The audit engagement partner, Edmund Black, has asked you to review the audit working papers

in relation to two audit issues which have been highlighted by the audit senior. Information on
each of these issues is given below:
(i) In December 20X4, a leisure centre complex was sold for proceeds equivalent to its fair

QUESTIONS
value of $35 million, the related assets have been derecognised from the Group statement
of financial position, and a profit on disposal of $8 million is included in the Group
statement of profit or loss for the year. The sale qualifies as a sale in line with IFRS 15
Revenue from Contracts with Customers.
At the date of the sale the fair value of the complex was $33 million. According to the
Group's website, it continues to operate services from this leisure centre and a lease
liability of $22 million has been created on the 20X5 draft financial statements in relation
to the complex.
(ii) In January 20X5, the Group acquired 52% of the equity shares of Baldrick Co. This
company has not been consolidated into the Group as a subsidiary, and is instead
accounted for as an associate. The Group finance director's reason for this accounting
treatment is that Baldrick Co's operations have not yet been integrated with those of the
rest of the Group. Baldrick Co's financial statements recognise total assets of $18 million
and a loss for the year to 31 March 20X5 of $5 million.

The audit senior also left the following note for your attention:
'I have been working on the audit of properties, including the Group's storage facility
warehouses. Customers rent individual self-contained storage areas of a warehouse, for which
they are given keys allowing access by the customer at any time. The Group's employees rarely
enter the customers' storage areas.
It seems the Group's policy for storage contracts which generate revenue of less than $10,000, is
that very little documentation is required, and the nature of the items being stored is not always
known. While visiting one of the Group's warehouses, the door to one of the customers' storage
areas was open, so I looked in and saw what appeared to be potentially hazardous chemicals,
stored in large metal drums marked with warning signs. I asked the warehouse manager about
the items being stored, and he became very aggressive, refusing to allow me to ask other
employees about the matter, and threatening me if I alerted management to the storage of these
items. I did not mention the matter to anyone else at the client.'

(a) Using the information provided in Exhibit 1, comment on the matters to be considered, and
explain the audit evidence you should expect to find in your review of the audit working
papers.
(b) Discuss the implications of the information provided in Exhibit 2 for the completion of the
audit, commenting on the auditor's responsibilities in relation to laws and regulations, and
on any ethical matters arising.
Professional marks will be awarded for the demonstration of skill in analysis and evaluation, and
professional scepticism and judgement in your answer.
Assume it is 6 June 20X5.

23 Setter (P7 June 2013) (amended) 49 mins

You are the manager responsible for the audit of Setter Stores Co, a company which operates
supermarkets across the country. The final audit for the year ended 31 January 20X3 is nearing
completion and you are reviewing the audit working papers. The draft financial statements
recognise total assets of $300 million, revenue of $620 million and profit before tax of
$47.5 million.

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Questions 31
TB1332120
 (a)
Setter Stores Co owns a number of properties which have been classified as assets held for
sale in the statement of financial position. The notes to the financial statements state that
the properties are all due to be sold within one year. On classification as held for sale, in
October 20X2, the properties were re-measured from carrying value of $26 million to fair
value less cost to sell of $24 million, which is the amount recognised in the statement of
financial position at the year end.
(b)
A 'sale and leaseback' arrangement involving a large property complex was entered into on
31 January 20X3. The property complex is a large warehousing facility, which was sold for
$37 million, which is both its fair value at the date of the disposal and the present value of
the lease payments. Setter Stores Co retains control of use of the asset. The lease term is
20 years, the same as the useful life of the property.
The facility was held under the cost model – together with other assets of its class – at its
carrying amount at that date of $27 million.
Setter Stores Co has made accounting entries to recognise the cash received and a non-
current liability classified as a 'Lease liability'. It has recognised a revaluation gain on the
property asset of $10 million.
(c)
The statement of financial position includes an intangible asset of $15 million, which is the
cost of a distribution licence acquired on 1 September 20X2. The licence gives Setter Stores
Co the exclusive right to distribute a popular branded soft drink in its stores for a period of
five years.

Comment on the matters to be considered, and explain the audit evidence you should expect to
find during your file review in respect of each of the issues described above.
The split of the mark allocation is shown against each of the issues above.
Professional marks will be awarded for the demonstration of skill in analysis and evaluation, and
professional scepticism and judgement in your answer.

24 York (P7 Mar/Jun 2016) (amended) 49 mins

(a) According to ISA 240 The Auditor's Responsibilities Relating to Fraud in an Audit of
Financial Statements:
'When identifying and assessing the risks of material misstatement due to fraud, the
auditor shall, based on a presumption that there are risks of fraud in revenue recognition,
evaluate which types of revenue, revenue transactions or assertions give rise to such risks.'

Discuss why the auditor should presume that there are risks of fraud in revenue recognition
and why ISA 240 requires specific auditor responses in relation to the risks identified.

(b) You are the manager responsible for the audit of York Co, a chain of health and leisure
clubs owned and managed by entrepreneur Phil Smith. The audit for the year ended
30 November 20X5 is nearing completion and the draft financial statements recognise total
assets of $27 million and profit before tax of $2.2 million. The audit senior has left the
following file notes for your consideration during your review of the audit working papers:

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32 Advanced Audit and Assurance – International (AAA – INT)