Revision question on professional skepticism, impairment of goodwill, and procedures used to perform a forensic investigation

Revision question on professional skepticism, impairment of goodwill, and procedures used to perform a forensic investigation.

A high-quality audit features the exercise of professional judgment by Auditor, and importantly, a mindset that includes professional Skepticism throughout the planning and performance of the audit.

Explain the meaning of the term professional skepticism, and discuss its importance in planning and performing an audit.    

You are an audit manager in Soprano & Co, working on the audit of the Tony Group (the Group), whose financial year ended on 31 March 2015.  This is the time you have worked on the Group audit.  The draft consolidated financial statements to recognize profit before tax of $6 million (2014 – $9 million) and total assets of $90 million (2014 – $82 million).  The Group manufactures equipment used in the oil extraction industry.

Goodwill of $10 million is recognized in the Group statement of financial position, having arisen on several business combinations over the last few years.  An impairment review was conducted in March 2015 by Silvio Dante, the Group finance director, and this year an impairment of $50,000 is to be recognized in respect of Goodwill.

I don’t think you should need any evidence other than contained in my file.  The assumptions used are straightforward, so you shouldn’t need to look into them in detail.  The assumptions are consistent with how we conducted impairment reviews in previous years and your firm has always agreed with the assumptions used, so you can check that back to the last year’s audit file.  All of the calculations have been checked by the head of the Group’s internal audit department.

Silvio has also informed you that two members of the sales team are suspected of paying bribes in order to secure lucrative customer contracts.  The internal audit team was alerted to this when they were auditing cash payments and found significant payments to several new customers being made prior to contracts being signed.  Silvio has asked if Soprano & Co. would perform a forensic investigation into the alleged bribery payments.

( b)(i) Discuss how professional skepticism should be applied to the Statement made by Silvio, and

(ii )     Explain the principal audit procedures to be performed on the Impairment of goodwill.

(c ) Recommend the procedures to be used in performing a forensic investigation on the alleged bribery payments.

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