ACCA AAA ^INT Syllabus D. Audit of Historical Financial Information - Non Current Assets - Cost - Past Papers ^{2 / 41}

You are the manager responsible for the audit of Setter Stores Co, a company which operates supermarkets across the country. The final audit for the year ended 31 January 2013 is nearing completion and you are reviewing the audit working papers. The draft financial statements recognise total assets of $300 million, revenue of $620 million and profit before tax of $47•5 million.

An issue from the audit working papers is summarised below:

Distribution licence

The statement of financial position includes an intangible asset of $15 million, which is the cost of a distribution licence acquired on 1 September 2012. The licence gives Setter Stores Co the exclusive right to distribute a popular branded soft drink in its stores for a period of five years. (5 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.

You are the partner responsible for performing an engagement quality control review on the audit of Snipe Co. You are currently reviewing the audit working papers and draft audit report on the financial statements of Snipe Co for the year ended 31 January 2012. The draft financial statements recognise revenue of $8•5 million, profit before tax of $1 million, and total assets of $175 million.

During the year Snipe Co’s factory was extended by the self-construction of a new processing area, at a total cost of $5 million. Included in the costs capitalised are borrowing costs of $100,000, incurred during the six-month period of construction. A loan of $4 million carrying an interest rate of 5% was taken out in respect of the construction on 1 March 2011, when construction started. The new processing area was ready for use on 1 September 2011, and began to be used on 1 December 2011. Its estimated useful life is 15 years.

Required:

In respect of your file review of non-current assets:

Comment on the matters that should be considered, and the evidence you would expect to find regarding the new processing area. (8 marks)

You are a manager in the audit department of Beech & Co, responsible for the audits of Fir Co, Spruce Co and Pine Co. Each company has a financial year ended 31 July 2011, and the audits of all companies are nearing completion. The following issue has arisen in relation to the audit of accounting estimates and fair values:

Fir Co

Fir Co is a company involved in energy production. It owns several nuclear power stations, which have a remaining estimated useful life of 20 years. Fir Co intends to decommission the power stations at the end of their useful life and the statement of financial position at 31 July 2011 recognises a material provision in respect of decommissioning costs of $97 million (2010 – $110 million). A brief note to the financial statements discloses the opening and closing value of the provision but no other information is provided.

Required:

Comment on the matters that should be considered, and explain the audit evidence you should expect to find in your file review in respect of the decommissioning provision. (8 marks)

Jolie Co is a large company, operating in the retail industry, with a year ended 30 November 2010.

You are a manager in Jen & Co, responsible for the audit of Jolie Co, and you have recently attended a planning meeting with Mo Pitt, the finance director of the company.

As this is the first year that your firm will be acting as auditor for Jolie Co, you need to gain an understanding of the business risks facing the new client.

Notes from your meeting are as follows:

Jolie Co sells clothing, with a strategy of selling high fashion items under the JLC brand name. New ranges of clothes are introduced to stores every eight weeks The company relies on a team of highly skilled designers to develop new  fashion ranges.

The designers must be able to anticipate and quickly respond to changes in consumer preferences.

There is a high staff turnover in the design team 
Most sales are made in-store, but there is also a very popular catalogue, from which customers can place an order on-line, or over the phone.

The company has recently upgraded the computer system and improved the website, at significant cost, in order to integrate the website sales directly into the general ledger, and to provide an easier interface for customers to use when ordering and entering their credit card details.

The new on-line sales system has allowed overseas sales for the first time

The system for phone ordering has recently been outsourced.

The contract for outsourcing went out to tender and Jolie Co awarded the contract to the company offering the least cost.

The company providing the service uses an overseas phone call centre where staff costs are very low

olie Co has recently joined the Ethical Trading Initiative.

This is a ‘fair-trade’ initiative, which means that any products bearing the JLC brand name must have been produced in a manner which is clean and safe for employees, and minimises the environmental impact of the manufacturing process.

A significant advertising campaign promoting Jolie Co’s involvement with this initiative has recently taken place

The JLC brand name was purchased a number of years ago and is recognised at cost as an intangible asset, which is not amortised.

The brand represents 12% of the total assets recognised on the statement of financial position

The company owns numerous distribution centres, some of which operate close to residential areas.

A licence to operate the distribution centres is issued by each local government authority in which a centre is located. One of the conditions of the licence is that deliveries must only take place between 8 am and 6 pm.

The authority also monitors the noise level of each centre, and can revoke the operating licence if a certain noise limit is breached.

Two licences were revoked for a period of three months during the year

To help your business understanding, Mo Pitt has e-mailed to you extracts from the draft statement of comprehensive income, and the relevant comparative figures, which are shown below:

Required

Recommend the principal audit procedures to be performed in respect of the valuation of the JLC brand name. (5 marks)