Consolidated Financial Position and Audit Review – Sunderland Fields Forever Ltd.

1. Sunderland Fields Forever Ltd

2. Primary Indicators • Prepare a consolidated statement of financial position at July 1, 2012 • Prepare cashflow projections for the next 18 months for the consolidated group • Review the draft audit plan with a view to identifying how we can reduce the fee • Will the audit cover the requirements of the ‘government audit’ for the grant and if not, what additional work is required

3. Primary Indicators • What are the tax implications of the change in structure from a partnership to a company and what are the tax implications of the acquisition of BFI • Have we correctly accounted for all of the accounting transactions? • Evaluate the credit lines that have been made available

4. Cashflow forecast • This is more important than the other PI’s and therefore ranked first • See suggested solution

5. Prepare Group SOFP • Correct the accounting errors first • Research and development (asset should be €45,000 • Government grants • Contingent liability – grant issue • Revenue recognition (Foodmart)

6. Business Combination • Fair value of consideration • Replace the investment with net assets and goodwill – show the journal • Fair value of net assets at business combination date • Development costs • Accounts receivable – Foodmart • Land – 300,000

7. Business combination • Plants – fair value needed but we’ll use book value for the time being • Farm and research equipment - €70,000 • Hardware software and technology – same as plants; fair value needed but for the time being we’ll use book values • BFI development costs – project mothballed after acquisition; fair value is nil • Patents – same as plants; far value needed but for the time being we’ll use book values

8. Business combination • Accounts payable – discount future cashflow to PV; assume book value equals fair value • Notes payable – discount future cashflows to present value; interest charged is 3% but prime interest rate is 5% (300,000*1.03/1.05) • BFI president severance -100,000 • Deferred tax – we need the tax base of the net assets so for the moment we’ll use book value of €60,000

9. Goodwill • Consideration - €650,000 • Net assets at acquisition date; • Cash 6,000 • A/R 100,000 • Land 300,000 • Plants 40,000 • Farm equipment 70,000 • Info system 50,000 • Patents 60,000 • Accounts payable (17,000) • Notes payable (294,000) • Termination payment (100,000) • Deferred Tax (60,000)

10. Review the draft audit plan • There are opportunities to achieve reductions in the audit fee; • We could document the system and then they can simply review and test • The financial statements of BFI don’t need to be audited as a stand alone entity – R&W are auditing the group financial statements • The president of BFI is staying for 8 months as a consultant so he will be on hand to answer any queries

11. Review the draft audit plan • We’ll already have fair valued the net assets of BFI so there’s hardly a need for another specialist to value plant etc… - they can rely on our valuations obtained from an independent third party • My cashflow projections can be used to confirm that goodwill is not impaired • We can assist in sending debtor circs etc…. • Perhaps they can reduce some of the substantive testing in certain areas and replace with control tests

12. Scope of the audit work on government grants • The audit is of our compliance with the terms of the biosearch grant programme • The financial statement audit is probably not going to meet the needs of the government in this regard • The auditors will consider compliance as pat of their tests but only in the context of the overall financial statements • We could ask the government if they’d accept the assurances from our auditors

13. Scope of the audit work on government grants • We should be prepared to ask R&W to perform a ‘limited scope’ audit engagement • The report would be issued to the government and would document the specific procedures performed • Procedures required will probably include; • Review of the programme and it’s requirements • Verify what costs are eligible (gross/net/director salary/BFI costs etc..) • Source records will have to be examined to ensure compliance including invoices, vouchers, bank debits etc.. • R&W will be required to examine expenditures back to 2008

14. Tax issues • See the solution for a detailed list of the different tax issues

15. Consider the credit line optiions • See the solution for a detailed examination of the pro’s and con’s of each