You are the manager responsible for the audit of Peprem Co, a jewellery manufacturer and retailer. The final audit for the year ended 31 March 2019 is nearing completion and you are reviewing the audit working papers. The draft financial statements recognise total assets of GHC1,919 million (201R – GHC1,889 million), revenue of GHC1,052 million (2018 – GHC997 million) and profit before tax of GHC107 million (2018 – GHC110 million).

At the year end management performed an impairment review on its retail outlets, which are a cash generating unit for the purpose of conducting an impairment review. While internet sales grew rapidly during the year, sales from retail outlets declined, prompting the review. At 31 March 2019 the carrying amount of the assets directly attributable to the retail outlets totalled GHC137 million, this includes both tangible assets and goodwill. During the year management received a number of offers from parties interested in purchasing the retail outlets for an average of GHC125 million. They also estimated the disposal costs to be GHC1·5 million, based upon their experience of corporate acquisitions and disposals. Management estimated the value in use to be GHC128 million. This was based upon the historic cash flows attributable to retail outlets inflated at a general rate of 1% per annum. This, they argued, reflects the poor performance of the retail outlets. Consequently the retail outlets were impaired by GHC9 million to restate them to their estimated recoverable amount of GHC128 million. The impairment was allocated against the tangible assets of the outlets on a pro rata basis, based upon the original carrying amount of each asset in the unit.

Discuss the matters to consider and explain evidence you would expect to find on the audit file.

Answer rating: 100% (QA)