Section 2: Subsidiary 2 - Fashion Designers Limited

You are required to audit Fashion Designers Limited, a subsidiary company of Las Vegas Group Corporation (USA) Limited. Fashion Designers Ltd is a large multi-national manufacturer and distributor of fashion accessories.

The company is listed on the New York Stock Exchange and its major shareholder (51%) is the US Company which controls the use of the accessory brand names throughout the world. Fashion Designers Ltd operates predominantly out of Australia but is rapidly expanding into Asia and Eastern Europe. In 1992 overseas operations accounted for 15% of the group turnover and 10% of the Group profit. In 1993 this is expected to increase to 23% of turnover and 18% of profit. As the American market is considered to be stagnant, future growth is expected to come from the Asian and European markets.

The audit structure is such that all overseas operations are audited by the same international audit firm, XYZ & Co, who were the auditors of the major US shareholder. Your audit firm, DisneyLand Audit & Co, is responsible for the audit of all the American branches.

The consolidated Statement of Financial Performance and Statement of Financial Position for Fashion Designers Ltd for the year ended 31 December 1992 and the estimate for the coming year ending 31 December 1993 are as follows:

Statement of Financial Performance

	Estimate 31/12/93 $000	Audited 31/12/92 $000
Operating profit before abnormal items	113220	86974
Abnormal items	(17050)	-
Operating profit before income tax	96170	86974
Income tax expense	(25970)	(24720)
Operating profit after income tax	70200	62254
Retained profits at the beginning of the year	114257	52003
Dividends paid	(53274)	-
Retained profits at the end of the year	131183	114257
Statement of Financial Position
Current Assets
Cash	21720	24915
Receivables	391278	352307
Inventories	189702	153978
Total Current Assets	602700	531200
Non-Current assets
Property, plant & equipment	573291	495973
Investments	8357	21952
Brand names	474852	398115
Total Non-current Assets	1056500	916040
Total Assets	1659200	1447240
Current Liabilities
Creditors & borrowings	587294	401253
Provisions	170446	219077
Total Non-current Liabilities	757740	620330
Non-current Liabilities
Creditors and borrowings	392877	360112
Provisions	79803	68328
Total Non-current Liabilities	472680	428440
Total Liabilities	1230420	1048770
Net Assets	428780	398470
Shareholders Equity
Share Capital	101908	101563
Reserves	195689	182650
Retained Profits	131183	114257
Total Shareholders Equity	428780	398470

The abnormal item relates to the loss made on the sale of an investment during the year. Brand names relates to the price paid for the brand names purchased from the major shareholder. The asset is not being amortised as the company believes that asset to be a tangible asset with a value which will never decrease below that paid due to the proven success of the brand names worldwide for over half a century.

The stock valuation system used by Fashion Designers is an average costing system. Each time a delivery is entered into the stock system, the system automatically uses the new cost and the current average cost in the computer to calculate a new average cost.

All stock is physically counted at balance date and then the average cost in the computer is applied to the units on hand to calculate the year end inventory valuation. Fashion Designers also runs several fashion accessory stores. The inventory in the stores is valued using the retail inventory method.

You are required to complete the following:

1. Set a group materiality level based upon the estimated 31 December 1993 figures.

2. Prepare a memorandum to the audit partner detailing the procedures required regarding reliance on the audit work performed by XYZ & Co. on the overseas operations.