Bella works continuously on bringing new products to the market by spending a significant amount (approximately 5% of total annual revenue) on research and development efforts. The focus during the year has been on developing new products within the industrial business unit utilising patented innovations in yarn and latex formulations. Bella's company accounting policy manual states that all research and development costs should be reviewed by the financial controller who will examine the nature of the expenditure and make an assessment of the ability of the company to complete the development of the product, and to sell the product in the market prior to deciding on the appropriate treatment and recognition. It also provides that a monthly review of all accounting for costs related to research and development activities is to be undertaken by the company's financial controller. Your initial assessment indicates that the monthly reviews by the financial controller reviews have been intermittent in practice, and that all research and development expenditures greater than $20,000 have been routinely capitalised without prior review as there is an underlying assumption that large investments relate to the development of feasible product lines.

RE.QUIRED

(a) Identify the key assertion at risk and outline your asse.ssment of inherent risk/s and control risk/s in relation to Bella's development costs account

(b) For the assertion identified in (a) above in relation to the development costs account, ident.ify the appropriate audit approach and the level (none, small, medium, extensive) and nature of audit procedures (tests of controls, substantive analytical procedures, substantive tests of details) to be undertaken. Jus.tify the audit approach you have suggested.

Please use template below:

(a) Key assertion Inherent risk assessment Control risk assessment (b) Audit approach Procedure Extent Test of controls Substantive analytical procedures Substantive tests of details Justification