You are an audit manager in Coram & Co, a firm of Chartered Certified Accountants. The audit of one of your clients, Clark Co, for the year ended 31 May 20X8 is nearly complete and the auditor’s report is due to be issued next week. Clark Co is an unlisted, family owned business which specialises in the service and repair of both commercial and privately owned motor vehicles. The company operates from seven geographically distinct sites, each of which is considered a separate cash generating unit for impairment review purposes. The draft financial statements recognise profit before taxation for the year of GHC2·3 million and total assets of GHC22 million.

The schedule of uncorrected misstatements included in Clark Co’s audit working papers and prepared by the audit supervisor is shown below. You are due to attend a meeting with the finance director of Clark Co tomorrow, at which the uncorrected misstatements will be discussed.

	Statement of profit or loss		Statement of financial position
Schedule of uncorrected misstatements:	Debit (GHC)	Credit (GHC)	Debit (GHC)	Credit (GHC)
(1) Lease of testing equipment
- Lease assets			475,000
- Lease liabilities				475,000
(2) Legal claim
- Contingent assets			1,200,000
- Provision for liabilities				1,200,000
(3) Asset impairment
- Assets				85,000
- Expense	85,000
Total	85,000	-	1,675,000	1,760,000

(i) Lease of testing equipment

In the jurisdiction in which Clark Co operates, all motor vehicles over three years old are required to undergo an annual test of vehicle safety and roadworthiness. The annual test requires specialist testing equipment which is inspected by government officials on a regular basis. Following inspection visits in May 20X8, the government inspection report required Clark Co to replace the testing equipment at three of its sites. In order to comply with this requirement, Clark Co has agreed to lease new testing equipment from a leasing company on sixmonth leases. Under the terms of the leases, the company has no option to purchase the equipment. The testing equipment was made available for use by Clark Co at each of the three sites on 31 May 20X8. The client has capitalized leases with a total carrying amount of GHC625,000 at two of the sites but has elected to take advantage of the IFRS 16 Leases exemption not to capitalize short-term leases at the largest of the three sites. As a result, the present value of the lease payments of GHC475,000 relating to this site has not been recognized on the company’s statement of financial position. (5 marks)

(ii) Legal claim

A customer of Clark Co successfully sued the company for negligence in April 20X8 after suffering a personal injury at one of its sites. The court awarded the customer GHC1.2 million in damages and this had not yet been paid as at 31 May 20X8. The audit working papers include a copy of a verified letter dated 25 May 20X8 from an insurance company confirming that the claim is fully covered under Clark Co’s public liability insurance policy. On the basis that the company has no net liability as a result of the claim, the finance director has not recognised any amounts in the financial statements and has not made any disclosures in relation to the matter. (5 marks)

(iii) Asset impairment
During the year, a significant new competitor entered the market place at one of Clark Co’s seven sites. As a result, the site has experienced a decline in market share and revenue. The company has therefore conducted an impairment test on the site’s assets. The company’s working papers for the impairment test have been audited and the following figures have been agreed by the audit team:

Site assetsGHC

Carrying amount on statement of financial position as at 31 May 20X8 Value in use Fair value

3·6 million 2·9 million 3·9 million

Related costs of selling the assets:

– legal costs 126,000
– transaction taxes 174,000
– costs of removing the assets 85,000
– costs of reorganising the business following the asset disposals 96,000

On the basis of the results of these figures, the client has calculated the recoverable amount of the assets as GHC3.6 million and concluded that the site has not suffered an impairment. No adjustments have therefore been made to the financial statements in this regard. (5 marks)

Required;

Recommend and explain the matters which should be discussed with management in relation to each of the proposed adjustments, including an assessment of their individual impact on the financial statements and on the auditor’s opinion if management does not make the proposed adjustments.

Answer rating: 100% (QA)

Answer Please like the answer and keep supporting Thank you i Lease Equipment The carrying value of the unrecognised lease equipment is material becau... View the full answer