Tag (SQ): Horizontal groups

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.