(a) (i) Audit implications of Canary Co acquisition

Up to 1½ marks for each implication explained (3 marks maximum for identification):

– Develop understanding of Canary Co business environment
– Document Canary Co accounting systems and controls
– Perform detailed analytical procedures on Canary Co
– Communicate with previous auditor 
– Review prior year audit opinion for relevant matters
– Plan additional work on opening balances
– Determine that Canary Co is a significant component of the Group
– Plan for audit of intra-company transactions 
– Issues on auditing the one month difference in financial year ends
– Impact of acquisition on analytical procedures at Group level
– Additional experienced staff may be needed, e.g. to audit complex goodwill

Maximum marks 8

(ii) Risk of material misstatement

Up to 1½ marks for each risk (unless a different maximum is indicated below):

– General risks – diversification, change to group structure
– Goodwill – contingent consideration – estimation uncertainty (probability of payment)
– Goodwill – contingent consideration – measurement uncertainty (discounting)
– Goodwill – fair value of net assets acquired
– Goodwill – impairment
– Identify that the issues in relation to cost of investment apply also in Crow Co’s individual financial statements (1 mark)
– Loan stock – premium on redemption
– Loan stock – accrued interest
– Loan stock – inadequate disclosure
– Identify that the issues in relation to loan stock apply to cost of investment in Crow Co’s individual financial statements (1 mark)
– Online sales and risk relating to revenue recognition (additional 1 mark if calculation provided of online sales materiality to the Group) 
– No group accounting policy for online sales
– Canary Co management have no experience regarding consolidation
– Financial performance of Crow Co and Starling Co deteriorating (up to 3 marks with calculations)
– Possible misstatement of Canary Co revenue and profit
– Grant received – capital expenditure
– Grant received – amount not yet spent
– New IT system
– Starling Co – no finance director in place at year end

Maximum marks 18

(iii) Goodwill

Generally 1 mark per specific procedure (examples shown below):

– Confirm acquisition date to legal documentation
– Confirm consideration details to legal documentation
– Agree 100% ownership, e.g. using Companies House search/register of significant shareholdings
– Vouch consideration paid to bank statements/cash book
– Review board minutes for discussion/approval of acquisition
– Obtain due diligence report and agree net assets valuation
– Discuss probability of paying contingent consideration 
– Obtain management representation regarding contingency
– Recalculate goodwill including contingency on a discounted basis

Maximum marks 5

(b) Ethical matters

Generally 1 mark per comment:

– Reasonable for partner to attend board meetings
– But must avoid perception of management involvement
– Partner must not be appointed to the board
– Seconded manager would cause management and self-review threat
– Safeguards could not reduce these threats to an acceptable level
– Some recruitment services may be provided – interviewing/CV selection
– But avoid making management decision and put safeguards in place

Maximum marks 6