• 10 Marks

AA – Nov 2021 – L2 – Q4a – Completion Procedures and Reporting

Discusses audit procedures for non-depreciation of buildings and the impact on the audit report if unresolved.

ou are an audit intern in Transparency & Associates, a firm of Chartered Accountants. This year, one of your new clients is Obuse Ltd, a company having net assets of GH¢20,000,000. The audit work has been completed, but there is one outstanding matter you are currently investigating; the directors have decided not to provide depreciation on buildings in the financial statements, although International Financial Reporting Standards suggest that depreciation should be provided. The estimated depreciation is GH¢500,000.

Required:
i) State FOUR (4) additional audit procedures and actions you should take in respect of the above matter.
(6 marks)

ii) What should be the impact on the audit report if the issue remains unresolved at the reporting stage of the audit?

i) Additional audit procedures and actions

  1. Review the audit file – Ensure that sufficient appropriate audit evidence has been collected regarding the decision not to depreciate buildings.
  2. Verify compliance with IFRS – Ensure that GAAP (Generally Accepted Accounting Principles) or IFRS guidelines on depreciation apply to the specific buildings owned by Obuse Ltd.
  3. Discuss with directors – Meet with the directors to confirm their reasons for not depreciating buildings and to explain the potential consequences.
  4. Warn of possible modified audit report – Inform the directors that failure to provide depreciation may lead to a modified audit report.
  5. Assess materiality – Determine the effect of the depreciation issue on the financial statements, evaluating whether the misstatement is material.
  6. Obtain written representation – Secure a letter of representation from the directors confirming that depreciation will not be charged on buildings.

(6 marks)

ii) Impact on the audit report if unresolved
If the issue remains unresolved, the auditor must consider the materiality of the misstatement. The estimated depreciation of GH¢500,000 represents 2.5% of the company’s net assets, which is material. The audit report will need to be qualified with an “except for” opinion due to the material misstatement. The basis for qualification should be included in the report, explaining the disagreement regarding depreciation.

(4 marks)

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