(ii) General procedures
– Re-perform calculations to confirm the arithmetic accuracy of the forecast financial statements.
– Agree the unaudited figures for the period to 31 May 2012 to management accounts, and agree the cash figure to
bank statement or bank reconciliation.
– Confirm the consistency of the accounting policies used in the preparation of the forecast financial statements with
those used in the last audited financial statements.
– Consider the accuracy of forecasts prepared in prior periods by comparison with actual results and discuss with
management the reasons for any significant variances.
– Perform analytical procedures to assess the reasonableness of the forecast financial statements. For example,
finance charges should increase in line with the additional finance being sought.
– Discuss the extent to which the joint venture with Kestrel Co has been included in the forecast financial statements.
– Review any agreement with Kestrel Co, or minutes of meetings at which the joint venture has been discussed to
understand the nature, scale, and timeframe of the proposed joint business arrangement.
– Review any projected financial information for the joint venture, and agree any components relating to it into the
forecast financial statements. 18
Forecast income statement
– Consider the reasonableness of forecast trends in the light of auditor’s knowledge of Hawk Co’s business and the
current and forecast economic situation and any other relevant external factors.
– Discuss the reason for the anticipated 21·4% increase in revenue with management, to understand if the increase
is due to the inclusion of figures relating to the joint venture with Kestrel Co, or other factors.
– Discuss the trend in operating profit with management – the operating margin is forecast to improve from 30% to
33·8%. This improvement may be due to the sale of the underperforming Beak Retail park.
– Obtain a breakdown of items included in forecast operating expenses and perform an analytical review to compare
to those included in the 2012 figures, to check for any omissions.
– Using the cost breakdown, consider whether depreciation charges have increased in line with the planned capital
expenditure.
– Request confirmation from the bank of the potential terms of the $30 million loan being negotiated, to confirm the
interest rate at 4%. Consider whether the finance charge in the forecast income statement appears reasonable. (If
the loan is advanced in August, it should increase the company’s finance charge by $1 million ($30 million x 4%
x 10/12).)
– Discuss the potential sale of Beak Retail with management and review relevant board minutes, to obtain
understanding of the likelihood of the sale, and the main terms of the sale negotiation.
– Recalculate the profit on the planned disposal, agreeing the potential proceeds to any written documentation
relating to the sale, vendor’s due diligence report, or draft legal documentation if available.
– Agree the potential proceeds on disposal to management’s cash flow forecast, and confirm that operating cash
flows relevant to Beak Retail are not included from the anticipated date of its sale.
– Discuss the reason for not including current tax in the profit forecast.
Forecast statement of financial position
– Agree the increase in property, plant and equipment to an authorised capital expenditure budget, and to any plans
for the joint development with Kestrel Co.
– Obtain and review a reconciliation of the movement in property, plant and equipment. Agree that all assets relating
to Beak Retail are derecognised on its disposal, and that any assets relating to the joint development with Kestrel
Co are recognised in accordance with capital expenditure forecasts, and are properly recognised per HKFRS 11
Joint Arrangements.
– Discuss the planned increase in equity with management to understand the reason for any planned share issue,
its date and the nature of the share issue (rights issue or issue at full market price being the most likely).
– Perform analytical procedures on working capital and discuss trends with management, for example, receivables
days is forecast to reduce from 58 to 53 days, and the reason for this should be obtained.
Tutorial note: Credit will be awarded for other examples of ratios calculated on the figures provided such as
inventory turnover and average payables payment period.
– Agree the increase in long-term borrowings to documentation relating to the new loan, and also to the forecast cash
flow statement (where it should be included as a cash flow arising from financing activities).
– Discuss the deferred tax provision with management to understand why no movement on the balance is forecast,
particularly given the planned capital expenditure.
– Obtain and review a forecast statement of changes in equity to ensure that movements in retained earnings appear
reasonable. (Retained earnings are forecast to increase by $800,000, but the profit forecast for the period is
$10·52 million – there must be other items taken through retained earnings such as a planned dividend.)
– Agree the movement in cash, and the forecast closing cash position to a cash flow forecast.
(b) Briefing notes
From: Audit manager
To: Audit partner
Regarding: Osprey Co
Introduction
These briefing notes will firstly recommend the principal audit procedures to be performed in respect of the costs of closure
of the factory involved in the environmental contamination. I will also discuss the difficulties in measuring and reporting on
environmental and social performance.
(i) Recommended audit procedures
– Review board minutes for discussion of the closure and restructuring, noting the date the decision was made to
restructure, which should be before the year end.19
– Obtain any detailed and formal plan relating to the closure of the factory and relocation of its operations, noting the
date the plan was approved, which should be before the year end.
– Discuss with management any indication that the company has started to implement the plan prior to the year end,
e.g. the date of any public announcement, the date that plant began to be dismantled.
– Physically inspect the factory for evidence that dismantling has commenced.
Tutorial note: The procedures outlined above should establish whether a constructive obligation exists at the year
end, in which case it is appropriate to recognise a provision according to HKAS 37 Provisions, Contingent
Liabilities and Contingent Assets. If there is no detailed formal plan in place, and no evidence that a valid
expectation exists that the company will carry out the restructuring at the year end, then no provision should be
recognised.
– Obtain a breakdown of the $1·25 million costs of closure and review to ensure that only relevant costs have been
included, e.g. redundancy payments, lease cancellation fees. This is an important procedure for the potential
overstatement of the provision.
– Cast the schedule for arithmetic accuracy.
– Agree a sample of relevant costs included in the provision to supporting documentation, e.g. redundancy payments
to employees’ contracts, lease cancellation fees (if any) to lease agreement.
– Enquire as to whether any gain is expected to be made on the sale of assets, and ensure that if so, the gain has
not been taken into account when measuring the provision.
Tutorial note: HKAS 37 prescribes that only costs necessarily entailed by the restructuring and not associated with
the ongoing activities of the business may be included in the provision. In practice this means that very few costs
can be included, and costs to do with relocation of employees, plant and equipment and inventories, retraining
staff, investments in new infrastructure are not included as they are related to ongoing activities.
– Review the relevant disclosure note to the financial statements for accuracy and adequacy, where the provision
should be treated as a separate numerical class and a description of it given.
Tutorial note: Credit will also be awarded for procedures relevant to ascertaining whether the factory closure
constitutes a discontinued operation, and procedures relevant to any consequential disclosure requirements.
