ACCA AAA ^INT Syllabus D. Audit of Historical Financial Information - Provisions - Past Papers ^{20 / 41}

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:
(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)

Willow Co is a print supplier to businesses, printing catalogues, leaflets, training manuals and stationery to order. It specialises in using 100% recycled paper in its printing, a fact which is promoted heavily in its advertising.

You are a senior audit manager in Bark & Co, and you have just been placed in charge of the audit of Willow Co. The audit for the year ended 31 August 2011 is nearing completion, and the audit engagement partner, Jasmine Berry, has sent you an email:

To: Audit manager
From: Jasmine Berry, Audit partner
Subject: Audit completion and other issues – Willow Co

Hello

The manager previously assigned to the audit of Willow Co has been moved to another urgent assignment, so thank you for stepping in to take on the manager’s role this late in the audit. The audit report is due to be issued in two weeks’ time, and the audit senior has prepared a summary of matters for your consideration.

I have been asked to attend a meeting with the audit committee of Willow Co tomorrow, so I need you to update me on how the audit has progressed. I am asking you to prepare briefing notes for my use in which you:

Assess the audit implications of the THREE issues related to audit work raised by the audit senior. Your assessment should consider the sufficiency of evidence obtained, explain any adjustments that may be necessary to the financial statements, and describe the impact on the audit report if these adjustments are not made. You should also recommend any further audit procedures necessary. (15 marks)

Thanks

Summary of issues for manager’s attention, prepared by audit senior

Materiality has been determined as follows:

$800,000 for assets and liabilities
$250,000 for income and expenses

Issues related to audit work performed:

(ii) Audit work on provisions

Willow Co is involved in a court case with a competitor, Aspen Co, which alleges that a design used in Willow Co’s printed material copies one of Aspen Co’s designs which are protected under copyright. Our evidence obtained is a verbal confirmation from Willow Co’s lawyers that a claim of $125,000 has been made against Willow Co, which is probable to be paid.

Cherry Laurel has not made a provision, arguing that it is immaterial. Cherry refused our request to ask the lawyers to confirm their opinion on the matter in writing, saying it is not worth bothering the lawyers again on such a trivial matter.

Other issues for your attention:

Property revaluations

Willow Co currently adopts an accounting policy of recognising properties at cost. During the audit of non-current assets Willow Co’s property manager said that the company is considering a change of accounting policy so that properties would be recognised at fair value from 1 January 2012.

Non-current asset register

The audit of non-current assets was delayed by a week. We had asked for the non-current asset register reconciliation to be completed by the client prior to commencement of our audit procedures on non-current assets, but it seems that the person responsible for the reconciliation went on holiday having forgotten to prepare the reconciliation. This happened on last year’s audit as well, and the issue was discussed with the audit committee at that time.

Procurement procedures

We found during our testing of trade payables that an approved supplier list is not maintained, and invoices received are not always matched back to goods received notes. This was mentioned to the procurement manager, who said that suppliers are switched fairly often, depending on which supplier is the cheapest, so it would be difficult to maintain an up-to-date approved supplier list.

Financial controller

Mia Fern, Willow Co’s financial controller, owns a holiday home overseas. It appears that she offered the audit team free use of the holiday home for three weeks after the audit, as a reward for the team’s hard work. She also bought lunch for the audit team on most days.

Required:

Respond to the partner’s email.