You are the manager responsible for the audit of Obeyeyie Co. Ltd (OCL), a manufacturing company with a year ended 31 December 2018. The audit work has been completed and reviewed and you are due to issue the audit report in three days. The draft audit opinion is unmodified. The financial statements show revenue for the year ended 31 December 2018 of GH¢ 15 million, net profit of GH¢ 3 million, and total assets at the year-end are GH¢ 80 million.
The finance director of OCL e-mailed you this morning in addition to a whatsapp message to tell you about the announcement yesterday, of a significant restructuring of OCL, which will take place over the next six months. The restructuring will involve the closure of a factory, and its relocation to another part of the country. There will be some redundancies and the estimated cost of closure is GH¢ 250,000. The financial statements have not been amended in respect of this matter.
Required:
In respect of the announcement of the restructuring:
Comment on the financial reporting implications, and advise the further audit procedures to be performed; (6 marks)
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Financial Reporting Implications
The announcement of a restructuring after the reporting date is a non-adjusting event after the reporting date, according to IAS 10: Events After the Reporting Period. This is because the event does not provide evidence in relation to a condition that existed at the year end.
Materiality calculations in respect of the potential cost of closure are as follows: Based on revenue: GH¢ 250,000/15 million = 1·67%
Based on profit: GH¢ 250,000/3 million = 8·3%
Based on assets: GH¢ 250,000/80 million = <1%
Therefore this amount is material to the statement of comprehensive income.
Per IAS 10, a note should be provided to the financial statements, which describes the nature of the event, and provides an estimate of the financial effect.
Tutorial note: credit will also be awarded for discussion of whether a provision for the restructuring costs is required under IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Audit procedures could include:
• Review any potential note to financial statements which should disclose the non-adjusting event, providing a brief description of the event, and an estimate of the financial effect.
• Discuss the reason for the restructuring with a member of key management personnel, and read minutes of board meetings where the plan was discussed, in order to gain an understanding about the reason for the restructuring.
• Verify the approval of the plan itself, and the approval of the announcement of the plan, which can be performed through a review of board minutes.
• Confirm the date on which the plan was approved, and also the date of the announcement, using supporting documentation such as press release, letters sent to employees, internal meetings held with employees, etc.
• Obtain a copy of the announcement and review for details, particularly a description of the exact nature of the restructuring, including the number of employees to be affected.
• Agree the GH¢ 250,000 potential cost of closure to supporting documentation, including a schedule showing the number and grade of staff to be made redundant, which should be supported by payroll/contract details.
• Using the results of the discussion with management, assess the planned restructuring in the context of the auditor’s knowledge of the business, considering whether any further costs are likely to be incurred.