Sammy's Songs Inc. (Sammy's), an SEC registrant, is a new audit client with a fiscal year-end...

  

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Sammy's Songs Inc. (Sammy's), an SEC registrant, is a new audit client with a fiscal year-end of December 31, 2019. Sammy's manufactures musical instruments. Sammy's acquired Piano Man Inc. (Piano Man) in 2019 for $575 million in cash. The fair value of significant assets acquired was determined by an external valuation specialist and included property, plant, and equipment totaling $865 million (based on an appraisal of the market prices of similar assets) and other assets totaling $145 million. The useful lives assigned to the property, plant, and equipment acquired were 30 years for the plant and 15 years for the equipment. The useful lives for the plant and equipment already owned by Sammy's are 20 years and 10 years, respectively. Acquired customer lists, included in other assets, were assigned a useful life of 15 years. To test the useful lives of the operating assets, the engagement team asked management why the number of years assigned to the plant and equipment acquired differed from the years assigned to that which Sammy's had already owned. Management stated that the useful lives for the acquired assets were the amounts used by Piano Man before the acquisition. The engagement team discussed the useful lives of the acquired property, plant, and equipment with the plant manager of Piano Man. The plant manager stated that 30 years and 15 years for the plant and the equipment, respectively, were the useful lives used before the acquisition. This discussion was documented in the audit working papers. The valuation specialist allocated the plant fair value of $865 million to each asset class based on the percentage of the seller's total original cost applicable to each asset class. These percentages were provided by management of Piano Man and relied on by the valuation specialist. The engagement team compared the percentage of total costs to a client prepared spreadsheet listing each asset class, asset ID, and percentage of total cost. No errors were noted and, accordingly, no further testing of the client-prepared spreadsheet was performed by the engagement team. In addition to its drum manutacturing business, Sammy's also wholly owns Guitar World Inc. (Guitar World), which is the largest manufacturer of guitars in the United States. Guitar World grew through the acquisition of other guitar companies and completed five, eight, and four acquisitions during 2019, 2018, and 2017, respectively. As a result of the acquisitions, Guitar World reported approximately $90 million (15 percent of total assets and 60 percent of total intangible assets) of customer lists as of December 31, 2019. Guitar World amortizes its customer lists on a straight-line basis over 25 years, which management believes reflects the pattern in which the economic benefits of the customer lists are used up. During 2019, management revised its estimate of the customer list economic life, and began assigning an amortization period of 15 years to newly acquired customer lists. Amortization expense for the year ended December 31, 2019, was $3 million. To test the economic lives of the customer lists, the engagement team asked management what the reasoning was for the change in the assumed economic life this year. Management provided a memorandum that discussed the rationale for using the 25- year economic life to amortize the various customer lists, as well as the rationale for the current-year change in management's estimate of the newly acquired customer lists lives. This memo was included in the audit working papers, but the working papers did not include any additional documentation from the engagement team. Required: For both Piano Man and Guitar Worid, determine whether the engagement team performed adequate and appropriate audit procedures considering management's assumptions. (Note that your focus should be on the substantive audit procedures performed, not the accounting treatment nor the control testing.) If the engagement team did not perform adequate and appropriate procedures, describe what additional procedures you would have performed. Sammy's Songs Inc. (Sammy's), an SEC registrant, is a new audit client with a fiscal year-end of December 31, 2019. Sammy's manufactures musical instruments. Sammy's acquired Piano Man Inc. (Piano Man) in 2019 for $575 million in cash. The fair value of significant assets acquired was determined by an external valuation specialist and included property, plant, and equipment totaling $865 million (based on an appraisal of the market prices of similar assets) and other assets totaling $145 million. The useful lives assigned to the property, plant, and equipment acquired were 30 years for the plant and 15 years for the equipment. The useful lives for the plant and equipment already owned by Sammy's are 20 years and 10 years, respectively. Acquired customer lists, included in other assets, were assigned a useful life of 15 years. To test the useful lives of the operating assets, the engagement team asked management why the number of years assigned to the plant and equipment acquired differed from the years assigned to that which Sammy's had already owned. Management stated that the useful lives for the acquired assets were the amounts used by Piano Man before the acquisition. The engagement team discussed the useful lives of the acquired property, plant, and equipment with the plant manager of Piano Man. The plant manager stated that 30 years and 15 years for the plant and the equipment, respectively, were the useful lives used before the acquisition. This discussion was documented in the audit working papers. The valuation specialist allocated the plant fair value of $865 million to each asset class based on the percentage of the seller's total original cost applicable to each asset class. These percentages were provided by management of Piano Man and relied on by the valuation specialist. The engagement team compared the percentage of total costs to a client prepared spreadsheet listing each asset class, asset ID, and percentage of total cost. No errors were noted and, accordingly, no further testing of the client-prepared spreadsheet was performed by the engagement team. In addition to its drum manutacturing business, Sammy's also wholly owns Guitar World Inc. (Guitar World), which is the largest manufacturer of guitars in the United States. Guitar World grew through the acquisition of other guitar companies and completed five, eight, and four acquisitions during 2019, 2018, and 2017, respectively. As a result of the acquisitions, Guitar World reported approximately $90 million (15 percent of total assets and 60 percent of total intangible assets) of customer lists as of December 31, 2019. Guitar World amortizes its customer lists on a straight-line basis over 25 years, which management believes reflects the pattern in which the economic benefits of the customer lists are used up. During 2019, management revised its estimate of the customer list economic life, and began assigning an amortization period of 15 years to newly acquired customer lists. Amortization expense for the year ended December 31, 2019, was $3 million. To test the economic lives of the customer lists, the engagement team asked management what the reasoning was for the change in the assumed economic life this year. Management provided a memorandum that discussed the rationale for using the 25- year economic life to amortize the various customer lists, as well as the rationale for the current-year change in management's estimate of the newly acquired customer lists lives. This memo was included in the audit working papers, but the working papers did not include any additional documentation from the engagement team. Required: For both Piano Man and Guitar Worid, determine whether the engagement team performed adequate and appropriate audit procedures considering management's assumptions. (Note that your focus should be on the substantive audit procedures performed, not the accounting treatment nor the control testing.) If the engagement team did not perform adequate and appropriate procedures, describe what additional procedures you would have performed.

Answer rating: 100% (QA)

To perform the audit auditors always use a procedure of audit that is comprised if five general components a Analytical Review b Inquiry c Observation... View the full answer