ACCA AAA — Advanced Audit and Assurance Practice Exam 5

SECTION A - STRATEGIC CASE STUDY

You are an audit manager in the firm of K&P. You are planning the audit of AuraGrid PLC, a listed multinational renewable energy and public utility company, for the year ending 31 December 202X.

Exhibit 1: Email from Audit Partner
To: Audit Manager
From: Sarah Jenkins, Audit Partner
Subject: Audit Planning for AuraGrid PLC

Hello,
I need you to prepare briefing notes for our upcoming planning meeting. AuraGrid has expanded significantly this year. They have entered a new jurisdiction, the developing nation of 'Novaria', to build offshore wind farms. They also acquired a smart-grid technology startup, SmartGridX.

Please prepare briefing notes which:
(a) Evaluate the principal business risks facing AuraGrid PLC. (10 marks)
(b) Evaluate the significant audit risks to be considered in planning the group audit. (18 marks)
(c) Discuss the group audit implications of the Novaria expansion, specifically regarding our reliance on the component auditor, a small local firm named 'NovAudit'. (12 marks)
(d) Evaluate the ethical and practice management implications of a recent offer made by AuraGrid's CFO, who has invited me (the Group Audit Partner) to sit on the advisory board of the new Novaria subsidiary to provide 'strategic regulatory advice'. (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 2: Background Information on AuraGrid
AuraGrid's expansion into Novaria involves a $500m investment. The Novarian government has provided a $50m conditional grant, requiring AuraGrid to employ 70% local staff and maintain the wind farms for 10 years. If conditions are breached, the grant is repayable. AuraGrid has recognized the full $50m as income this year to boost profitability.

To hedge against the risk of low wind seasons, AuraGrid has entered into complex weather derivative contracts. These are highly bespoke financial instruments traded over-the-counter.

On 1 July 202X, AuraGrid acquired 100% of SmartGridX for $120m. The net assets at acquisition were valued at $40m, resulting in $80m of goodwill. SmartGridX's primary asset is internally generated software for grid optimization, which AuraGrid capitalized at $30m just prior to the acquisition.

Exhibit 3: Financial Extracts (Projected to 31 Dec 202X)
Revenue: $2,400m (202W: $1,900m)
Profit Before Tax: $180m (202W: $140m)
Total Assets: $3,500m (202W: $2,800m)

SECTION B - ADVISORY REPORT

You are an audit manager at L&M. You are reviewing the audit files of VerdiCrop Co, an unlisted agri-tech company specializing in indoor vertical farming, for the year ended 30 September 202X. The audit is nearly complete, and the auditor's report is due to be signed next week.

Materiality for the financial statements as a whole has been set at $1.2m.

The following two matters have been brought to your attention by the audit senior:

Matter 1: Crop Failure
On 15 November 202X, a newly discovered, highly contagious plant pathogen infiltrated VerdiCrop's main vertical farming facility, destroying 60% of their total crop inventory. Management has included a disclosure note describing this as a non-adjusting event after the reporting period. However, management has refused to perform a revised going concern assessment, stating that they have filed a $10m claim with their insurance provider which will cover the losses. The audit senior has noted that the insurance provider is currently disputing the claim, arguing that this specific novel pathogen is excluded from the policy.

Matter 2: Equipment Obsolescence
VerdiCrop's specialized hydroponic equipment is carried in the statement of financial position at $15m. During the year, a major competitor patented a vastly superior, energy-efficient hydroponic technology, rendering VerdiCrop's equipment technologically obsolete. The audit team believes the equipment is impaired and its recoverable amount is only $8m. Management refuses to write down the asset, arguing that their value-in-use model justifies the $15m carrying amount. The audit team has reviewed the model and found it relies on highly optimistic, unsubstantiated revenue growth rates of 25% per annum.

Requirements:
(a) Comment on the matters to be considered and state the audit evidence you would expect to find in the audit file in respect of the crop failure and the going concern assumption. (12 marks)
(b) Discuss the implications for the auditor's report if management refuses to adjust the financial statements in relation to the hydroponic equipment, and refuses to perform a revised going concern assessment regarding the crop failure. (13 marks)

SECTION B - ADVISORY REPORT

You are a manager in the special assignments department of H&J, a large firm of Chartered Certified Accountants. Your firm is the external auditor of Global Care Alliance (GCA), a large international Non-Governmental Organization (NGO) that provides disaster relief.

GCA's internal audit team recently discovered anomalies in the procurement of relief supplies (tents, medical kits, and clean water systems) in their 'Zambora' regional branch. The internal auditors suspect that the Regional Director of Zambora has misappropriated approximately $2m of donor funds by creating fictitious suppliers and authorizing payments to bank accounts controlled by the Director's family members.

GCA's Audit Committee has approached H&J to conduct a forensic investigation. The objectives of the engagement are to quantify the exact financial loss, identify the methods used to bypass internal controls, and provide an expert witness report that can be used in criminal proceedings against the Regional Director.

Requirements:
(a) Evaluate the ethical and professional issues that H&J should consider before accepting this forensic investigation engagement for an existing audit client. (10 marks)
(b) Recommend the specific forensic investigative procedures that H&J should perform to quantify the extent of the misappropriated donor funds and gather evidence of the fictitious suppliers. (15 marks)