Question

Identifies the appropriate type of audit report from the list below (a. through f.) and briefly explain the rationale for selecting the report.

Appropriate type of audit report:

Unqualified, standard

1. Unqualified, explanatory paragraph

2. Qualified opinion because of departure from GAAP

3. Qualified scope and opinion

4. Disclaimer

5. Adverse

Audit Situations:

During the past year, Network Computer, Inc. devoted its entire research and development efforts to develop and market an enhanced version of its state-of-the-art telecommunications system. The costs, which were significant, were all capitalized as research and development costs. The company plans to amortize these capitalized costs over the life of the new product. The auditor has concluded that the research to date will likely result in a marketable product. A full description of the research and development, and the costs, is included in a note. The note also describes that basic research costs are expensed as incurred, and the auditor has verified the accuracy of the statement.

Answer 1

The expenditure on research does not directly lead to future economic benefits, and capitalising such costs does not comply with the accruals concept. Therefore, the accounting treatment for all research expenditure is to write it off to the profit and loss account as incurred.

The expenditure on development costs should be written off to the profit and loss account as incurred, as with the expenditure on research. However, under SSAP 13, there is an option to defer the development expenditure and carry it forward as an intangible asset if the following criteria are met:

there is a clearly defined project

expenditure is separately identifiable

the project is commercially viable

the project is technically feasible

project income is expected to outweigh cost

resources are available to complete the project.

In the Given Case, The company has capitalised the significant cost of research and development. However the company should have recognised the research cost into the profit nd loss account as incurred and capitalise the development cost if above criteria are met.

Auditor has concluded that the research to date will result in a marketeable product which means the project is viable and it meets the above criteria for capitalisation.

The Auditor will provide a qualified opinion as the company has not recognised the research costs into the Profit and loss account.

Note-

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