Part (b) Describe the additional substantive procedures that should be performed by the JZK Auditors audit team to obtain sufficient and appropriate audit evidence with regard to the right-of-use asset with reference to only the following assertions:
(i) For the recognition and initial measurement of this transaction: existence, classification, accuracy, and valuation and allocation; and
The following procedures had already been performed by the audit team:
o Obtaining a management representation letter for all assertions relating to the right of use asset;
o Agreeing, where applicable, all amounts in the schedules, reports and calculations to the general ledger, trial balance and annual financial statements; and
o Casting of all totals and subtotals. (Note to markers: consideration could be given to correct procedures listed under the incorrect heading (e.g. subsequent instead of initial)
Answer
RAC
Recognition/Measurement:
Accuracy/Valuation:
Classification:
The text outlines audit steps for a Right-of-Use (RoU) asset:
Recognition/Measurement: Confirm authorization and lease validity.
Accuracy/Valuation: Verify physical existence, recalculate lease financials, and check VAT.
Classification: Confirm tenant occupancy and review sublease agreements, using experts if needed for complex cases.
The provided text details audit procedures for a Right-of-Use (RoU) asset, covering:
Recognition & Initial Measurement: Verify board authorization and check for lease restrictions.
Accuracy, Valuation & Allocation:
Physically inspect the property.
Confirm lease terms (duration, payments, rates) against calculations.
Re-perform interest rate and present value calculations.
Verify VAT treatment.
Classification:
Confirm the property is tenant-occupied (not owner-occupied) to support investment property classification.
Review sublease agreements.
Consult experts for complex sublease terms to confirm proper classification.
The images provided outline substantive audit procedures for a Right-of-Use (RoU) asset, focusing on three key assertions: Recognition and Initial Measurement, Accuracy/Valuation/Allocation, and Classification.
Part (b) of the question asks for additional substantive procedures to obtain sufficient and appropriate audit evidence for the RoU asset, specifically addressing:
Existence: The asset exists.
Classification: The asset is categorized correctly (e.g., as an investment property).
Accuracy: The amounts are correct.
Valuation and Allocation: The asset is valued appropriately, and costs/benefits are allocated correctly.
The question also notes that certain preliminary procedures (management representation letter, agreeing amounts, casting totals) have already been performed.
Here's a breakdown of the suggested audit procedures:
1. Recognition and Initial Measurement:
1.1 Inspect minutes of directors' and capital expenditure committee meetings: This confirms that the acquisition of the RoU asset was properly authorized, providing evidence for its existence.
1.2 Inspect memorandum of incorporation: This checks for any restrictions or prohibitions on the lease transaction, further supporting the existence assertion.
2. Accuracy, Valuation, and Allocation:
2.1 Physically verify the office building: This provides direct evidence of the property's existence and confirms it matches the lease description.
2.2 Obtain management's calculation and inspect the head lease agreement/contract: This procedure is crucial for accuracy and valuation. It involves checking the details used in the RoU asset calculation, such as:
Commencement date of contract
Duration of contract
Monthly payments
Payments in arrears
Interest rates/escalation clauses
2.3 Confirm due authorization of signed agreements: This confirms the validity and existence of the lease agreements.
2.4 Re-perform implicit interest rate calculations: This is an independent check on the accuracy and valuation of the lease liability and RoU asset.
2.5 Recalculate the present value (PV) of the lease liability and RoU asset: Using the confirmed input factors, the auditor recalculates the initial measurement to assess the reasonableness, accuracy, and valuation of management's figures.
2.6 Inspect supporting VAT documentation: This ensures that VAT (Value Added Tax) was correctly handled, specifically whether the entity (Beesprop) was entitled to claim input VAT, impacting the accuracy of the asset's cost.
2.7 Recalculate the amount of VAT excluded from the transaction: This is a specific check on the accuracy and valuation related to VAT.
3. Classification:
3.1 Observe and discuss with the tenant: To confirm the office building is not owner-occupied. This is a key criterion for classifying a property as an investment property (held for rental income or capital appreciation, rather than for use in production/supply of goods/services or for administrative purposes).
3.2 Obtain subleasing agreements: This provides direct evidence to confirm the existence of the sublease and supports the classification of the RoU asset as an investment property.
3.3 Obtain services of an expert (legal and IFRS expert): If the sublease terms are complex, an expert's opinion is needed to determine if they constitute valid lease agreements. This directly addresses the classification assertion, ensuring the property's treatment aligns with IFRS.
In essence, these procedures guide the auditor to systematically gather evidence to ensure the RoU asset is correctly accounted for from its initial recording through to its ongoing classification in the financial statements.
No comments:
Post a Comment