Section B – TWO questions ONLY to be attempted（a) You are an audit manager in Rose & C

Section B – TWO questions ONLY to be attempted

(a) You are an audit manager in Rose & Co, responsible for the audit of Cooper Co. You are reviewing the audit working papers relating to the financial year ended 31 January 2014. Cooper Co is a manufacturer of chemicals used in the agricultural industry. The draft financial statements recognise profit for the year to 31 January 2014 of $15 million (2013 – $20 million) and total assets of $240 million (2013 – $230 million).

The audit senior, Max Turner, has brought several matters to your attention:

(i) Cooper Co’s factories are recognised within property, plant and equipment at a carrying value of $60 million. Half of the factories produce a chemical which is used in farm animal feed. Recently the government has introduced a regulation stipulating that the chemical is phased out over the next three years. Sales of the chemical are still buoyant, however, and are projected to account for 45% of Cooper Co’s revenue for the year ending 31 January 2015. Cooper Co has started to research a replacement chemical which is allowed under the new regulation, and has spent $1 million on a feasibility study into the development of this chemical. (8 marks)

(ii) In October 2013, Cooper Co’s finance director, Hannah Osbourne, purchased a car from the company. The carrying value of the car at the date of its disposal to Hannah was $50,000, and its market value was $75,000. Cooper Co raised an invoice for $50,000 in respect of the disposal, which is still outstanding for payment. (7 marks)

Required:

Comment on the matters to be considered and explain the audit evidence you should expect to find during your review of the audit working papers in respect of each of the issues described above.

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

(b) Max noticed that a section of the audit file had not been completed on the previous year’s audit. The incomplete section relates to expenditure incurred in the year to 31 January 2013, which appears not to have been audited at all in the prior year. The expenditure of $1·2 million was incurred in the development of an internally generated brand name. The amount was capitalised as an intangible asset at 31 January 2013, and that amount is still recognised at 31 January 2014.

Required:

Explain the implications of this matter for the completion of the audit, and any other professional issues raised, recommending any actions to be taken by the auditor. (5 marks)