Question

Jack Motors manufactures a range of motor cars and its year end is 31st January 2019. You are the audit supervisor of Ayeyi & Partners and are currently preparing the audit programmes for the year-end audit of Jack Motors. You have had a meeting with your audit manager and he has notified you of a number of issues identified during the audit risk assessment process.

Land and buildings

Jack Motors have a policy of revaluing land and buildings, this is undertaken on a rolling basis over a five-year period.

During the year Jack Motors requested an external valuer to revalue a number of properties, including a warehouse purchased in May 2018. Depreciation is charged on a pro rata basis.

Work in progress

Jack Motors undertakes continuous production of cars, 24 hours a day, and seven days a week. An inventory count is to be undertaken at the year end and Ayeyi & Partners will attend. You are responsible for the audit of work in progress (WIP) and will be part of the team attending the count as well as the final audit. WIP constitutes the partly assembled cars at the year end and this balance is likely to be material. Jack Motors values WIP according to percentage of completion, and standard costs are then applied to these percentages.

Required:

i. Explain the factors Ayeyi & Partners should consider when placing reliance on the work of the independent valuer.

ii. Describe the substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to:

a. The revaluation of land and buildings

b. The recently purchased warehouse.

Answer 1

(I)

Reliance on the work of an independent valuer
--ISA 500 Audit Evidence requires auditors to evaluate the competence, capabilities including expertise and objectivity of a management expert.

--This would include consideration of the qualifications of the valuer and assessment of whether they were members of any professional body or industry association.

--The expert’s independence should be ascertained, with potential threats such as undue reliance on the company or a self-interest threat such as share ownership considered.

-In addition, Ayeyi & partners should meet with the expert and discuss with them their relevant expertise, in particular whether they have valued similar land and buildings to those of the company in the past.

The audit firm hould also consider whether the valuer understands the accounting requirements of IAS 16 Property, Plant and Equipment in relation to valuations.

-The valuation should then be evaluated. The assumptions used should be carefully reviewed and compared to previous revaluations if any

-These assumptions should be discussed with both management and the valuer to understand the basis of any valuations

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(II)

A. Substantive procedure for revaluation of Land and Building-

--

Review the schedule of Land and building revalued during the year and cast to confirm completeness and accuracy of the revaluation adjustment and agree to trial balance and financial statements.

– Consider the competence and capability of the valuer, by assessing through enquiry his qualification, membership of a professional body and experience in valuing these types of assets.

– Consider whether the valuation undertaken provides sufficiently objective audit evidence. Discuss with management whether valuer has any financial interest in the company which along with the family relationship could have had an impact on his independence.

– Agree the revalued amounts to the valuation statement provided by the valuer.

– Review the valuation report and consider if all assets in the same category have been revalued in line with IAS 16 Property, Plant and Equipment.

– Agree the revalued amounts for these assets are included correctly in the non-current assets register.

– Recalculate the total revaluation adjustment and agree correctly recorded in the revaluation surplus.

– Recalculate the depreciation charge for the year to ensure that for the assets revalued during the year, the depreciation was based on the correct valuation and was for 12 months.

– Review the financial statements disclosures relating to the revaluation to ensure they comply with IAS 16.

B. Substantive audit procedure for purchased warehouse-

--- check the purchase agreement and purchase deed to ensure that the warehouse has been in the ownership of the company.

-- check the BOD resolution to verify the authorization of purchase and payment.

--- check proper Account, valuation and reporting has been done as per IAS 16

-- physically verify the warehouse