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. 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) Substantive procedures for land and buildings
– Acquire a schedule of land and buildings revalued this year and cast to endorse comprehensiveness and precision of the revaluation amendment.
– On a sample basis, decide the revalued totals to the appraisal statement provided by the valuer.
– Settle the revalued amounts for these assets are incorporated properly in the non-current assets register.
– Recalculate the total revaluation adjustment and settle properly noted in the revaluation excess.
– Agree the original cost for the warehouse accumulation to secondary documentation such as invoices to approve cost.
– Approve through a assessment of the title deeds that the warehouse is possessed by Jack Motors.
– Recalculate the depreciation charge for the year to make sure that for assets revalued during the year, the depreciation was founded on the correct valuation and for the warehouse addition that the charge was for six months only.
– Evaluate the financial statements revelations of the revaluation to ensure they comply with IAS 16 Property, Plant and Equipment.

(ii)   Substantive procedures for work in progress (WIP)
      – Earlier to appearing the inventory count, converse with management how    the percentage completions are attributed to the WIP, for example, is this founded on motor cars passing certain points in the fabrication procedure?

– During the count, detect the procedures carried out by Jack Motors staff in evaluating the level of WIP and cogitate the rationality of the suppositions used.
– Approve for a sample that the percentage finishing point evaluated during the count are in harmony with Jack Motors’s dogmas communicated earlier to the count.
– Converse with management the origin of the standard costs applied to the percentage completion of WIP, and how often these are reviewed and updated.
– Analysis the level of variances between standard and actual costs and discuss with management how these are treated.
– Get a breakdown of the standard costs and agree a sample of these costs to actual invoices or payroll records to assess their reasonableness.
– Cast the agenda of total WIP and agree to the trial balance and financial statements.
– Agree sample of WIP assessed during the count to the WIP schedule, agree percentage completion is correct and recalculate the inventory valuation.