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Planning and Conducting an Audit of Historical Financial InformationGroup AuditRisk AssessmentIFRS 3Business Risk

ACCA · Question 1 · Planning and Conducting an Audit of Historical Financial Information

SECTION A: STRATEGIC CASE STUDY

You are an audit manager at Apex Assurance LLP. You are planning the audit of Verdant Horizon Group (the Group) for the financial year ending 31 December 20X6. The Group operates in the sustainable agriculture and renewable energy sectors, a rapidly evolving industry heavily reliant on government subsidies and technological innovation. You have received the following email from the audit engagement partner.

To: Audit Manager
From: Sarah Jenkins, Audit Partner
Subject: Audit Planning - Verdant Horizon Group
Date: 15 November 20X6

Hello,

I am currently finalizing the planning for the Verdant Horizon Group audit. The Group has experienced significant changes this year, most notably the acquisition of AeroCrop Co, a company specializing in drone-based crop spraying and agricultural data analytics.

I need you to prepare briefing notes for my review which address the following areas:

  1. Business Risks: Evaluate the principal business risks facing the Group based on the information provided in Exhibit 1. (10 marks)
  2. Audit Risks: Evaluate the significant audit risks to be considered in planning the Group audit. (18 marks)
  3. Audit Procedures: Design the principal audit procedures to be performed in respect of the acquisition of AeroCrop Co. (12 marks)
  4. Ethical and Professional Issues: The Group's Finance Director has requested that Apex Assurance LLP design and implement a bespoke inventory and drone-fleet management IT system for AeroCrop Co. Discuss the ethical and professional issues raised by this request and recommend appropriate actions. (10 marks)

Note: 10 professional marks are available within the total 50 marks for the structure, clarity, and professional tone of your briefing notes, as well as the exercise of professional skepticism and commercial acumen.

EXHIBIT 1: Company Background and Financial Highlights
Verdant Horizon Group's revenue has grown by 22% this year, largely driven by the AeroCrop acquisition and new government contracts for solar farm installations. However, profit before tax has fallen by 8%. The Group's solar division is facing supply chain delays for photovoltaic cells from overseas, leading to penalty clauses being triggered on two major government contracts. Furthermore, a recent change in government policy has reduced the renewable energy subsidies available for projects commencing after 1 October 20X6.

EXHIBIT 2: Acquisition of AeroCrop Co
On 1 July 20X6, the Group acquired 80% of the equity share capital of AeroCrop Co for an initial cash payment of $45 million. A further contingent consideration of up to $15 million is payable in two years, dependent on AeroCrop achieving specific revenue targets from its proprietary agricultural data analytics software. The fair value of AeroCrop's net assets at acquisition was estimated at $30 million, which included $12 million for an internally generated software platform that had not been previously recognized in AeroCrop's individual financial statements.

Required:
Respond to the partner's email by preparing the requested briefing notes.

How to approach this question

Approach this 50-mark question systematically. 1. Adopt the persona of an Audit Manager writing to a Partner. Use clear headings, professional language, and a logical structure to secure the 10 professional marks. 2. For Business Risks, focus on operational, strategic, and external threats (supply chain, subsidies, tech changes). 3. For Audit Risks, link the scenario facts to specific accounting standards (IFRS 15 for penalties, IFRS 3 for acquisition, IAS 36 for impairment). Always state the risk (over/understatement) and the reason. 4. For Procedures, use the 'verb, document, purpose' structure (e.g., 'Review the SPA to confirm the acquisition date'). Focus specifically on the acquisition, not general audit procedures. 5. For Ethics, identify the specific threats (self-review, management), reference the ethical code, and provide a definitive conclusion (decline the engagement).

Full Answer

This question tests the core of the ACCA AAA syllabus: planning a complex group audit. It requires the application of advanced IFRS knowledge (IFRS 3, IFRS 15, IAS 36) to identify audit risks. The ethical component tests the strict rules around non-audit services (IT implementation) provided to audit clients, emphasizing the self-review threat.

Common mistakes

1. Confusing business risks with audit risks (e.g., saying 'the risk is they lose money' instead of 'the risk is that assets are overstated due to lack of impairment'). 2. Providing generic audit procedures (e.g., 'check invoices') instead of procedures specific to the acquisition of a subsidiary. 3. Failing to conclude on the ethical dilemma (e.g., suggesting safeguards when the service should be outright declined).
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