In: Accounting
Consider each of the following independent and material
situations. In each case:
the financial report date is 30 June 2019;
the field work was completed on 12 August 2019;
the Directors’ Declaration and the Audit report were signed on 19
August 2019;
the completed financial report accompanied by the signed Audit
report were mailed to the shareholders on 18 September 2019.
You are an auditor of KK Limited (KK), a company specialising in
industrial property development. On 10 August 2019, you become
aware that a major overseas investor has informed the management of
KK of their intention to withdraw their investment in a proposed
major development. Based on its discussions with the investor and
previously pledged funds from them, KK has incurred substantial
costs in feasibility studies, structural engineering reports and
architectural plans. A significant portion of these costs have been
capitalised. The management is dependent on finding a new investor
to be able to meet these expenses and to continue with the
project.
select the appropriate action from the list below, and justify your
response.
Adjust the 30 June 2019 financial report.
Disclose the information in the notes to the 30 June 2019 financial
report.
Request that the client recall the 30 June 2019 financial report
for revision.
No action is required
. ii. If no action is taken by management for each of the events
described above , determine the most appropriate audit opinion to
be issued.
As per IAS 38, Development costs are capitalised as an intangible asset if all of the following criteria are met:
a. The technical feasibility of completing the asset so that it will be available for use or sale
b.The intention to complete the asset and use or sell it;
c.The ability to use or sell the asset;
d.The asset will generate probable future economic benefits and demonstrate the existence of a market or the usefulness of the asset if it is to be used internally;
e.The availability of adequate technical, financial and other resources to complete the development and to use or sell it; and.
Development costs are capitalised as an intangible asset if all of the following criteria are met [IAS 38R.57]
a.The technical feasibility of completing the asset so that it will be available for use or sale;
b.The intention to complete the asset and use or sell it;
c.The ability to use or sell the asset;
d.The asset will generate probable future economic benefits and demonstrate the existence of a market or the usefulness of the asset if it is to be used internally;
e.The availability of adequate technical, financial and other resources to complete the development and to use or sell it; andf.The ability to measure reliably the expenditure attributable to the intangible asse
f.The ability to measure reliably the expenditure attributable to the intangible asset.
In the given scenario, it has been noted that majority of investor is opting out for investment and inteniton to complete the assets is not going to happen. Auditors should ask Management to recall the financials statements and adjust the cost already capitalized. Cost already capitalized need to be expensed in guidance with above literature of IAS 38. Further, a disclosure is required in notes to accounts while performing post balance sheet events and since this is a major event to auditors need to adjust their financials and proper disclosure is required.
In case management, do not take action agains the event, then auditor need to modify their opinion in audit report and issue a Disclaimer in their audit report regarding the scope of work.
A disclaimer audit report is issued when the limitation on scope is imposed by client, as a result the auditor is unable to obtain sufficient appropriate audit evidence.