1 (a) Evaluation of risk of material misstatement
Generally 1 mark for each ratio (including comparative) calculated, and ½ mark for relevant trends
calculated, up to a maximum of 5 marks. In addition, up to 2 marks for discussion of risks in relation to the
ratios calculated. Risks in relation to ratio analysis could include:
– Understatement of operating expenses excluding the impairment loss
– Understatement of finance costs
– Tax expense not in line with movement in deferred tax liability
– Overstatement of current assets/understatement of current liabilities
– Significant new loan liability to be taken on around the reporting date – recognition, measurement and
disclosure risks
– Unexplained/ inconsistent movement in intangible assets/loan raised to finance development
– Unreconciled movement in retained earnings
Other risks of material misstatement – up to 2 marks for each risk identified and explained:
– Allow 1 mark for each correct calculation and comment on materiality up to a maximum of 2 marks
– New loan may breach existing loan covenants – risk that IFRS 7 disclosures not made
– Change to PPE useful lives may not be appropriate – overstated assets and profit
– Management bias risk due to new loan being taken out
– Impairment to Chico brand may be understated if full carrying value of brand not written off
– Impairment may need separate disclosure due to materiality – risk of inadequate disclosure
– Chico inventories will need to be written off – risk of overstated assets
– Risk that goodwill has not been tested for impairment
– A provision may be needed for customer claims – risk of understated liabilities
– Deferred tax liability appears incorrect and likely to be overstated
Maximum marks 16
(b) Additional information to assist with preliminary analytical review
Generally up to 1 mark for each piece of information recommended:
– Disaggregation of revenue into major brands to identify significant trends by brand
– Monthly breakdown of revenue to assess date at which Chico products were withdrawn
– Disaggregation of operating expenses to determine main categories and inclusion of impairment
expense
– Disaggregation of current assets to assess movements in inventories, receivables and cash
– Disaggregation of current liabilities to assess significant decrease
– Details of the $20 million loan taken out to evaluate appropriateness of finance charge
– Details of the new $130 million loan to build into projected gearing and other ratios
– Reconciliation of brought forward and carried forward intangible assets
– Statement of changes in equity
Maximum marks 5
(c) Audit procedures
Up to 1 mark for each well described procedure:
(i) Impairment of brand name
– Obtain management’s calculations relevant to the impairment and review to understand
methodology
– Evaluate the assumptions used by management in their impairment review and consider their
reasonableness
– Confirm the carrying value of the Chico brand pre-impairment to prior year financial statements or
management accounts
– From management accounts, obtain a breakdown of total revenue by brand, to evaluate the
significance of the Chico brand
– If the brand is not fully written off, discuss with management the reasons for this treatment given
that the brand is now discontinued
– Obtain a breakdown of operating expenses to confirm that the impairment is included
– Review the presentation of the income statement, considering whether separate disclosure of the
impairment is necessary given its materiality
Maximum marks 5
Marks
(ii) Acquisition of Azalea Co
– Read board minutes to understand the rationale for the acquisition, and to see that the acquisition
is approved
– Discuss with Group management the way that control will be exercised over Azalea Co, enquiring
as to whether the Group can determine the board members of Azalea Co
– Review the minutes of relevant meetings held between management of the Group and Azalea Co
to confirm matters such as:
– That the deal is likely to go ahead
– The likely timescale
– The amount and nature of consideration to be paid
– The shareholding to be acquired and whether equity or non-equity shares
– The planned operational integration (if any) of Azalea Co into the Group
– Obtain any due diligence reports which have been obtained by the Group and review for matters
which may need to be disclosed in accordance with IAS 10 or IFRS 3
– After the reporting date, agree the cash consideration paid to bank records
Maximum marks 5
Professional marks
Generally 1 mark for heading, 1 mark for introduction, 1 mark for use of headings within the briefing notes,
1 mark for clarity of comments made. 4
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Maximum 35
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