CA Proficiency 2 Auditing & Assurance

Continuous Assessment 2012 Paper 2

Suggested Solutions

Audit area examined: Non-current assets

CAP 2 Auditing & Assurance continuous assessment

2012 Paper 2 suggested solution
Part (a)
Reasons why the engagement could be risky:

Startup company It may not have reliable controls established yet

resulting in a more substantive focused audit approach being
required

Going concern the company has taken out loans to finance

growth; will it generate the cash flows necessary to service that
debt? It reported a loss in the year under audit and the new walking
aid has yet to generate income.

Valuation of non-current assets we do not know if the new walking

aid has actually generated significant sales to support the carrying
value of the production lines. A prototype is not a final product.

Unrecorded liabilities the person seriously injured in the

development process may bring a claim against the company
therefore a provision may be necessary.

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CAP 2 Auditing & Assurance continuous assessment

2012 Paper 2 suggested solution
Part (b)

Working paper errors/omissions

1. No record of who prepared or reviewed the document

2. No record of when the document was prepared
3. No objective set
4. No reference to financial statement assertions
5. No conclusion made

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CAP 2 Auditing & Assurance continuous assessment

2012 Paper 2 suggested solution

Part (c) (i)

Review points:
1. Assets purchased pre 1 Jan 11

The net book value at 31 Dec 2010 per the register of /965k does not
agree to the comparative figure of /900k in the financial statements.
The difference of /65k is material and should be investigated.

Ensure the prior year accounts were audited

2. Additional conveyor line

We need to ensure it is not replacing the original line which would then
need to be disposed off? Physically inspect the production area to
ensure both are still being used

Getwell appear to have incorrectly capitalised the VAT element of the

addition (see journal in part (c) for removal)

3. Refurbishment costs

Review the expenditure to assess whether it adds value to the assets or

whether it is maintenance

This expenditure appears to fail the IAS16 criteria for recognition of a

non-current asset and should be expensed (see journal in part (c) for
removal)

4. Assembly robots

This is not an invoice, it is a quotation

Given the date of the quotation, it appears the assets have not yet been
supplied to Getwell therefore a cut-off error has occurred (see journal in
part (c) for removal)

The amount is very material therefore if Getwell entered into a contract

to purchase the robots by the year end, a capital commitments note
should be included in the financial statements

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CAP 2 Auditing & Assurance continuous assessment

2012 Paper 2 suggested solution

5. Depreciation

No audit work has been performed on the appropriateness of the assets

being depreciated over 10 years. Assess this by:
(a) looking at industry rates;
(b) obtaining an independent expert opinion; or
(c) obtaining details on expected life from suppliers.

6. Gaps in audit evidence

Adequate evidence has not been obtained on the existence assertion.

This could be achieved by physically inspecting the three new assets

Adequate evidence has not been obtained on the completeness

assertion. Perform floor-to-sheet and sheet-to-floor testing when
physically inspecting the assets

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CAP 2 Auditing & Assurance continuous assessment

2012 Paper 2 suggested solution

Part (c) (ii)

Proposed journals:
1. Correct capitalisation of VAT on additional conveyor line:

Income Statement
Dr
/

Cr
/

Balance Sheet
Dr
/

Plant & equipment

cost

Cr
/

100k

VAT liability

100k

Depreciation
charged

10k

Accumulated
depreciation

10k

2. Correct capitalisation of refurbishment costs:

Income Statement
Dr
/

Cr
/

Balance Sheet
Dr
/

Plant & equipment

cost
Repairs &
maintenance

Cr
/

100k

100k

Depreciation
charged

10k

Accumulated
depreciation

10k

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CAP 2 Auditing & Assurance continuous assessment

2012 Paper 2 suggested solution

3. Remove assembly robots:

Income Statement
Dr
/

Cr
/

Balance Sheet
Dr
/

Plant & equipment

cost

Cr
/

520k

Other payables

520k

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