Subject - Auditing

Question 1: Impairments and Valuation - You are auditing a manufacturing company that produces 4G technologyto supportmobile telephony. The company has had healthy annual net income for the last 10 years, but they currently lack the technological abilities to shift to 5G 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 The impact of this is that much of their current equipment is obsolete.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 4G manufacturing assets are only sellable in Australia.

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 overseasfor 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 5G 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?

Asset 4G Technology Patents Manufacturing Equipment Factory and Premises Carrying Amount $3,400,000 $30,000,000 $41,000,000 Recoverable Amount $800,000 $2,500,000 $20,000,000 Asset 4G Technology Patents Manufacturing Equipment Factory and Premises Carrying Amount $3,400,000 $30,000,000 $41,000,000 Recoverable Amount $800,000 $2,500,000 $20,000,000