In relation to company law, explain:

(a) the limitations on the use of company names; (4 marks)

(b) the tort of ‘passing off’; (4 marks)

(c) the role of the company names adjudicators under the Companies Act 2006. (2 marks)

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)

TQ Company, a listed company, recently went into administration (it had become insolvent and was being managed by a firm of insolvency practitioners). A group of shareholders expressed the belief that it was the chairman, Miss Heike Hoiku, who was primarily to blame. Although the company’s management had made a number of strategic errors that brought about the company failure, the shareholders blamed the chairman for failing to hold senior management to account. In particular, they were angry that Miss Hoiku had not challenged chief executive Rupert Smith who was regarded by some as arrogant and domineering. Some said that Miss Hoiku was scared of Mr Smith.

Some shareholders wrote a letter to Miss Hoiku last year demanding that she hold Mr Smith to account for a number of previous strategic errors. They also asked her to explain why she had not warned of the strategic problems in her chairman’s statement in the annual report earlier in the year. In particular, they asked if she could remove Mr Smith from office for incompetence. Miss Hoiku replied saying that whilst she understood their concerns, it was difficult to remove a serving chief executive from office.

Some of the shareholders believed that Mr Smith may have performed better in his role had his reward package been better designed in the first place. There was previously a remuneration committee at TQ but when two of its four non-executive members left the company, they were not replaced and so the committee effectively collapsed.

Mr Smith was then able to propose his own remuneration package and Miss Hoiku did not feel able to refuse him.

He massively increased the proportion of the package that was basic salary and also awarded himself a new and much more expensive company car. Some shareholders regarded the car as ‘excessively’ expensive. In addition, suspecting that the company’s performance might deteriorate this year, he exercised all of his share options last year and immediately sold all of his shares in TQ Company.

It was noted that Mr Smith spent long periods of time travelling away on company business whilst less experienced directors struggled with implementing strategy at the company headquarters. This meant that operational procedures were often uncoordinated and this was one of the causes of the eventual strategic failure.

(a) Miss Hoiku stated that it was difficult to remove a serving chief executive from office.

Required:

(i) Explain the ways in which a company director can leave the service of a board. (4 marks)

(ii) Discuss Miss Hoiku’s statement that it is difficult to remove a serving chief executive from a board.

(4 marks)

(b) Assess, in the context of the case, the importance of the chairman’s statement to shareholders in TQ

Company’s annual report. (5 marks)

(c) Criticise the structure of the reward package that Mr Smith awarded himself. (4 marks)

(d) Criticise Miss Hoiku’s performance as chairman of TQ Company. (8 marks)

John Pentanol was appointed as risk manager at H&Z Company a year ago and he decided that his first task was to examine the risks that faced the company. He concluded that the company faced three major risks, which he assessed by examining the impact that would occur if the risk were to materialise. He assessed Risk 1 as being of low potential impact as even if it materialised it would have little effect on the company’s strategy. Risk 2 was assessed as being of medium potential impact whilst a third risk, Risk 3, was assessed as being of very high potential impact.

When John realised the potential impact of Risk 3 materialising, he issued urgent advice to the board to withdraw from the activity that gave rise to Risk 3 being incurred. In the advice he said that the impact of Risk 3 was potentially enormous and it would be irresponsible for H&Z to continue to bear that risk.

The company commercial director, Jane Xylene, said that John Pentanol and his job at H&Z were unnecessary and that risk management was ‘very expensive for the benefits achieved’. She said that all risk managers do is to tell people what can’t be done and that they are pessimists by nature. She said she wanted to see entrepreneurial risk takers in H&Z and not risk managers who, she believed, tended to discourage enterprise.

John replied that it was his job to eliminate all of the highest risks at H&Z Company. He said that all risk was bad and needed to be eliminated if possible. If it couldn’t be eliminated, he said that it should be minimised.

(a) The risk manager has an important role to play in an organisation’s risk management.

Required:

(i) Describe the roles of a risk manager. (4 marks)

(ii) Assess John Pentanol’s understanding of his role. (4 marks)

(b) With reference to a risk assessment framework as appropriate, criticise John’s advice that H&Z should

withdraw from the activity that incurs Risk 3. (6 marks)

(c) Jane Xylene expressed a particular view about the value of risk management in H&Z Company. She also said that she wanted to see ‘entrepreneurial risk takers’.

Required:

(i) Define ‘entrepreneurial risk’ and explain why it is important to accept entrepreneurial risk in business

organisations; (4 marks)

(ii) Critically evaluate Jane Xylene’s view of risk management. (7 marks)

Big Cheese Chairs (BCC) manufactures and sells executive leather chairs. They are considering a new design of massaging chair to launch into the competitive market in which they operate.

They have carried out an investigation in the market and using a target costing system have targeted a competitive selling price of $120 for the chair. BCC wants a margin on selling price of 20% (ignoring any overheads).

The frame. and massage mechanism will be bought in for $51 per chair and BCC will upholster it in leather and assemble it ready for despatch.

Leather costs $10 per metre and two metres are needed for a complete chair although 20% of all leather is wasted in the upholstery process.

The upholstery and assembly process will be subject to a learning effect as the workers get used to the new design.

BCC estimates that the first chair will take two hours to prepare but this will be subject to a learning rate (LR) of 95%.

The learning improvement will stop once 128 chairs have been made and the time for the 128th chair will be the time for all subsequent chairs. The cost of labour is $15 per hour.

The learning formula is shown on the formula sheet and at the 95% learning rate the value of b is -0·074000581.

Required:

(a) Calculate the average cost for the first 128 chairs made and identify any cost gap that may be present at

that stage. (8 marks)

(b) Assuming that a cost gap for the chair exists suggest four ways in which it could be closed. (6 marks)

The production manager denies any claims that a cost gap exists and has stated that the cost of the 128th chair will be low enough to yield the required margin.

(c) Calculate the cost of the 128th chair made and state whether the target cost is being achieved on the 128th chair. (6 marks)

You are the audit manager of Chestnut & Co and are reviewing the key issues identified in the files of two audit clients.

Palm Industries Co (Palm)

Palm’s year end was 31 March 2015 and the draft financial statements show revenue of $28·2 million, receivables of $5·6 million and profit before tax of $4·8 million. The fieldwork stage for this audit has been completed.

A customer of Palm owed an amount of $350,000 at the year end. Testing of receivables in April highlighted that no amounts had been paid to Palm from this customer as they were disputing the quality of certain goods received from Palm. The finance director is confident the issue will be resolved and no allowance for receivables was made with regards to this balance.

Ash Trading Co (Ash)

Ash is a new client of Chestnut & Co, its year end was 31 January 2015 and the firm was only appointed auditors in February 2015, as the previous auditors were suddenly unable to undertake the audit. The fieldwork stage for this audit is currently ongoing.

The inventory count at Ash’s warehouse was undertaken on 31 January 2015 and was overseen by the company’s internal audit department. Neither Chestnut & Co nor the previous auditors attended the count. Detailed inventory records were maintained but it was not possible to undertake another full inventory count subsequent to the year end.

The draft financial statements show a profit before tax of $2·4 million, revenue of $10·1 million and inventory of $510,000.

Required:

For each of the two issues:

(i) Discuss the issue, including an assessment of whether it is material;

(ii) Recommend ONE procedure the audit team should undertake to try to resolve the issue; and

(iii) Describe the impact on the audit report if the issue remains UNRESOLVED.

Notes:

1 The total marks will be split equally between each of the two issues.

2 Audit report extracts are NOT required.

The town of Brighttown in Euraria has a mayor (elected every five years by the people in the town) who is responsible for, amongst other things, the transport policy of the town.

A year ago, the mayor (acting as project sponsor) instigated a ‘traffic lite’ project to reduce traffic congestion at traffic lights in the town. Rather than relying on fixed timings, he suggested that a system should be implemented which made the traffic lights sensitive to traffic flow. So, if a queue built up, then the lights would automatically change to green (go). The mayor suggested that this would have a number of benefits. Firstly, it would reduce harmful emissions at the areas near traffic lights and, secondly, it would improve the journey times for all vehicles, leading to drivers ‘being less stressed’. He also cited evidence from cities overseas where predictable journey times had been attractive to flexible companies who could set themselves up anywhere in the country. He felt that the new system would attract such companies to the town.

The Eurarian government has a transport regulation agency called OfRoad. Part of OfRoad’s responsibilities is to monitor transport investments and it was originally critical of the Brighttown ‘traffic lite’ project because the project’s benefits were intangible and lacked credibility. The business case did not include a quantitative cost/benefit analysis. OfRoad has itself published a benefits management process which classifies benefits in the following way.

Financial: A financial benefit can be confidently allocated in advance of the project. Thus if the investment will save $90,000 per year in staff costs then this is a financial benefit.

Quantifiable: A quantifiable benefit is a benefit where there is sufficient credible evidence to suggest, in advance, how much benefit will result from the project. This benefit may be financial or non-financial. For example, energy savings from a new building might be credibly predicted in advance. However, the exact amount of savings cannot be accurately forecast.

Measurable benefit: A measurable benefit is a benefit which can only be confidently assessed post-implementation, and so cannot be reliably predicted in advance. Increase in sales from a particular initiative is an example of a measurable benefit. Measurable benefits may either be financial or non-financial.

Observable benefit: An observable benefit is a benefit which a specific individual or group will decide, using agreed criteria, has been realised or not. Such benefits are usually non-financial. Improved staff morale might be an example of an observable benefit.

One month ago, the mayoral elections saw the election of a new mayor with a completely distinct transport policy with different objectives. She wishes to address traffic congestion by attracting commuters away from their cars and onto public transport. Part of her policy is a traffic light system which gives priority to buses. The town council owns the buses which operate in the town and they have invested heavily in buses which are comfortable and have significantly lower emissions than the conventional cars used by most people in the town. The new mayor wishes to improve the frequency, punctuality and convenience of these buses, so that they tempt people away from using their cars. This will require more buses and more bus crews, a requirement which the mayor presents as ‘being good for the unemployment rate in this town’. It will also help the bus service meet the punctuality service level which it published three years ago, but has never yet met. ‘A reduction in cars and an increase in buses will help us meet our target’, the mayor claims.

The mayor has also suggested a number of initiatives to discourage people from taking their cars into the town. She intends to sell two car parks for housing land (raising $325,000) and this will reduce car park capacity from 1,000 to 800 car spaces per day. She also intends to raise the daily parking fee from $3 to $4. Car park occupancy currently stands at 95% (it is difficult to achieve 100% for technical reasons) and the same occupancy rate is expected when the car park capacity is reduced.

The new mayor believes that her policy signals the fact that Brighttown is serious about its green credentials. ‘This’, she says, ‘will attract green consumers to come and live in our town and green companies to set up here. These companies and consumers will bring great benefit to our community.’ To emphasise this, she has set up a Go Green team to encourage green initiatives in the town.

The ‘traffic lite’ project to tackle congestion proposed by the former mayor is still in the development stage. The new mayor believes that this project can be modified to deliver her vision and still be ready on the date promised by her predecessor.

Required:

(a) A ‘terms of reference’ (project initiation document, project charter) was developed for the ‘traffic lite’ project to reduce traffic congestion.

Discuss what changes will have to be made to this ‘terms of reference’ (project initiation document, project charter) to reflect the new mayor’s vision of the project. (5 marks)

(b) The new mayor wishes to re-define the business case for the project, using the benefits categorisation suggested by OfRoad. Identify costs and benefits for the revised project, classifying each benefit using the guidance provided by OfRoad. (14 marks)

(c) Stakeholder management is the prime responsibility of the project manager.

Discuss the appropriate management of each of the following three stakeholders identified in the revised (modified) project.

(i) The new mayor;

(ii) OfRoad;

(iii) A private motorist in Brighttown who uses his vehicle to commute to his job in the town. (6 marks)

Background information

B-Star is a theme park based on a popular series of children’s books. Customers pay a fixed fee to enter the park,where they can participate in a variety of activities such as riding roller-coasters, playing on slides and purchasing themed souvenirs from gift shops.

The park is open all year and has been in operation for the last seven years. It is located in a country which has very little rainfall – the park is open-air so poor weather such as rain results in a significant fall in the number of customers for that day (normally by 50%). During the last seven years there have been on average 30 days each year with rain.

B-Star is now very successful; customer numbers are increasing at approximately 15% each year.

Ticket sales

Customers purchase tickets to enter the theme park from ticket offices located outside the park. Tickets are only valid on the day of purchase. Adults and children are charged the same price for admission to the park. Tickets are preprinted and stored in each ticket office.

Tickets are purchased using either cash or credit cards.

Each ticket has a number comprising of two elements – two digits relating to the ticket office followed by six digits to identify the ticket. The last six digits are in ascending sequential order.

Cash sales

1. All ticket sales are recorded on a computer showing the amount of each sale and the number of tickets issued.

This information is transferred electronically to the accounts office.

2. Cash is collected regularly from each ticket office by two security guards. The cash is then counted by two

accounts clerks and banked on a daily basis.

3. The total cash from each ticket office is agreed to the sales information that has been transferred from each office.

4. Total cash received is then recorded in the cash book, and then the general ledger.

Credit card sales

1. Payments by credit cards are authorised online as the customers purchase their tickets.

2. Computers in each ticket office record the sales information which is transferred electronically to the accounts office.

3. Credit card sales are recorded for each credit card company in a receivables ledger.

4. When payment is received from the credit card companies, the accounts clerks agree the total sales values to the amounts received from the credit card companies, less the commission payable to those companies. The receivables ledger is updated with the payments received.

You are now commencing the planning of the annual audit of B-Star. The date is 3 June 2009 and B-Star’s year end is 30 June 2009.

Required:

(a) List and explain the purpose of the main sections of an audit strategy document and for each section, provide an example relevant to B-Star. (8 marks)

(b) (i) For the cash sales system of B-Star, identify the risks that could affect the assertion of completeness of sales and cash receipts; (4 marks)

(ii) Discuss the extent to which tests of controls and substantive procedures could be used to confirm the

assertion of completeness of income in B-Star. (6 marks)

(c) (i) List the substantive analytical procedures that may be used to give assurance on the total income from

ticket sales for one day in B-Star;

(ii) List the substantive analytical procedures that may be used to give assurance on the total income from

ticket sales in B-Star for the year. (8 marks)

(d) List the audit procedures you should perform. on the credit card receivables balance. (4 marks)

(a) List and explain FOUR methods of selecting a sample of items to test from a population in accordance with ISA 530 (Redrafted) Audit Sampling and Other Means of Testing. (4 marks)

(b) List and explain FOUR assertions from ISA 500 Audit Evidence that relate to the recording of classes of

transactions. (4 marks)

(c) In terms of audit reports, explain the term ‘modified’. (2 marks)

James died on 22 January 2015. He had made the following gifts during his lifetime:

(1) On 9 October 2007, a cash gift of ￡35,000 to a trust. No lifetime inheritance tax was payable in respect of this gift.

(2) On 14 May 2013, a cash gift of ￡420,000 to his daughter.

(3) On 2 August 2013, a gift of a property valued at ￡260,000 to a trust. No lifetime inheritance tax was payable in respect of this gift because it was covered by the nil rate band. By the time of James’ death on 22 January 2015, the property had increased in value to ￡310,000.

On 22 January 2015, James’ estate was valued at ￡870,000. Under the terms of his will, James left his entire estate to his children.

The nil rate band of James’ wife was fully utilised when she died ten years ago.

The nil rate band for the tax year 2007–08 is ￡300,000, and for the tax year 2013–14 it is ￡325,000.

Required:

(a) Calculate the inheritance tax which will be payable as a result of James’ death, and state who will be responsible for paying the tax. (6 marks)

(b) Explain why it might have been beneficial for inheritance tax purposes if James had left a portion of his estate to his grandchildren rather than to his children. (2 marks)

(c) Explain why it might be advantageous for inheritance tax purposes for a person to make lifetime gifts even when such gifts are made within seven years of death.

Notes:

1. Your answer should include a calculation of James’ inheritance tax saving from making the gift of property to the trust on 2 August 2013 rather than retaining the property until his death.

2. You are not expected to consider lifetime exemptions in this part of the question. (2 marks)