(i) Audit risk evaluation

In relation to the matters listed below:
Up to 2 marks for each audit risk evaluated
Up to 1 mark for each relevant calculation/trend and ½ mark for relevant materiality calculations

– New audit client
– Brand name – indefinite useful life and lack of amortisation
– Equity accounting – measurement of associate and possible impairment
– Disclosure of income from associate
– Classification as an associate
– Ross Co’s revenue recognition
– Ross Co’s inventory – control issues relating to multi-location of inventory
– Lynott Co’s new inventory control system
– Beard Co’s investment property – measurement of the gain
– Beard Co’s investment property – incorrect classification as other comprehensive income
– Possible error in comparative information and need for skepticism
– Bonus scheme – inherent risk of overstating revenue
– Trend calculations, comment on increase in both revenue and operating expenses
– Elimination of management charges
– Inventories – movement in the year and potential overstatement
– Intercompany trading (inventories)
– Goodwill – none recognised

Maximum marks 18

(ii) Additional information requests

1 mark for each additional information identified and explained to a maximum of 5 marks:

– Details of marketing and advertising to support the indefinite life of the brand name
– Reasons for the investment in Stewart Co 
– Details relevant to how Adams Co exercises influence over Stewart Co, e.g. right to appoint board members
– Previous auditor’s working papers especially in relation to Beard Co’s investment properties
– Previous years’ auditor’s reports for the Group
– Terms of the management bonus scheme
– Original purchase documentation for each subsidiary

Maximum marks 5