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. [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

Answer 1

Solution :

Part 1 : Factors Ayeyi & Partners should consider when placing reliance on the work of the independent valuer :

1) Whether the valuer has a professional qualification and is a member of the relevant body or association.

2) The competence and capability of the valuer to perform the valuation.

3) The independence of the valuer should be evaluated. The valuer should be free from any objectivity, bias, or conflict of interest. The valuer's decision should not be influenced by any other person related to the organization.

4) The auditor shall discuss with the valuer about his prior experience in the valuation of any similar item.

5) Evaluate the valuer's understanding of the accounting standard and policies relating to the assets that are subject to valuation.

6) The assumptions & relevant judgments made by the valuer.

7) Whether there is any change of any events or conditions affecting the present status of the assets valued.

Part 2A : Substantive procedures to be performed in relation to the revaluation of land and buildings :

1) Verify the title deeds and ascertain the original purchase cost of the land & buildings.

2) Evaluate the authenticity of the valuation report and obtain an understanding regarding the method of valuation adopted for revaluation.

3) Enquire about the market value of land & building in the area and reconfirm the same with the registrar records, if required.

4) Verify whether the revaluation adjustments are treated appropriately as per the accounting standards.

5) Undertake a physical verification of the land & building to verify its existence.

6) Check the assets register and ascertain whether the depreciation is charged correctly.

Part 2B : Substantive procedures to be performed in relation to the recently purchased warehouse :

1) Undertake a physical verification to confirm the existence of the warehouse.

2) Verify the title deeds and ascertain the authenticity of the documents.

3) Evaluate whether the warehouse is capitalized as per the relevant accounting standard and ensure all the costs related to the purchase are appropriately capitalized or expensed off as the case may be.

4) Rework the depreciation charged on the warehouse.