Roman Holiday Pizza Required Franchise Rights Accounting, Case Study Example

There are a number of auditing procedures that can be applied to determine management’s assertions in estimating the fair value of the re-acquired franchise right. These auditing standards evaluate and highlight four key indicators; (1) Occurrence and rights and obligations, (2) completeness, (3) rights and obligations, and valuation. There are a number of procedures that can be applied in obtaining audit evidence and they can either be risk assessment procedure or further audit procedures. They include;

Inspection: inspection entails the examination of digital or hardcopy records that entail the occurrence and accounting of the reacquiring of the franchise rights by Roman Holiday Pizza. Inspection avails critical information and evidence to the auditor on the reliability and efficacy of the controls that Roman Holiday Pizza has employed over their production. However, this is determinant of the nature and source of the information.

External Confirmation: this entails seeking external; confirmation from a third party on the occurrence and valuation of a given transaction. The auditor may seek this information from the other parties involved in selling their franchise rights to Roman Holiday Pizza.

Inquiry: this entails pursuing information from individuals within the company with prior knowledge on the financial aspects within the company. This inquiry would mainly entail formal written inquires to personnel within high level management as well as finance, on the reacquired franchising rights. However, this is procedure is not sufficient on its own, as information may not be completely reliable.

Recalculation: this is a vital procedure that entails the checking of mathematical precision of the records and/or documents employed in recording of the transactions in question (reacquiring of the franchise rights).

Reperformance: this entails the auditor applying controls and procedures that were initially applied by Roman Holiday Pizza’s internal control departments. This procedure is considerably reliable.

Analytical Procedures; this entails the evaluation of financial information that relate to financial and non-financial factors. This is also important in highlighting any existing inconsistencies between financial relationships, especially in situations where the financial information provided varies considerably from either of two sources.

Taking into consideration the fact that Roman Holiday Pizza repurchased the franchise rights but recorded the fair value estimate higher than the book value recorded. This depicts that the value of the reacquired franchise rights is not impaired. It is therefore required that SFAS 142 will be employed. Roman Holiday Pizza recorded the reacquired franchise rights from Arizona at a book value of $20,777 while the fair value estimate at $22,320. Therefore, the technique employed is acceptable. This is because this information is projected from the history of similar assets held within the company.