Tag (SQ): Business Risks
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- 30 Marks
AAA – L3 – Q44 – Group audits
Identify risks, audit planning effects, support letters, and horizontal groups' impact for Kwei Co's group audit.
Question
You are an audit manager in Rita & Co, a firm of Chartered Accountants. One of your audit clients Kwei Co provides satellite broadcasting services in a rapidly growing market.
In February 20X8 Kwei purchased Thunder Co, a competitor group of companies. Significant revenue, cost and capital expenditure synergies are expected as the operations of Kwei and Thunder are being combined into one group of companies. The following financial and operating information consolidates the results of the enlarged Kwei group:
| | Year end 31 December | | | | 20X8 (Est.) | 20X7 (Actual) | | | $m | $m | | Revenue | 6,827 | 4,404 | | Cost of sales | (3,109) | (1,991) | | Distribution costs and administrative expenses | (2,866) | (1,700) | | Research and development costs | (25) | (22) | | Depreciation and amortisation | (927) | (661) | | Interest expense | (266) | (202) | | Loss before taxation | (366) | (172) | | Customers | 14.9m | 7.6m | | Average revenue per customer (ARPC) | 458 | 579 |
In November 20X8 Kwei purchased Storm Co, a large cable communications provider in India, where your firm has no representation. The financial statements of Storm for the year ending 31 December 20X8 will continue to be audited by a local firm of Chartered Accountants. Storm’s activities have not been reflected in the above estimated results of the group. Kwei is committed to introducing its corporate image in India.
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 Kwei group.
(b) Explain what effect the acquisitions will have on the planning of Rita & Co’s audit of the consolidated financial statements of Kwei Co for the year ending 31 December 20X8.
(c) Explain the role of ‘support letters’ (often called ‘comfort letters’) as evidence in the audit of financial statements.
(d) Discuss how ‘horizontal groups’ (i.e. non-consolidated entities under common control) affect the scope of an audit and the audit work undertaken.
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- Tags: Audit Planning, Business Risks, Group audits, Horizontal groups, Support letters
- Level: Level 3
- Topic: Group audits
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- 15 Marks
AAA – L3 – Q28 – Planning
Identify principal business risks for Sparks Electrical Wholesalers from provided information.
Question
You are the audit manager responsible for visiting potential new audit clients. You are visiting an electrical wholesaler, Sparks Electrical Wholesalers (Sparks), a limited liability company. The managing director and majority shareholder, Mr Samuel, has asked your company to tender for the audit because he is considering obtaining a quotation on the Accra Stock Exchange.
You make the following notes from your initial meeting:
Revenue has grown from $2 million to $3.5 million in the last two years and the company is very profitable. Finance is needed, in order to:
(1) establish a nationwide customer base by making some of the company’s products available to the public through builders merchants; and
(2) set up a subsidiary in Vietnam to purchase supplies. No sales would be made there as the company faces strong competition.
Mr Samuel is the main contact with suppliers and customers and negotiates prices directly with both. Mr Samuel is in charge of buying, sales and stores. A senior bookkeeper has recently been recruited (not a qualified accountant) to help with credit control and to set up more formal accounting systems and procedures. There is a recently installed accounting software package but staff are still being trained to use it and Mr Samuel’s former brother-in-law has specifically written the software. Mr Samuel is dissatisfied with his existing firm of accountants who prepare and audit the annual financial statements. His dissatisfaction is partly because of the un-reconciled amounts on the ledgers and partly because his accountants have failed to suggest how he can take increased emoluments to meet his personal needs.
Required:
(a) Write a memorandum to the intended audit partner which highlights the principal business risks for Sparks Electrical Wholesalers identified from an analysis of the above information. (b) Write a memorandum to the intended audit partner which highlights the factors that should influence the partner in deciding whether or not the firm should make a proposal for this engagement. (c) Write a memorandum to the intended audit partner which highlights the principal risks you would identify if planning the first audit of Sparks Electrical Wholesalers. (d) Write a memorandum to the intended audit partner which highlights two significant steps which could be taken by the company to improve accounting procedures and financial controls prior to the next audit.
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