Is the following statement true or false?

A significant change in the ownership of an existing audit client is a factor which makes it appropriate for the auditor to review the terms of engagement.

A.True

B.False

You are the audit supervisor of Maple & Co and are currently planning the audit of an existing client, Sycamore Science Co (Sycamore), whose year end was 30 April 2015. Sycamore is a pharmaceutical company, which manufactures and supplies a wide range of medical supplies. The draft financial statements show revenue of $35·6 million and profit before tax of $5·9 million.

Sycamore’s previous finance director left the company in December 2014 after it was discovered that he had been claiming fraudulent expenses from the company for a significant period of time. A new finance director was appointed in January 2015 who was previously a financial controller of a bank, and she has expressed surprise that Maple & Co had not uncovered the fraud during last year’s audit.

During the year Sycamore has spent $1·8 million on developing several new products. These projects are at different stages of development and the draft financial statements show the full amount of $1·8 million within intangible assets. In order to fund this development, $2·0 million was borrowed from the bank and is due for repayment over a ten-year period. The bank has attached minimum profit targets as part of the loan covenants.

The new finance director has informed the audit partner that since the year end there has been an increased number of sales returns and that in the month of May over $0·5 million of goods sold in April were returned.

Maple & Co attended the year-end inventory count at Sycamore’s warehouse. The auditor present raised concerns that during the count there were movements of goods in and out the warehouse and this process did not seem well controlled.

During the year, a review of plant and equipment in the factory was undertaken and surplus plant was sold, resulting in a profit on disposal of $210,000.

Required:

(a) State Maples & Co’s responsibilities in relation to the prevention and detection of fraud and error. (4 marks)

(b) Describe SIX audit risks, and explain the auditor’s response to each risk, in planning the audit of Sycamore Science Co. (12 marks)

(c) Sycamore’s new finance director has read about review engagements and is interested in the possibility of Maple & Co undertaking these in the future. However, she is unsure how these engagements differ from an external audit and how much assurance would be gained from this type of engagement.

Required:

(i) Explain the purpose of review engagements and how these differ from external audits; and (2 marks)

(ii) Describe the level of assurance provided by external audits and review engagements. (2 marks)

There has been significant divergence in practice over recognition of revenue mainly because International Financial Reporting Standards (IFRS) have contained limited guidance in certain areas. The International Accounting Standards Board (IASB) as a result of the joint project with the US Financial Accounting Standards Board (FASB) has issued IFRS 15 Revenue from Contracts with Customers. IFRS 15 sets out a five-step model, which applies to revenue earned from a contract with a customer with limited exceptions, regardless of the type of revenue transaction or the industry. Step one in the five-step model requires the identification of the contract with the customer and is critical for the purpose of applying the standard. The remaining four steps in the standard’s revenue recognition model are irrelevant if the contract does not fall within the scope of IFRS 15.

Required:

(a) (i) Discuss the criteria which must be met for a contract with a customer to fall within the scope of IFRS 15. (5 marks)

(ii) Discuss the four remaining steps which lead to revenue recognition after a contract has been identified as falling within the scope of IFRS 15. (8 marks)

(b) (i) Tang enters into a contract with a customer to sell an existing printing machine such that control of the printing machine vests with the customer in two years’ time. The contract has two payment options. The customer can pay $240,000 when the contract is signed or $300,000 in two years’ time when the customer gains control of the printing machine. The interest rate implicit in the contract is 11·8% in order to adjust for the risk involved in the delay in payment. However, Tang’s incremental borrowing rate is 5%. The customer paid $240,000 on 1 December 2014 when the contract was signed. (4 marks)

(ii) Tang enters into a contract on 1 December 2014 to construct a printing machine on a customer’s premises for a promised consideration of $1,500,000 with a bonus of $100,000 if the machine is completed within 24 months. At the inception of the contract, Tang correctly accounts for the promised bundle of goods and services as a single performance obligation in accordance with IFRS 15. At the inception of the contract, Tang expects the costs to be $800,000 and concludes that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will occur. Completion of the printing machine is highly susceptible to factors outside of Tang’s influence, mainly issues with the supply of components.

At 30 November 2015, Tang has satisfied 65% of its performance obligation on the basis of costs incurred to date and concludes that the variable consideration is still constrained in accordance with IFRS 15. However, on 4 December 2015, the contract is modified with the result that the fixed consideration and expected costs increase by $110,000 and $60,000 respectively. The time allowable for achieving the bonus is extended by six months with the result that Tang concludes that it is highly probable that the bonus will be achieved and that the contract still remains a single performance obligation. Tang has an accounting year end of 30 November. (6 marks)

Required:

Discuss how the above two contracts should be accounted for under IFRS 15. (In the case of (b)(i), the discussion should include the accounting treatment up to 30 November 2016 and in the case of (b)(ii), the accounting treatment up to 4 December 2015.)

Note: The mark allocation is shown against each of the items above.

Professional marks will be awarded in question 4 for clarity and quality of presentation. (2 marks)

Moonstar Co is a property development company which is planning to undertake a $200 million commercial property development. Moonstar Co has had some difficulties over the last few years, with some developments not generating the expected returns and the company has at times struggled to pay its finance costs. As a result Moonstar Co’s credit rating has been lowered, affecting the terms it can obtain for bank finance. Although Moonstar Co is listed on its local stock exchange, 75% of the share capital is held by members of the family who founded the company. The family members who are shareholders do not wish to subscribe for a rights issue and are unwilling to dilute their control over the company by authorising a new issue of equity shares. Moonstar Co’s board is therefore considering other methods of financing the development, which the directors believe will generate higher returns than other recent investments, as the country where Moonstar Co is based appears to be emerging from recession.

Securitisation proposals

One of the non-executive directors of Moonstar Co has proposed that it should raise funds by means of a securitisation process, transferring the rights to the rental income from the commercial property development to a special purpose vehicle. Her proposals assume that the leases will generate an income of 11% per annum to Moonstar Co over a ten-year period. She proposes that Moonstar Co should use 90% of the value of the investment for a collateralised loan obligation which should be structured as follows:

– 60% of the collateral value to support a tranche of A-rated floating rate loan notes offering investors LIBOR plus 150 basis points

– 15% of the collateral value to support a tranche of B-rated fixed rate loan notes offering investors 12%

– 15% of the collateral value to support a tranche of C-rated fixed rate loan notes offering investors 13%

– 10% of the collateral value to support a tranche as subordinated certificates, with the return being the excess of receipts over payments from the securitisation process

The non-executive director believes that there will be sufficient demand for all tranches of the loan notes from investors. Investors will expect that the income stream from the development to be low risk, as they will expect the property market to improve with the recession coming to an end and enough potential lessees to be attracted by the new development.

The non-executive director predicts that there would be annual costs of $200,000 in administering the loan. She acknowledges that there would be interest rate risks associated with the proposal, and proposes a fixed for variable interest rate swap on the A-rated floating rate notes, exchanging LIBOR for 9·5%.

However the finance director believes that the prediction of the income from the development that the non-executive director has made is over-optimistic. He believes that it is most likely that the total value of the rental income will be 5% lower than the non-executive director has forecast. He believes that there is some risk that the returns could be so low as to jeopardise the income for the C-rated fixed rate loan note holders.

Islamic finance

Moonstar Co’s chief executive has wondered whether Sukuk finance would be a better way of funding the development than the securitisation.

Moonstar Co’s chairman has pointed out that a major bank in the country where Moonstar Co is located has begun to offer a range of Islamic financial products. The chairman has suggested that a Mudaraba contract would be the most appropriate method of providing the funds required for the investment.

Required:

(a) Calculate the amounts in $ which each of the tranches can expect to receive from the securitisation arrangement proposed by the non-executive director and discuss how the variability in rental income affects the returns from the securitisation. (11 marks)

(b) Discuss the benefits and risks for Moonstar Co associated with the securitisation arrangement that the non-executive director has proposed. (6 marks)

(c) (i) Discuss the suitability of Sukuk finance to fund the investment, including an assessment of its appeal to potential investors. (4 marks)

(ii) Discuss whether a Mudaraba contract would be an appropriate method of financing the investment and discuss why the bank may have concerns about providing finance by this method. (4 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)

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)

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)

1 Oliver Hoppe has been working at Hoopers and Henderson accountancy practice for eighteen months. He feels that

he fits in well, especially with his colleagues and has learnt a lot from them. However, he feels that the rules and

regulations governing everyday activities and time keeping are not clear.

Oliver does not get on well with his line manager, David Morgan. There appears to be a clash of personalities and

reluctance on David Morgan’s part to deal with the icy atmosphere between them after David was asked by one of

the accounting partners to give Oliver a job. For the past three months Oliver has gone to lunch with his fellow workers

and always returned to work with them or before them. In fact they all have returned to work about ten minutes late

on several previous occasions. After the third time, Oliver was called into David Morgan’s office and given an oral

warning about his time keeping.

Oliver was not permitted to argue his case and none of the other staff who returned late were disciplined in this way.

On the next occasion the group was late returning from lunch, David Morgan presented Oliver with a written warning

about his time keeping.

Yesterday, Oliver was five minutes late returning to work. His colleagues returned after him. David Morgan gave Oliver

notice and told him to work until the end of the week and then collect his salary, the necessary paperwork and to

leave the practice.

There is a partner responsible for human resources. Oliver has come to see the partner to discuss the grievance

procedures against David Morgan for his treatment and about what Oliver regards as unfair dismissal.

Required:

(a) Describe the six stages of a formal disciplinary procedure that an organisation such as Hoopers and

Henderson should have in place. (12 marks)

某个人在A市设立从事生产、经营的个人独资企业，税务机关对其进行查账征收管理。2009年2月份聘请注册税务师代理企业2008年度个人所得税的纳税申报工作，注册税务师审核企业的资料如下：

(1) 企业自行申报取得销售产品收入640万元，购买国家发行的金融债券利息收入2.50万元；

(2) 结转的销售产品成本450万元；发生管理费用150万元(其中含业务招待费15万元，广告费 8万元，业务宣传费7万元，缴纳的印花税0.40万元、房产税0.60万元，)；发生营业外支出30万元(其中含向红十字事业捐款6万元，税款滞纳金1万元)；

(3) 应缴纳的增值税2万元、城市维护建设税 0.14万元、教育费附加0.06万元；

(4) 拥有员工7人(其中含投资者1人)，全年计入各项成本、费用中的实发工资总额136800元 (投资者每月工资为3000元，2名管理员工每月工资2200元，4名普通员工每月工资1000元)，并已经代扣代缴个人所得税；计提福利费19152元，当年并未发生福利费支出。

(5) 8月份购进小汽车一辆，用于企业的业务洽谈及接送投资者女儿上学使用，汽车价款11.70万元，支付的车辆购置税1万元，车辆牌照等费用8000元，2008年8月至2009年7月企业应负担的养路费978元。企业将儿70万元计入了“固定资产”科目，其他计入了“管理费用”中核算。并按照固定资产原值和税法规定计提了折旧。当地税务机关核定的准予扣除折旧额为根据标准计算的折旧额的60%。(税法规定汽车折旧年限4年)

(6) 9月份，投资者在龙门大酒店招待家人发生餐费共计2万元，已经计入了“管理费用一业务招待费”科目中核算。

(7) 购进生产设备一台，支付买价和安装费共计 10万元(其中支付给个人的安装劳务费0.50万元，按照安装协议，支付给个人的安装劳务费应缴纳的个人所得税由该个人独资企业代为负担，个人独资企业代缴个人所得税800元，计入了“税后列支费用”中)；

(8) 12月木，企业根据应收账款年末余额200万元，计提坏账准备金5万元。

(9) 12月末，给每位员工(包括业主)，发放年终一次性不含税奖金1万元，计入了“管理费用”中核算，以现金支付。

(10) 经当地主管税务机关审核，企业从业人员的工资符合税前扣除标准。

要求：根据所给资料，顺序分析投资者存在的纳税问题；并计算企业2008年度应补缴的代扣代缴个人所得税和应缴纳的个人所得税。(以元为单位，整数后四舍五入保留两位小数)