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    Sep 22 - Forsythia Group

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    Amanda Low
    AAA practice question

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    Sep 22 - Forsythia Group

    Uploaded by

    Amanda Low
    6 views2 pages
    AAA practice question

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    Sep 22 - Forsythia group

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    AAA practice question

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    6 views2 pages

    Sep 22 - Forsythia Group

    Uploaded by

    Amanda Low
    AAA practice question

    Copyright:

    © All Rights Reserved
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    of 2

    The audit of the Forsythia Group (the Group) for the year ended 31 March 20X5 is in the

    completion stage and the auditor’s report is due to be issued next week.

    The Group has diverse operations, focusing on manufacturing, but is also involved with activities
    in some other areas, such as agriculture. The draft consolidated financial statements include
    revenue of $129 million (20X4: $113 million), profit before tax of $18·6 million (20X4: $23·2
    million) and total assets of $465 million (20X4: $460 million).

    You have discussed the Group audit with a junior member of the audit team, who made the
    following comments about how it was planned and carried out:

    ‘On 10 June 20X5, the Group acquired another subsidiary, Robin Co, which is forecast to
    increase the Group’s total revenue by around 20%. This meant that the Group chief finance
    officer (CFO) had little time to discuss matters with the audit team. The acquisition has taken
    place quickly, and so did not form part of the audit planning, which took place in January 20X5.
    The audit engagement partner said that we did not need to perform audit work on any aspect
    of the acquisition as, according to the CFO, it will all be accounted for in next year’s financial
    statements.

    ‘Due to pressure to reduce the costs of the audit, the audit manager arranged for the audit
    procedures on revenue recognised by several significant subsidiaries, including a subsidiary in
    the agricultural industry, to be delegated to Camelia Associates, an unconnected firm. The audit
    manager said that we can rely on the evidence obtained by Camelia Associates as they are a
    firm of qualified accountants.

    ‘I also audited the Group’s intangible assets, which involved evaluating the assumptions relating
    to the appropriateness of capitalisation of $1·2 million of development costs in the year. I could
    not discuss this with the CFO and no one else was available, so I agreed the assumptions, for
    example, relating to technical feasibility and commercial viability, to the Group’s business plan
    and concluded that they were consistent. This is the first year that development costs have been
    recognised as an intangible asset in the Group financial statements.

    ‘Yew Co, which operates in the agricultural industry, is a subsidiary of the Group. At the audit
    planning stage, in line with the previous year’s audit, it was not identified as a significant
    component. However, due to the specialist nature of the operations of the company, a
    consultant should have been used to provide input on some technical matters, as stated in the
    audit strategy and audit plan. Due to cost implications, the consultant was not engaged, and the
    section of the audit strategy and audit plan containing instructions relating to the consultant was
    deleted from the audit files.’

    Following your conversation with the audit assistant, you reviewed the audit working papers and
    found the following:
    –
    The audit evidence obtained by Camelia Associates has not been reviewed by the audit
    manager or partner.
    –
    No further evidence has been obtained relating to the development expenditure.
    –
    Yew Co has total assets of $60·5 million (20X4: $83 million) and revenue of $6·5 million
    (20X4: $6·4 million).

    Evaluate the quality management and other professional matters identified


    during your review in respect of the planning and performance of the Forsythia
    Group audit, and recommend appropriate actions to be taken.
    (20 marks)

    Professional marks will be awarded for the demonstration of skill in analysis and
    evaluation, professional scepticism and judgement, and commercial acumen in your
    answer.
    (5 marks)

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