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.
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You are the audit manager of Explorer Ltd, which acquired the small proprietary company Local
Pty Ltd (Local) on 30 June 2018. The price of the acquisition was agreed at Mk 3.8 Billion, on the
condition that Explorer Ltd 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 Explorer Ltd, to access its
books and records. The CEO of Explorer Ltd, Ms. Chifundo Harawa, has requested that your firm
provide assurance on the following three items:
- The
- 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 Explorer Ltd indicate the level of
assurance that they require for each item. Chifundo 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.
Required:
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.
Step by step
Solved in 4 steps
- ou 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 2018In order to clarify your responsibilities, you requested that OEL…Week 1You are the audit manager of Overseas Explorer Ltd (OEL), which acquired the small proprietarycompany 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 proprietarycompany, it has not prepared statutory financial reports or undergone an audit since its incorporationin 2016. However, Local has agreed to allow your firm, which is the auditor of OEL, to access its booksand records. The CEO of OEL, Wendy Champion, has requested that your firm provide assurance onthe 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, toensure that all transactions were within the normal course of operations The financial report prepared at the acquisition date of 30 June 2018In order to clarify your responsibilities, you requested that OEL…You are a partner incharge of the audit for Bargin Ltd, a private company. The finishing of the audit report is pending for the income year 2018 and you have recorded some situations where possible action is required They are listed below: Bargin Ltd, carries its property, plant, and equipment accounts at current market values. Current market values exceed historical cost by a highly material amount, and the effects are pervasive throughout the financial statements. Management of Bargin Ltd, refuses to allow you to observe, or make, any counts of inventory. The recorded book value of inventory is highly material. You were unable to confirm accounts receivable with Bargin Ltd, customers. However, because of detailed sales and cash receipts records, you were able to perform reliable alternative audit procedures. One week before the end of fieldwork, you discover that the audit manager on the Bargin Ltd, engagement owns a material amount of Bargin Ltd, common stock. You relied…
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- On 1 July 2020, Lada Ltd (LL) acquired a 20 per cent interest in Hupmobile Ltd (HL) for a cash consideration of $40,000. Despite its small shareholding in HL, LL is considered to have significant influence over HL, since LL is able to appoint a director to HL’s Board of Directors, and HL is a major customer of LL. LL also provides management personnel to HL, and the two companies share technical information. On the date of the acquisition, the assets of HL were reported at fair value. The share capital and reserves of HL at the date of acquisition were: Share capital 50,000 Retained earnings 140,000 Total shareholders’ equity $190,000 Additional information For the year ending 30 June 2021, HL recorded an after-tax profit of $100,000, from which it paid a dividend of $50,000. For the year ending 30 June 2022, HL recorded an after-tax profit of $80,000, from which it paid a dividend of $60,000. On 30 June 2022, HL revalued its Land upwards by $10,000. Before this revaluation, the Land…The following statement expresses the conclusion of XYZ auditors with respect to the company’s investment in ABC. Assume that all amounts are material. What type of audit opinion should be rendered given this statement? Explain the reasoning behind your answer. XYZ’s investment in ABC, a foreign subsidiary acquired during the year and accounted for by the equity method, is carried at $120,000 on the statement of financial position as at December 31, 2015, and XYZ’s share of ABC’s net income of $20,000 is included in XYZ’s income for the year then ended. We were unable to obtain sufficient appropriate audit evidence about the carrying amount of XYZ’s investment in ABC as at December 31, 2015, and XYZ’s share of ABC’s net income for the year because we were denied access to the financial information, management, and the auditors of ABC. Consequently, we were unable to determine whether any adjustments to these amounts were necessary.Pilgrim Products, Inc., buys a controlling interest in the common stock of Crestwood Corporation. Shortly after the acquisition, a meeting of Pilgrim's accounting department is convened to discuss the internal reporting procedures required by the ownership of this subsidiary. Each member of the staff has a definite opinion as to whether the equity method, initial value method, or partial equity method should be adopted. To resolve this issue, Pilgrim's chief financial officer outlines several of her concerns about the decision. I already understand how each method works. I know the general advantages and disadvantages of all three. I realize, for example, that the equity method provides more detailed information whereas the initial value method is much easier to apply. What I need to know are the factors specific to our situation that should be considered in deciding which method to adopt. I must make a recommendation to the president on this matter, and he will want firm reasons for…
- The draft statement of financial position of Holm PLC includes an amount of GHS 60,000 owed by Paulina PLC. The total assets of Holm PLC are GHS 40 million.The auditor has obtained the following audit evidence:• Paulina PLC is controlled by the chairman of Holm PLC, who is its majority shareholder.• The draft financial statements of Holm PLC do not provide any disclosures about the GHS 60,000 transaction, on the grounds that it is immaterial.• There is no information about the nature of the transaction, but the GHS 60,000 had been included in receivables at the end of the previous financial year.RequiredWhat further measures should the auditor take?Jonathan Ewing is auditing the financial statements of California Company for the year ended December 31, 2020. In concluding the process of gathering sufficient appropriate evidence, Ewing has asked to meet with his supervisor on the audit (Daniel Ross) to discuss responsibility for events occurring after the date of the financial statements. Assume that on January 8, 2021, California Company agreed to acquire San Jose Inc. in a significant transaction. The date of Ewing's report was February 7, 2021, and California issued its financial statements (and Ewing's reports on its financial statements and internal control over financial reporting) on February 14, 2021. Required: How would Ewing proceed if he became aware of this subsequent event on the following dates? 1. January 10, 2021 2. February 10, 2021 3. February 20, 2021You were in the final stages of your audit of the financial statements of Ozine Corporation for the year ended December 31, 2013, when you wereconsulted by the corporation’s president, who believes there is no point to your examiningthe year 2014 acquisitions journal and testing data in support of year 2014 entries. Hestated that (a) bills pertaining to 2013 that were received too late to be included in theDecember acquisitions journal were recorded as of the year-end by the corporation byjournal entry, (b) the internal auditor made tests after the year-end, and (c) he willfurnish you with a letter certifying that there were no unrecorded liabilities.a. Should a CPA’s test for unrecorded liabilities be affected by the fact that the clientmade a journal entry to record 2013 bills that were received late? Explain.