Your firm is the auditor of Green Brown Ltd, a manufacturer. You have obtained a summary of
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Question:
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 capitalised 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:
• buildings: 2-4% straight line
• plant and machinery: 5-10% straight line
• fixtures fittings and equipment: 5-20% straight line.
Required Describe audit procedures to ensure:
a. The accuracy of the summary of property, plant and equipment
b. All items of a capital expenditure are included in additions for the year and that no revenue expenditure has been capitalised
c. the depreciation rates are calculated appropriately.
2. Bank reconciliation errors
You have spent 2 years working as an auditor. In that time you have come across a number of errors in performing bank reconciliations. Oulined below are some of them.
1. An unreconciled item of $300 was on the final bank reconciliation of the client and was deemed by the client to be immaterial.
2. An amount from an associated company of $40,000 was banked 2 days before the end of the year in the client's bank account and then paid back 1 week after the end of the year.
3. A cheque for $5000 was omitted from the outstanding cheque list on the bank reconciliation at 30 June. It cleared the bank on 14 August.
4. A bank transfer of $20,000 was included as a deposit in transit at 30 June in the accounting records.
Required
a. What control could be implemented to reduce the likelihood of each of the above?
b. What is an audit procedure to detect each of the above?
Related Book For
International Financial Reporting A Practical Guide
ISBN: 978-1292200743
6th edition
Authors: Alan Melville
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