(a) You are a manager in Lapwing & Co. One of your audit clients is Hawk Co which operates commercial real estate properties typically comprising several floors of retail units and leisure facilities such as cinemas and health clubs, which are rented out to provide rental income.
Your firm has just been approached to provide an additional engagement for Hawk Co, to review and provide a report on the company’s business plan, including forecast financial statements for the 12-month period to 31 May 2013. Hawk Co is in the process of negotiating a new bank loan of $30 million and the report on the business plan is at the request of the bank. It is anticipated that the loan would be advanced in August 2012 and would carry an interest rate of 4%. The report would be provided by your firm’s business advisory department and a second partner review will be conducted which will reduce any threat to objectivity to an acceptable level.
Extracts from the forecast financial statements included in the business plan are given below:
Statement of comprehensive income (extract)
Notes:
1. Beak Retail is a retail park which is underperforming. Its sale is currently being negotiated, and is expected to take place in September 2012.
2. Hawk Co is planning to invest the cash raised from the bank loan in a new retail and leisure park which is being developed jointly with another company, Kestrel Co.
Required:
In respect of the engagement to provide a report on Hawk Co’s business plan:
(i) Identify and explain the matters that should be considered in agreeing the terms of the engagement; and Note: You are NOT required to consider ethical threats to objectivity. (6 marks)
(ii) Recommend the procedures that should be performed in order to examine and report on the forecast financial statements of Hawk Co for the year to 31 May 2013. (13 marks)
(b) You are also responsible for the audit of Osprey Co, which has a financial year ended 31 May 2012. The audit engagement partner, Bill Kingfisher, sent you the following email this morning:
Required:
Respond to the partner’s email. (10 marks)
Note: the split of the mark allocation is shown within the partner’s email.
Professional marks will be awarded in part (b) for the presentation and clarity of your answer. (4 marks)