ACCA AAA — Advanced Audit and Assurance Practice Exam 2

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.

SECTION B: ADVISORY REPORT

You are an audit manager at Cura Audit Partners. You are currently reviewing the audit files for NovaGen Therapeutics Co (NovaGen), a late-stage biotechnology company, for the year ended 30 September 20X6. The audit is nearing completion, and the auditor's report is due to be signed next week. The audit senior has left the following two unresolved matters for your attention:

Matter 1: Capitalized Research & Development (R&D)
NovaGen has capitalized $8 million of development costs relating to a new drug, 'NeuroVax', intended to treat neurodegenerative diseases. The total assets of NovaGen are $45 million, and profit before tax is $5 million. In August 20X6, Phase 3 clinical trials for NeuroVax yielded mixed results, failing to meet two of the five primary efficacy endpoints required by the medical regulator. The medical director believes they can adjust the formula and conduct a supplementary trial, but this will delay potential market launch by at least two years. Management has refused to impair the $8 million capitalized balance, arguing the drug will eventually be profitable.

Matter 2: Going Concern and Subsequent Event
In November 20X6, 'PharmaGlobal', a major pharmaceutical partner that had committed to funding 50% of NovaGen's ongoing operational costs for the next three years, abruptly withdrew from their joint funding agreement due to their own internal restructuring. NovaGen's updated cash flow forecast shows a severe cash deficit by May 20X7 unless alternative funding is secured. Management has added a brief note to the financial statements mentioning the loss of the partner but states they are 'confident in securing alternative funding'. They have prepared the financial statements on a going concern basis and refuse to expand the disclosure to explicitly state that a material uncertainty exists.

Required:
(a) In respect of Matter 1 (Capitalized R&D), comment on the matters you should consider, and explain the audit evidence you would expect to find on the audit file. (10 marks)

(b) In respect of Matter 2 (Going Concern), evaluate the implications for the auditor's report if management refuses to amend the financial statements or expand the disclosures. (15 marks)

SECTION B: ADVISORY REPORT

You are a manager at Stellar Advisory. OrbitData Solutions (OrbitData) is an existing audit client of your firm, with a financial year-end of 31 March 20X6. OrbitData provides high-resolution satellite imaging data to agricultural and defense sectors.

OrbitData is currently seeking a $50 million syndicated bank loan to fund the design, manufacture, and launch of a new constellation of five micro-satellites. The bank has requested that OrbitData provide a business plan, including Prospective Financial Information (PFI) comprising a forecast statement of profit or loss and cash flows for the five years ending 31 March 20Y1.

The Board of Directors of OrbitData has approached Stellar Advisory to examine and provide an assurance report on this PFI to be submitted to the bank. The PFI includes significant assumptions regarding future revenue from uncontracted defense clients and massive capital expenditure for the satellite launches.

Required:
(a) Identify and explain the matters to be considered by Stellar Advisory before accepting the engagement to report on OrbitData's Prospective Financial Information (PFI). (8 marks)

(b) Describe the examination procedures you would perform to obtain sufficient appropriate evidence regarding the forecast revenue and forecast capital expenditure within the PFI. (17 marks)