AC6062 ASSURANCE SERVICES
COURSEWORK – AUTUMN 2020-21
Your audit firm, Cube and Chester, has just won a bid to audit the financial statements of Ambleside plc (Ambleside). You joined the audit engagement partner at two meetings with Ambleside’s Finance Director and the Operations Director, as part of the process to plan the audit of the financial statements for the year ended 31 October 2020.
Ambleside is one of United Kingdom’s oldest department stores. It began trading in 1919 and has 50 shops in towns and cities across the United Kingdom. Ambleside currently employs 2,000 staff. Ambleside also has a fairly strong online presence but in recent months the website has experienced some software issues.
Ambleside had experienced tough trading conditions in recent years mainly due to the changing retail environment and most recently as a result of the Covid-19 pandemic. The company undertook a major restructuring in December 2019 resulting in the closure of 20 shops and laying off 500 staff. As costs continued to increase, the company had tried unsuccessfully in the past year to secure rent reductions with landlords.
For the year ended 31 October 2020, the company reported sales of £505.2 million (2019: £870.3 million) and a loss for the period of £190.4 million (2019: £36.8 million loss).
Since mid-September 2020, the management has been having extensive discussions with institutional investors and other shareholder groups about securing additional investment for the business.
Below is the statement of financial position of the company and accompanying notes.
AMBLESIDE PLC
Consolidated Statement of financial position as at 31 October 2020
31 October 2020 31 October 2019
Note £ million £ million
Non-current assets
Intangible assets 1 16.3 65.8
Property, plant and equipment 2 27.7 55.0
Investments – 4.8
44.0 125.6
Current assets
Inventories 169.0 87.0
Trade and other receivables 44.9 65.2
Financial instruments 2.0 0.5
Cash and cash equivalents 10.2 18.0
226.1 170.7
Total assets 270.1 296.3
Equity and liabilities
Equity
Share capital 95.0 95.0
Share premium 70.0 70.0
Retained loss (327.3) (136.9)
Total equity -162.3 28.1
Non-current liabilities
Trade and other payables 80.5 36.4
Borrowings 45.8 25.5
Financial instruments 10.8 0.8
Retirement benefit obligation 86.8 74.5
223.9 137.2
Current liabilities
Trade and other payables 152.3 100.2
Borrowings 23.9 4
Others 32.3 26.8
208.5 131.0
Total equity and liabilities 270.1 296.3
Notes and additional information
Note 1. Intangible assets
Intangible assets include software, trade name and customer relationships.
Software is used for business operations and processes across the whole group. The carrying value of Software is £10 million at 31 October 2020, and it is amortised on a straight-line basis over its expected useful life, which is usually five years. The trade name and customer relationships related to earlier acquisitions and are being amortised over a useful life of 20 and10 years respectively. At each balance sheet date, the Group reviews the carrying amounts of its intangible assets to determine whether there is any indication that those assets have suffered an impairment loss.
For the year ended 31 October 2020, Software additions include £2.5 million (2019: £1.6 million) of internally generated intangible assets
Note 2. Property, plant and equipment Total
£ million
Cost
As at 01 November 2019 246.6
Additions 5.9
Disposals (52.8)
As at 31 October 2020 199.7
Accumulated depreciation and impairments
As at 01 November 2019 191.6
Charge for the period 10.8
Impairments 15.4
Disposals (45.8)
As at 31 October 2020 172.0
Carrying Value
As at 31 October 2019 55.0
As at 31 October 2020 27.7
Impairment testing during the period had identified a number of stores where the current and anticipated future performance did not support the carrying value of the stores. The charge for the impairment of property, plant and equipment was included within administrative expenses. At 31 October 2020, the Group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to £4 million (2019: £18 million)
Going concern
The directors confirm that the application of the going concern basis for the preparation of the financial statements continues to be appropriate. The Directors are confident that the Group will operate within the terms of its committed borrowing facilities and covenants for the foreseeable future, and the Group’s proven cash management capability supports the preparation of the financial statements on a going concern basis.
The Audit Committee
The Audit Committee is chaired by Ms Winter, an expert in logistics and supply management. Other members are Mr Spring, an insurance expert, Ms Summer, a chartered surveyor and Mr Autumn, an IT Director. All the Committee members are independent non-executive Directors.
The company secretary is secretary to the Audit Committee. The chairman and chief executive of Ambleside have attended all the Audit Committee meetings during the year. Other key invitees, including the Chief Financial Officer, the Group Finance Director, the Head of Risk and Assurance, the Director of Treasury and Tax and the external auditor, attended as relevant. The committee met two times during the year.
The engagement partner has asked you to prepare a report to cover the following four tasks:
SECTION ONE
Explain the substantive audit procedure you would perform in order to verify the following items in the financial statement:
- Software, and
- Property, plant and equipment (20%)
SECTION TWO
The Audit Committee is an important part of the corporate governance structure of any UK public limited company.
Required:
- How does the audit committee of a public limited company safeguard the interests of shareholders?
- Evaluate how the structure and workings of Ambleside’s audit committee promotes or hinders its effectiveness in discharging it responsibilities.
(20%)
SECTION THREE
According to ISA 570 Going Concern, the auditor has responsibilities to obtain sufficient appropriate audit evidence regarding, and conclude on: whether a material uncertainty related to going concern exists, and the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements.
Required:
- Discuss the viability of Ambleside as a going concern. Your discussion should be within the context of the current UK and global economic environment.
- Explain the substantive audit procedures that the auditor should undertake to discharge the responsibilities under ISA 570 provided above. You should recognise the impact COVID-19 could have on the going concern procedures.
(30%)
SECTION FOUR
The audit ‘expectation gap’ broadly measures public concern about the external audit.
Required:
Discuss the expectation gap in audit and the measures in place to close this gap.
(30%)
GUIDELINES
- Your coursework should be 1500 words long +/- 10%
- Coursework constitutes 50% of the overall module mark
- The coursework must be clearly presented in a report format with structured headings and parts (corresponding to the sections set above).
- You should clearly identify the substantive audit procedures to be conducted with full reference to data sources and in the context of the company.
- You must relate the specific issues arising from the audit of the company to relevant ISAs, to the audit process and to articles from the accounting literature.
- Comments on the Audit Committee should refer to the on-going debates on improving financial reporting and the relevant principles of the UK Corporate Governance Code 2018 and other relevant regulations.
- You should demonstrate evidence of wide research in the discussion of the audit expectation gap. You should cite relevant cases involving auditors but not older than 10 years and refer to recent developments in regulations and practice to close the expectation gap.
- You should provide sufficient in-text referencing as well as a fully referenced bibliography, use a mix of sources/citations, and should appropriately reference your sources using the Harvard style.
- All material submitted must be your own work. Copying, plagiarism, and collusion is a serious assessment offence.
- Word count must be stated at the end of your answer.
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