- 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 | |
| Acquisitions through business combinations | 24,400,000 | 35,750,430 | |
| 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 | 79,258,078 | 134,633,223 |
| At December 31, 2019 | 28,590,212 | 53,778,390 | 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 ₦8.5million within the period under review.
Required:
a. Evaluate the different types of audit review, the purposes and the scope of the reviews.
(10 Marks)
b. 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)
c. Advise on the treatment of the issue raised with regard to the wrongly classified assets.
(3 Marks)
Answer
a.
The review of audit work is a key aspect of quality control. All audit work should be reviewed by an auditor with a higher level of competence and experience than the members of the audit team who performed the audit work. The review process may take any of the following forms:
i) Peer review: This is a review carried out by another firm;
ii) Engagement quality control review (EQCR): A peer review performed before the audit is signed as required by International Standards on Quality Control 1 (ISQC1) during the audit of a listed or public interest entity. An EQCR forms part of the quality control procedure specific to an individual assignment;
iii) Hot Review: Similar in substance to an EQCR except that the hot review is not performed as a direct requirement of ISQC1, for instance, when an engagement partner on a non-listed/public interest entity audit wants a second opinion to monitor the work of a new partner; and
iv) Monitoring review (also called a “cold review”): This is a peer review performed after the audit report is signed. A cold review forms part of the monitoring of quality control procedures.
The purpose of audit review is to check whether:
i) Audit work was carried out to proper professional standards; ii) The objectives of the audit have been achieved; and iii) The work carried out during audit and the audit evidence are suitably
documented, and that the audit evidence supports the conclusions that have been reached.
The review of the audit work should cover:
i) The audit planning process; ii) Audit procedures, including:
• Documentation (the audit working papers);
• The audit tests performed and the audit evidence gathered;
• Compliance with the audit work programme;
• The resolution of problems encountered on the audit; and iii) Whether the conclusion reached is consistent with the audit evidence obtained and documented.
b. The requirements of IAS 16 for the audit checklist include the following:
i) Has the cost of property, plant and equipment been determined in accordance with IAS 16? ii) Have costs been correctly allocated to the components of asset in accordance with IAS 16?
The requirements of IAS 36 for the audit checklist include the following:
i) Have assets been tested for impairment in accordance with IAS 36?
ii) Has the recoverable amount of the asset been determined in accordance with IAS 36?
iii) Has the carrying amount of the asset been compared with the recoverable amount in accordance with IAS 36?
iv) Has an impairment loss been recognised in accordance with IAS 36?
v) Has an impairment loss been allocated in accordance with IAS 36?
vi) Has an impairment loss been reversed in accordance with IAS 36?
vii) Has a reversal of an impairment loss been disclosed in accordance with IAS 36?
c. The treatment of the issue raised with regard to the wrongly classified assets include the following:
i) The auditor should consider whether the error is material and, if so, discuss it with management and those charged with governance.
ii) The auditor should determine whether the financial statements need to be amended.
iii) If the financial statements need to be amended, the auditor should request management to amend the financial statements.
- Tags: Asset Classification, Audit Checklist, Audit Review Types, IAS 16, IAS 36, Impairment of Assets
- Level: Level 3
- Uploader: Samuel Duah