You are an audit manager at Rockwell & Co, a firm of Chartered Certified Accountants. You are responsible for the audit of the Hopper Group, a listed audit client which supplies ingredients to the food and beverage industry worldwide.

The audit work for the year ended 30 June 2015 is nearly complete, and you are reviewing the draft audit report which has been prepared by the audit senior. During the year the Hopper Group purchased a new subsidiary company, Seurat Sweeteners Co, which has expertise in the research and design of sugar alternatives. The draft financial statements of the Hopper Group for the year ended 30 June 2015 recognise profit before tax of $495 million (2014 – $462 million) and total assets of $4,617 million (2014: $4,751 million). An extract from the draft audit report is shown below:

Basis of modified opinion (extract)

In their calculation of goodwill on the acquisition of the new subsidiary, the directors have failed to recognise consideration which is contingent upon meeting certain development targets. The directors believe that it is unlikely that these targets will be met by the subsidiary company and, therefore, have not recorded the contingent consideration in the cost of the acquisition. They have disclosed this contingent liability fully in the notes to the financial statements. We do not feel that the directors’ treatment of the contingent consideration is correct and, therefore, do not believe that the criteria of the relevant standard have been met. If this is the case, it would be appropriate to adjust the goodwill balance in the statement of financial position.

We believe that any required adjustment may materially affect the goodwill balance in the statement of financial position. Therefore, in our opinion, the financial statements do not give a true and fair view of the financial position of the Hopper Group and of the Hopper Group’s financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards.

Emphasis of Matter Paragraph

We draw attention to the note to the financial statements which describes the uncertainty relating to the contingent consideration described above. The note provides further information necessary to understand the potential implications of the contingency.

Required:

(a) Critically appraise the draft audit report of the Hopper Group for the year ended 30 June 2015, prepared by the audit senior.

Note: You are NOT required to re-draft the extracts from the audit report. (10 marks)

(b) The audit of the new subsidiary, Seurat Sweeteners Co, was performed by a different firm of auditors, Fish Associates. During your review of the communication from Fish Associates, you note that they were unable to obtain sufficient appropriate evidence with regard to the breakdown of research expenses. The total of research costs expensed by Seurat Sweeteners Co during the year was $1·2 million. Fish Associates has issued a qualified audit opinion on the financial statements of Seurat Sweeteners Co due to this inability to obtain sufficient appropriate evidence.

Required:

Comment on the actions which Rockwell & Co should take as the auditor of the Hopper Group, and the implications for the auditor’s report on the Hopper Group financial statements. (6 marks)

(c) Discuss the quality control procedures which should be carried out by Rockwell & Co prior to the audit report on the Hopper Group being issued. (4 marks)

(c) Outline the problems with references. (7 marks)

(15 marks)

(b) What advantages and disadvantages might result from outsourcing Global Imaging’s HR function?

(8 marks)

6 Assume today’s date is 16 April 2005.

Henry, aged 48, is the managing director of Happy Home Ltd, an unquoted UK company specialising in interior

design. He is wealthy in his own right and is married to Helen, who is 45 years old. They have two children – Stephen,

who is 19, and Sally who is 17.

As part of his salary, Henry was given 3,000 shares in Happy Home Ltd with an option to acquire a further 10,000

shares. The options were granted on 15 July 2003, shortly after the company started trading, and were not part of

an approved share option scheme. The free shares were given to Henry on the same day.

The exercise price of the share options was set at the then market value of ￡1·00 per share. The options are not

capable of being exercised after 10 years from the date of grant. The company has been successful, and the current

value of the shares is now ￡14·00 per share. Another shareholder has offered to buy the shares at their market value,

so Henry exercised his share options on 14 April 2005 and will sell the shares next week, on 20 April 2005.

With the company growing in size, Henry wishes to recruit high quality staff, but the company lacks the funds to pay

them in cash. Henry believes that giving new employees the chance to buy shares in the company would help recruit

staff, as they could share in the growth in value of Happy Home Ltd. Henry has heard that there is a particular share

scheme that is suitable for small, fast growing companies. He would like to obtain further information on how such

a scheme would work.

Henry has accumulated substantial assets over the years. The family house is owned jointly with Helen, and is worth

￡650,000. Henry has a ￡250,000 mortgage on the house. In addition, Henry has liquid assets worth ￡340,000

and Helen has shares in quoted companies currently worth ￡125,000. Henry has no forms of insurance, and believes

he should make sure that his wealth and family are protected. He is keen to find out what options he should be

considering.

Required:

(a) (i) State how the gift of the 3,000 shares in Happy Home Ltd was taxed. (1 mark)

(c) Identify and evaluate other strategic options ONA could consider to address the airline’s current financial and

operational weaknesses.

Note: requirement (c) includes 2 professional marks (10 marks)

(iii) A statement on the importance of confidentiality in the financing of the early stage working capital needs

and an explanation of how this conflicts with the duty of transparency in matters of corporate

governance. (6 marks)

Professional marks for layout, logical flow and persuasiveness of the statement. (4 marks)

The finance director of Blod Co, Uma Thorton, has requested that your firm type the financial statements in the form

to be presented to shareholders at the forthcoming company general meeting. Uma has also commented that the

previous auditors did not use a liability disclaimer in their audit report, and would like more information about the use

of liability disclaimer paragraphs.

Required:

(b) Discuss the ethical issues raised by the request for your firm to type the financial statements of Blod Co.

(3 marks)

(d) Explain whether or not Dovedale Ltd, Hira Ltd and Atapo Inc can register as a group for the purposes of value

added tax. (3 marks)

Which of the following statements relating to internal and external auditors is correct?

A.Internal auditors are required to be members of a professional body

B.Internal auditors’ scope of work should be determined by those charged with governance

C.External auditors report to those charged with governance

D.Internal auditors can never be independent of the company

(b) You are the audit manager of Petrie Co, a private company, that retails kitchen utensils. The draft financial

statements for the year ended 31 March 2007 show revenue $42·2 million (2006 – $41·8 million), profit before

taxation of $1·8 million (2006 – $2·2 million) and total assets of $30·7 million (2006 – $23·4 million).

You are currently reviewing two matters that have been left for your attention on Petrie’s audit working paper file

for the year ended 31 March 2007:

(i) Petrie’s management board decided to revalue properties for the year ended 31 March 2007 that had

previously all been measured at depreciated cost. At the balance sheet date three properties had been

revalued by a total of $1·7 million. Another nine properties have since been revalued by $5·4 million. The

remaining three properties are expected to be revalued later in 2007. (5 marks)

Required:

Identify and comment on the implications of these two matters for your auditor’s report on the financial

statements of Petrie Co for the year ended 31 March 2007.

NOTE: The mark allocation is shown against each of the matters above.

(ii) List the additional information required in order to calculate the employment income benefit in respect

of the provision of the furnished flat for 2007/08 and advise Benny of the potential income tax

implications of requesting a more centrally located flat in accordance with the company’s offer.

(4 marks)