Reference no: EM132919273

The Solace Group (the Group) has been an audit client of your firm for several years. You have recently been assigned to act as audit manager, replacing a manager who has fallen ill, and the audit of the group financial statements for the year ended 31 Dec 20X0 is underway. The Group's activities include property management and the provision of large storage facilities in warehouses owned by the Group. The draft consolidated financial statements recognise total assets of MVR150 million, and profit before tax of MVR20 million. (a) The audit engagement partner, Mohamed, has asked you to review the audit working papers in relation to two audit issues which have been highlighted by the audit senior.

Information on each of these issues is given below:

(i) In September 20X0, a social center for leisure activities was sold for proceeds equivalent to its fair value of MVR35 million, the related assets have been derecognised from the Group statement of financial position, and a profit on disposal of MVR8 million is included in the Group statement of profit or loss for the year. The remaining useful life of the social center for leisure was 21 years at the date of disposal. The Group is leasing back the social center for leisure to use in its ongoing operations, paying a rental based on the market rate of interest plus 2%. At the end of the 20- year lease arrangement, the Group has the option to repurchase the social center for leisure for its market value at that time.

(ii) In October 20X0, the Group acquired 52% of the equity shares of Manha and Hoodh Co. This company has not been consolidated into the Group as a subsidiary, and is instead accounted for as an associate. The Group finance director's reason for this accounting treatment is that Manha and Hoodh Co's operations have not yet been integrated with those of the rest of the Group. Manha and Hoodh Co's financial statements recognise total assets of MVR18 million and a loss for the year to 31 December 20X0 of MVR5 million.

Required

Problem (a) Briefly explain the steps that may be followed in consolidating the Statement of Financial Position for a group, which the auditors of a group should be familiar with

Problem (b) In respect of the issues described above: Comment on the matters to be considered, and explain the audit evidence you should expect to find in your review of the audit working papers