You have been recently assigned as the manager for the audit of Layton Co, a software engineering company whose securities are publicly traded. You are filling in for your colleague, Luke Paolo, who has taken a sick leave at short notice.

The company's audit for the financial year ended 30 June 20Y0 is nearing completion and its draft financial statements recognize a profit before tax of $65.4 million and total assets of $27.9 million.

You are in the midst of reviewing the audit working papers and have come across the following comments from the audit senior, a part-qualified accountant:

It is a relief to have you on the team. I was starting to get anxious that our working papers would not have been reviewed in time for the clearance meeting with Layton Co's management next week. The audit junior and I have tried our level best to complete all of the procedures outlined in the audit programme but it was difficult to do so considering that Luke had already taken ill at the commencement of the audit and there was no one supervise our work. The only guidance provided by Luke during a short briefing meeting with him was to 'refer to the prior year's audit file' should we have doubts on how to proceed with the audit.

There is an issue that I wanted to run by you. During the year, Layton Co introduced a share-based payment scheme in which it granted its senior executives share appreciation rights (SARs). This area was not highlighted as being high risk during the audit planning meeting. The SARs were granted at the beginning of the financial year and their fair value as at that date was determined by an independent valuation firm. A copy of the valuation report is on file and judging by a quick search I did online, I can safely say that they are competent in doing their job as their website seems to be professionally designed.

The fair value of the SARS at the grant date was amortized over a five-year vesting period, resulting in the recognition of a straight line expense of $235,000 and a corresponding credit entry to equity reserves has been in the financial statements during the year. The amounts appear to have been appropriately recognized in the financial statements and given their immateriality, I believe that no disclosures in the notes to the financial statements are necessary in respect of the share-based scheme.'

Required:

Comment on the quality control and other professional issues that have arisen during the planning and performance of the audit of Layton Co for the financial year ended 30 June 20Y0.

Answer rating: 100% (QA)

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