ACCA AAA ^UK Syllabus D. Audit of Historical Financial Information - Non-current Assets - Impairments - Past Papers ^{5 / 41}

You are the manager responsible for the audit of Osier Co, a jewellery manufacturer and retailer. The final audit for the year ended 31 March 2017 is nearing completion and you are reviewing the audit working papers. The draft financial statements recognise total assets of $1,919 million (2016 – $1,889 million), revenue of $1,052 million (2016 – $997 million) and profit before tax of $107 million (2016 – $110 million). Three issues from the audit working papers are summarised below:

(b) Impairment
At the year end management performed an impairment review on its retail outlets, which are a cash generating unit for the purpose of conducting an impairment review. While internet sales grew rapidly during the year, sales from retail outlets declined, prompting the review. At 31 March 2017 the carrying amount of the assets directly attributable to the retail outlets totalled $137 million, this includes both tangible assets and goodwill.

During the year management received a number of offers from parties interested in purchasing the retail outlets for an average of $125 million. They also estimated the disposal costs to be $1·5 million, based upon their experience of corporate acquisitions and disposals. Management estimated the value in use to be $128 million. This was based upon the historic cash flows attributable to retail outlets inflated at a general rate of 1% per annum. This, they argued, reflects the poor performance of the retail outlets.

Consequently the retail outlets were impaired by $9 million to restate them to their estimated recoverable amount of $128 million. The impairment was allocated against the tangible assets of the outlets on a pro rata basis, based upon the original carrying amount of each asset in the unit. (7 marks)

Required:
Comment on the matters to be considered, and explain the audit evidence you should expect to find during your file review in respect of each of the issues described above.

Note: The split of the mark allocation is shown against each of the issues above. You are not required to discuss any potential implications for the auditor’s report.

You are an audit manager in Rose & Co, responsible for the audit of Cooper Co. You are reviewing the audit working papers relating to the financial year ended 31 January 2014. Cooper Co is a manufacturer of chemicals used in the agricultural industry. The draft financial statements recognise profit for the year to 31 January 2014 of $15 million (2013 – $20 million) and total assets of $240 million (2013 – $230 million).

The audit senior, Max Turner, has brought several matters to your attention:

Cooper Co’s factories are recognised within property, plant and equipment at a carrying value of $60 million. Half of the factories produce a chemical which is used in farm animal feed. Recently the government has introduced a regulation stipulating that the chemical is phased out over the next three years. Sales of the chemical are still buoyant, however, and are projected to account for 45% of Cooper Co’s revenue for the year ending 31 January 2015. Cooper Co has started to research a replacement chemical which is allowed under the new regulation, and has spent $1 million on a feasibility study into the development of this chemical.

Required:
Comment on the matters to be considered and explain the audit evidence you should expect to find during your review of the audit working papers in respect of each of the issues described above. (8 marks)

Dasset Co operates in the coal mining industry. The company owns ten mines across the country from which coal is extracted before being sold onto customers who are energy providers. Coal mining companies operate under licence from the National Coal Mining Authority, an organisation which monitors the environmental impact of coal mining operations, and requires coal mines to be operated in compliance with strict health and safety regulations.

You are an audit manager in Burton & Co, responsible for the audit of Dasset Co and you are reviewing the audit working papers for the year ended 31 August 2013. The draft financial statements recognise profit before tax of  $18 million and total assets of $175 million. The audit senior has left a note for your attention:

Accident at the Ledge Hill Mine

On 15 August 2013, there was an accident at the Ledge Hill Mine, where several of the tunnels in the mine collapsed, causing other tunnels to become flooded. This has resulted in one-third of the mine becoming inaccessible and for safety reasons, the tunnels will be permanently closed. However, Dasset Co’s management thinks that the rest of the mine can remain operational, as long as improvements are made to ensure that the mine meets health and safety regulations.

Luckily no one was injured in the accident. However, the collapse caused subsidence which has damaged several residential properties in a village located above the mine. A surveyor has been commissioned to report on whether the properties need to be demolished or whether they can be safely repaired. A group of 20 residents has been relocated to rental properties in the local area and Dasset Co is meeting all expenses in relation to this.

The Ledge Hill Mine was acquired several years ago and is recognised in the draft statement of financial position at $10 million. As no employees were injured in the accident, Dasset Co’s management has decided not to report the accident to the National Coal Mining Authority.

Required:

In respect of the accident at the Ledge Hill Mine:

(a) (i) Comment on the matters which you should consider; and

(ii) Describe the audit evidence which you should expect to find, in undertaking your review of the audit working papers and financial statements of Dasset Co.

Note: The total marks will be split equally between each part. (14 marks)

Clooney Co is one of the world’s leading leisure travel providers, operating under several brand names to sell package holidays. The company catered for more than 10 million customers in the last 12 months.

Draft figures for the year ended 30 September 2010 show revenue of $3,200 million, profit before tax of $150 million, and total assets of $4,100 million. Clooney Co’s executives earn a bonus based on the profit before tax of the company.

You are the manager responsible for the audit of Clooney Co. The final audit is nearing completion, and the following points have been noted by the audit senior for your attention:

In July 2010, thousands of holiday-makers were left stranded abroad after the company operating the main airline chartered by Clooney Co went into liquidation. The holiday-makers were forced to wait an average of two weeks before they could be returned home using an alternative airline.

They have formed a group which is claiming compensation for the time they were forced to spend abroad, with the total claim amounting to $20 million. The items which the group is claiming compensation for include accommodation and subsistence costs, lost income and distress caused by the situation.

The claim has not been recognised or disclosed in the draft financial statements, as management argues that the full amount payable will be covered by Clooney Co’s insurance.

One part of the company’s activities, operating under the Shelly’s Cruises brand, provides cruise holidays. Due to economic recession, the revenue of the Shelly’s Cruises business segment has fallen by 25% this year, and profit before tax has fallen by 35%.

Shelly’s Cruises contributed $640 million to total revenue in the year to 30 September 2010, and has identifiable assets of $235 million, including several large cruise liners. The Shelly’s Cruises brand is not recognised as an intangible asset, as it has been internally generated.

On 15 November 2010, Clooney Co acquired Craig Co, a company offering adventure holidays for independent travellers. Craig Co represents a significant acquisition, but this has not been referred to in the financial statements.

Required:

Comment on the matters that you should consider, and state the audit evidence you should expect to find in your review of the audit working papers for the year ended September 2010 in respect of  Shelly’s Cruises, (7 marks)