ACCA AAA — Advanced Audit and Assurance Practice Exam 4

SECTION A: STRATEGIC CASE STUDY

It is 1 July 202X. You are an audit manager in the audit firm of Cobden & Co. You are assigned to the audit of Verdant Horizon Group (VHG), a listed multinational agricultural technology and commercial farming group, for the year ending 30 September 202X.

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

To: Audit Manager
From: Sarah Jenkins, Audit Partner
Subject: Audit planning for Verdant Horizon Group (VHG)

Hello,
We are currently planning the audit of VHG for the year ending 30 September 202X. VHG operates large-scale commercial farms across South America and Europe, and recently expanded into agricultural technology. I have provided some background information and financial extracts in the exhibits below.

I require you to prepare briefing notes for my review which address the following:
(a) Evaluate the principal business risks facing VHG. (10 marks)
(b) Evaluate the significant audit risks to be considered in planning the group audit. (18 marks)
(c) Design the principal audit procedures to be performed in respect of the valuation of biological assets. (8 marks)
(d) VHG's management has requested that Cobden & Co design and implement a new cloud-based inventory and drone-tracking IT system for their newly acquired subsidiary, AeroAgri. Discuss the ethical and professional issues raised by this request, and recommend the actions our firm should take. (10 marks)

Note: 4 professional marks will be awarded for the structure, clarity, and professional tone of your briefing notes.

EXHIBIT 1: Background Information
VHG's core business is the cultivation of high-yield soybeans and wheat. This year, the region in South America where 40% of VHG's farms are located experienced an unprecedented drought, followed by severe unseasonal flooding. Management claims that new genetically modified seeds have mitigated most of the crop loss, but local agricultural reports suggest widespread devastation.

On 1 April 202X, VHG acquired 100% of the share capital of AeroAgri, a tech startup specializing in drone-based crop spraying and monitoring. The purchase consideration was $45 million, paid in cash. AeroAgri's net assets at acquisition were valued at $12 million. VHG has recognized $33 million as goodwill. AeroAgri is currently developing a proprietary AI software for yield prediction. VHG has capitalized $8 million of development costs incurred by AeroAgri since the acquisition date.

EXHIBIT 2: Financial Extracts (Draft for year ending 30 Sept 202X vs Actual for year ending 30 Sept 202W)
Revenue: $410m (202X) / $385m (202W)
Operating Profit: $42m (202X) / $55m (202W)
Biological Assets (Fair Value): $185m (202X) / $140m (202W)
Goodwill: $33m (202X) / $0 (202W)
Capitalized Development Costs: $8m (202X) / $0 (202W)
Cash and Cash Equivalents: $15m (202X) / $65m (202W)

Respond to the partner's email by drafting the requested briefing notes.

SECTION B: ADVISORY REPORT

It is 15 August 202X. You are an audit manager responsible for the audit of AeroGrid Utilities Co, a listed company operating offshore wind farms and regional power grids. The audit for the year ended 30 June 202X is nearing completion. The draft financial statements recognize profit before tax of $18 million and total assets of $320 million.

You are reviewing the audit working papers and have noted the following two unresolved matters:

Matter 1: Storm Damage and Impairment
In May 202X, a severe cyclone caused significant structural damage to 'Grid-Alpha', one of AeroGrid's oldest offshore wind farms. The carrying amount of Grid-Alpha in the draft financial statements is $45 million. Management has performed an impairment review and concluded that no impairment is necessary, arguing that the turbines can be repaired and will continue to generate cash flows for another 10 years. The audit senior has noted that the repair estimates provided by management seem unusually low compared to industry averages.

Matter 2: Going Concern and Government Subsidies
Historically, 30% of AeroGrid's revenue has come from a government 'Green Feed-in Tariff' subsidy. On 10 August 202X, the government abruptly announced the immediate termination of this subsidy program due to national budget cuts. Management has prepared a revised cash flow forecast showing that the company will maintain positive cash flow for the next 12 months, but only if they secure a $20 million emergency bank loan, which is currently under negotiation. Management has included a brief note in the financial statements stating that 'the loss of subsidies may impact future margins', but they have not explicitly disclosed a material uncertainty related to going concern.

Requirements:
(a) In respect of Matter 1 (Storm Damage), comment on the matters you should consider and describe the audit evidence you should expect to find in your review of the audit working papers. (12 marks)
(b) In respect of Matter 2 (Going Concern), evaluate the implications for the auditor's report if management refuses to amend the disclosures regarding the going concern status of the company. (13 marks)

SECTION B: ADVISORY REPORT

You are a manager in the advisory department of a large accounting firm. Your firm has been approached by the VitaNova Foundation, a large global healthcare non-governmental organization (NGO). VitaNova is not currently an audit client of your firm.

VitaNova is applying for a $50 million grant from the World Health Organization (WHO) to build and operate a network of mobile vaccination clinics across Sub-Saharan Africa over the next three years. As part of the grant application, the WHO requires an independent assurance report on the Prospective Financial Information (PFI) prepared by VitaNova. The PFI includes detailed forecasts of capital expenditure, operational running costs, and projected patient reach.

Furthermore, to execute the logistics of this project, VitaNova is planning to partner with 'MediDeliver', a local medical logistics company based in the region. VitaNova's board has asked your firm to conduct a brief due diligence review on MediDeliver before they sign a binding partnership agreement.

Requirements:
(a) Identify and explain the matters your firm should consider before accepting the engagement to report on the Prospective Financial Information (PFI). (8 marks)
(b) Describe the examination procedures you would perform on the Prospective Financial Information (PFI) regarding the forecasted capital and operational expenditures. (10 marks)
(c) Recommend specific financial and operational due diligence procedures your firm should perform regarding the proposed partnership with MediDeliver. (7 marks)