We have a new client, Air Health Latitude, and you have been assigned to audit the amortization/depreciation expense, specifically the helicopter portion of the audit. Upon your review you noted the following:

When Air Health Latitude purchases a helicopter for $400,000, it includes the following:

• Engine ($50,000 if purchased separately on acquisition date)
• Seats ($10,000 if purchased separately on acquisition date)
• Customized medical treatment equipment ($75,000 if purchased separately on acquisition date).

Air Health Latitude considers the useful life of the helicopter to be 20 years, but the engine and seats will need to be replaced after 10 years and the medical equipment after 5 years.

Air Health Latitude has made the decision to depreciate the entire helicopter cost ($400 000) over 20 years, or $20,000 per helicopter per year (straight line depreciation).

Air Health Latitude fleet consists of ten (10) helicopters.

In our studies and further research, we noted that it is practice to split the cost down into significant component parts with different useful lives, and to depreciate each one separately.

In this scenario, if they have different useful lives, the engine and the customized medical equipment should be treated as separate significant components per helicopter body (seats probably not) and depreciation is calculated as follows:

Depreciation/Amortization per helicopter

Component	$	Useful life	Annual depreciation
Engine	50 000	10	$5000
Medical equipment	75 000	5	15 000
Rest of helicopter	275 000	20	13 750
Component Depreciation			$33 750
No component – straight line depreciation			$20 000
Understatement of depreciation			$13 750

Required:

a) Understanding impact. What is the impact of the issue noted at Air Health Latitude on their financial statements?

b) Impact on materiality. You are required to determine whether uncorrected misstatements are material, individually or in aggregate. Discuss how you would evaluate the effect of the misstatement.

c) Correction of misstatements. Management is expected to correct the misstatements which are brought to their attention by the auditor. After you have communicated the misstatement, to the management at Air Health Latitude, and they refused to change their depreciation/amortization method, what are possible next steps?

d) Modifications to the opinion of the audit report. What opinion would you express on the audit of Air Health Latitude financial statements? Justify your answer.