Bangi Chemicals Ltd makes chemicals for the defense industry. They had no subsidiary companies, but in mid 202X, they acquired 60 per cent of the share capital of a US company for £6m paid partly in cash and partly in shares in Bangi. The net assets of the US company, Chemola Inc., were about £4.8m at the time of purchase. Since then, the company has made a loss of £1.5m but is expected to break even next year and make a large profit after that. The auditors of Chemola are based in the USA and it is proposed that they will continue to carry out the audit as auditors Cherry & Blossom LLP have no representation in the USA.

Discussion
– Draw up a list of audit procedures that Cherry & Blossom LLP, the auditors of Bangi, should carry out in connection with Chemola. The audit of Chemola is carried out by a US firm. Cherry & Blossom LLP is engaged on the audit of Bangi’s 202X accounts.
– How should the matters connected with Chemola appear in Bangi’s own accounts? Bangi advanced £1.2m as a temporary loan to Chemola to cover a cash flow shortage and, in addition, has a trading balance of Dr £600,000 at 31.12.202X.
– What matters should Cherry & Blossom LLP consider when reviewing the group accounts?
– What actions should they take with regard to the audit by the US firm of the accounts of Chemola?
– Identify the risks and the risk areas that Cherry & Blossom LLP should worry about.