Trueblood Case
SUBJECT: Deciding the Appropriate Extent of Audit Performed for Billy’s Beats for Asset Valuation
Billy’s Beats Inc., an SEC registrant, is a new audit client with a fiscal year-end of December 31, 2010. Billy’s is a manufacturer of musical instruments. Billy’s acquired Little Drummer Boy Inc. in 2010 for $575 million in cash. Significant assets acquired included property, plant, and equipment totaling $865 million 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 Billy’s are 20 years and 10 years. Other included assets of acquired customer lists, 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 the assets which Billy’s had already owned. Management stated that the useful lives for the acquired assets were the amounts used by Little Drummer before the acquisition. The engagement team discussed the useful lives of the acquired property, plant, and equipment with the plant manager of Little Drummer. 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 Little Drummer 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
Billy’s Beats Inc., an SEC registrant, is a new audit client with a fiscal year-end of December 31, 2010. Billy’s is a manufacturer of musical instruments. Billy’s acquired Little Drummer Boy Inc. in 2010 for $575 million in cash. Significant assets acquired included property, plant, and equipment totaling $865 million 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 Billy’s are 20 years and 10 years. Other included assets of acquired customer lists, 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 the assets which Billy’s had already owned. Management stated that the useful lives for the acquired assets were the amounts used by Little Drummer before the acquisition. The engagement team discussed the useful lives of the acquired property, plant, and equipment with the plant manager of Little Drummer. 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 Little Drummer 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