13.5 Blackford Ltd is a company engaged in two diverse activities: the manufactu

Question

13.5 Blackford Ltd is a company engaged in two diverse activities: the manufacture of lawn- mowers and trading in the hardware sector, selling its lawnmowers through its own hardware outlets. The company decided to discontinue its loss making lawnmower operation from 31 May 2015 (one month before the year-end date). Many people in the workforce were accepted for transfer to the hardware sector, but others are taking early retirement and accepting redundancy payments. Redundancy payments are based on length of service and wage/salary levels in the last year of service, provided the employee has been at least two years with the company. The company has provided for redundancy costs of £200 000. Identify management assertions and suggest audit steps you would perform to satisfy yourself

Explanation / Answer

In the given question, Blackford Ltd had decided to discontinue its loss-making operation i.e. Lawnmower from 31st of May’15, one month before the year end date. And in doing so created a provision for redundancy for employees 200,000. Now redundancy cost provision was based on the length of the service and wages/salary levels in the last year of service, provided the employee has been with company for at-least 2 years.

As per IAS 37.36, the amount recognized as provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date, that is, the amount that an entity would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third part which mean that the provision for one off events should be measure at most likely amount and for large population of events are measured at probability weighted expected value. Now in the given question the redundancy provision is created due to discontinuation of a division hence this provision is created for a one-off event.

In line with above from audit stand point we need to evaluate the management assertions as regard to completeness of the provision which has been created whether the provision shown at balance sheet date is as per the working identified and accounted for. Also, we need to evaluate the rights and obligation as regard to redundancy payout, like number of employees, number of employees moved to other division as well as number of employees in service for a period of 2 years to qualify. And, all this parameter needs to be evaluated and audited in the valuation of this provision as to assumptions and estimation done to conclude the provision amount.

Refer below for detailed summary –

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