Question
An entity holds an indefinite-lived intangible asset that it tests annually for impairment under ASC 350 using an income approach (discounted cash flow analysis). As
An entity holds an indefinite-lived intangible asset that it tests annually for impairment under ASC 350 using an income approach (discounted cash flow analysis). As part of its assessment procedures, the engagement team identified the following risk of material misstatement related to the valuation assertion:
The revenue projections (i.e., revenue growth rate) used in the discounted cash flow analysis could be unreasonable and result in the entity not recording an impairment that exists.
The risk of material misstatement was not identified as a fraud risk.
Note that the engagement team may have identified additional risks of material misstatement related to the valuation assertion as part of its risk assessment procedures; however, this case focuses on this specific risk of material misstatement for illustrative purposes.
The engagement team obtained the following evidence from the audit procedures performed to address this risk:
The entity's revenue projections align with historical trends.
The entity's revenue forecasts have not significantly varied from actual results over the past few years.
The entity is operating in a depressed industry that has recently experienced market declines.
The entity has gained market share in each of the last three years.
The revenue growth rates used in the projections are above the growth rates predicted by the industry analysts.
The entity has a significant number of multi-year contracts with its customers.
Required:
For each case above:
1. Identify and summarize the corroborative and contradictory audit evidence in each scenario.
2. Determine what additional information, if any, is needed to reach a conclusion regarding management's assertion.
3. On the basis of the case facts, determine whether management's assertion is supportable and how additional information obtained might change your conclusion.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started