ACCA考试

2 Your audit client, Prescott Co, is a national hotel group with substantial cash resources. Its accounting functions arewell managed and the group accounting policies are rigorously applied. The company’s financial year end is31 December.Prescott has bee

题目

2 Your audit client, Prescott Co, is a national hotel group with substantial cash resources. Its accounting functions are

well managed and the group accounting policies are rigorously applied. The company’s financial year end is

31 December.

Prescott has been seeking to acquire a construction company for some time in order to bring in-house the building

and refurbishment of hotels and related leisure facilities (e.g. swimming pools, squash courts and restaurants).

Prescott’s management has recently identified Robson Construction Co as a potential target and has urgently requested

that you undertake a limited due diligence review lasting two days next week.

Further to their preliminary talks with Robson’s management, Prescott has provided you with the following brief on

Robson Construction Co:

The chief executive, managing director and finance director are all family members and major shareholders. The

company name has an established reputation for quality constructions.

Due to a recession in the building trade the company has been operating at its overdraft limit for the last 18

months and has been close to breaching debt covenants on several occasions.

Robson’s accounting policies are generally less prudent than those of Prescott (e.g. assets are depreciated over

longer estimated useful lives).

Contract revenue is recognised on the percentage of completion method, measured by reference to costs incurred

to date. Provisions are made for loss-making contracts.

The company’s management team includes a qualified and experienced quantity surveyor. His main

responsibilities include:

(1) supervising quarterly physical counts at major construction sites;

(2) comparing costs to date against quarterly rolling budgets; and

(3) determining profits and losses by contract at each financial year end.

Although much of the labour is provided under subcontracts all construction work is supervised by full-time site

managers.

In August 2005, Robson received a claim that a site on which it built a housing development in 2002 was not

properly drained and is now subsiding. Residents are demanding rectification and claiming damages. Robson

has referred the matter to its lawyers and denied all liability, as the site preparation was subcontracted to Sarwar

Services Co. No provisions have been made in respect of the claims, nor has any disclosure been made.

The auditor’s report on Robson’s financial statements for the year to 30 June 2005 was signed, without

modification, in March 2006.

Required:

(a) Identify and explain the specific matters to be clarified in the terms of engagement for this due diligence

review of Robson Construction Co. (6 marks)

参考答案和解析
正确答案：
2 PRESCOTT CO
(a) Terms of engagement – matters to be clarified
Tutorial note: This one-off assignment requires a separate letter of engagement. Note that, at this level, a standard list of
contents will earn few, if any, marks. Any ‘ideas list’ must be tailored to generate answer points specific to the due diligence
review of this target company.
■ Objective of the review: for example, to find and report facts relevant to Prescott’s decision whether to acquire Robson.
The terms should confirm whether Prescott’s interest is in acquiring the company (i.e. the share capital) or its trading
assets (say), as this will affect the nature and scope of the review.
Tutorial note: This is implied as Prescott ‘has been seeking to acquire ... to bring building … in-house’.
■ Prescott’s management will be solely responsible for any decision made (e.g. any offer price made to purchase Robson).
■ The nature and scope of the review and any standards/guidelines in accordance with which it will be conducted. That
investigation will consist of enquiry (e.g. of the directors and the quantity surveyor) and analytical procedures (e.g. on
budgeted information and prior period financial statements).
Tutorial note: This is not going to be a review of financial statements. The prior year financial statements have only
recently been audited and financial statements for the year end 30 June 2006 will not be available in time for the
review.
■ The level of assurance will be ‘negative’. That is, that the material subject to review is free of material misstatement. It
should be stated that an audit is not being performed and that an audit opinion will not be expressed.
■ The timeframe. for conducting the investigation (two days next week) and the deadline for reporting the findings.
■ The records, documentation and other information to which access will be unrestricted. This will be the subject of
agreement between Prescott and Robson.
■ A responsibility/liability disclaimer that the engagement cannot be relied upon to disclose errors, illegal acts or other
irregularities (e.g. fraudulent financial reporting or misappropriations of Robson’s assets).
Tutorial note: Third party reliance on the report seems unlikely as Prescott has ‘substantial cash resources’ and may not
need to obtain loan finance.
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