- 20 Marks
Question
The statement below is an extract of property, plant and equipment from the “notes to the financial statements” of ABC Plc:
| Land and buildings | Plant, equipment, fixtures and fittings, and motor vehicles | Total | |
|---|---|---|---|
| Costs (₦) | |||
| At January 1, 2020 | 75,230,481 | 120,454,850 | 195,685,331 |
| Additions | 12,540,000 | 16,000,500 | 28,540,500 |
| Acquisitions through business combinations | 24,400,000 | 35,750,430 | 60,150,430 |
| Classified as held for sale | (10,200,450) | (15,450,600) | (25,651,050) |
| Disposals | (5,000,465) | (10,700,250) | (15,700,715) |
| At December 31, 2020 | 96,969,566 | 146,054,930 | 243,024,496 |
| Accumulated depreciation and impairment losses | |||
| At January 1, 2020 | 46,660,254 | 66,675,860 | 113,336,114 |
| Depreciation charge for the year | 5,594,523 | 17,220,518 | 22,815,041 |
| Classified as held for sale | (7,650,338) | (9,270,000) | (16,920,338) |
| Disposals | (3,762,523) | (9,034,069) | (12,796,592) |
| Impairment losses | 5,267,533 | 6,022,713 | 11,290,246 |
| Reversal of Impairment losses | (4,515,028) | (4,818,170) | (9,333,198) |
| At December 31, 2020 | 41,594,421 | 66,796,852 | 108,391,273 |
Net carrying amount
At December 31, 2020: ₦55,375,145 (Land and buildings), ₦79,258,078 (Plant, equipment, fixtures, and fittings, and motor vehicles), Total: ₦134,633,223
At December 31, 2019: ₦28,590,212 (Land and buildings), ₦53,778,390 (Plant, equipment, fixtures, and fittings, and motor vehicles), Total: ₦82,368,602
The above was the situation of the statement of financial position of the company when it was signed at the board of directors meeting. During further review to sign off the audit file, it was discovered that the classification of some of the assets as impaired was due to wrong classification and the value had actually increased due to a new road network in the location. This affected the impairment losses for the year. The new value of the buildings affected and shown in the note above as available from market survey had actually grown to ₦8.5 million within the period under review.
Required:
- Evaluate the different types of audit review, the purposes, and the scope of the reviews. (10 Marks)
- Discuss the necessary information to be included in the audit checklist based on the information above in relation to IAS 16 – Property, Plant, and Equipment and IAS 36 – Impairment of Assets. (7 Marks)
- Advise on the treatment of the issue raised with regard to the wrongly classified assets. (3 Marks)
Answer
a. The types of audit reviews include:
- Preliminary Review: Conducted at the start to understand the company’s environment and design the audit approach.
- Interim Review: Performed mid-year to evaluate controls and operations, allowing issues to be flagged before the final audit.
- Analytical Review: Uses financial ratios and trend analysis to detect discrepancies or unusual trends for further inspection.
- Final Review: Ensures all audit evidence is collected, examined, and that financial statements fairly represent the entity’s position.
- Quality Control Review: Ensures the audit adheres to standards through internal and external peer reviews.
Each review type serves to ensure financial statement accuracy, compliance, and operational integrity. Scope varies from risk assessment, control analysis, and financial statement inspection.
b. Audit checklist for IAS 16 and IAS 36:
- Asset Classification: Confirm assets are correctly listed as PPE.
- Depreciation and Impairment: Check depreciation aligns with IAS 16, and impairment losses are calculated per IAS 36 guidelines.
- Reversal of Impairment: Verify market-driven revaluations reflect current conditions.
- Value Adjustments: Ensure new market data is used for fair valuations.
- Disclosure: Check for disclosure of revaluation surplus in line with IAS 16 and IAS 36.
c. Treatment of Misclassified Assets: The misclassified assets should be revalued to reflect actual market conditions. An impairment reversal should be recorded, adjusting the net carrying value in the financial statements to correct misclassification errors.
- Tags: and Equipment, Asset Classification, Audit Review, Financial Reporting, IAS 16, IAS 36, Impairment Reversal, Plant, Property
- Level: Level 3
- Topic: Overview of Advanced Audit and Assurance
- Series: MAY 2024
- Uploader: Dotse