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Question 1 (12.5 marks)
Your firm is the auditor of GreenBrown Ltd, a manufacturer. You have obtained a summary of the property, plant and equipment for the year ended 30 June 2015, 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 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 capitalized
(c) the depreciation rates are calculated appropriately.
Question 2 (12.5 marks)
You attended the inventory count of your client Davis Hydraulics Ltd. You observed the
following during the count.
1. Warehouse staff counted specific areas of the stock as determined by the warehouse
Supervisor; staff members, including the warehouse supervisor, were allocated their own
area to count.
2. Several blank paper sheets were issued to count staff for recording stock counted.
3. Staff were instructed to write down the stock description and number counted.
4. Staff were told to write the stock quantities in pencil on the sheets to ensure errors can be
corrected.
5. Any staff that completed a section early were allocated to another area to help out one of the
other staff.
6. The supervisor collected all sheets at the end of the count to finalise the stock count.
