(b) Audit procedures on impairment and research and development costs
 Up to 1 mark for each well described procedure:

(i) Impairment
– Obtain management’s detailed calculations and discuss with management to gain understanding of the methodology and assumptions used

– From the non-current asset register, confirm the carrying value of the cash generating unit prior to any impairment being recognised, and confirm the carrying value of each component of the cash generating unit

– Obtain a copy of the company’s insurance policy and review the terms and conditions to confirm whether the buildings and machinery is covered by insurance

– Develop an auditor’s estimate of the fair value less cost to sell and value in use and compare to management’s estimate, this will include performing the following procedures:

– Obtain and review the reports from the engineer to confirm the nature and extent of damage caused to the factory

– Obtain and review any external valuation report which the company has used as a basis of the fair value less cost to sell, and evaluate the reasonableness of any assumptions used in the valuation

– For the value in use, discuss with management to obtain their view as to whether the factory has any value in use at all in its current state

– Visit the factory to view the extent of damage caused by the storm and evaluate whether it can be used without any further capital expenditure

– Given the materiality of the figures, an auditor’s expert could be used to provide evidence

(ii) Research and development costs
– Discuss the project to develop new packaging with management, to develop an understanding of matters such as how the company intends to use the new packaging, the stage of development reached by the year end and whether the project may need additional funding

– Obtain and review reports and correspondence from ProPack which will indicate the progress made so far

– Obtain and review the contract with ProPack to determine contractual terms and if the asset will be owned and controlled by Margot Co and that ProPack does not have any continuing interest in the development once it is complete

– Discuss the project with ProPack, to obtain further understanding on a range of matters including technical feasibility and the results of testing of the prototype

– Discuss with the company’s production and marketing directors to obtain understanding of how the company will use the new packaging

– Obtain any financial budgets prepared in relation to the project, to confirm the amount of expenditure which has been approved, and that the costs are clearly distinguishable

– By reference to the company’s cash position and available finance, evaluate whether Margot Co has sufficient funds to complete the development

– Obtain samples of the prototype packaging from Propack, to confirm existence

– Agree the amount spent to date to invoices submitted by ProPack, and to the company’s cash records

Maximum marks