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Hi Mike
Question 1 (i) the question asks to identify and explain the impliaction…. is this the same as asking what are the audit procedures?
1. Do we need to test for opening balances figures for canary? or is this left for the individual auditor in Canary, I would imagine we had to test opening balances or obtain suffcient appropriate evidence that the aiditor work can be relied upon
2. Materiality – 11.9% revenue, 23.5% – profit. if > 15% it is an significant component hence requires a full audit, does full audit mean testing mostly all transactions and balances? so in this case the profit exceeds 15% so full audit, wheras reveune < 15% hence we only need to perform analytical porcedures. is this right.
3. It is difficult to perform analytical procedures as group y/e 31.7.12 and canary y/e 30.6.12. so we need to perform analytical procedures from the date of acquisition of canary ( Feb 12 – 31.7.12) and not the full year. is this right?
Thanks
No, “implications” is not the same as procedures. An alternative expression that could have been used is “How will the audit be affected by ….” or “What impact will the above matters have on the audit process?”
Canary is acquired part way through the year so the concept of checking last year’s closing balances / this year’s opening figures is hardly relevant. The printed solution includes a point about confirming the reasonableness of the fair values of Canary net assets as at date of acquisition – I would have thought that that would be sufficient
I’ll come back to the rest of your post when I’ve checked the question again
I don’t see anywhere in the question or in the printed solution any mention of materiality being 15% of any base figure, nor anywhere is there the expression “a full audit”
Is this you making up a hypothetical scenario and asking “if it’s greater than one benchmark then we direct full attention to it, but if it’s less than a different benchmark then we need only analytically review”? Or are you asking specifically about the Canary situation (because you are quoting figures from Canary)
Where we have the situation that an individual matter discovered by the auditor is then compared with previously determined materiality benchmarks, we could find that we are comparing with revenue, with profit and/or with assets.
For example, where depreciation has been applied / calculated incorrectly, it could be totally immaterial in the context of revenue and even immaterial in the context of assets. However, at same figure could be material in the context of profit for the year.
Does that address your second point?
The concept of applying / using analytical procedures is sufficiently flexible for the auditor to apply procedures to the period since acquisition, or alternatively to the full Canary year to 30 June or even to annualise the post-acquisition period where that period is materially affected as a result of the take-over
Ok?
Hi Mike
The materiality benchmark is on the Kaplan P7 Study text. It is under chapter 10 transnational audit. – Materiality. dont have the page number for you just now.
There must be a benchmark in order for us to determine how significant it is.
1. Magpie (ii) Evaluate risks of material misstatement. Is this risk assessment?
2. In terms of business valuations – why is there an audit risk?
3. Loan – can you mention that there is an audit risk if the loan has not been discounted over the years and finace costs have not been discounted and allocated to the P/L?
4. Gov grants – of $35m, you cannot use this grant for anything else i.e in case packaging, you will have to spend it on solar panels, which amounted $25m, the $m has been overstated to deferred income, does that mean that starling does nto qualify for Gov grants?In Bpp book the answers mentions ” prior period not relevant” – deferred income in prior period was overstated by $10,000. this is 0.014% of Crow’s forecast revenue ( 100,000/69000,000) it is clearly immaterial and not relevant to audit planning. I dont understand where they got the $10,000 from? and is it in releavnt because the grant was received on March 2012 whereas we are preparing for the y/e 31.7.2012
thanks
Hi Kerri
I don’t have to hand, and nor will I have in the foreseeable future, a copy of Kaplan’s study text
The figure of >15% is, to the best of my knowledge, an arbitrary percentage made up by Kaplan, probably by way of illustration
Agreed – there has to be a benchmark in order to determine proposed action when the auditor finds some matter that has so far been incorrectly treated. If the aggregate value of the wrongly-treated matters exceeds the benchmark, then the auditor will ask the directors to make the appropriate adjustments
Risk assessment is more normally associated as part of the role of a company’s board of directors but I suppose that we could apply it also to the company’s auditors. Hmmm, is “evaluation” the same as “assessment”? No, not necessarily although I can see situations where the two words could be used to convey the same meaning. “Evaluation” suggests putting a monetary value (hence the “value” element within “eVALUation)
“Assessment” doesn’t necessarily involve putting a monetary value on risk
Why is there audit risk associated with business valuations? If “audit risk” is the risk facing the auditor whereby the auditor expresses an inappropriate opinion (and it is!) then the valuation of a business, whether it be over- or under-valued, will result in an audit opinion based on dubious valuations and, thus, an inappropriate opinion = audit risk
No, I don’t think so! We have found the error so inappropriate opinion isn’t involved – we’ll simply ask (require?) the directors to recalculate goodwill and restate the value of the non-current liability
The solar panel expenditure seems to me to fall into an energy-saving category but the proposed expenditure of improving production processes is worded in such a way as to leave little doubt that it lies beyond the realms of energy saving.
It potentially could be argued by the company’s board of directors that the improvement of the production process leads to greater energy efficiency, but we would need to hear that from them, and have it in writing, and we would also be justified in asking the directors to get written confirmation from the body that has given the grant money. My interpretation, when I first read the question, was that the proposed destination of the remaining $10 million was outside the scope of energy saving and would therefore likely have to be repaid.
In turn, that could potentially involve repayment of the other $25 million already spent (if it’s an all-or-nothing situation). Thes some audit work to be done in this area to determine exactly what the possibilities are.
As is my situation with Kaplan texts, so it is also with BPP texts! That being the case, I’m totally confused with the $10,000 / $100,000 amounts
The date of receipt (March 2012) certainly IS relevant in the year to 31 July, 2012
Ok?
So how will i know the benchmark? is it based on own assumptions?
Its the bpp book for the exam kit. that i use.
I need time to digest what you have mentioned as above, certaintly materiality is quite a difficult section in this syallabus i think.
“No, I don’t think so! We have found the error so inappropriate opinion isn’t involved – we’ll simply ask (require?) the directors to recalculate goodwill and restate the value of the non-current liability”
you mentioned the above. it doesnt state in this case whether error was found or not, it only mentions about the amortised cost.
the loan figure $20 is already included in the net assets I thought so why recalculate goodweill again? im confused
The question in no way suggests that the appropriate technique of discounting a future payment to arrive at a present value has been applied. In fact the suggestion is that it hasn’t been applied. That’s what made me say “the error has already been discovered”
Where does the $20 loan come in? I don’t remember reading it and I now don’t have the question readily to hand
Materiality is ALWAYS based on auditors’ assumptions, knowledge, experience, assessment of risk to name but a few matters
And materiality values vary from client to client within the audit firm. The level even varies / moves within a single client in a single audit! As matters come to light during the course of an audit, the senior in charge will reassess the appropriateness of the materiality level decided upon at the planning stage of the audit. If necessary, that level may be changed during the audit resulting in extended testing or in a reduction of the extent of sample selection for testing
Ok?
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