Question

QUESTION 2
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. [10 marks]
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 [5 Marks]
b. The recently purchased warehouse. [5 Marks]
[Total Marks = 20 marks]

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 Jack Motors 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 jack motors in the past. Ayeyi & Partners should 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 at Jack motors. These assumptions should be discussed with both management and the valuer to understand the basis of any valuations.

(ii a) Substantive procedures for land and buildings

– Obtain a schedule of land and buildings revalued this year and cast to confirm completeness and accuracy of the revaluation adjustment.

– On a sample basis, agree the revalued amounts to the valuation statement provided by the valuer.

– 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.

– Agree the initial cost for the warehouse addition to supporting documentation such as invoices to confirm cost.

– Confirm through a review of the title deeds that the warehouse is owned by Jack motors.

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

– Review the financial statements disclosures of the revaluation to ensure they comply with IAS 16 Property, Plant and Equipment.

(ii b) Substantive procedures for work in progress (WIP) ( recently purchased warehouse)

– Prior to attending the inventory count, discuss with management how the percentage completions are attributed to the WIP, for example, is this based on motor cars passing certain points in the production process?

– During the count, observe the procedures carried out by Jack motors staff in assessing the level of WIP and consider the reasonableness of the assumptions used.

– Agree for a sample that the percentage completions assessed during the count are in accordance with Jack motors policies communicated prior to the count.

– Discuss with management the basis of the standard costs applied to the percentage completion of WIP, and how often these are reviewed and updated.

– Review the level of variances between standard and actual costs and discuss with management how these are treated.

– Obtain 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 schedule 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.