HI6026 Audit Tutorial Answers
HI6026 Audit, Assurance and Compliance
Week 1 Tutorial Question Answer
Week 1 Question
You are the audit manager of Overseas Explorer Ltd (OEL), which acquired the small proprietary company Local Pty Ltd (Local) on 30 June 2018. The price of the acquisition was agreed at $5 million, on the condition that OEL is satisfied with the financial records of Local. As Local is a small proprietary company, it has not prepared statutory financial reports or undergone an audit since its incorporation in 2016. However, Local has agreed to allow your firm, which is the auditor of OEL, to access its books and records. The CEO of OEL, Wendy Champion, has requested that your firm provide assurance on the following three items:
The management accounts for the year ended 30 June 2017
All transactions occurring from the date negotiations commenced until the settlement date, to ensure that all transactions were within the normal course of operations
The financial report prepared at the acquisition date of 30 June 2018
In order to clarify your responsibilities, you requested that OEL indicate the level of assurance that they require for each item. Wendy replied that the financial report as at acquisition date is very important, as are the transactions since negotiations commenced, but that she is willing to have less work done on the previous year’s management accounts.
Indicate the type of engagement that will most likely be undertaken for each of the three tasks and the level of assurance to be provided. Explain your selections. (10 marks)
Week 1 Tutorial Answer
a. In case of audit of management accounts for year ended June 30, 2017-
This will be considered as audit engagement where we as an auditor should summarize all information gained for Local Pty Ltd. in terms of checking whether the balances recorded by entity is correct or not e.g-
· Trade receivables,
· Fixed assets,
· Order book,
· Tax calculations
By doing this we will ensure the entity is correctly valued in terms of business combination principals and any fair value adjustments are required.
b. For transactions occurring from date of negotiation until settlement, We as an auditor needs to perform “Vendor due diligence”, which will give us comfort of operational and legal aspects of Local Pty Ltd.
This cover majorly if there are-
· Any legal deficiencies
· Any direct or indirect tax litigations/claims pending
· Any other outstanding liability
· Projections for revenue by analysing order book
By doing this Buyer and seller can agree on the terms of settling the liability and arriving appropriate purchase price.
c. To prepare financial report of acquisition as of June 30, 2018, We as an auditor needs to engage in preparing “Purchase price adjustment (PPA)” report.
This report will give a breakup of purchase price and any fair value adjustment required in calculating goodwill and intangibles acquired on business combination.
Also if there are any working capital adjustments or contingent consideration is involved will be decided by this report.
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