You are a partner in Collins LLP (Collins), a large, international firm of accountants and auditors. One of your audit clients is Rex plc Group (the Group), a UK-based, international group of automotive manufacturing companies, and a member of the UKs FTSE-250 list of companies.

The audit team that you lead has completed the final audit of the Group for the year ended 31 December 2021. The team has completed the interim audit with no outstanding issues. The final audit is complete with one outstanding issue.

You are finalising the audit and currently deciding on the contents of the audit report. Extracts of four paragraphs from the draft audit report are set out in boxes A to D below.

B

The Group capitalises a high proportion of product development spend and there is a key judgement in determining whether the nature of the product engineering costs satisfies the criteria for capitalisation to Intangible Assets, Product Development in Progress and when this capitalisation should commence. The judgement of when capitalisation should commence consists of a number of judgements regarding the satisfaction of IAS 38 capitalisation criteria, and a key judgement is assessing whether development projects will generate probable future economic benefit. Our procedures included the operation of controls. We tested controls over the Groups retrospective review of historically forecast material production costs at the point capitalisation commenced against actual costs observed in manufacture. This historical accuracy is a key input into the directors assessment of whether the future economic benefit of development projects is probable and the control over the Groups judgements as to whether costs are considered directly attributable.

Required

(b) Identify and briefly explain the purpose of the paragraphs in box B.