It has come to our attention that much of Roman Holiday’s recent revenue growth came from acquisition of franchise right and existing restaurants rather than real growth in the franchise. Management is aware of these issues and may be feeling some pressure to meet growth targets and earnings forecasts. In the following working papers, we address this potential issue by reviewing the various accounting treatments for the reacquired franchise rights. We also examine the reacquired franchise rights from the Arizona acquisition and assess the reasonableness of management’s assumptions in its impairment analysis. Q1
Purpose: The purpose of this testing procedure is to verify the mathematical accuracy of the schedule and reconcile the total to the preliminary balance sheet to ensure the assertions of accuracy and valuation are met.
1. Obtain the client prepared schedule of reacquired franchise rights during the year. 2. Trace and agree all amounts to last year working paper. 3. Trace and agree book value of reacquired franchise rights to respective impairment analysis schedule to ensure no impairment losses. 4. Recalculate the balance at end of the year to verify that the correct amount is calculated. 5. If the balance at end of the year is not correctly calculated, reconcile the total balance at end of the year to the reacquired franchise right amount on the preliminary balance sheet. Working paper see appendix 1.
There is a 2000 difference between the recalculated balance at end of the year 127,414,000 and the client recorded balance of 127,412,000. The difference is way below the materiality which is 5 million, therefore the difference is immaterial. Based on the audit procedures performed, the schedule of reacquired franchise rights is mathematically accurate. Q2
Purpose: to evaluate the appropriateness of the client’s determination of an indefinite life classification...