- 20 Marks
AAA – L3 – Q58- Reporting
Evaluate the audit opinion for Yams Co’s change in depreciation method, assessing materiality and compliance with IAS 16.
Question
Yams Co
The directors of Yams Co have decided that this year, motor vehicles should be depreciated on a reducing balance basis. Previously this has been done on a straight line basis. Profits have fallen by GH₵18,000 as a result.
Required:
Discuss the impact on the auditor’s report, considering materiality and compliance with relevant accounting standards.
Answer:
The relevant figure in terms of materiality is GH₵18,000. This represents 12% of profit before tax, which is above 5%, so the amount is material.
Depreciation of non-current assets is described in IAS 16. A change from one method of depreciation to another is permissible only on the grounds that the new method will give a fairer presentation of the results and of the financial position. Such a change does not, however, constitute a change of accounting policy (IAS 8); it is a change in accounting estimate.
In Yams Co there is nothing to suggest that such a change in accounting estimate is warranted. Furthermore, motor vehicles are a normal class of non-current asset, so it would be highly unusual to change the method of depreciation.
If the directors are unable to give a satisfactory explanation for the change, a modified audit opinion on the grounds of material misstatement would be appropriate. The qualification is only material (and not pervasive) and an ‘except for’ opinion is correct
(b) Plantain Co
A competitor of Plantain Co wrote a damaging article about one of its products. Having consulted its lawyers, Plantain Co has decided to take legal action and is suing the competitor for GH₵500,000. The court case will be heard in September of this year and Plantain Co’s lawyers have informed them that there is an 80% chance of success. As a result, Plantain Co has adjusted its profits upwards by GH₵100,000.
Required:
Discuss the impact on the auditor’s report, considering materiality and compliance with relevant accounting standards.
(c) Papaya Co
On 10 February 20X5, Papaya Co were informed that one of their leading customers had gone into liquidation. At 31 December 20X8, the balance owed was GH₵45,000. The directors thought they had better reflect this in the financial statements so they disclosed this in the notes to the financial statements.
Required:
Discuss the impact on the auditor’s report, considering materiality and compliance with relevant accounting standards.
(d) Melon Co
During the valuation of inventory it was discovered that a line of inventory had been valued under LIFO. This had resulted in a misstatement of GH₵8,000. A further line of inventory was clearly obsolete and should not have been included at all. In the financial statements, this had been included at a valuation of GH₵4,000.
Required:
Discuss the impact on the auditor’s report, considering materiality and compliance with relevant accounting standards.
Find Related Questions by Tags, levels, etc.
- Tags: Adjusting Events, Auditor’s Report, IAS 10, Liquidation, Material Misstatement, Receivables
- Level: Level 3
- Topic: Reporting
