Cottrell Sunningdale

Question 3

a) Evaluate the matters which should be discussed with management in relation to each
of the unresolved issues, and recommend the further actions necessary prior to
issuing the auditor’s report

(i) Investment properties

The investment property which has a value $25,000 below its carrying amount is
considered as immaterial because it is below the materiality level that have been set.

The directors are refusing to adopt the fair value model for this investment property,
but have accounted for the revaluation gains for the other three investment properties
correctly in the statement of profit or loss. According to IAS 8 40 Investment Property,
the accounting policies need to be consistently apply to the same class of assets. In
this case, one of the investment properties amounted $25,000 is are using cost
model unlike the other investment properties which is using the fair value model.

This will impact the investment properties to be understate by $25,000, expense

overstate and profit understate at the same amount.

Thus, Sunningdale Co should make an adjustment by using the consistent

accounting policy for the investment property. They need to revalue the property by
adjusting the $25,000 to debit in the SOPL as to recognise the loss on fair value and
credit the SOFP.

(ii) Specialist manufacturing equipment

The depreciation expense that have been increase amounted $140,000 is The
expense is 11.67% of the profit before tax and considered as material to the financial
statement since it has exceed the materiality level of $40,000.

The management of Sunningdale Co has decided to increase the useful life of the
specialist manufacturing equipment by five years as the finance director believes this
more accurately reflects the value of the equipment over its life. According to IAS 8,
the only changes in estimate that allowable is only when there are changes arise in
the circumstances or a result of new information, development and experience. In
this case, there is no indication that the useful life of the specialist manufacturing
equipment should be increase besides of the financial directors believe that it is more
accurate, which is irrelevant in this case.

This will impact the PPE as it will be overstated and the expense understate and
profit overstate of $140,000.

Thus, Sunningdale Co should reverse the adjustment made of $140,000 by debiting

the amount in the specialist manufacturing equipment and crediting in the SOPL to
reverse the expense.

(iii) Gift of cars

The gift cars with the carrying value of $35,000 is considered as immaterial since it
have not exceed the materiality level. However, since the transaction is a related
party transaction, thus it is considered as material by nature.

it was found that Sunningdale Co gifted two company cars to the son and daughter of
one of the company’s directors, David Fisher. According to IAS 24 Related Party
Transaction, when there is a transaction between the company and the key
management personnel close person such as dependent person, thus it is
considered as a related party transaction. In this case, although David Fisher’s son
and daughter do not currently and have never been employed by Sunningdale Co
and no payment was requested or received for the vehicles, it is still consider as a
close person of David Fisher, since they are dependent to him.

This will impact to the presentation of the financial statement as there is no

disclosure or only partial disclosure has been made by Sunningdale Co.

Sunningdale Co do not need to do the adjustment in the SOPL and SOFP. However,
a disclose the related party transaction should be included in the notes to the
financial statement by including the name of the son and daughter of David Fisher's,
the relationship that they have, the amount of the company's cars which is $35,000.
b) Assuming that management does not make any further adjustments to the financial
statements, justify an appropriate audit opinion and explain the aggregate impact of
both misstatements on the auditor’s report.

Since the management did not make an adjustment of the Specialist manufacturing
equipment and disclosure of the gift cars to the director's son and daughter, auditor
also need consider whether it is pervasive. Since the misstatement cumulatively
amounted $175,000, this indicates that it is not pervasive as it does not exceed 60%
of the profit before tax, total assets and revenue. It also does not make the profit
becomes losses.

Thus the auditor need to issue an Qualified Except For Opinion since both of the
issue is considered as material but aggregately not pervasive to the financial
statement.