Professional Level ~ Options Module [eee ee Advanced Audit and Assurance (International) Monday PIU Time allowed Reading and planning: 15 minutes wiring 3 hours “This paper ie divided into two sections: Section A— BOTH questions are compulsory and MUST be attempted Section B— TWO questions ONLY to be attempted Do NOT open this paper until instructed by the superviser. During reading and planning time only the question paper may be annotated, You must NOT write in your answer booklet until instructed by the supervisor. This question papor must not be removed from the examination hall. ‘The Association of Chartered Certified AccountantsSection A BOTH questions are compulsory and MUST be altempted 1 You ate a manager in Magole & Co, responsible forthe aut ofthe CS Group. An extract from the permanent audit file descrioing the CS Group's history and operations is shown below: Permanent file (extract) crow Co was incorporated 100 years ago. Itwas founded by Joseph Grow, who established a small poten rang tableware such as ses, plates and cups. The products quickly erew porula, with ane range of rods becoming ighy sought after when it was used ata royal wedang, The compary’s produets have rained their popularity over the decades, and the Crow brand enjoys a strong identity and good market share. Ten years ago, Crow Co made its frst acnuistion by purchasing 100% of te share caplet Starling Co. Both Companizs benefited from the newly formed CS Group, as Staring Co éself had a stone brand narre In the pottery market, Tho CS Group has a history of steady profiabllity and stable management Crow Co and Stating Co have a financial year ending 31 July 2012, and your firm has audited both companies for several years. (a) You have recoived an email from Jo Daw, the audit engagement partner: To: Audit manager From: Jo Daw Rogarding: CS Group audit planning Hello Ihave ust been to 2 meeting with Steve Este the finance dkestr ofthe CS Group. We wee discussing eon! ‘events which will have a bearing on our forthcoming audit, and my notes from the meeting are attached to this ‘email, One of the issues discussed is the change in group structure due to the acquisition of Canary Co earlier this year. Our firm has been appointed as auditor of Canary Co, which has a year ending 30 June 2012, and vr eo tne engagement ve been aged withthe cient, We need fo start planning the autts ofthe three components of the Group, and of the consolidated financial statements. Using the atached information, you ae requited to: (@_Wentiy and eypain the impications of tne acquisition of Conary Co forthe audit planning of the indie and consolidated financial statements ofthe CS Group: (@ marks) Evaluate the rats of retail ristatement to be considered in tne aud planning ofthe individual art consolidated financlal statements of the CS Group; and (18 marks) Recommend the prircloa audit procedures to be performed in respect of the goodwill iiially recognised on the aequistion of Canary Co. (5 marks) Thank you ‘Attachment: Notes from meeting with Steve Eagle, finance director of the CS Group Acquisition of Canary Co ‘The most significant event forthe CS Group this year was the acauiston of Canary Co, which took place on 1 February 2012. Grow Co purchased all of Canary Co's equity sates for cash consideration of $125 million, seu tart contingent consideration of $30 milion wil be paid on the third anniversary ofthe acqusiion, if the Group's revonue grows by at leact 8% per annum, Crow Co engaged an external provider to perform cue cians fn Canary Co, whose report indcsted that the fair value of Canary Co's net assets was estimated (o be $110 milion atthe date of acquisition, Goodwill arising on the acquisition has been calculated 2s follows:$ million Fair value of consideration: Cash consideration 125 Contingent consideration 30 155 Less: fair value of identifable net asses acquired 10) Goodwill 45 ‘po help finance the acquisition, Crow Co issued Ican stock at par on 31 January 2012, raked 1 of $100 rrilion, The loan has a fveyear term, and wil be repaid ata premium of $20 milion. 69% infeest Is payable annually in areas. It Group accourting policy to recognise financial Failties at emenises cos canary Co manufactures potey fesrnes ard omamens, The company & considered a good stated Ht he Goan asts products ae lututy lems lke thse of Grow Co and Starling Co, and its acautsiton wil enable Ine Grout te cverly ito a ferent marke. Approximately 30% of Its sales are made aline, andi hoped that crore sales van soon be introduced forthe rest of the Group's products. Canary Co has only ever operted 29 2 single company, so ths isthe frst year that it Is part of a group of companies. Financial performance and position The Graun has performed well this year, with forecast consolidated rvonue forthe year to 31 July 2012 of $136 millon (2011 -'$128 milion). and profit before tax of $8-5 milion (2011 — $6:4 milion). A bresksown of the Group's forecast revenue and profit is shown below: Crow Co Starling Co CanatyCo CS Group § million § million § million $ million Revenue 6 50 16 135 Profit before tox 35 3 2 85 Note: Canaty Co's results nave been included from 1. February 2012 (date of acauisiton), and forecast up fo 31 July 2012, the CS Group's financial year end. Te forecast corsefidated statement of financial position at 31 July 2012 reeugnises teal assats of $560 millon Other matters Staring Co raceived 2 grant of $35 million on 1 Match 2012 in relation to redevelopment of is main Traruiecuring ate, Te government is proving grants to companies for caital expenestureon er ronmentaly Fonaly assets, Stafing Co has spent $25 millon of the amount received on solar panels which generale lectiely, and intonds to soend the remaining $20 millon on upgrading ts production and packaging ines On 1 Jonuary 2012, a new IT system was introduced to Crow Co and Stating Co, with the aim of improving financial reporting cariols and to standardise processes scvss the two comparies. Unfortunately, Stating O's finance director left the company last week. Required: Respond to the email from the partnes. (31 marks) Note: the split of the maré allocation is shown within the email. 3 (PTO.