(c) (i) Depreciation on land and buildings
Depreciation has been provided on the land element of property, plant and equipment and this is contrary to IAS 16
Property, Plant and Equipment, as depreciation should only be charged on buildings.
The error is material as it represents 7% of profit before tax (0·7m/10m) and hence management should remove this
from the financial statements.
If management refuse to amend this error then the audit report will need to be modified. As management has not
complied with IAS 16 and the error is material but not pervasive then a qualified opinion would be necessary.
A basis for qualified opinion paragraph would need to be included explaining the material misstatement in relation to
the provision of depreciation on land and the effect on the financial statements. The opinion paragraph would be
qualified ‘except for’ – due to material misstatement.
(ii) Wages program
Minnie Co’s wages program has been corrupted leading to a loss of payroll data for a period of two months. The auditors
should attempt to verify payroll in an alternative manner. If they are unable to do this then payroll for the whole year
would not have been verified.
Wages and salaries for the two month period represents 11% of profit before tax (1·1m/10m) and therefore is a material
balance for which audit evidence has not been available.
The auditors will need to modify the audit report as they are unable to obtain sufficient appropriate evidence in relation
to a material, but not pervasive, element of wages and salaries and therefore a qualified opinion will be required.
A basis for qualified opinion paragraph will be required to explain the limitation in relation to the lack of evidence over
two months of payroll records. The opinion paragraph will be qualified ‘except for’ – due to insufficient appropriate audit
evidence.
(iii) Lawsuit
The company is being sued by a competitor for breach of copyright. This matter has been correctly disclosed in
accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
The lawsuit is for $5m which represents 50% of profit before tax (5·0m/10m) and hence is a material matter. This is
an important matter which needs to be brought to the attention of the users.
An emphasis of matter paragraph would need to be included in the audit report, in that the matter is appropriately
disclosed but is fundamental to the users’ understanding of the financial statements; this will not affect the audit opinion
which will be unmodified in relation to this matter.
An emphasis of matter paragraph should be inserted after the opinion paragraph, the paragraph would explain clearly
about the lawsuit and cross references to where in the financial statements the disclosure of this contingent liability can
be found. |
