ACCA · Question 01 · Planning and Conducting an Audit of Historical Financial Information

SECTION A: STRATEGIC CASE STUDY

It is 1 July 20X6. You are an audit manager at the firm of K&P Associates. You are responsible for the audit of the AeroVolt Group (AeroVolt), a listed multinational developer of renewable energy infrastructure, specializing in wind and solar farms. The group's financial year-end is 30 September 20X6.

You have received the following email from the group audit engagement partner, Sarah Jenkins:

To: Audit Manager
From: Sarah Jenkins, Audit Partner
Date: 1 July 20X6
Subject: AeroVolt Group - Audit Planning

Hello,

I have just returned from a planning meeting with AeroVolt's Chief Financial Officer (CFO). The group has experienced rapid expansion this year, heavily driven by their entry into emerging markets. I have attached some financial highlights and notes from my meeting (Exhibit 1).

Of particular note is AeroVolt's recent acquisition of a 100% subsidiary, Zephyr Energy, located in the politically volatile country of Zandia. Zephyr Energy is audited by a local firm, Zandia Partners, who are not part of the K&P global network. I have provided details regarding this component auditor in Exhibit 2.

I require you to prepare briefing notes for my attention which address the following requirements:

(a) Evaluate the principal business risks facing the AeroVolt Group. (10 marks)
(b) Evaluate the significant audit risks to be considered in planning the group audit. (20 marks)
(c) Discuss the quality management and ethical issues regarding our reliance on Zandia Partners as a component auditor, and recommend the actions K&P should take to comply with ISA 600 (Revised). (10 marks)
(d) Design the principal audit procedures to be performed in respect of the government grants received by AeroVolt. (6 marks)

Note: 4 professional marks are available for the structure, presentation, logical flow, and clarity of your briefing notes.

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EXHIBIT 1: Meeting Notes and Financial Highlights

AeroVolt's draft consolidated revenue has increased by 45% to $850m (20X5: $586m), while profit before tax has decreased by 12% to $42m (20X5: $48m). Total assets have doubled to $1.2bn.

Key developments:

1. Long-term Contracts: AeroVolt has entered into several 5-year contracts to build offshore wind farms. Management has recognized 40% of the total contract revenue upfront this year, arguing that the initial design and procurement phases represent the most significant value transfer to the customer.
2. Government Grants: To incentivize green energy, the government of Zandia awarded AeroVolt a $30m grant to build a solar facility. The grant requires the facility to remain operational for 10 years. AeroVolt has recognized the full $30m in the statement of profit or loss this year to offset the heavy initial capital expenditure.
3. Zandia Acquisition: AeroVolt acquired Zephyr Energy for $150m, generating $60m in goodwill. Zandia has recently experienced severe political unrest, leading to a 30% devaluation of its local currency and threats of nationalization of foreign-owned infrastructure.

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EXHIBIT 2: Component Auditor Details (Zandia Partners)

Zandia Partners is a mid-tier firm in Zandia. They audit according to local Zandian Auditing Standards, which have not been fully converged with ISAs. The audit working papers are maintained in the local language, Zandian. The CFO of AeroVolt mentioned that the lead partner at Zandia Partners is the brother-in-law of Zephyr Energy's local Managing Director. The CFO dismissed this as a non-issue, stating, "In Zandia, business is always done among family."