Your audit client is Brilliant Backyards (BB), a 50-year old company which specialises in producing content for hobby gardners. Until recently most of BB's revenue came from selling their magazine (also called "Brilliant Backyards"). As magazine sales have been declining, BB has now decided to launch a streaming service, which they describe as 'Netflix for gardners'. To support this ambition BB has invested heavily in creating a custom indoor/outdoor studio to shoot gardening content. BB has also paid many of its celebrity garderners lump sums so they will not appear on any rival channels for 5 years, though BB's most popular gardener (Grace "green thumb" Thomas) has not yet signed. Both the studio costs and non-compete payments to celebrity gardners have been capitalised as "Streaming assets" and are to be written off over 5 years. These assets have been funded through an equity investment by Ace, a private bank located in Panama, South America. As a result, Ace has been granted two seats on the 5-member BB board.

1/ Explain two business risks faced by BB. 

2/ State and justify your assessment of the Inherent Risk for the accuracy, valuation and allocation of "Streaming assets" for BB, giving two reasons. 

3/ In relation to the completeness of "Streaming assets" for BB, state a preventative OR detective control that would mitigate the risk and state how you would test that control. 

4/ You have assessed Control Risk in relation to the existence of BB's "Streaming assets" as low. From your initial review of the report listing the contents of the studio, however, you have noticed that some invoices have been paid twice.

(a) Provide one (1) example of an IT input control and one (1) example of a manual control that may have prevented this error ;

(b) Define an 'integrated test facility' (ITF). Explain how an ITF could be used to test the IT control you discussed in part (a) ;

(c) Explain a 'code review' and discuss whether undertaking a code review would be useful in testing the IT control you discussed in part (a). ;

(d) After undertaking additional testing you have determined that this is a systemic error and reassessed Control Risk as high. Discuss how this finding will change your planned nature, timing, and extent of audit testing in relation to BB's "Studio assets". 

1/ Risk 1:

Risk 2:

2/ Assessment of accuracy, valuation and allocation of BB's "Streaming assets" (high, medium, or low):

Reason 1:

Reason 2:

3/ Preventative OR detective control in relation to existence of BB's "Streaming assets" :

How you would test that control:

4/ (a) Example of an IT input control that may have prevented this error:

Example of a manual control that may have prevented this error:

(b) Definition of 'integrated test facility' (ITF):

How ITF could be used to test the IT control you discussed in part (a):

(c) Explanation of a 'code review':

Discussion of whether undertaking a code review would be useful in testing the IT control you discussed in part (a):

(d) How this finding will change your planned nature, timing, and extent of audit testing in relation to BB's "Studio assets":

Answer rating: 100% (QA)

1 a The decline in magazine sales may continue and BB may not be able to offset this decline with revenue from the streaming service b The streaming service may not be successful and BB may not be abl... View the full answer