Essay on Billy S Beats Inc

1264 Words Jan 14th, 2015 6 Pages
Little Drummer:
Management of Billy’s made several assumptions towards its newly acquired company, Little Drummer Boy. Management finally adopted the assumptions that the fair value of significant assets acquired was $865 million and that of other assets was $145 million. At the same time of the acquisition, management also decided that useful lives of the acquired plant and equipment were 30 years and 15 years, respectively, which were different from the 20 years and 10 years useful lives for the previously owned plant and equipment. Furthermore, management determined a useful live of 15 years for the acquired customer list. Regarding the $865 million assumption, auditors only adopted the procedure to compare the percentage used to
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As indicated by PCAOB, the written representation cannot be a substitute for substantive procedures. Thus, auditors did not perform adequate procedures to test the management’s estimates. What’s more, inquires were heavily relied on the management’s integrity. Auditors ignored the professional skepticism. Finally, the 30 years and 15 years useful lives, which were adopted previously by Little Drummer, were not appropriately audited. Since the engagement team did not contact the predecessor auditors, the team did not get any audit documents from predecessor auditors regarding the assumptions of 30 years and 15 years. There was no evidence to show the reasonableness of these two assumptions.
For Little Drummer, auditors should focus on testing the fair market value of the assets acquired and the depreciation-related items. Audit of the presentation and disclosures were required. Substantive procedures were also required. The engagement team could use physical inspection to determine the existence and the actual condition of the property, plant, and equipment acquired. The title documents of the significant assets should be obtained to determine the rights and obligations of Billy’s. Regarding the valuation and allocation assertion, the reasonableness of $865 million and $145 million should be carefully evaluated. The fair market value of the significant assets was calculated based on the second level of input. Auditors should