Audit Program for Goodwill Impairment Testing Outline the major elements of an audit program to determine whether there is a goodwill impairment, and if there is, the extent of the goodwill impairment

Answer 1

An overview of the audit program for goodwill impairment testing:
1 . Review the methodology that the client initially used in determining the amount it used to purchase the reporting unit. Examine the initial client documents to determine:
a . Assumptions about economic growth and synergies expected with the acquisition.
b. Expected cash flow, discounted to present terms.
c. Cost savings expected from integrated operations.
d. Assumptions about the general economy, industry growth, and new-product innovation.
2 . Compare actual results with those expected since the time of the acquisition.
a . Determine significant changes in assumptions and projected results.
b. Estimate the company's acquisition model with new assumptions that reflect current market conditions, actual results, and current information about cost of capital to get an estimate of reporting unit fair value.
c. Compare fair value with carrying value and determine amount of goodwill impairment.
3 . If the client does not have the original data, perform an independent analysis of the industry and develop:
a . A set of assumptions about future performance based on industry expectations and company products.
b. An estimated of future discounted cash flows.
c. A sensitivity analysis of changes in value based on industry and cash-flow assumptions.
d. A range of estimates and compare to carrying value of the reporting unit and goodwill carrying cost.
4 . If the original reporting unit no longer exists because operations have been fully integrated into operations of the parent company:
a . Compare book value with market value. A market value less than book value is presumptive evidence that goodwill has been impaired.
b. Determine whether all other assets have been adjusted to fair value, where applicable.
c. Compute difference between market value and book value to determine the amount of goodwill impairment.
d. Review assumptions about future operations, industry position, expected future cash flows, and strategic plans for the business to determine if the write-off in part (c) is sufficient.