Question - Part 2 -Year-end Procedures

After the fiscal year-end, management updated its assessment of internal controls (using COSO's framework) and found no additional problems. Your firm also completed its testing and review of controls and intends to issue an unqualified opinion based on the audit team's assessment that there are no material weaknesses in the controls. You reviewed the results of the interim procedures and determined that the year-end procedures for auditing reacquired franchise rights are appropriate.

The audit of intangible assets is complicated this year and potentially creates increased audit risk. As the audit senior, you determined that you should complete certain year-end procedures yourself based on discussions during the planning meeting. Complete the following procedures contained in the audit program:

1. Obtain the client-prepared schedule of reacquired franchise rights during the year (Exhibit 5) and verify the mathematical accuracy of the schedule and reconcile the total to the preliminary balance sheet. Assume that all amounts are unchanged from prior years and that all amounts agree with last year's audit work papers. Indicate all procedures performed.

2. Evaluate the client's determination of an indefinite life classification for the reacquired franchise rights in accordance with Statement of Financial Accounting Standards (SFAS) 142. Is the indefinite life correct? If not, what should be the asset life?

3. In past years, the Company executed a number of acquisitions. You assigned different members of the audit team to audit the impairment analysis of the various markets in which the Company made acquisitions and recorded reacquired franchise rights. You retained responsibility to analyze the Arizona market. Obtain and evaluate the client's impairment assessment for the reacquired franchise rights related to the Arizona market (Exhibit 6). Supporting details for the calculations are found in the notes to Exhibit 6.

Evaluate the client's key assumptions in arriving at the estimated fair value for the reacquired franchise rights by comparison to external and internal information.

i. Which provides the greatest level of assurance: internal or external information? Why?

ii. Identify information sources from which to obtain the information required to audit each assumption.

iii. Prepare a document request to the client to (1) obtain the information the client relied on in determining the assumptions, and (2) other client-specific information that you may reasonably use to evaluate the assumptions and information supporting the assumptions (the instructor, acting for the client, will then provide requested information that is available from the client).

iv. Identify Internet and other external sources to obtain additional evidence in order to evaluate the key assumptions. This external evidence may include information on the Arizona pizza market from industry sources to evaluate growth rates and revenue levels, and financial market information to support discount rates.

Reference - Auditing Intangible Assets and Evaluating Fair Market Value: The Case of Reacquired Franchise   Rights by Mark J. Kohlbeck, Jeffery R. Cohen, and Lori L. Holder-Webb.

Attachment:- Assignment File.rar