Required (Discuss the difficulties in measuring ang eporting on social and environmental performance; and (4 marks) (i) Recommend the procedures to be used to gain idity of the performance information in Faster Jets Co's CSR report SaTe# OMe vali ofthe pet (6 marks) (Total = 20 marks) 25 Magpie (6/12) 72 mins You area manager in Magpie & Co, responsibie forthe audit file describing the CS Group's history and operations is sho Permanent file (extract) of the CS Group. An extract from the permanent audit wn below: Crow Go was incorporated 100 years ago, It was founded by Joseph Crow, who established a small pottery making tableware such as dishes, plates and cups. The products quickly grew popular with one range of products becoming highly Sought after when it was used at a royal wedding. The cony any's products have retained their popularity over the decades, and the Crow brand enjoys a strong identity and good market share Ten years ago, Crow Co made its first acquisition by ‘companies benefited from the newly formed CS Gro. market. The CS Group has a history of steady profi urchasing 100% of the share capital of Starling Co. Both UP, as Starling Co itself had a strong brand name in the pottery itability and stable management, Grow Co and Staring Co have a financial year ending 31 July 20X2, and your firm has aucited both ‘companies for several years, (@ _Youhave received an email from Jo Daw, the aut engagement partner: ‘Audit manager Jo Daw CS Group audit planning ' have just been to a meeting with Steve Ea recent events which will have a bearing on attached to this email. One of the issues di Canary Co earlier this year. Our firm has be 30 June 20X2, and the terms of the engag: the auaits of the three components of the gle, the finance director of the CS Group. We were discussing Our forthcoming audit, and my notes from the meeting are 'scussed is the change in group structure due to the acquisition of een appointed as auditor of Canary Co, which has a year ending ement have been agreed with the client. We need to start planning Group, and of the consolidated financial statements, Using the attached information, you are required to: (0) Identity and explain the implications ofthe acquisition of Canary Co forthe audit planning of the individual and consolidated financial statements of the CS Group (8 marks) (il) Evaluate the risks of material misstatement to be considered in the audit planning ofthe individual and Consolidated financial statements of the CS Group, identifying any matters that are not relevant to the audit planning (16 marks) {ii) Recommend the principal audit procedures to be performed in respect ofthe goodwill initially Tecognised on the acquisition of Canary Co (6 marks) Thank you. cnn BE owe ES‘Attachment: Notes from meeting with Steve Eagle, finance director of the CS Group ‘Acquisition of Canary Co The most significant event for the CS Group ths year was the acquistion of Canary Co, wich t, 1 February 20X2. Crow Co purchased al of Canary Co's equily shares for cash consideration of sige and further contingent consideration of $30 miion wil be pad onthe third anniversary ofthe any ein the Grou’ rvenve grows by at leat 8% pe annu Crow Co engaged an extemal provider ges iligence on Canary Co, whese report indicated thatthe far value of Canary Co's net assets was eg’ be $110 milion atthe date of acquisition. Goodil arising onthe acquistin has been calculteg se "th $ million Fair value of consideration: Cash consideration i Contingent consideration 2 185 Less fair value of identifiable net assets acquired £119) Goodwill a To help finance the acquisition, Crow Co issued loan stock at par on 31 January 20X2, raising cash of $100 milan. The loan has a five-year term, and wil be repaid at a premium of $20 milion, 535 intrest Deyable annually n areas, It is Group accountng poly to recognise than Habits at amortsed co Canary Co manufactures pottery figurines and ornaments. The company is considered a good strategic ty the Group, as its products are luxury items lke those of Crow Co and Starling Co, and its acquisition wi enable the Group to diversity ito aaterent market. Approximately 0% ofits sales are made online, andi hoped that online sales can soon be introduced forthe rest ofthe Group's products. Canary Co has only aay. operated as a single company, so this is the frst year that itis pat of a group of companies. Financial performance and pos The Group has performed well this year, with forecast consolidated revenue forthe yeat to 31 July 20X2 of $135 milion (204 ~ $125 milion), and profit betore tax of $8.5 milion (20X1 ~ $8.4 million). A breakdown of the Group's forecast revenue and prof is shown below, Crow Co Starling Co Canary Co CS Group Smilion — $milion—$ milion—$ milion Revenue 69 50 16 135 Profit before tax 35 3 2 85 Note. Canary Co's results have been included from 1 Februaty 20X2 (date of acquisition), and forecast up to 31 July 202, the CS Group's financial yearend, ‘The forecast consolidated statement of financial position at 31 July 20X2 recognises total assets of {$550 milion, Other matters Starling Co received a grant of $35 milion on 1 March 20X2 in relation to redevelopment ofits main ‘manufacturing site. The government is providing grants to companies fr capital expenditure on environmentally frenaly assets Staring Co has spent $25 milion ofthe amount received on solar panels which generate electricity, and intends to spend the remaining $10 milion on upgrading its production and packaging lines. During the year to 31 July 20X2 it was discovered that an error had been made by a member of Crow Co's finance department which had resuited inthe overstatement of deferred revenue by $10,000 in the prior period. (On 4 January 20X2, a new IT system was introduced to Crow Co and Starling Co, wth the aim of improving financial reporting Controls and to standardise processes across the two companies. Unfortunately, Staring (00's finance director lt the company last week <= — a 7Requited i Respond to the email from the partner. (31 marks) Note. The split of the mark allocation is shown within the email. (e) Magpie & Co's ethics partner, Robin Finch, leaves a note on your desk | | “Ihave just had a conversation with Steve Eagle concerning the CS Group. He would lke the audit engagement partner to attend the CS Group's board meetings on a monthly basis so that our firm can be made aware of any Issues relating to the audit as soon as possible. Also, Steve asked if one of our audit ‘managers could be seconded to Starling Co in temporary replacement ofits finance director who recently left, } and asked for our help in recruiting a permanent replacement. Please provide me with a response to Steve { which evaluates the ethical implications of his requests.” | t } | | | | Required Respond to the note from the partn (6 marks) (Total = 37 marks) 26 Adder (6/15) 49 | 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 il, and the audit of the group financial } statements for the year ended 31 March 20XS 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. | bu. (@) The audit engagement partner, Edmund Black, has asked you to review the audit working papers in relation to two aud ssues which hve been highlighted by the aust sero. formation on each ofthese issus is given below: ot ye () In December 20%4, a leisure centre complex was sold for proceeds equivalent to its fair value of $35 Us million, the related assets have been derecognised from the Group statement of financial position, and 4 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 ofthe 20-year lease arrangement, the Group has the option to repurchase the leisure centre complex for its market value at that time, . (i) In January 20%8, the Group acquired 62% 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 ofthe rest ofthe Group. Baldrick Co's financial statements recognise {otal assets of $18 milion and a loss forthe year to 31 March 20XS of $5 milion, Required In respect of the issues described above: Comment on the matters to be considered, and explain the aucit 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) (0) The audit senior also left the following note for your attention: ' have been working on the audit of properties, including the Group's storage facility warehouses. Customers ‘ent 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, {tseems the Group's policy for storage contracts which generate revenue of less than $10,000, is that very litle 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 | looked in and wun BPP _—@ 21S: Magpre - ee In fegiwd) 49. your previ email | wii ches Your Conan rq Curdany tee G&S gc —@)\) Nenpiveechons of Gcqusinhon Indl Conwy wes ocGjuared 4r 1907 9, rts ec ~rshawed ~ teas dseue fore “expec yout yee ntl ceaunth of Cand As pre etn thew Gecou ly: The de_culligenc—_ pefacaned on. 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