Question # 5 (10)

Shan Motor Co (Shan) manufactures a range of motorcycles and its year end is 30 June 2015. You are the audit supervisor of Khan & Co and are currently preparing the audit programmes for the year-end audit of Shan. You have had a meeting with your audit manager, and he has notified you of the following issues identified during the audit risk assessment process:

Land and buildings

Shan has a policy of revaluing land and buildings; this is undertaken on a rolling basis over a five-year period. During the year Shan requested an external independent valuer to revalue a number of properties, including a warehouse purchased in January 2015. Depreciation is charged on a pro rata basis.

Work in progress

Shan undertakes continuous production of motorcycles, 24 hours a day, seven days a week. An inventory count is to be undertaken at the year end and Khan & Co will attend. You are responsible for the audit of work in progress (WIP) and will be part of the team attending the count as well as the final audit. WIP constitutes the partly assembled cars at the year end and this balance is likely to be material. Shan values WIP according to percentage of completion, and standard costs are then applied to these percentages.

Required:

(b) Explain the steps Khan & Co should now take and the impact on the audit report in relation to the directors refusal to amend the financial statements.