- 30 Marks
Question
You are an employee of Ben, Tai & Co., a firm of Chartered Accountants. One of the firm’s clients is Keke Limited, a car rental company whose shares are not traded on a stock exchange. The company has a large fleet of vehicles which it hires out on a contract basis.
The duration of a contract varies from one day to three months. Anybody wishing to hire a car must possess a valid driver’s license. In addition, they must take out insurance with Keke Limited.
You are involved in the audit of non-current assets for the year ended December 31, 2015.
The company’s main non-current assets are:
- Freehold land and buildings
- Office equipment (mainly computers)
- Motor vehicles
The company was formed ten years ago, and all non-current assets (except for land and buildings) are maintained in a non-current assets register. The company depreciates non-current assets at the following rates:
- Freehold land and buildings: 2% on cost
- Office equipment: 20% on cost
- Motor vehicles: 50% on cost
The company has recently revalued its buildings upwards by N200 million. The directors believe that they have fallen victim to a fraudster who has disappeared with a number of the company’s vehicles.
Required:
a. What is the difference between the responsibilities of management and the auditor for the prevention and the detection of fraud? Explain how these responsibilities are carried out. (6 marks)
b. Describe how you would verify the ownership of:
i. Freehold land and buildings
ii. Computers
iii. Motor vehicles
(6 marks)
c. Comment on the appropriateness of the depreciation rates of the non-current assets and their respective effect on the income statement. (6 marks)
d. List the contents of a non-current asset register and describe its usefulness for Keke Limited. (6 marks)
e. Explain the accounting effect of the revaluation of the buildings to the financial statements and the audit work you would perform in this matter. (6 marks)
Answer
a. Management vs. Auditor Responsibility in Fraud Prevention and Detection:
- Management is responsible for implementing and maintaining adequate internal controls to prevent and detect fraud. This includes establishing a robust system of internal checks, authorizations, and oversight processes to minimize fraud risk.
- Auditors are responsible for evaluating the design and effectiveness of management’s controls and performing procedures to obtain reasonable assurance that the financial statements are free from material misstatement due to fraud. While auditors may detect fraud, they do not guarantee the absolute prevention of all fraudulent activities.
b. Verification of Ownership:
i. Freehold Land and Buildings: Review land registry documents and title deeds to confirm ownership, ensuring that these are registered in the company’s name.
ii. Computers: Cross-reference purchase invoices with serial numbers recorded in the non-current assets register to verify ownership.
iii. Motor Vehicles: Examine vehicle registration documents and insurance policies to verify ownership and ensure they are consistent with the vehicles in use by the company.
c. Depreciation Rates and Their Appropriateness:
- The depreciation rates for motor vehicles (50%) appear high, indicating a short useful life, which may lead to high depreciation charges and reduce income. Office equipment’s rate at 20% seems reasonable given typical useful life expectations. For freehold land and buildings, a 2% depreciation rate aligns with a long-term view. These rates impact the income statement by influencing annual depreciation expenses.
d. Contents and Usefulness of a Non-Current Assets Register:
- Contents: Asset description, acquisition date, cost, accumulated depreciation, net book value, location, and responsible department.
- Usefulness: This register is essential for tracking assets, verifying physical existence, facilitating depreciation calculations, and ensuring assets are safeguarded against unauthorized disposal or misappropriation.
e. Revaluation of Buildings:
- Accounting Impact: The upward revaluation increases the asset’s carrying value on the balance sheet, and the gain is credited to a revaluation surplus in equity.
- Audit Work: Confirm the valuation method, review external appraiser’s report, and verify that the revaluation complies with applicable accounting standards (e.g., IAS 16). Ensure the revaluation surplus is accurately recorded in equity
- Topic: The Role and Responsibilities of Auditors
- Series: MAY 2016
- Uploader: Kwame Aikins