Bexall Pharmaceuticals Co.

is a case concerning the closing stages of an audit

assignment and the issues surrounding a disagreement between the view of the
corporate accountants and the audit team on the recognition and measurement of various
assets.

The discussions around these accounting adjustments have wider implications for the
company, its senior management and their remuneration, the relationship with their bank,
and the exposure of the company to the risk of a take-over. The case sets the background
against which the deliberations and actions of the audit team finalising the annual audit
and those of the accounting department of the company can be analysed.

Iain Morton is a financial accountant reporting to the CFO at Bexall Pharmaceuticals. Gail
Li is a senior manager at Putnam Rhodes and is the Audit Manager of the Bexall
Pharmaceuticals audit. Her audit team raises some issues during the audit and the
company is asked to make some adjustments.

All of the characters are qualified accountants, and they are reporting under International
Accounting Standards 38.

Bexall Pharmaceuticals Co., in a meeting room with the audit team.

See the Case Study Overview for links to relevant reference material and the Help for
links to the ACCA Rulebook

Black man (Timothy): I cant believe they have recognised such a high amount with long-
term assets in the accounts in respect of the customer list.

Asia woman: To be frank, may be thay shouldnt recognised it at all. Did they purchase
that list from a third-party?

Black man (Timothy): No, apparencetly it is simply their list of customer, built up
internally and update over the last twenty-three years, since the company started-up.

Asia woman: Well Im fairly certain that creating intangible asset for an internally
generated customer base goes against the requirements of IAS 38.

Another standing issue, Timothy, where do you stand with the depreciation issue?

Black man (Timothy): Well they have made an end-of-year adjustment that has reduce
this years depreciation charge on the office building significantly. The company
previously amortised the building of a 20 year lease.
The reason given for the adjusment is that there is a plan to renew the lease for another
20 years, when the existing lease lapses, without a further lease premium, so they left
entitled to increase the useful life of the lease by a further 20 years.

This adjusment has been made despite the current lease not being up for renewal for
another five years. In addition, there is no documentary record of a plan, nor is there
anything in the contract to support the view that renewal will be possible. And the effect
of the adjustment is to reduce the depreciation charge by 80% this year in each of the
next four year.

Old white man: You people really know to take over the conference room. Margaret tells
me youre interrogating her staff quite hard. Surely this is just a routine audit and your firm
has been doing this for several years now.

Lets not turn this into major issue and create too many problems, when there has never
been a problem in the past. Remember, Ive got a board waiting patiently for an annual
report and we cant wait for ever.

Asia woman: Well Timothy, too bad he left so quickly. I was going to say: Can you get
me the item by item inventory turnover statistics and the year end cash receipt weve
been asking for, and then well be ready for a serious discussion.

We would also be able to form a better judgement if we could get a complete receivables
profile and compare it with last years receivables, if that;s possible. But he doesnt seen
interested working with us.

Other staff: Hello Gail. Mrs Wilson would like to see you in her office as soon as possible.

In Iain Morton's office at Bexall's, Margaret Wilson is discussing the audit and the revised
adjustments with her financial accountant.

Mr