Question 2

You are an audit manager of Adeoti & Co and you are currently responsible for the audit of Gbadebo limited, a company which develops and manufactures health and beauty products and distributes these to wholesale customers. Its draft profit before tax is 6.4m and total assets are 37.2m for the financial year ended 31 January 20X8. The final audit is due to commence shortly and the following matters have been brought to your attention:

Research and development:

Gbadebo limited spent 1.9m in the current year developing nine new health and beauty products, all of which are at different stages of development. Once they meet the recognition criteria under IAS 38 Intangible Assets for development expenditure, Gbadebo limited includes the costs incurred within intangible assets. Once production commences, the intangible assets are amortised on a straight line basis over three years. Management believes that this amortisation policy is a reasonable approximation of the assets useful lives, as in this industry there is constant demand for innovative new products.

Depreciation:

Gbadebo limited has a large portfolio of property, plant and equipment (PPE). In March 20X7, the company carried out a full review of all its PPE and updated the useful lives, residual values, depreciation rates and methods for many categories of asset. The finance director felt the changes were necessary to better reflect the use of the assets. This resulted in the depreciation charge of some assets changing significantly for this year.

Bonus:

The companys board is comprised of seven directors. They are each entitled to a bonus based on the draft year-end net assets, excluding intangible assets. Details of the bonus entitlement are included in the directors service contracts. The bonus, which related to the 20X8 year end, was paid to each director in February 20X8 and the costs were accrued and recognised within wages and salaries for the year ended 31 January 20X8. Separate disclosure of the bonus, by director, is required by local legislation.

Required:

(i) Describe FIVE substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to Gbadebo limiteds research and development expenditure. [7.5 Marks]

(ii) Describe FIVE substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to the matters identified regarding depreciation of property, plant and equipment. [7.5 Marks]

(iii) Describe FIVE substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to the directors bonuses. [7.5 Marks]

(iv) During the audit, the team discovers that the intangible assets balance includes 440,000 related to one of the nine new health and beauty products development projects, which does not meet the criteria for capitalisation. As this project is ongoing, the finance director has suggested that no adjustment is made in the 20X8 financial statements. She is confident that the project will meet the criteria for capitalisation in 20X9.

Required: Discuss the impact of the discovery on the true and fair status of the financial statements and describe the impact on the auditors report, if any, should this issue remain unresolved. [7.5 Marks]