Question

Your firm is the auditor of Pinkglow Ltd, a manufacturer. You have obtained a summary of the property, plant and equipment for the year ended 30 June 2018, 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 capitalisation and expenses; 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 a 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 capital expenditure are included in additions for the year and that no expenses have been capitalised c) the depreciation rates are calculated appropriately. (this is auditing question but i could not find auditing in subject list so i choose finannce)

Answer 1

Audit Procedures to ensure summary of the Property Plant and Equipment:

since the management letter shows that there is differences in the capitalization and expenses auditor will need to look for the items of the summary that are eligible and not eligible for the capitalization.

which can be ensured by the invoices of the assets and the description and nature of industry operations.

Vouching of all additions made and items from R&M account needed to be verified for any capital assets that are charged off.

Depreciation adopted by the company should either by the rate fixed by the governing Act and have appropriate documents for any deviation from the specified rates need to be collected.

however a company cannot disclose depreciation policy as range of rates since Act specifies specific rates for the assets.

Auditor need to make sure that depreciation is reworked and be in compliance with the rates specified and have proper adjustment entries are made. (this is summary of procedures that has to be adopted by auditor in said scenario)