Billy S Beats Inc
Little Drummer:
Management of Billy’s made several assumptions towards its newly acquired company, Little Drummer Boy. Management finally adopted the assumptions that the fair value of significant assets acquired was $865 million and that of other assets was $145 million. At the same time of the acquisition, management also decided that useful lives of the acquired plant and equipment were 30 years and 15 years, respectively, which were different from the 20 years and 10 years useful lives for the previously owned plant and equipment. Furthermore, management determined a useful live of 15 years for the acquired customer list. Regarding the $865 million assumption, auditors only adopted the procedure to compare the percentage used to calculate the fair market value to a client prepared spreadsheet. Regarding the useful lives of the plant and equipment, first, auditors inquired the management of Billy’s. Then, auditors made a discussion with the manager of Litter Drummer about the useful lives it previously assigned to the plant and equipment. Auditors only focused on the valuation and allocation assertion towards its assumptions.
However, the above procedures taken by auditors were not adequate to determine the appropriateness of the management’s estimates. First, Billy’s was a new client to the audit teams, which meant the engagement team should take some actions to obtain some understandings towards the new client. The engagement team should contact the predecessor auditors to obtain knowledge of Billy’s. If the engagement team failed to gather enough information about the client, the control risk of Billy’s should be automatically set at maximum. In this situation, the engagement team would choose to use substantive tests of details at year-end to test controls. Large sample size would be adopted as well. However, in the case, auditors did not get contact with the predecessor auditors. The only audit evidence the engagement team gathered was the inquiries of
Management of Billy’s made several assumptions towards its newly acquired company, Little Drummer Boy. Management finally adopted the assumptions that the fair value of significant assets acquired was $865 million and that of other assets was $145 million. At the same time of the acquisition, management also decided that useful lives of the acquired plant and equipment were 30 years and 15 years, respectively, which were different from the 20 years and 10 years useful lives for the previously owned plant and equipment. Furthermore, management determined a useful live of 15 years for the acquired customer list. Regarding the $865 million assumption, auditors only adopted the procedure to compare the percentage used to calculate the fair market value to a client prepared spreadsheet. Regarding the useful lives of the plant and equipment, first, auditors inquired the management of Billy’s. Then, auditors made a discussion with the manager of Litter Drummer about the useful lives it previously assigned to the plant and equipment. Auditors only focused on the valuation and allocation assertion towards its assumptions.
However, the above procedures taken by auditors were not adequate to determine the appropriateness of the management’s estimates. First, Billy’s was a new client to the audit teams, which meant the engagement team should take some actions to obtain some understandings towards the new client. The engagement team should contact the predecessor auditors to obtain knowledge of Billy’s. If the engagement team failed to gather enough information about the client, the control risk of Billy’s should be automatically set at maximum. In this situation, the engagement team would choose to use substantive tests of details at year-end to test controls. Large sample size would be adopted as well. However, in the case, auditors did not get contact with the predecessor auditors. The only audit evidence the engagement team gathered was the inquiries of