Section B – TWO questions ONLY to be attempted You are a manager in the audit department of Beech & Co, responsible for the audits of Fir Co, Spruce Co and Pine Co. Each company has a financial year ended 31 July 2011, and the audits of all companies are nearing completion. The following issues have arisen in relation to the audit of accounting estimates and fair values: (a) Fir Co Fir Co is a company involved in energy production. It owns several nuclear power stations, which have a remaining estimated useful life of 20 years. Fir Co intends to decommission the power stations at the end of their useful life and the statement of financial position at 31 July 2011 recognises a material provision in respect of decommissioning costs of $97 million (2010 – $110 million). A brief note to the financial statements discloses the opening and closing value of the provision but no other information is provided. Required: Comment on the matters that should be considered, and explain the audit evidence you should expect to find in your file review in respect of the decommissioning provision. (8 marks) (b) Spruce Co Spruce Co is also involved in energy production. It has a trading division which manages a portfolio of complex financial instruments such as derivatives. The portfolio is material to the financial statements. Due to the specialist nature of these financial instruments, an auditor’s expert was engaged to assist in obtaining sufficient appropriate audit evidence relating to the fair value of the financial instruments. The objectivity, capabilities and competence of the expert were confirmed prior to their engagement. Required: Explain the procedures that should be performed in evaluating the adequacy of the auditor’s expert’s work. (5 marks) (c) Pine Co Pine Co operates a warehousing and distribution service, and owns 120 properties. During the year ended 31 July 2011, management changed its estimate of the useful life of all properties, extending the life on average by 10 years. The financial statements contain a retrospective adjustment, which increases opening non-current assets and equity by a material amount. Information in respect of the change in estimate has not been disclosed in the notes to the financial statements. Required: Identify and explain the potential implications for the auditor’s report of the accounting treatment of the change in accounting estimates. (5 marks)