3 You are the manager responsible for the audit of Volcan, a long－established limited liab

Question

3 You are the manager responsible for the audit of Volcan, a long-established limited liability company. Volcan operates

a national supermarket chain of 23 stores, five of which are in the capital city, Urvina. All the stores are managed in

the same way with purchases being made through Volcan’s central buying department and product pricing, marketing,

advertising and human resources policies being decided centrally. The draft financial statements for the year ended

31 March 2005 show revenue of $303 million (2004 – $282 million), profit before taxation of $9·5 million (2004

– $7·3 million) and total assets of $178 million (2004 – $173 million).

The following issues arising during the final audit have been noted on a schedule of points for your attention:

(a) On 1 May 2005, Volcan announced its intention to downsize one of the stores in Urvina from a supermarket to

a ‘City Metro’ in response to a significant decline in the demand for supermarket-style. shopping in the capital.

The store will be closed throughout June, re-opening on 1 July 2005. Goodwill of $5·5 million was recognised

three years ago when this store, together with two others, was bought from a national competitor. It is Volcan’s

policy to write off goodwill over five years. (7 marks)

Required:

For each of the above issues:

(i) comment on the matters that you should consider; and

(ii) state the audit evidence that you should expect to find,

in undertaking your review of the audit working papers and financial statements of Volcan for the year ended

31 March 2005.

NOTE: The mark allocation is shown against each of the three issues.

Answer 1

正确答案：
3 VOLCAN
(a) Store impairment
(i) Matters
■ Materiality
? The cost of goodwill represents 3·1% of total assets and is therefore material.
? However, after three years the carrying amount of goodwill ($2·2m) represents only 1·2% of total assets –
and is therefore immaterial in the context of the balance sheet.
? The annual amortisation charge ($1·1m) represents 11·6% profit before tax (PBT) and is therefore also
material (to the income statement).
? The impact of writing off the whole of the carrying amount would be material to PBT (23%).
Tutorial note: The temporary closure of the supermarket does not constitute a discontinued operation under IFRS 5
‘Non-Current Assets Held for Sale and Discontinued Operations’.
■ Under IFRS 3 ‘Business Combinations’ Volcan should no longer be writing goodwill off over five years but
subjecting it to an annual impairment test.
■ The announcement is after the balance sheet date and is therefore a non-adjusting event (IAS 10 ‘Events After the
Balance Sheet Date’) insofar as no provision for restructuring (for example) can be made.
■ However, the event provides evidence of a possible impairment of the cash-generating unit which is this store and,
in particular, the value of goodwill assigned to it.
■ If the carrying amount of goodwill ($2·2m) can be allocated on a reasonable and consistent basis to this and the
other two stores (purchased at the same time) Volcan’s management should have applied an impairment test to
the goodwill of the downsized store (this is likely to show impairment).
■ If more than 22% of goodwill is attributable to the City Metro store – then its write-off would be material to PBT
(22% × $2·2m ÷ $9·5m = 5%).
■ If the carrying amount of goodwill cannot be so allocated; the impairment test should be applied to the
cash-generating unit that is the three stores (this may not necessarily show impairment).
■ Management should have considered whether the other four stores in Urvina (and elsewhere) are similarly
impaired.
■ Going concern is unlikely to be an issue unless all the supermarkets are located in cities facing a downward trend
in demand.
Tutorial note: Marks will be awarded for stating the rules for recognition of an impairment loss for a cash-generating
unit. However, as it is expected that the majority of candidates will not deal with this matter, the rules of IAS 36 are
not reproduced here.
(ii) Audit evidence
■ Board minutes approving the store’s ‘facelift’ and documenting the need to address the fall in demand for it as a
supermarket.
■ Recomputation of the carrying amount of goodwill (2/5 × $5·5m = $2·2m).
■ A schedule identifying all the assets that relate to the store under review and the carrying amounts thereof agreed
to the underlying accounting records (e.g. non-current asset register).
■ Recalculation of value in use and/or fair value less costs to sell of the cash-generating unit (i.e. the store that is to
become the City Metro, or the three stores bought together) as at 31 March 2005.
Tutorial note: If just one of these amounts exceeds carrying amount there will be no impairment loss. Also, as
there is a plan NOT to sell the store it is most likely that value in use should be used.
■ Agreement of cash flow projections (e.g. to approved budgets/forecast revenues and costs for a maximum of five
years, unless a longer period can be justified).
■ Written management representation relating to the assumptions used in the preparation of financial budgets.
■ Agreement that the pre-tax discount rate used reflects current market assessments of the time value of money (and
the risks specific to the store) and is reasonable. For example, by comparison with Volcan’s weighted average cost
of capital.
■ Inspection of the store (if this month it should be closed for refurbishment).
■ Revenue budgets and cash flow projections for:
– the two stores purchased at the same time;
– the other stores in Urvina; and
– the stores elsewhere.
Also actual after-date sales by store compared with budget.