Trendy Fashion Accessories Manufacturing Limited (“Trendy”) had been an audit client of Go Kwong & Tei CPA Limited (“GKT”) for years. Kwong, the audit manager of GKT, was assigned to lead the audit of the financial statements of Trendy for the year ended 31 December 20x1. In planning the audit, Kwong noted that Trendy had invested a significant amount in property, plant, and equipment (PPE) because Trendy had expanded its operation by setting up a new product line during the year. Kwong decided to assess the appropriateness of the depreciation policy applied to the newly acquired PPE in order to see whether it was consistent with Trendy’s accounting policy with regard to the present condition and expected useful life of the PPE.

Trendy’s PPE movements for the year ended 31 December 20x1 were as follows:

PPE - net carrying amount as at 31 Dec 20x0	$477,500,000
Add: additions	$ 62,500,000
For new product line
Less: depreciation
For new product line	($ 12,330,000)
For existing product lines	($ 16,325,000)
PPE - net carry amount as at 31 Dec 20x1	$ 511,345,000

The audit test results were as follow:

Sample selected Depreciation (for new product line)

Sample value (depreciation of newly acquired PPE) $6,165,000

Misstatements found in samples:

Overstatement of depreciation expense of newly acquired PPE $ 669,900

(Understatement of depreciation expense of newly acquired PPE ($ 123,300)

Profits before tax for the year ended 31 Dec 20x1 was $27,750,000

Kwong set the tolerable misstatement for Trendy's PPE was $500,000

Required:

a) State two assertions that are most at risk? (2 marks)

b) Discuss the steps that Kwong may apply to plan for selecting samples for the test of depreciation expense of the newly acquired PPE. (12 marks)

c) Calculate:

1) Net carrying amount of the newly acquired PPE; (1 mark)

2) Net amount of misstated depreciation expense of the newly acquired PPE for the year; (1 mark)

3) the project errors in the sample back to the population; and (2 marks)

4) impact of the errors found in the samples on profits before tax. (2 marks)

d) Based on Kwong's audit findings in c) above, suggest further actions Kwong should take to achieve a desirable level of assurance.

Answer rating: 100% (QA)

a The two assertions that are most at risk in this scenario are Valuation assertion This assertion relates to the accuracy and appropriateness of the carrying amount of the newly acquired property pla... View the full answer