading to sale in August 2011.

There is a specific office building and some other tangible assets that will be sold as part of the deal. These assets are recorded at  $7•6 million in the financial statements. No redundancies will be necessary as employees’ contracts will transfer to the new owners.’

Attachment 2:

Planning Summary: Bill Co, year ending 30 June 2011, prepared by Tara Lafayette, manager previously assigned to the audit

The planning for the forthcoming audit is almost complete. Time has been saved by not carrying out procedures considered unnecessary for this long-standing audit client. Forecast accounts have been obtained and placed on file, and discussions held with management concerning business developments during the year.

Analytical procedures have been performed on the statement of comprehensive income, but not on the statement of financial position, as there did not appear to be any significant movements in assets or liabilities since last year.

Management confirmed that there have been no changes to accounting systems and controls in the financial year. For this reason we do not need to carry out walk-through tests or review our documentation of the systems and controls.

Management also confirmed that there have been no changes to business operations, other than the potential sale of ‘Treasured Homes’. All divisions are operating normally, generating sufficient profit and cash. For this reason, the business risk of Bill Co is assessed as low, and no further comments or discussions about business operations have been placed on file.

The matter that will demand the most audit work is the valuation of properties currently under development, especially the determination of the percentage completion of each development at the reporting date. Historically, we have engaged a property valuation expert to provide a report on this area.

However, Bill Co has recently employed a newly qualified architect, who will be happy to provide us with evidence concerning the stage of completion of each property development contract at the year end. Using this person to produce a report on all properties being developed will save time and costs.

Bill Co has recently completed the development of a luxury new office building in Newtown. Several of the office units are empty, and the management of Bill Co has offered the office space to our firm for a nominal rent of $100 per year.

Required:

Respond to the partner’s email.

Note: The split of the mark allocation is shown within the partner’s email.