Audit Tutorial 9 Semester 2, 2022 The questions for this week's tutorial examine issues around the case study of impairments. Question 3 relates to the individual case study due 22 October and is available if you have time in your tutorials. Refer to the lecture slides and lecture video in preparation for this class. Question 1: Impairments and Valuation You are auditing a manufacturing company that produces 46 technology to support mobile telephony. The company has had healthy annual net income for the last 10 years, but they currently lack the technological abilities to shift to 56 technologies and beyond without significant investment. Upon review of their asset portfolio, the company decides to invest significantly in new manufacturing equipment. The impact of this is that much of their current equipment is obsolete. The company believes that this qualifies as a case for impairment under their impairment policy and under AASB 136. The company carries a significant impairment loss for this financial period. They sought the expertise of an external valuer to support the determination of fair value in calculating the recoverable amount. All the valuations are carefully documented for your benefit. The valuer makes a couple of assumptions, including that the 46 manufacturing assets are only sellable in Australia. I Asset Carrying Amount Recoverable Amount 46 Technology Patents $3,400,000 $800,000 Manufacturing Equipment $30,000,000 $2,500,000 I Factory and Premises $41,000,000 $20,000,000 You are not overly concerned about the patent valuation, as this is jurisdictionally specific to Australia. However, you are less sure about the other two impairments claimed (totally $48,500,000). These figures concern you for a couple of reasons: a) 4G technology still has value in Australia and you also know that there are active markets overseas for 4G technology; b) You are unsure why the factory/premises is impaired in value the factory building is still in good condition and would easily be converted to support 56 manufacturing or sold at a likely profit. Consider the following questions: i) In this scenario, advise what your options, as auditor, would be? ii} Assume that you raise your concerns and suggest alternative valuations {based on expert valuations) that you believe constitute more appropriate fair value calculations. What would your options be if management chose not to act on your advice and refused to change their proposed financial statements? Question 2 You have been asked by a colleague to help in auditing a company's impairment testing for goodwill. You know that goodwill must be tested annually, when it is part of an acquired business unit. In preparation, your colleague asks you to prepare a checklist with respect to goodwill impairment testing using the normal account balance assertions checklist. Your colleague asks you to highlight which elements are most important and why and how you would support the assertion: ACCOUNT BALANCE ASSERTIONS Existence Actually exist ? Rights and ' ' ? Obligations Entity has rights/control . Completeness Recorded correctly. ? Accuracy Recorded correctly/disclosures ? Valuation Properly classified in line with accounting Clasmflcatlon standards. Presentation Sufficient and proper disclosure