SPRINGFIELD NURSERIES

a) Main risk associated with financial statement assertions relating to nca.

 All assets in practice are liable to be overstated rather than understated; where assets
are overstated it is likely that profits are overstated.
 There is a risk that the non-current assets do not exist, or that they are overvalued
either because they are impaired in some way or have been under-depreciated.
 There is also a risk that non-current assets are overstated because of the inclusion of
items (such as small tools) that should be expensed through the profit and loss account
rather than capitalized in the balance sheet.
 As with all financial statement assertions, there is a risk that the values are misstated
because of errors in the accounting and internal control systems.
b) Evidence of verifying ownership and cost:
i- Land and building
1) Ownership - may be possible to obtain confirmation of ownership from the central land
registry office.
2) Cost – can be traced to original invoices or it can be found on the original completion
documents from the solicitor on the purchase of the land.
ii- Computer and motor vehicles.
1) Ownership – computer it is possible to look into name that is registered for the warranty.
Meanwhile for motor vehicle may be possible to look into motorcycle grant.
2) Cost –
c) Audit procedure to check depreciation rates
i) Building – 5% depreciation rate
 Consider the physical condition of the building and whether the remaining
useful life assumption is reasonable
 Review the minutes of board meeting to ensure there are no relocation plans.
 Consider the budgets and ensure that they account for the appropriate amount
of depreciation. If they do not, they may give indication of management future
plan.
ii) Computer and motor vehicles
 The reducing balance basis seems reasonable, given that computers and their
software are updated frequently and therefore do wear faster early on in life,
however the auditor should consider whether 20% is an appropriate rate given
the speed at which technology develops.
 The auditor should enquire and observe whether the assets are still in use.
 The auditor should review the board minutes to ascertain whether there are any
plans to upgrade the system
 The auditor should estimate the average age of the motor vehicles according to
their registration plates and consider whether the life is reasonable in light of
average age and recent purchases. Given that a number of vehicles are delivery
vehicles and likely to heavily used, the auditor should look at recent profits and
losses on disposals to see if large losses on disposal give an indication the 20%
rate might be too low.
  The auditor should ask management what the replacement policy of the assets
is.
iii) Equipment
 The equipment is depreciated at 15% per year, or over 6-7 years.
 The auditor should consider whether this is reasonable for all the categories of
equipment, or whether there are some assets for which the technology
advances more quickly than others. Such assets may require a higher rate of
depreciation