You have been recently assigned as the manager for the audit of Layton Co, a software...

You have been recently assigned as the manager for the audit of Layton Co, a software engineering company whose securities are publicly traded. You are filling in for your colleague, Luke Paolo, who has taken a sick leave at short notice.

The company's audit for the financial year ended 30 June 20Y0 is nearing completion and its draft financial statements recognize a profit before tax of $65.4 million and total assets of $27.9 million.

You are in the midst of reviewing the audit working papers and have come across the following comments from the audit senior, a part-qualified accountant:

It is a relief to have you on the team. I was starting to get anxious that our working papers would not have been reviewed in time for the clearance meeting with Layton Co's management next week. The audit junior and I have tried our level best to complete all of the procedures outlined in the audit programme but it was difficult to do so considering that Luke had already taken ill at the commencement of the audit and there was no one supervise our work. The only guidance provided by Luke during a short briefing meeting with him was to 'refer to the prior year's audit file' should we have doubts on how to proceed with the audit.

There is an issue that I wanted to run by you. During the year, Layton Co introduced a share-based payment scheme in which it granted its senior executives share appreciation rights (SARs). This area was not highlighted as being high risk during the audit planning meeting. The SARs were granted at the beginning of the financial year and their fair value as at that date was determined by an independent valuation firm. A copy of the valuation report is on file and judging by a quick search I did online, I can safely say that they are competent in doing their job as their website seems to be professionally designed.

The fair value of the SARS at the grant date was amortized over a five-year vesting period, resulting in the recognition of a straight line expense of $235,000 and a corresponding credit entry to equity reserves has been in the financial statements during the year. The amounts appear to have been appropriately recognized in the financial statements and given their immateriality, I believe that no disclosures in the notes to the financial statements are necessary in respect of the share-based scheme.'

Required:

Comment on the quality control and other professional issues that have arisen during the planning and performance of the audit of Layton Co for the financial year ended 30 June 20Y0.

Expert Solution

Quality control and other issues arisen during the planning and performance of audit:

^ While planning activitiesthe auditor shall establish an overall audit strategy considering - nature timing and extent of resources necssary to perform the engagement - in this situation engagement team should have verified the avaliability of Mr. Luke who was previously in favour with engagement.

^ Analytical procedures need to be applied for the risky areas

^ Engagement team need to determine the materiality level for the risk ascertained through the risk assessment procedures.

^ Involvement of experts are required when the auditor dont have sufficient knowledge about the particular matter - in this engagement team didnot obtain expert opinion and moreover it didnot obtained the evidence about fair valuation, but confirmed only by checking their website design which is not relevant and not considered as sufficient and appropiate audit evidence.

^ While obtaining the experts opinion auditor should consider their competence,capability and objectivity and whether the work of such individual is adequate for auditors purpose.

^ Disclosure are required to be done by management in the financial statements with respect to SAR of employees, where the auditor judgement is not appropiate for not disclosing considering its materiality.

^ Disclosure may be given with respect to the agreement between employees, terms and conditions, No. of SAR, exercise price, fair value, valuation method for measuring the fair value, the impact on statement of profit and loss and on balance sheet for such SAR's.

ekkarill92 answered 1 year ago

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