Question no 1

Briefing note

To:Finn Drake, Audit engagement partner

From: Audit manager

Subject:re: Audit planning for Bransfield Co

Date: 1 July 20X5

Introduction

This brefing note relates to audit planning of Bransfield co for the year ended 30
September 20X5.The brefing note starts with the significant audit risks to be
considered in planning the audit of Bransfield Co.Further principal audit
procedures to be carried out in respect of measurement of the share-based
payment expense and recognition and measurement of the deferred tax asset are
included in this briefing note.Lastly limate-related risks should be considered by
the audit team during the audit of Bransfield Co are included in this briefing note.

Audit Risk

-Materiality

Materiality of Bransfield company will be based on profit before tax of the

company.This will range from 5% to 10% of the profit before tax ,in case of
Bransfield this range between 44.5m to 89m.Our firm will use proffessional
judgement based on risk assessment to detemine the materiality from the given
range.As Bransfield co is existing client it reduces the audit risk .However as the
company has major transaction like sale and lease back transaction and given that
company has just being profitable after several years of loss this increases risk of
audit therefore materiality is required to be set on middle range therefore it will be
67m.

-Revenue recognisation policy

Revenue of Bransfield is significantly higher then then the materiality level of 67m
therefore material to financial statement.Bransfield nature of business is service
organisation therefore the revenue recognisation should be done when the
performace obligation is satisfied.The advance received of 20% deposit when
booking made is required to be recorded as deferred income.There is risk that
Bransfield has recoginsed 20% deposit advance received as income .In case where
the deposite recieved and booked as income during year for booking of post year
end will create cuff off issues and the revenue will be overstated and liability will
be understated.

-Share based payement

Share based payment to executives and senior management are related party
transactions as they being key management personel.Therefore the grant of share
based payment to directors are required to be properly disclosed in financial
statement.There is risk that the management of the company has not adequately
disclosed the transattion in financial statement.As related party transactions are
material by nature ,ommission of information or inadequate disclosure will
materially misstate notes to financial statement of Bransfield co.

-Deferred Tax Asset

As per the standard deferred tax asset are only to be recognised to the extend that
there willbe profit avalible against which the deferred tax asset couldbe
utilised.Given that the company are requried to utilise deferred tax asset over the
same trade which created loss it is less likely that the company will be able to
utilise all of the deferred tax asset that arose in past year. management actual
operating profit from operation being only 55m in current year it is less likely that
it will be able to utilise all of 285m defer tax asset.Further given that calculation of
deferred tax requires significant management judgement having exposure to
management biasness ,there is risk that managemet recognisation of 285m
deffered tax is significantly overstated given the current performace.

-Sale and leaseback of properties

Bransfiled sale of 8 property with profit 125m (higher then materiality

level)indicates that the carrying value will also be material to financial statement
.As per IFRS 16 lease ,when asset is sold and leased back it should first satisfy that
the sale condition as per IFRS 15 are met.Bransfield has sold asset and leased it for
15 year with option to repurchase asset at the end.This shows that the control of
the asset is not passed to the buyer and do not satisfy sales condition as per IFRS
15. Theredore Bransfield should continue recording the asset in its register and
shouldnot record any profit for the disposal.

For the amount received as sale proceeds it should be treated as loan ,IFRS 9
Financial instrument. The treatment of management as the asset being sold and
recognisation of profit in other opertaing income overstates the profit of the
company of 125m which is not correct and understates assets and liability of the
company.

-Impairment reveiw

In case of 3 hotels which were damaged by flood, value in use of the hotels might
have significantly decreased as they could not operate as normal and also given
that they will be closed during the repair causing loss on revenue during that
period and that also have caused fair value of the asset to decline.This decrease in
fairvalue andvalue in use of asset are clear indicator that impairment review must
be performed for the hotels destroyed by flood. Management claim that no review
are required as they will be repaired is not valid as although they are repaired they
still might be impaired given that they were only built 2 year ago they might have
high values .If imapairment reviews and impairment accounting will not be done
for all 3 hotels this will overstate carrying value of hotels an understates the
expense.

-Repair and maintenance of property

As per IAS 16 all the repair and mantainance cost which will contribute to
enhancement of assets's working capacity ,value in use,and life of asset are only
capitalised and those cost which are of repair natures are requrired to be
expensed in profit and loss when they incur.All the estimated cost of repair and
maintence of 15m should only be capitalised or expense when incure.Given that
repair has only stated on August and expected to complete on December it is not
possible that all the expenditure of 15m will haveincurred in the year
end.Management treatment of recording all the expense in profit or loss is
incorrect as when they incur they should be classified as capital or revenue
expenditure and then be accounted accordingly.The current treatement will
understate the profit figure of the company.
-Financial anlaysis

Growth in revenue 24%

Increase in property plant and equipment 11%

Increase in operating profit 475%

Increase in profit before tax 1350%

Increasein other operating income 1250%

Revene from operation has increased by 24% which is normal increase given that
the whole industry revenue has increased by 20%. Movement in operating profit
and profit before tax of 475% and 1350% are significantly higher and
abnormal.This is because of profit on disposal of 125m added in other opertating
profit which wasincorrect leading to rise in other operating income by
1250%.Increase in property plant and equipment by 11% is also an abnormal
movement given that company selling 8 of its property and recent destroy of 3
other building by flood which should have actually reduced the value of PPE.

Conclusion,

The most significant risk is of revenue recognisation as if they has been incorrected
accounted then it will have very pervasive impact on financial statement given that
company suffing loss in prior several year and risk that earning management
techique has been used to boost revnue exist.Secondly share based payment is
another significant risk given its nature of transation with key personal they might
be abusing their powers.Recognisation of deferred tax asset is another
significantrisk given that high management assumptions required in its calculation.

b.

Principal audit procedures to be carried out in respect of the following:

I.Measurement of share based payment expense.

1.Review board minutes to understand the decision of board for number of
shares to be grantes ,other condition attached of performance and board's
approval for share based scheme.

2.Obtain draft financial statement and review the disclosure notes to ensure that
the amount,conditions and benificiers and other information as per requrement of
IFRS are clearly disclosed.

3.Obtain market data,eg from stock market,and reveiw the share price of each
share in grant date to compare with those price used by the company in
calculation.

4.Recalculate the share based payment amount to be recorded in profit and loss
and equity using the informations in board minutes and share data to verify the
accuracy of mangaement calculation.

5.Discuss with management for the accounting treatment they have done in
relation to share based payement ,review the financial statement and confirm if it
is in accordance with the IFRS standard.

ii.Recognition and measurement of the deferred tax asset.

1.Obtain information of rules and regulation in the country from data pubished by
tax officers and compare with the rules used by Bransfield in calculation to ensure
they are consistent with the requirement with tax rules.

2.Obtain forcaste of profits for next few year and review the assumptions used in
calculation if they are in accordance with the auditor understanding and to ensure
that profit generated are available to offset against the deferred tax of 285m

3.Recalculate the deferred tax asset using the information provided by

management and prevailing tax rules and compare with those calculation of
management to discuss significant variances.

4.Obtain written representation from management confirming that there

assumptions in deferred tax calculations are complete and reasonable.

c.how climate-related risks should be considered by the audit team during the
audit of Bransfield Co
-All the audit team members are requried to be properly informed by audit
manager or engagement partner for areas which are prone to damanges due to
floods ,fire and other factors to ensure that all member are aware of the damanges
that could incur in such areas.

-All team memberes shouldbe instructed to obtain further information of the areas
which could have been affected by climate factors and assess further the extent of
damanged incured as they couldbe used in detemiation of imapirment and other
calculation.

-For those industry like agricultural sector,hotels near water resources which are
prone to enviroment risk ,it shouldbe considered as if the audit staffs are
sufficiently competent to perform engagement in high risk areas.

-Further it needs to be considered if there are any insurance polices which could
cover the damages due to climate risk and there claused should be assessed
properly as they could be helpful in recoginsing contingent asset or asstes.

Question no 2

a.Identify and explain the matters that should be considered in agreeing the terms
of the engagement:

1.The intented user of reports is requried to be conditor as whether it is only for

the bank use or will it be generally distributed.Where the report will be generally
distrubuted it will increase the engagement risk.

2.Further the assumptions used in the preparation of the PFI are required to be
considered .Usually the assumptions made using best estimates are supposed to
be reasonable and could be analysised better whereas if any hypotethical
information are used by the company then it makes the PFI meaningless and
increases risk of engagement.

3.Period covered by PFI reports are requried to be considered as it is longer period

considerd would mean that more assumptions are used making the report less
useful. As report is being prepared for 12 month it is accepatble period for an PFI
engagement as estimates are more realistic.
4.Further it needs to be considered that Amunden co being our existent client,the
PFI information would also be assessed at the time of audit which will create self
review threat as the audit team member would review the report with less
professional skepticism and more reliance will be kept on report as it was prepared
by our firm.

5.Accepting the PFI engagement also required to be considered by the commercial

prospective as company will be providing PFI to bank for loan of 30m in which
assurance willbe provided by our fault.There is risk that if Amudsen co defults its
payment then bank would take legal actions against our firm affecting our
reputation .

6.Lastly it needs to be considered as there will be resorcses available inorder to

complete the enagagement on requried time .Given that loan is to advanced on
August there is less than a month and there might not be adequate resources
avlaible in this time constrain to complete the engagement

b.The examination procedures which should be performed in the examination of

the forecast financial statements of Amundsen Co for the year to 31 May 20X6.

1.Review the PFI and identify who has prepared the statement whether he has
required competence and experience to prepare the PFI .This could also be verified
reviewing the previous PFI and actual results to identify if any significant variance
exists.

2.The revenue of the company has been forcasted to increase by 21% which is a
signifcant increase in the revenue of the company over a year.The estimation of
management are over optimistic given that although company is planning to invest
in new park it would not generate such high revenue in such short
period.Therefore discussion with management,such as sales director, is requrired
to be done in this aspects.

3.Obtain correspondace with bank in relation to existing,if any, and new loan to
verify terms of loan and chances of loan made available being discussed with the
management.
4.Discuss with report preparer accouting policies used in preparing the PFI and
compare it with Amundsen existing accounting policy and with IFRS standard to
ensure they are consistent with each other.

5.Obtain list of system and control processes usedin calculation of PFI report and
verify it will existing system and control to ensure that they are consistenty applied
while preparing the PFI reports.

6.Review correspondance with Lazarev co to verify how they have agreed to invest
in new retail and leisuire to understand the nature of investment made and
underlying responsibility.

7.Review board minutes in relation to decision being made by board for

investment and approval to obtain loan from bank of 30m.

8.Review capital budget forcast and compare it with PFI forcaste to ensure that all
the capital expenditure that are planned to be carried out within a year has been
included in the PFI report to ensure completion.

9.Review any correspondance with possible buyer of Bellinhausen retail to identify

the potential sale and the sales proceeds of Bellinghausen retail .

10.Obtain written representation letter from management stating that all

assumptions made in PFI report are reasonable and complete.

C.the implications for the assurance report, assuming no revisions will be made to
the forecast financial statements.

As the assumptions on revenue of 25m and profit on disposal of 4720000 are both
significant components ,Over optimistic view of management will materially
misstate the report .

Given that PFI assurance report being based on future which is uncertain ,the
assurance provided would be limitated assurance.

As the assumptions are over optimistic the opinion povided will be

modified.Opinion para with be headed as Qualified opinion (Nothing has come to
other attention,except for,......)if, the assumption is material but not
pervasive,followed by basis of Qualified opinion para which will explain the reason
for opinion being qualified ,and its imapct on PFI.

QUESTION NO -3

(i) Comment on the sufficiency of evidence obtained and recommend any further
audit procedures necessary.

(ii) Comment on the matters to be considered and explain any adjustments that
may be necessary to the financial statement

Inventory

1Audit procedure performed identified that inventory of 130000 were

obsolete.The amount is below the materiality level determined .However it needs
to be considered that these results identified might be required to be extrapolated
over all of the inventory figure given that audit procedure might have been carried
out over a sample of inventory.

2.As per IAS 2 inventory it is required to record inventory at lower of cost or net
realisable value of the inventory.Considering that obsolete inventory might be
recycled still it will incure cost for recycling and that the NRV of inventory wouldbe
lower then the cost and it might be written down by management.

3.Management has recorded the inventory in cost commenting it will be recycled

.However if they were obsolete or NRV being less then 130000 then it will
overstate profit and inventory figures in financial statement.

4.Written confirmation obtained from management is not a reliable source and

cannot be used as a basis for conclusions to be placed,it should only be used to
support other evidence.Further procedure like reviewing post year end recycle of
the obsolete inventory and there sale should be done to veify the statement of
management that the goods canbe recycled.

Legal claim

1.Legal claim of 125000 is below the materiality threshold of the company

however it couldbe material when combined with other misstatement.
2.As per requirement of IFRS standard ,provision is required to be created if there
is present obligation ,highly probable that the payment will be required for
settlement of obligation and that reliable estimate of the cost can be
made.Therefore as the legal claim fulfills all these crtieria,provision will be required
for the legal claim of 125000.

3.Management has not recoginsed provision in relation to legal claim commenting

that they are immaterial .However it is not expected from management to use any
materiality level while applying accounting treatment correctly.Therefore this
misstatement will undestate liability and overstate the profit of the Weddell co.

4.Evidence obtained was only verbel communication with management which is

not suffcient evidence as it could not be documented ,verifed and presented at
the time of requriment or engagement review thus being unable to form
conclusion.

5.Further procedure like obtaining post year end legal orders to confirm the
progress in case and amount required to be paid by Wedell co should be
performed to verify the value of provision that should be recorded.

6.The matter is required to be communicated with those charged with goverment

although immaterial and they are requested to arrange a written confirmation
from their lawyer

Director loan

1.Director of the Weddlell ,Mawson Ross is the related party as he is the key
management personel of Weddell co . Therefore transcation with Mawson Ross is
a related party transaction.

2.Loan of 6000 to Mawsoon is therefore requried to be disclosed in financial

statement as being related party transactions regardless of the fact that it has
been carried out in market condition which has been confirmed.

3.There is the risk that the financial statement of Weddell co doesnot contain
adequate disclosure related to the amount of loan,terms of laon, total amount of
loan outstanding in the year end in relaion to loan to Mawsoon co .This will
misstate the notes to financial statement of weddell co.
4.Although amount of loan of 6000 is significantly lower then materilaity threshold
of the company .Related party transation are material by the nature of their
transaction.

5.Procedure performed by auditor does confirm that 6000 was given to Mawson
but doesnot confirm that the adequacy of disclosured.Therefore further procedure
are requried to be performed to confirm that necessary disclosures are made.

6.Obtain the draft financial statement and review the disclosure notes to ensure
that the loan taken by director Mawson, interest rate and outstaanding amount
are adequately disclosed in financial statement.

d.Implications for the auditor’s report on the basis that no further adjustments
have been made to the financial statements in relation to the matters discussed in
requirement

1.Financial statements when the misstatement are not corrected is misstated by

total of 255000.Profit is overstated by 255000 which exceeds the materiality level
determined.

2.As due to the misstatement being uncorrected ,financial statement is materially

misstated and modified opinion will be issued due to the existing material
misstatement.Audit report will be modified due to modified opinion.

3.Since the misstatement is material but not pervasive as it doesnot make whole
financial statement meaning less.Heading of opinion para will be modified as
Qualified opinion followed by basis of Qualified opinion.

4.Qulaified opinion willbe financial statement is true and fair in all material respect
except for misstatement ..... and basis of qualified opinion para will explain the
misstatement,its amount and impact on financial statement.