(ii) Regulatory penalties
– Material expense to profit and assets (with calculation)
– Expense and provision should have been recognised at present value per IAS 37

Difficulties when performing audit:
– Difficult to estimate final amount payable as not yet finalised; amount currently recognised is based on management’s judgement
– Difficulties are compounded by need to measure at PV and therefore also predict payment dates and identify appropriate pre-tax rate; both require significant level of management judgement
– Also possibility of other provisions needed, e.g. for costs of correcting current issues and/or for other unidentified safety problems
– Addressing completeness assertion here is challenging and also difficult to predict as costs to be incurred in future and have not yet been determined

Procedures:
– Obtain copy of regulator’s notice detailing date of issue and any quantification of amount of penalty payable by Awdry Co
– Obtain copy of any draft instalment agreement detailing the timing and amount of each repayment
– Review correspondence with regulator for evidence of amount payable and details of repayment schedule
– Confirm payment to bank statement
– Review correspondence with Awdry Co’s lawyers to ascertain current status of negotiations and views of legal advisors
– Review of cash flow statements and forecasts to assess company’s ability to pay instalments
– Discuss with management the current status of negotiations; accounting treatment and non-compliance with IAS 37 (failure to measure at PV)
– Review board minutes for evidence of discussion of penalty, remedial action to address safety issues and any other possible safety issues
– Request client calculation of present value (including identification of appropriate discount rate)

Maximum marks 6