You are the manager responsible for the audit of SANY Engineering, a long$-$established

limited liability company engaged in the manufacture, distribution and installation of heavy

container handling equipment.

The draft financial statements for the year ended $31$ May $2021$ show revenue of US$ $120$

million $(2020$ US$ $72$ million$),$ profit before taxation of US$ $4$ million $(2020$ US$$3$ million$)$

and total assets of US$ $75$ million $(2020$ US$ $60$ million$).$

The following issues arising during the final audit have been noted on a schedule of points

for your attention.

$1.$ During the year due to technological advancement of the manufacturing process,

there was an increase in production capacity in the company's factory buildings and

one factory building became surplus to SANY Engineering's production requirements.

On $10$ May $2021,$ SANY Engineering contracted to sell this building for US$ $4$ million.

The building was last revalued in June $2018$ and had a carrying amount of US$ $3$

million at the date of sale.

The gain on disposal has been credited to revenue and the balance of the revaluation

surplus relating to the building, US$ $1$ million, has been credited against other

operating charges in the statement of profit or loss and other comprehensive income.

$2.$ SANY Engineering borrowed US$ $3$ million in May $2020$ for five years at $5\%,$ to

finance investment in manufacturing equipment. The loan became repayable on

demand on $1$ May $2021$ when SANY Engineering failed to pay the annual interest

charge for the first year. On $10$ June $2021$ the lender agreed to 'roll over' the overdue

interest by adding it to the principal amount due.

The loan is classified as a non$-$current financial liability in the draft financial

statements and the first year's interest charge is accrued in 'trade and other

payables'.

$3.$ SANY Engineering's fees scale for installing machinery was increased by $30\%$ with

effect from $1$ January $2021.$ This increase takes into account SANY Engineering now

giving a warranty to reinstall any item which fails to perform to specification, through

an installation defect, for a period of up to three years. The notes to the financial

statements disclose the following:

'The company guarantees all installations of equipment sold since $1$ January $2021.$

No provision has been recognised as the amount of the obligation cannot be

measured with sufficient reliability.$\text{'}$

Installation fees for the year to $31$ May $2021$ amounted to US$ $3$ million of which US$

$1$ million related to the three months to $31$ August $2021.$

Page $6$ of $10$

REQUIRED

In undertaking your review of the audit working papers and financial

statements of SANY Engineering for the year ended $31$ May $2021,$ for each of

the above issues:

$($a$)$ Comment on the matters that you should consider;

$[15$ marks$]$

$($b$)$ State the audit evidence that you should expect to find.