Reference no: EM132959765

Sun-Ace Co operates a large number of restaurants throughout the country, which are operated under four well known brand names. The company's strategy is to offer a variety of different dining experiences in restaurants situated in city centres and residential areas, with the objective of maximizing market share in a competitive business environment. You are a senior audit manager in Yoon &Co, a firm of CPAs, and you are planning the audit of the financial statements of Sun-Ace Co for the year ended 31 May 2019.

Extracts from the draft operating and financial review are shown below:

Key financial information
                                          31 May 2019                           31 May 2018
                                    Unaudited                               Audited
                                     $ million                                   $ million

Company revenue            1,500                                 1,350

Revenue is derived from four restaurant chains, each having a
distinctive brand name:
Fast Fred family bistros           800                             660
QB outlets                            375                              400
Dakota Diner & Grills                 300                           290
Veggie Vinnie cafés                     25                           -

Company profit before tax            135                          155
Company total assets                 4,200                          3,350
Company cash at bank                 116                              350

Business segments

• The Fast Fred chain of restaurants provides family-friendly dining in an informal setting. Most of the restaurants are located in residential areas. Each restaurant has a large children's play area containing climbing frames and slides, and offers a playroom facility, where parents may leave their children for up to two hours. Recently there has been some media criticism of the quality of the child care offered in one playroom, because a child had fallen from a climbing frame and was slightly injured.One of the Fast Fred restaurants was closed in December 2018 for three weeks following a health and safety inspection which revealed some significant breaches in hygiene standards in the kitchen.
• The QB chain offers fast-food. The restaurants are located next to busy roads, in shopping centres, and at railway stations and airports. Sun-Ace Co has launched a significant marketing campaign to support the QB brand name. The draft statement of comprehensive income for the year ended 31 May 2019 includes an expense of $150 million in relation to the advertising and marketing of this brand. In January 2019 the company started to provide nutritional information on its menus in the QB restaurants, following pressure from the government for all restaurants to disclose more about the ingredients of their food. 50% of the revenue for this business segment is derived from the sale of 'giggle boxes' - self-contained children's meals which contain a small toy.
• The Dakota Diner & Grills offer a more sophisticated dining experience. The emphasis is on high quality food served in luxurious surroundings. There are currently 250 Dakota Diner & Grills, and Sun-Ace Co is planning to expand this to 500 by May 2020. The grills are all situated in prime city centre locations and are completely refurbished every two years.
• The Veggie Vinnie café chain is a recent addition to the range of restaurants. There are only 30 restaurants in the chain, mostly located in affluent residential areas. The restaurants offer eco-friendly food, guaranteed to be free from artificial flavourings and colourings, and to have been produced in an environmentally sustainable manner. All of the 30 restaurants have been newly constructed by Sun-Ace Co, and are capitalized at $210 million.
• This includes all directly attributable costs, and borrowing costs capitalized relating to loans taken out to finance the acquisition of the sites and construction of the restaurants. Sun-Ace Co is planning to double the number of Veggie Vinnie cafés operating within the next twelve months.

Laws and regulations

Two new regulations were issued by the government recently which will impact on Sun-Ace Co. The regulations come into effect from September 2019.

(i) Minimum wage regulation has increased the minimum wage by 15%. One third of Sun-Ace Co's employees earn the minimum wage.

(ii) Advertising regulations now forbid the advertising of food in a manner specifically aimed at children.

Three audit juniors are joining your team for the forthcoming audit of Sun-Ace Co, and you have asked them to read through the permanent file to familiarize themselves with the client. One of the juniors has told you that he appreciates that auditors need to have a thorough understanding of the business of their client, but he does not know what aspects of the client's business this relates to, or how the understanding is developed
Required:

Problem (a) Prepare briefing notes to be used at a planning meeting with your audit team, in which you:

(i) identify and explain the aspects of a client's business which should be considered in order to gain an understanding of the company and its operating environment;
(ii) recommend the procedures an auditor should perform in order to gain business understanding.

Problem (b) Using the information provided, evaluate the business risks facing Sun-Ace Co.

Problem (c) Describe the principal audit procedures to be performed in respect of the amount recognized as an expense for the advertising of the QB brand.