Bangi Chemicals Ltd make chemicals for the defence industry. They had no subsidiary companies but in mid 2X10, they acquired 60 per cent of the share capital of an American company for £6m paid partly in cash and partly in shares in Bangi. The net assets of the American company, Chemola Inc., were about £4.8m at the time of purchase. Since then the company has made a loss of £1.5m, but is expected to break even next year and make a large profit after that. The auditors of Chemola are based in the USA and it is proposed that they will continue to carry out the audit as Tickitt & Run have no representation in the USA.

Questions:-

(a) Draw up a list of audit procedures that Tickitt & Run, the auditors of Bangi, should carry out in connection with Chemola. The audit of Chemola is carried out by an American firm. Tickitt & Run is engaged on the audit of Bangi’s 2X10 accounts.

(b) How should the matters connected with Chemola appear in Bangi’s own accounts? Bangi advanced £1.2m as a temporary loan to Chemola to cover a cash flow shortage and, in addition, has a trading balance of Dr £600 000 at 31.12. 2X10.

(c) What matters should Tickitt & Run consider when reviewing the group accounts?

(d) What actions should they take with regard to the audit by the American firm of the accounts of Chemola?

(e) Identify the risks and the risk areas that Tickitt & Run should worry about.