London Innovations plc (London) develops and manufactures a wide range of consumer goods. The company’s year‐end is 31 December 2022 and the forecast profit before tax is £8.3 million. You are the audit manager of Hood & Co, the company’s external auditors.

During your audit of research and development you find out that London has spent over £2 million in 2022 on developing new product lines. It incurred expenditure on five projects, all of which are at different stages of development. Once they meet the recognition criteria under IAS 38 Intangible Assets for development expenditure, London includes the costs incurred within intangible assets. Once production commences, the intangible assets are amortized on a straight line basis over five years. This is the correct accounting treatment.

However during the audit, you have discovered that one of the five development projects, valued at £980,000 and included within intangible assets, does not meet the criteria for capitalization. The finance director does not intend to change the accounting treatment adopted as she considers this an immaterial amount.

(c) Discuss the issue and describe the impact on the auditor’s report, if any, if the issue remains unresolved.

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The detailed answer for the above question is provided below The issue at hand is that one of the development projects valued at 980000 does not meet ... View the full answer