You are an audit manager of Cranberry & Co and you are currently responsible for the audit of Gooseberry Co, 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
Gooseberry Co 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, Gooseberry Co includes the costs incurred within intangible assets.
Once production commences, the intangible assets are amortised on a straight line basis over three years.
Management believe 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
Gooseberry Co 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 company’s 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 recognized within wages and salaries for the year ended 31 January 20X8.
Separate disclosure of the bonus, by the director, is required by local legislation.
(a) Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to Gooseberry Co's research and development expenditure.