AR PYQ

Surplus plant and machinery was sold during the year, resulting in a loss on disposal of $160,000

• Significant profits or losses on disposal are an indication that the depreciation policy of plant and machinery may not be appropriate.

  Depreciation may be understated and profit and assets overstated

• Recalculate the loss on disposal calculations and agree all items to supporting documentation.

• PPE and profits are overstated

• Discuss the accounting treatment with the FD and the level of any necessary adjustment to ensure treatment is in accordance with IAS16

SD18- D Co purchased and installed a new manufacturing line. PP-2.2m,install-0.4m , S&M-0.5m

• As per IAS 16 Property, Plant and Equipment, the cost of an asset includes its purchased price and directly attributable costs only.

   

  IAS16 does not allow servicing and maintenance costs to be capitalized as part of the cost of a NCA, as they are not directly related to the cost of bringing the asset to its working condition.

  PPE and profits are overstated

• Discuss the accounting treatment with the FD and the level of any necessary adjustment to ensure treatment is in accordance with IAS16

• Only asset which physically exist at year end should be capitalized as PPE. Paying in advance should recognized as prepayment

  PPE overstated, prepayment understated

• Discuss the accounting treatment with management to confirm the amount paid in advance recognized as prepayment.

Paying machinery in advance but didn’t received yet

• Only asset which physically exist at year end should be capitalized as PPE. Paying in advance should recognized as prepayment

  PPE overstated, prepayment understated

• Review the NCA register to determine if prepayments has been capitalised

• IAS 16 asset lives should be reviewed annually, and if genuinely increased, then depreciation decrease may be reasonable

  P&M overstated, depreciation expense understated

• Discuss with directors the rationale for any extensions of asset lives and reduction of depreciation rates

Directors extend P&M useful lives

• IAS 16 asset lives should be reviewed annually, and if genuinely increased, then depreciation decrease may be reasonable

  P&M overstated, depreciation expense understated

• Discuss with directors the rationale for any extensions of asset lives and reduction of depreciation rates

• Discuss with management the accounting treatment of request capitalized cost included in PPE to ensure it is accordance IAS 16

• Depreciation may be understated and profit and assets overstated

The financial controller was dismissed and is threatening to sue the company for unfair dismissal

• If it probable that company will make payment, a provision for unfair dismissal is required to comply with IAS 37 Provisions, Contingent Liabilities and Contingent Asset.

   

  If payment possible rather than probable, a contingent liability disclosure would be necessary.

  TIART over completeness of any provisions or contingent liabilities.

• The audit team should discuss with management and request confirmation from the company’s lawyers of the existence and likelihood of success of any claim from the former financial controller

• A warranty provision will be required under IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

   

  Calculating warranty provision requires judgement as it is an uncertain amount.

  TIART provision could be understated, leading to understated expenses and liabilities.

• Discuss with management the basis of the provision calculation, and compare this to the level of post year-end claims, if any, made by customers. In particular, discuss the rationale behind reducing the level of provision this year.

Co offers its customers a building warranty of 5 years, which covers any construction defects

 

Warranty provision increased

• A warranty provision will be required under IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

   

  Calculating warranty provision requires judgement as it is an uncertain amount.

  TIART provision could be understated, leading to understated expenses and liabilities.

• Discuss with management the basis of the provision calculation, and compare this to the level of post year-end claims, if any, made by customers. In particular, discuss the rationale behind reducing the level of provision this year.

• If it probable that company will make payment, a provision for unfair dismissal is required to comply with IAS 37 Provisions, Contingent Liabilities and Contingent Asset.

   

  If payment possible rather than probable, a contingent liability disclosure would be necessary.

  TIART over completeness of any provisions or contingent liabilities.

• The audit team should discuss with management and request confirmation from the company’s lawyers of the existence and likelihood of success of any claim from the former financial controller

The company purchased a patent for $800k at the end of the prior year which has a useful life of four years. The CA amount in forecast FS is $800k same as prior year

• In accordance with IAS 38 Intangible Assets, this intangible asset should be amortised over its four year life

  If it doesn’t correctly accounted for amortization and as result, IA and profits are overstated

• Agree the useful life of the patent is four years to supporting documentation.

   

  The amortization charge should be calculated and the appropriate journal adjustment discussed with management, in order to ensure the accuracy of the charge and that the intangible is correctly valued at the year end.

• IAS 38 Intangible Assets has strict criteria to which cost can capitalized as development expenditure

   

  IAS 38 Intangible Assets require research expense to be recognized as expense incurred and development expenditure capitalized only if strict criteria satisfied

  Risk that RE incorrectly classified as development expenditure.

   

  Intangible assets could be overstated and research expenses understated

• Audit team discuss with management the accounting policy applied to identify the R&D stages

Company capitalised research expenditure as development expenditure

• IAS 38 Intangible Assets has strict criteria to which cost can capitalized as development expenditure

   

  IAS 38 Intangible Assets require research expense to be recognized as expense incurred and development expenditure capitalized only if strict criteria satisfied

  Capitalised expenditure should be amortised over life of process commencing when product brought into use

  Risk that RE incorrectly classified as development expenditure.

   

  Intangible assets could be overstated and research expenses understated

  TRIART amortization charge misstated

• Review the cost capitalized and supporting documentation carried out to determine the nature of expenditure and agree to capitalized if met the criteria set by IAS 38

   

  Discuss the accounting treatment with FD to ensure it is accordance with IAS 38

• In accordance with IAS 38 Intangible Assets, this intangible asset should be amortised over its four year life

  If it doesn’t correctly accounted for amortization and as result, IA and profits are overstated

• Agree the useful life of the patent is four years to supporting documentation.

Receivables days increased, allowance for receivables historically maintained/reduced

• Some balances may be irrecoverable

  Receivables overvalued

• Discuss with directors the rationale for maintaining/reducing the allowance for receivables at same level as the prior year

• Deposits should not be recognized as revenue immediately instead recognized as contract liabilities/deferred income until the performance obligation been satisfied

  Receivables is overstated and CL understated

• Obtain a copy of contracts with customers and review them to understand the performance obligation, discuss with mgt the criteria to determine performance obligation have been satisfied.

Inventory can no longer sell and believe it can be sell again but additional cost will incur

• Risk that NRV of inventory  is less than cost

  Inventory overstated and COS understated

• Detailed cost and NRV testing to be performed and discuss with management if a write-down is required.

  Obtain supporting documentation in respect of cost and NRV

• It is unlikely that the auditor will be able to attend all the inventory count in one day

   

  For the site is not visited, they need to ensure that they obtain SAAE over the inventory counting controls, and completeness and existence

  Increase detection risk

• The audit team should assign more experienced audit members to significant estimates and judgmental areas.