Johnson Company is a medium-size manufacturing client that has expanded its operations over the past few years by acquiring smaller companies that had complementary products or that manufactured products that could be used in Johnson Company’s primary products.

The auditor believes that some of the acquisitions were made because the client had not invested in its own research and development sufficiently to maintain a competitive edge, and therefore some of the acquisitions have been needed to keep up with technological change. The client has been relatively, but not spectacularly, profitable over the past decade.

You have been assigned to audit the Goodwill account. The senior tells you that goodwill existed in previous years, and that the beginning balance agrees with last year’s balance. Before beginning your detailed audit work, you perform a background review and note that five acquisitions were made over the past five years.

Three have worked out well, but two others (on which a large amount of goodwill was recorded) have not been successful. Both of the subsidiaries have continued to incur large losses, and company management is now considering disposing of both.

The Goodwill account balance for the year is as follows:

The partner on the engagement indicates that it is the client’s policy to take a full year’s amortization during the year of acquisition; your firm has agreed that this is an appropriate policy followed consistently by the client.

Required:

a. Identify the assertions that will be addressed by the auditor in auditing the Goodwill account. Identify the appropriate GAAP that would serve as a reference for valuing goodwill.

b. Starting with the beginning goodwill, identify audit evidence that would address each of the assertions. Briefly identify the audit procedures that would be utilized to gather the audit evidence.

c. For the newly acquired goodwill, identify the audit evidence that would address each of the assertions. Briefly identify the audit procedures that would be utilized to gather the audit evidence.

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Goodwill Beginning balance $475,000 Acquisition Amortization (beginning balance) Amortization (Acquisition) 300,000 (25,000) (7,500) Ending balance $742,500