Section A – BOTH questions are compulsory and MUST be attempted
You are an audit manager in Montreal & Co, a firm of Chartered Certified Accountants, and you are responsible for the audit of the Vancouver Group (the Group). The Group operates in the supply chain management sector, offering distribution, warehousing and container handling services.
The Group comprises a parent company, Vancouver Co, and two subsidiaries, Toronto Co and Calgary Co. Both of the subsidiaries were acquired as wholly owned subsidiaries many years ago. Montreal & Co audits all of the individual company financial statements as well as the Group consolidated financial statements.
You are beginning to plan the Group audit for the financial year ending 31 July 2016, and the audit engagement partner has sent you the following email:
Notes from meeting with the Group finance director and audit committee representative
The Group has not changed its operations significantly this year. However, it has completed a modernisation programme of its warehousing facilities at a cost of $25 million. The programme was financed with cash raised from two sources: $5 million was raised from a debenture issue, and $20 million from the sale of 5% of the share capital of Calgary Co, with the shares being purchased by an institutional investor.
An investigation into the Group’s tax affairs started in January 2016. The tax authorities are investigating the possible underpayment of taxes by each of the companies in the Group, claiming that tax laws have been breached. The Group’s tax planning was performed by another firm of accountants, Victoria & Co, but the Group’s audit committee has asked if our firm will support the Group by looking into its tax position and liaising with the tax authorities in respect of the tax investigation on its behalf. Victoria & Co has resigned from their engagement to provide tax advice to the Group. The matter is to be resolved by a tribunal which is scheduled to take place in September 2016.
The Group audit committee has also asked whether one of Montreal & Co’s audit partners can be appointed as a non-executive director and serve on the audit committee. The audit committee lacks a financial reporting expert, and the appointment of an audit partner would bring much needed knowledge and experience.
Financial information provided by the Group finance director
Consolidated statement of financial position
Consolidated statement of profit or loss for the year to 31 July
Notes:
1. Several old warehouses were modernised during the year. The modernisation involved the redesign of the layout of each warehouse, the installation of new computer systems, and the replacement of electrical systems.
2. The deferred tax asset is in respect of unused tax losses (tax credits) which accumulated when Toronto Co was loss making for a period of three years from 2009 to 2012.
3. The non-controlling interest has arisen on the disposal of shares in Calgary Co. On 1 January 2016, a 5% equity shareholding in Calgary Co was sold, raising cash of $20 million. The profit made on the disposal is separately recognised in the Group statement of profit or loss.
4. The provisions relate to onerous leases in respect of vacant properties which are surplus to the Group’s requirements.
Required:
Respond to the instructions in the partner’s email. (31 marks)
Note: The split of the mark allocation is shown within the email.
Professional marks will be awarded for presentation, logical flow, and clarity of explanations provided. (4 marks)