《审计学》-基于环境变化的概念 ppt ch14
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Valuing goodwill
Comment on Determining the
Cost of the Acquisition
Normally, cost is amount paid to acquire the company
However, there are things that make the assessment more complicated:
The auditor must evaluate: Management's methodology for assessing
impairment Whether an objective evaluation supports the
client's conclusion
Annual Audits: Risk Factors and
How do you value goodwill?
Goodwill is the excess of purchase cost over the fair market value of tangible and intangible assets acquired in a purchase
Goodwill Impairment
In addition to the annual review, situations may arise which impair goodwill:
Significant adverse change in legal factors or the business environment
whether assessed values are appropriate Auditor may rely on the specialist hired by management or hire
their own specialist. Either way, the auditor should: Evaluate qualifications of the specialist Determine if specialist is independent of management Review the methodology used by the specialist
Valuing the assets and associate liabilities upon acquisition
Measuring restructuring charges and recognition of the liability
Measuring impairment of assets after operation begins
appropriateness of client accounting
Comment on Testing for
Goodwill Impairment
GAAP requires goodwill must be tested every year for impairment
The company must determine the fair market value of the reporting unit and compare it to the reporting unit's carrying value (including goodwill)
entity's performance
Auditor must assess likelihood of acquired entity meeting performance objectives - if highly likely, the full cost should be recognized at the time of acquisition
SFAS 142 requires goodwill be specifically identified with an operating or reporting unit
Important so goodwill can be tested for impairment on an annual basis
flows Auditor cannot simply accept appraisal and management's
assessment of fair value of assets Auditor must gather independent evidence to determine
Acquisitions made using stock rather than cash Where the final price is contingent on the assets
received (post-audit) Where the final price is contingent on acquired
determine whether the transactions involved a related party
The auditor then investigates the transactions to determine if they have been properly recorded and disclosed
Valuation and testing of impairment is facilitated if company uses capital budgeting process
Discuss Restructuring Charges
When companies restructure operations, GAAP requires companies recognize the cost of restructuring and associated liabilities
Define & Explain Warranty
Reserves
The warranty reserve represents expected future cost related to sales of a company's product; it is estimated and recorded when the product is sold
Chapter 14
Audit of Acquisitions, Related Equity Transactions, Long-Term
Liabilities, and Equity
Review Mergers and Acquisitions
There are three valuation issues associated with acquisitions:
Adverse action or assessment by regulator Unanticipated competition that significantly reduces
value of company's products Significant loss of key personnel Expectation that reporting unit will be disposed of Significant asset group within a reporting unit tested
Discuss Acquisition - Asset Valuation Issues
Major issues associated with valuing an acquisition are:
Determining the cost of the acquisition
Valuing identifiable tangible and intangible assets and liabilities
If fair market value is less than carrying value, it is inferred that goodwill has been impaired and must be written down
The reporting unit may be the company or a sub-unit of the company
restructuring has moved beyond a plan Test estimates by reviewing contracts, property appraisals,
severance contracts, and other restructuring documents Mathematically test estimates Develop conclusion as to reasonableness of liability and
Related Parties
Related party transactions have been used to manipulate financial reporting and should, therefore, be considered high risk
Auditor must consider that a client may not want to have its related party transactions discovered
for recoverability Impairment recognized by subsidiary
Audit tests for goodwill impairment will require considerable judgment and business knowledge
Review Transactions with
Discuss Audits of Long-Term Liabilities Байду номын сангаасnd Owners Equity
Liabilities with significant subjective judgments:
Restructuring reserves Warranty reserves Pension obligations Other post-retirement benefits
To uncover these transactions, the auditor will: Obtain a list of all related parties; then develop a list
of all transactions with those parties Carefully examine all unusual transactions to
The auditor should examine restructuring charges though these procedures:
Review FASB pronouncements and EITF statements Review how company estimated restructuring charges Review actions taken by management that indicate
Valuing Identifiable Tangible &
Intangible Assets & Liabilities
Acquiring company records assets at their fair market value at time of acquisition:
Company usually hires appraiser to value tangible assets Intangibles should be valued at net present value of future cash
Comment on Determining the
Cost of the Acquisition
Normally, cost is amount paid to acquire the company
However, there are things that make the assessment more complicated:
The auditor must evaluate: Management's methodology for assessing
impairment Whether an objective evaluation supports the
client's conclusion
Annual Audits: Risk Factors and
How do you value goodwill?
Goodwill is the excess of purchase cost over the fair market value of tangible and intangible assets acquired in a purchase
Goodwill Impairment
In addition to the annual review, situations may arise which impair goodwill:
Significant adverse change in legal factors or the business environment
whether assessed values are appropriate Auditor may rely on the specialist hired by management or hire
their own specialist. Either way, the auditor should: Evaluate qualifications of the specialist Determine if specialist is independent of management Review the methodology used by the specialist
Valuing the assets and associate liabilities upon acquisition
Measuring restructuring charges and recognition of the liability
Measuring impairment of assets after operation begins
appropriateness of client accounting
Comment on Testing for
Goodwill Impairment
GAAP requires goodwill must be tested every year for impairment
The company must determine the fair market value of the reporting unit and compare it to the reporting unit's carrying value (including goodwill)
entity's performance
Auditor must assess likelihood of acquired entity meeting performance objectives - if highly likely, the full cost should be recognized at the time of acquisition
SFAS 142 requires goodwill be specifically identified with an operating or reporting unit
Important so goodwill can be tested for impairment on an annual basis
flows Auditor cannot simply accept appraisal and management's
assessment of fair value of assets Auditor must gather independent evidence to determine
Acquisitions made using stock rather than cash Where the final price is contingent on the assets
received (post-audit) Where the final price is contingent on acquired
determine whether the transactions involved a related party
The auditor then investigates the transactions to determine if they have been properly recorded and disclosed
Valuation and testing of impairment is facilitated if company uses capital budgeting process
Discuss Restructuring Charges
When companies restructure operations, GAAP requires companies recognize the cost of restructuring and associated liabilities
Define & Explain Warranty
Reserves
The warranty reserve represents expected future cost related to sales of a company's product; it is estimated and recorded when the product is sold
Chapter 14
Audit of Acquisitions, Related Equity Transactions, Long-Term
Liabilities, and Equity
Review Mergers and Acquisitions
There are three valuation issues associated with acquisitions:
Adverse action or assessment by regulator Unanticipated competition that significantly reduces
value of company's products Significant loss of key personnel Expectation that reporting unit will be disposed of Significant asset group within a reporting unit tested
Discuss Acquisition - Asset Valuation Issues
Major issues associated with valuing an acquisition are:
Determining the cost of the acquisition
Valuing identifiable tangible and intangible assets and liabilities
If fair market value is less than carrying value, it is inferred that goodwill has been impaired and must be written down
The reporting unit may be the company or a sub-unit of the company
restructuring has moved beyond a plan Test estimates by reviewing contracts, property appraisals,
severance contracts, and other restructuring documents Mathematically test estimates Develop conclusion as to reasonableness of liability and
Related Parties
Related party transactions have been used to manipulate financial reporting and should, therefore, be considered high risk
Auditor must consider that a client may not want to have its related party transactions discovered
for recoverability Impairment recognized by subsidiary
Audit tests for goodwill impairment will require considerable judgment and business knowledge
Review Transactions with
Discuss Audits of Long-Term Liabilities Байду номын сангаасnd Owners Equity
Liabilities with significant subjective judgments:
Restructuring reserves Warranty reserves Pension obligations Other post-retirement benefits
To uncover these transactions, the auditor will: Obtain a list of all related parties; then develop a list
of all transactions with those parties Carefully examine all unusual transactions to
The auditor should examine restructuring charges though these procedures:
Review FASB pronouncements and EITF statements Review how company estimated restructuring charges Review actions taken by management that indicate
Valuing Identifiable Tangible &
Intangible Assets & Liabilities
Acquiring company records assets at their fair market value at time of acquisition:
Company usually hires appraiser to value tangible assets Intangibles should be valued at net present value of future cash