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.

SECTION A - STRATEGIC CASE STUDY You are an audit manager in Summit & Co, a firm of Chartered Certified Accountants. It is 1 July 202X. You are planning the audit of AeroGrid International Co (AeroGrid), a listed multinational company operating offshore wind farms and cross-border energy transmission grids, for the year ending 31 October 202X. You have received the following email from the Audit Engagement Partner: To: Audit Manager From: Sarah Jenkins, Audit Engagement Partner Subject: AeroGrid International Co - Audit Planning Hello, I have just returned from a planning meeting with the CFO of AeroGrid. The group has experienced a turbulent year due to volatile global energy prices and extreme weather events affecting their offshore installations. I need you to prepare briefing notes for my review which address several planning matters. Exhibit 1: Business Operations and Group Structure AeroGrid generates revenue by selling electricity to national grids across three countries. On 1 February 202X, AeroGrid acquired 80% of the equity shares in WindStream Ltd, a company located in the nation of Zephyria, which operates experimental floating wind turbines. Zephyria has a different regulatory framework and uses local accounting standards, though WindStream's financial statements will be consolidated into AeroGrid's IFRS financial statements. AeroGrid paid a significant premium for WindStream due to its patented turbine technology. Exhibit 2: Financial Extracts and Complex Transactions Draft financial highlights for the 8 months to 30 June 202X show revenue of $450m (202W: $410m) and a profit before tax of $22m (202W: $45m). Total assets are $1.2bn. To manage the extreme volatility in energy prices, AeroGrid entered into complex weather and energy price derivative contracts this year. The CFO admitted that their internal finance team struggled with the IFRS 9 valuation models for these derivatives, relying heavily on a third-party broker's estimate. Furthermore, a severe storm in May 202X damaged several offshore turbines in the North Sea. Management has recognized a minor repair provision but has not tested the assets for impairment, arguing the damage is temporary. Exhibit 3: Quality Management and Ethics I must also inform you of a recent development. David Chen, who was the audit senior manager on the AeroGrid engagement for the past four years, resigned from Summit & Co on 31 May 202X. On 15 June 202X, he commenced employment as the Financial Controller at AeroGrid. David was heavily involved in the interim audit work performed in April 202X. Requirements: Respond to the partner's email by preparing briefing notes that: (a) Evaluate the business risks facing AeroGrid International Co. (10 marks) (b) Evaluate the audit risks to be considered in planning the group audit. (18 marks) (c) Discuss the ethical and quality management implications arising from David Chen's appointment as Financial Controller at AeroGrid, and recommend the actions Summit & Co should take. (10 marks) (d) Design the principal audit procedures to be performed in respect of the valuation of the derivative financial instruments. (8 marks) Professional marks will be awarded for the presentation, logical flow, and clarity of your briefing notes. (4 marks)

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. --- 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. --- 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."