Advanced Audit and
Tuesday 2 June 2009
2 (a) Explain FOUR reasons why a firm of auditors may decide NOT to seek re-election as auditor. (6 marks)
The Dragon Group is a large group of companies operating in the furniture retail trade. The group has expanded rapidly
in the last three years, by acquiring several subsidiaries each year. The management of the parent company, Dragon
Co, a listed company, has decided to put the audit of the group and all subsidiaries out to tender, as the current audit
firm is not seeking re-election. The financial year end of the Dragon Group is 30 September 2009.
You are a senior manager in Unicorn & Co, a global firm of Chartered Certified Accountants, with offices in over 150
countries across the world. Unicorn & Co has been invited to tender for the Dragon Group audit (including the audit
of all subsidiaries). You manage a department within the firm which specialises in the audit of retail companies, and
you have been assigned the task of drafting the tender document. You recently held a meeting with Edmund Jalousie,
the group finance director, in which you discussed the current group structure, recent acquisitions, and the group’s
plans for future expansion.
Meeting notes – Dragon Group
The parent company owns 20 subsidiaries, all of which are wholly owned. Half of the subsidiaries are located in
the same country as the parent, and half overseas. Most of the foreign subsidiaries report under the same financial
reporting framework as Dragon Co, but several prepare financial statements using local accounting rules.
Acquisitions during the year
Two companies were purchased in March 2009, both located in this country:
(i) Mermaid Co, a company which operates 20 furniture retail outlets. The audit opinion expressed by the
incumbent auditors on the financial statements for the year ended 30 September 2008 was qualified by a
disagreement over the non-disclosure of a contingent liability. The contingent liability relates to a court case
which is still on-going.
(ii) Minotaur Co, a large company, whose operations are distribution and warehousing. This represents a
diversification away from retail, and it is hoped that the Dragon Group will benefit from significant economies
of scale as a result of the acquisition.
The acquisitive strategy of the group over the last few years has led to significant growth. Group revenue has
increased by 25% in the last three years, and is predicted to increase by a further 35% in the next four years as
the acquisition of more subsidiaries is planned. The Dragon Group has raised finance for the acquisitions in the
past by becoming listed on the stock exchanges of three different countries. A new listing on a foreign stock
exchange is planned for January 2010. For this reason, management would like the group audit completed by