The second issue related to the acquisition of a 52% shareholding in Baldrick Co, which had been accounted for as an associate in the consolidated financial statements. Again, candidates were able to identify that the accounting treatment seemed incorrect, and could explain their reasoning.

Fewer candidates appreciated that the loss-making status of Baldrick Co was the possible explanation for the Group’s reluctance to consolidate it as a subsidiary and therefore that the Group’s profits were overstated.

Most candidates could provide some evidence points, with the most commonly cited being the board approval of the acquisition and agreeing the cash paid to bank statements.

Fewer candidates could suggest how the audit firm should obtain evidence on the exercise of control by the parent company or on the mechanics of the consolidation that should have taken place.