3 You are the manager responsible for the audit of Seymour Co. The company offers informat
3 You are the manager responsible for the audit of Seymour Co. The company offers information, proprietary foods and
medical innovations designed to improve the quality of life. (Proprietary foods are marketed under and protected by
registered names.) The draft consolidated financial statements for the year ended 30 September 2006 show revenue
of $74·4 million (2005 – $69·2 million), profit before taxation of $13·2 million (2005 – $15·8 million) and total
assets of $53·3 million (2005 – $40·5 million).
The following issues arising during the final audit have been noted on a schedule of points for your attention:
(a) In 2001, Seymour had been awarded a 20-year patent on a new drug, Tournose, that was also approved for
food use. The drug had been developed at a cost of $4 million which is being amortised over the life of the
patent. The patent cost $11,600. In September 2006 a competitor announced the successful completion of
preliminary trials on an alternative drug with the same beneficial properties as Tournose. The alternative drug is
expected to be readily available in two years time. (7 marks)
Required:
For each of the above issues:
(i) comment on the matters that you should consider; and
(ii) state the audit evidence that you should expect to find,
in undertaking your review of the audit working papers and financial statements of Seymour Co for the year ended
30 September 2006.
NOTE: The mark allocation is shown against each of the three issues.
■ A change in the estimated useful life should be accounted for as a change in accounting estimate in accordance
with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. For example, if the development
costs have little, if any, useful life after the introduction of the alternative drug (‘worst case’ scenario), the carrying
value ($3 million) should be written off over the current and remaining years, i.e. $1 million p.a. The increase in
amortisation/decrease in carrying value ($800,000) is material to PBT (6%) and total assets (1·5%).
■ Similarly a change in the expected pattern of consumption of the future economic benefits should be accounted for
as a change in accounting estimate (IAS 8). For example, it may be that the useful life is still to 2020 but that
the economic benefits may reduce significantly in two years time.
■ After adjusting the carrying amount to take account of the change in accounting estimate(s) management should
have tested it for impairment and any impairment loss recognised in profit or loss.
(ii) Audit evidence
■ $3 million carrying amount of development costs brought forward agreed to prior year working papers and financial
statements.
■ A copy of the press release announcing the competitor’s alternative drug.
■ Management’s projections of future cashflows from Tournose-related sales as evidence of the useful life of the
development costs and pattern of consumption.
■ Reperformance of management’s impairment test on the development costs: Recalculation of management’s
calculation of the carrying amount after revising estimates of useful life and/or consumption of benefits compared
with management’s calculation of value in use.
■ Sensitivity analysis on management’s key assumptions (e.g. estimates of useful life, discount rate).
■ Written management representation on the key assumptions concerning the future that have a significant risk of
causing material adjustment to the carrying amount of the development costs. (These assumptions should be
disclosed in accordance with IAS 1 Presentation of Financial Statements.)
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