- 30 Marks
AAA – Nov 2014 – L3 – SA – Q1 – Group Audits
Identify business risks, audit planning effects, and implications of acquisitions for the consolidated financial statements audit of Wasp Ltd.
Question
You are an audit manager in Ruby & Co, a firm of Chartered Accountants. One of your audit clients, Wasp Ltd., provides satellite broadcasting services in a rapidly growing market.
In February 2014, Wasp Ltd. purchased Xstatic Ltd., a competitor group of companies. Significant revenue, cost, and capital expenditure synergies are expected as the operations of Wasp Ltd. and Xstatic Ltd. are being combined into one group of companies.
The following financial and operating information consolidates the results of the enlarged Wasp Ltd. group:
| Year-end 31 December | 2014 (Budget) | 2013 (Actual) |
|---|---|---|
| Revenue | ₦6,827m | ₦4,404m |
| Cost of Sales | (₦3,109m) | (₦1,991m) |
| Distribution Costs and Administrative Expenses | (₦2,866m) | (₦1,700m) |
| Research and Development Costs | (₦25m) | (₦22m) |
| Depreciation and Amortization | (₦927m) | (₦661m) |
| Interest Expense | (₦266m) | (₦202m) |
| Loss Before Tax | (₦366m) | (₦172m) |
| Number of Subscribers | 14.9m | 7.6m |
| Average Revenue Per Subscriber (ARPS) | ₦437 | ₦556 |
In November 2014, Wasp Ltd. purchased MTbox Ltd., a large cable communications provider in Gambia, where your firm has no representation. The financial statements of MTbox Ltd. for the year ending 31 December 2014 will continue to be audited by a local firm of Chartered Accountants. MTbox Ltd.’s activities have not been reflected in the above estimated results of the group.
Wasp Ltd. is committed to introducing its corporate image into Gambia.
In order to sustain growth, significant costs are expected to be incurred as operations are expanded, networks upgraded, and new products and services introduced.
Required:
a. Identify and describe the principal business risks for the Wasp group. (9 Marks)
b. Explain what effect the acquisitions will have on the planning of Ruby & Co’s audit of the budgeted consolidated financial statements of Wasp Ltd. group for the year ending 31 December 2014. (10 Marks)
c. Explain the role of a Letter of Comfort as evidence in the audit of financial statements. (6 Marks)
d. Discuss how non-consolidated entities under common control affect the scope of an audit and the audit work undertaken. (5 Marks)
(Total 30 Marks)
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