QUESTION 4 (RoMM)

You are a manager in the audit department of Snow & Co, a firm of Chartered Certified Accountants, and you are responsible for the audit of Margot Co. The company has a financial year ending 30 June 20X9, and you are about to start planning the audit.

Margot Co produces fruit-based food products using agricultural produce grown on its farms. Ben Duval, the audit engagement partner, met with the companys finance director last week to discuss business developments in the year and recent financial performance.

You are provided with the following exhibits: 1. An email you have received from Ben Duval, in respect of the audit of Margot Co. 2. Notes of a meeting which Ben held recently with the finance director of Margot Co. 3. A reference document prepared by Snow & Co containing an overview of the accounting requirements applied in the agriculture sector. 4. Extracts from the latest management accounts of Margot Co and accompanying notes, including the results of preliminary analytical procedures, which have been performed by a member of the audit team. 5. An email which the audit engagement partner received from Len Larch, a production manager working at one of the companys olive farms.

Required:

Respond to the instructions in the email from the audit engagement partner. Note: The split of the mark allocation is shown in the partners email (Exhibit 1).	(46 marks)
Professional marks will be awarded for the presentation and logical flow of the briefing notes and the clarity of the explanations provided.	(4 marks) (50 marks)

Exhibit 1 Email from Ben Duval

To: From:

Audit manager Ben Duval, Audit engagement partner for Margot Co

Subject: Audit planning for Margot Co

Hello I have provided you with some information in the form of a number of exhibits which you should use to help you withplanning the audit of Margot Co for the financial year ending 30 June 20X9.

Using the information provided, I require you to prepare briefing notes for my own use, in which you:

(a) Evaluate the significant risks of material misstatement to be considered in planning the companys audit. You should not include risks of material misstatement relating to the valuation of the companys bearer plants or biological assets, which will be evaluated separately. (20 marks)

(b) Design the principal audit procedures to be used in the audit of: (i) The impairment of the factory, and (ii) The development cost capitalised in respect of the new packaging. (10 marks)

(c) Discuss the matters to be considered in planning to use an auditors expert in the audit of the fruit, which are recognised as biological assets of the company. (6 marks)

In Exhibit 5, I have provided you with an email I received from Len Larch, one of the companys production managers. In respect of this, in your briefing notes you should also:

(d) Discuss the audit implications of the email from Len Larch, recommending any further action to be taken by our firm. (10 marks)

Thank you.

Exhibit 2 Notes of a meeting held on 28 February 20X9

Meeting attendees: Ben Duval, audit engagement partner, Snow & Co, Ayana Easton, finance director, Margot Co

Business background

Margot Co was established 30 years ago by Jim Margot, who began processing the fruit grown on his family farm to make a small range of food products including canned fruit and fruit juice. The business was relatively small until ten years ago, when the company began to expand by acquiring more farmland with different crops, and building new production facilities. This extended the range of food products which could be processed, which now includes olive oil, packaged nuts and frozen fruit. The company sells its products under the Fructus Gold brand name, and the goods are sold in major supermarkets and online on the companys website.

The company is not listed, and the Margot family members are the companys majority shareholders. Jim Margot retired several years ago, his daughter, Mia Margot, is the companys chief executive officer, and other family members hold positions in senior management.

Business developments in the year Online sales In the last year, sales made through the companys website grew significantly. The finance director believes that this was in response to an advertising campaign costing $225,000, which promoted the Fructus Gold brand and coincided with the launch of a new online sales portal on the company website designed to make online ordering easier. To encourage online sales, the company has regular special offers, with discounts periodically offered on a selection of product lines, and offers such as Buy One Get One Free for a limited time on some products.

Research and development Recently, concern over the level of plastic used in packaging has encouraged food producers to investigate the use of plastic-free packaging for their products. In July 20X8, the board approved a budget of $400,000 to be spent on research and development into new packaging for its products. By 28 February 20X9, $220,000 has been spent, with this amount being paid to ProPack, a firm of packaging specialists, to design and develop a range of plastic-free bottles, bags and containers. It is anticipated that the packaging will be ready for use in two years time at which point the company will introduce it for use across its product range. ProPack is currently testing prototypes of items which have been developed, with encouraging results.

Loan A loan of $375,000 was taken out during the year to support the companys research and development plans.

Factory damage One of the companys several factories, used to process fruit and produce fruit juice, was damaged in August 20X8 when a severe storm occurred. High winds destroyed part of the factory roof, and heavy rain led to flooding and damage to machinery and processing equipment. The factory has not operated since the storm, and the finance director has performed an impairment review on the building and plant and equipment; details of the impairment review are given in the extract from the management accounts (Exhibit 4).

Use of an auditors expert The fruit growing on trees and the harvested agricultural produce are biological assets which were recognised at fair value of $31 million in the 20X8 audited financial statements. Due to the specialised nature of these assets, an auditors expert will be used to provide evidence relating to their valuation. A resource document containing an overview of the accounting requirements in relation to the companys activities is provided in Exhibit 3.

Exhibit 3 Reference document Extract from Snow & Cos internal technical guidance for audit staff working with clients in the agriculture sector

IAS 16 Property, Plant and Equipment Bearer plants

Definition: A bearer plant is defined under IAS 16 as a living plant that:

is used in the production or supply of agricultural produce; is expected to bear produce for more than one period; and has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

In line with the requirements of IAS 16, bearer plants are recorded at accumulated cost until they reach maturity and then they are depreciated over their useful life.

IAS 41 Agriculture Biological assets Produce growing on bearer plants, and harvested agricultural produce are biological assets and should be accounted for under IAS 41. Biological assets are measured on initial recognition and at subsequent reporting dates at fair value less estimated costs to sell, unless fair value cannot be reliably measured. A gain or loss arising on initial recognition of agricultural produce at fair value less costs to sell shall be included in the statement of profit or loss for the period in which it arises.

IAS 2 Inventories Agricultural produce When agricultural produce enters the production process, it should be accounted for under IAS 2.