（b) You are the audit manager of Johnston Co, a private company. The draft consolidated fi

(b) You are the audit manager of Johnston Co, a private company. The draft consolidated financial statements for

the year ended 31 March 2006 show profit before taxation of $10·5 million (2005 – $9·4 million) and total

assets of $55·2 million (2005 – $50·7 million).

Your firm was appointed auditor of Tiltman Co when Johnston Co acquired all the shares of Tiltman Co in March

2006. Tiltman’s draft financial statements for the year ended 31 March 2006 show profit before taxation of

$0·7 million (2005 – $1·7 million) and total assets of $16·1 million (2005 – $16·6 million). The auditor’s

report on the financial statements for the year ended 31 March 2005 was unmodified.

You are currently reviewing two matters that have been left for your attention on the audit working paper files for

the year ended 31 March 2006:

(i) In December 2004 Tiltman installed a new computer system that properly quantified an overvaluation of

inventory amounting to $2·7 million. This is being written off over three years.

(ii) In May 2006, Tiltman’s head office was relocated to Johnston’s premises as part of a restructuring.

Provisions for the resulting redundancies and non-cancellable lease payments amounting to $2·3 million

have been made in the financial statements of Tiltman for the year ended 31 March 2006.

Required:

Identify and comment on the implications of these two matters for your auditor’s reports on the financial

statements of Johnston Co and Tiltman Co for the year ended 31 March 2006. (10 marks)