Question

Question 2
You are the auditor of Green Machine Ltd, a manufacturer. You have obtained a summary of
the property, plant and equipment for the year ended 30 June 2018, which identifies cost and
accumulated depreciation brought forward, additions and disposals in the year and
depreciation charges.
A review of the management letter from the previous year’s audit shows that there were some
problems in relation to making a distinction between capital and revenue expenditure; some
items were capitalized when they should have been expensed and other capital items were
included in repairs and maintenance in the income statement.
Another risk identified from prior years relates to depreciation calculations: there is a range of
depreciation rates within categories and there has been concern that the rates applied to some
assets have been too low. The depreciation policy disclosed in the financial report shows:
• Building: 2 – 4% straight line
• Plant and machinery: 5 – 10% straight line
• Fixtures fittings and equipment: 5 – 20% straight line
REQUIRED
(a) Identify and explain the two key assertions at risk in relation to property, plant and
equipment
(b) Identify and describe two substantive audit procedures that you could perform in response
to each risk identified above
(c) Explain the requirement of ASA 701 Communicating Key Audit Matters in the Auditor’s
Report and the rationale for this auditing standard. Determine if the above matters are key
audit matters, providing full rationale for the determination. If it is determined that they
are Key Audit Matters, provide the disclosures which are required in Key Audit Matters
Section of the Auditor’s report as required under ASA 701.
Requirement: Using reference materials available on the internet, research the topic and
prepare a report, fully referenced and up to 2,500 words (assignment in excess of 2,500
words will be penalized). Minimum of 8 academic references is required.

Answer 1

Step 1

a) Two key assertions at risk in relation to property, plant and equipment

Auditing Standard ASA 701 applies to an audit of a financial report for a financial year and is operative for financial reporting periods ending on or after 15 December 2016.

Following key assertions are relevant in this area:

- Confirmation of ownership,

- Inspection of these assets

- valuation by third parties

- Adequacy of depreciation rates

- Potential impairment.

Step 2

Identify and describe audit procedure

In respect of above areas, Audit objective will be as below:

* All these assets have been correctly stated at cost less accumulated depreciation,

* Addition and disposals are correctly recorded,

* Review any impairment indicators, test or impairment.

* Disclosures relating to cost, additions and disposals, depreciation policies and rates, useful lives and assets held under financial leases are adequate and in accordance with accounting standards.

Step 3

Requirement of ASA 701

Auditing Standard ASA 701 deals with auditor's responsibility to communicate key audit matters in the auditor's report.

The purpose of communicating key audit matters is to enhance the communicative value of the auditor's report by providing transparency about the audit that has been performed.

Key audit matters provides additional information to intended users of the financial report.

Key audit matters in the auditor's report is in the context of the auditor having formed an opinion on the financial report as a whole.

Communicating key audit matters in the auditor's report is not a substitute for disclosures in the financial report that the applicable financial reporting framework requires management to make or that are otherwise necessary to achieve fair presentation.

Step 4

Depreciations rates disclosed in the depreciation policies are vague and not clear, thus, requires to be expressed in auditor's report in key ay audit matters.