Question

You are the audit senior with Howard & Associates and have been assigned to the audit of Beautiful Hair

Ltd (Beautiful Hair).

In early 2019, Beautiful Hair acquired a small manufacturer of high-quality organic hair-styling products,

Shimmer Pty Ltd (Shimmer). Beautiful Hair’s management had identified that Shimmer’s line of products

would fit extremely well with the Beautiful Hair business, and organized funding for the acquisition from

Regional Bank.

Shimmer uses special formulas to create its product. Only the owner of Shimmer knows the secret

ingredients for the formulas. These secret ingredients are apparently documented and held by Shimmer’s

solicitors.

Beautiful Hair’s management has been advised that the intellectual property related to the formulas has the

potential to be both a material and valuable asset and has been recognized as an intangible asset arising

from the acquisition in accordance with accounting standard AASB 3.

Required

(a) Identify and explain the two key assertions most at risk in relation to the intellectual property

intangible asset

(b) Identify and describe a substantive audit procedure that you could perform in response to each risk

identified above

Answer 1

The following are the assertions with respect to Intellectual property rights which is an Intangible Asset.

Assertions about account balances and related disclosures at the period end

• Rights and obligations – the entity holds or controls the rights to Intellectual property are the obligations of the entity
• Completeness – Intellectual property have been recorded have been recorded and all related disclosures that should have been included in the financial statements have been included

• Accuracy, valuation and allocation – Intellectual property included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments have been appropriately recorded and related disclosures have been appropriately measured and described.

• Classification – Intellectual property have been recorded in the proper accounts.

• Presentation – Intellectual property is appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.

  In the present situation:

In early 2019, Beautiful Hair acquired Shimmer Pty Ltd (Shimmer) which uses special formulas to create its product. Only the owner of Shimmer knows the secret ingredients for the formulas. These secret ingredients are apparently documented and held by Shimmer’s

solicitors.

Beautiful Hair’s management has been advised that the intellectual property related to the formulas has the potential to be both a material and valuable asset and has been recognized as an intangible asset arising

from the acquisition in accordance with accounting standard AASB 3.

Solution:

According to me Rights, Obligations and Valuation are the key assertions.

As in the present case, Since the business has been acquired by Beautiful hair, it is appropriate to recognise the intellectual property in the books of beautiful hair.

Substantive proceedures:

In this context auditor needs to obtain sufficient and appropriate audit evidence as follows

1. whether the Beautiful company has paid for transfer of intecllutal property in particular ? if not they cannot recognise in the books as internally generated goodwill or IP has no value.
2. Auditor needs to check the title transfer document to ensure that there is no legal issues in future on this.
3. since the formulae is so valuable auditor needs to ensure how the formulae is protected for tangible loss
4. Auditor needs to confirm on valuation perspective as well in order to ensure it is properly valued in books.