Management of Billy’s made several assumptions towards its newly acquired company, Little Drummer Boy. Management finally adopted the assumptions that the fair value of significant assets acquired was $865 million and that of other assets was $145 million. At the same time of the acquisition, management also decided that useful lives of the acquired plant and equipment were 30 years and 15 years, respectively, which were different from the 20 years and 10 years useful lives for the previously owned plant and equipment. Furthermore, management determined a useful live of 15 years for the acquired customer list. Regarding the $865 million assumption, auditors only adopted the procedure to compare the percentage used to
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Auditors could obtain the knowledge about the specific industry’s economic and regulatory environment similar to Litter Drummer. Auditors may inquire the industry specialist regarding the market information, past experience with similar companies, data used in calculating the assumptions, and the similar experience in allocating the cost. Auditors could choose to check the background of the valuation specialist that Billy’s used. If the valuation specialist was deemed independent, auditors could use the assumptions made by him. If possible, auditors should re-perform the computations. Then, auditors could trace the data they generated to the $865 million, $145 million, and the cost allocation amounts. Any bias or misapplication must be communicated to the management and documented. Furthermore, auditors should pay attention to any goodwill impairment. By testing the significant assets values, auditors could find out whether goodwill impairment existed or not. If this happened, auditors should communicate with the management about any improper recording and losses. The related data and methods regarding the assumptions should be disclosed in detail. Auditors must carry out other procedures to ensure the occurrence and rights and obligations, completeness, classification and understandability, and accuracy and valuation regarding the presentation and disclosure were all tested.
For useful lives used by Billy’s and Little