(b) (i) Applying professional skepticism
Generally up to 1½ marks for each point discussed, and 1 mark for calculation of materiality.
– Risk that impairment loss understated due to Group’s fall in profit
– The determination of the impairment loss is judgemental and subject to management bias
– Auditor should question the reasons for finance director’s insistence that no other audit work is
needed
– Evidence provided by the finance director is not reliable (client-generated)
– Assumptions are unlikely to have stayed the same since last year
– Audit team should remain alert for other instances where professional skepticism is needed
– Possible threat of intimidation by the finance director
Maximum marks 6
(ii) Procedures on impairment
Generally 1 mark for each procedure explained:
– Review all assumptions, e.g. used in preparing projected cash flows, to ensure in line with
auditor’s current business understanding
– Confirm that the impairment review includes the goodwill relating to all business combinations
– Consider impact of auditor’s assessment of the Group’s going concern status
– Consider operating effectiveness of any controls in place
– Confirm whether management has performed the impairment test or used an expert
– Reperform calculations based on auditor-generated inputs
– Develop an independent estimate of the impairment loss and compare to that prepared by
management
– Confirm that the impairment calculations exclude cash flows relating to tax and finance items
– Perform sensitivity analysis
– Check the arithmetic accuracy of the calculations used in the impairment calculations
Maximum marks 5