问答题
2.The Adder Group (the Group) has been an audit client of your firm for several years. You have recently been assigned to act as audit manager, replacing a manager who has fallen ill, and the audit of the Group financial statements for the year ended 31 March 2015 is underway. The Group’s activities include property management and the provision of large storage facilities in warehouses owned by the Group. The draft consolidated financial statements recognise total assets of $150 million, and profit before tax of $20 million.
问答题
(a) The audit engagement partner, Edmund Black, has asked you to review the audit working papers in relation to two audit issues which have been highlighted by the audit senior. Information on each of these issues is given below:
(i) In December 2014, a leisure centre complex was sold for proceeds equivalent to its fair value of $35 million,the related assets have been derecognised from the Group statement of financial position, and a profit on disposal of $8 million is included in the Group statement of profit or loss for the year. The remaining useful life of the leisure centre complex was 21 years at the date of disposal.
The Group is leasing back the leisure centre complex to use in its ongoing operations, paying a rental based on the market rate of interest plus 2%. At the end of the 20-year lease arrangement, the Group has the option to repurchase the leisure centre complex for its market value at that time.
(ii) In January 2015, the Group acquired 52% of the equity shares of Baldrick Co. This company has not been consolidated into the Group as a subsidiary, and is instead accounted for as an associate. The Group finance director’s reason for this accounting treatment is that Baldrick Co’s operations have not yet been integrated with those of the rest of the Group. Baldrick Co’s financial statements recognise total assets of $18 million and a loss for the year to 31 March 2015 of $5 million.
Required:
In respect of the issues described above:
Comment on the matters to be considered, and explain the audit evidence you should expect to find in your review of the audit working papers.
Note: The marks will be split equally between each part. (16 marks)
【正确答案】 (i) The sale and leaseback transaction is material to the Group statement of financial position. The proceeds received on the sale of the property, equivalent to the fair value of the assets, represents 23·3% of Group assets, and the carrying value of the assets disposed of were $27 million ($35 million – $8 million), representing 18% of Group assets. In addition, the profit recognised on the disposal represents 40% of the Group’s profit for the year, so it is highly material to the statement of profit or loss.
The accounting treatment may not be in accordance with IAS 17 Leases. The property has been derecognised and a profit on disposal recognised, but this is only appropriate where the leaseback is an operating lease arrangement,whereby the risk and reward of the asset has been transferred to the purchaser.
However, in this case it appears that the leaseback may actually be a finance leaseback, which is essentially a financing arrangement, and should be accounted for following the substance of the transaction. The leaseback appears to be a finance lease because the Group is bearing the risk and reward of ownership – it bears the risk of adverse changes in the market price of the property up to the point of repurchase, and also bears the risk of adverse changes in the market
interest rate. It is also benefitting from the continued use of the property and the profit which it may generate. In addition,the lease is for a major part of the asset’s remaining useful life.
If the leaseback is a finance lease, the asset should remain recognised in the Group’s financial statements, and the apparent profit made on disposal should be deferred and amortised over the lease term.
Therefore the Group’s profit is materially overstated, and the total assets and liabilities are materially understated. An adjustment should be recommended to management, whereby the asset would be reinstated, measured at fair value,with a finance lease liability established, and the apparent profit moved to the statement of financial position and recognised as deferred income.
The following adjustments should be recommended to management:
【答案解析】
问答题
The audit senior also left the following note for your attention:
I have been working on the audit of properties, including the Group’s storage facility warehouses. Customers rent individual self-contained storage areas of a warehouse, for which they are given keys allowing access by the customer at any time. The Group’s employees rarely enter the customers’ storage areas.
It seems the Group’s policy for storage contracts which generate revenue of less than $10,000, is that very little documentation is required, and the nature of the items being stored is not always known. While visiting one of the Group’s warehouses, the door to one of the customers’ storage areas was open, so I looked in and saw what appeared to be potentially hazardous chemicals, stored in large metal drums marked with warning signs. I asked the warehouse manager about the items being stored, and he became very aggressive, refusing to allow me to ask other employees about the matter, and threatening me if I alerted management to the storage of these items.I did not mention the matter to anyone else at the client.’
Required:
Discuss the implications of the audit senior’s note for the completion of the audit, commenting on the auditor’s responsibilities in relation to laws and regulations, and on any ethical matters arising. (9 marks)
【正确答案】The storage of the potentially hazardous chemicals raises concerns that the Group may not be complying with regulations such as health and safety legislation. The auditor needs to consider the requirements of ISA 250 Consideration of Laws and
Regulations in an Audit of Financial Statements, which states that while it is management’s responsibility to ensure that the entity’s operations are conducted in accordance with the provisions of laws and regulation, the auditor does have some responsibility in relation to compliance with laws and regulations, especially where a non-compliance has an impact on the financial statements.
The auditor is required by ISA 315 Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment to gain an understanding of the legal and regulatory framework in which the audited entity operates. This will help the auditor to identify non-compliance and to assess the implications of non-compliance. Therefore the auditor should ensure a full knowledge and understanding of the laws and regulations relevant to the storage of items in the Group’s warehouses is obtained, focusing on health and safety issues and the implications of non-compliance.
ISA 250 requires that when a non-compliance is identified or suspected, the auditor shall obtain an understanding of the nature of the act and the circumstances in which it has occurred, and further information to evaluate the possible effect on the financial statements. Therefore procedures should be performed to obtain evidence about the suspected non-compliance, for example, to identify any further instances of non-compliance in the Group’s other warehouses.
Management may not be aware that the warehouse manager is allowing the storage of these potentially hazardous items.ISA 250 requires the matter to be discussed with management and where appropriate with those charged with governance.The auditor must therefore ignore the warehouse manager’s threats and communicate the suspected non-compliance as required by ISA 250. Given the potential severity of the situation, and that the chemicals may not be safe, there is the risk
of injury to the Group’s employees or the general public, and the matter should be communicated as soon as possible.
The auditor needs to consider the potential implications for the financial statements. The non-compliance could lead to regulatory authorities imposing fines or penalties on the Group, which may need to be provided for in the financial statements.Audit procedures should be performed to determine the amount, materiality and probability of payment of any such fine or penalty imposed.
In terms of reporting non-compliance to the relevant regulatory authorities, ISA 250 requires the auditor to determine whether they have a responsibility to report the identified or suspected non-compliance to parties outside the entity. In the event that management or those charged with governance of the Group fail to make the necessary disclosures to the regulatory authorities, the auditor should consider whether they should make the disclosure. This will depend on matters including whether there is a legal duty to disclose or whether it is considered to be in the public interest to do so. Confidentiality is also an issue, and if disclosure were to be made by the auditor, it would be advisable to seek legal advice on the matter. This is very much a worst case scenario, however, as the Group’s management is likely to make the necessary disclosures, and should be encouraged by the auditor to do so.
There is also an ethical issue arising from the warehouse manager’s aggressive attitude and threatening behaviour. It would seem that the manager has something to hide, and that he was the only person who knew about the storage of the chemicals.He may have been bribed to allow the storage of the dangerous chemicals. His behaviour amounts to intimidation of the auditor, which is not acceptable behaviour, and those charged with governance should be alerted to the situation which arose.ISA 260 Communication with Those Charged with Governance requires the auditor to communicate significant difficulties encountered during the audit, which may include examples of lack of co-operation with the auditor, and imposed limitations on auditors performing their work.
The final issue is that the Group should review its policy of requiring limited documentation for contracts less than $10,000.This would seem to be inappropriate because it may lead to other instances of unknown items being stored in the Group’s warehouses. This would seem to be a significant control deficiency, and should be reported to those charged with governance in accordance with both ISA 260 and ISA 265 Communicating Deficiencies in Internal Control with Those Charged with Governance and Management. The auditor could recommend improvements to the controls over the storage of items which should prevent any further non-compliance with laws and regulations from occurring.
【答案解析】