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kindly explain whether or not to qualify report in this scenario.
pluto: included in the balance sheet as at 31march20y0 are non current assets at cost of $2.5m which have been constructed by the company during the year. the cost include own labour capitalised of 180,000.the labour costs are based on the directors’ estimates of time spent by employees on the construction work,which are unsupported by time records. there are no satisfactory audit procedures to confirm that labour costs have been appropriately capitalised. the pre tax profit of pluto for the year ended 31 march 20y0 is 650,000If pre-tax profit is only $650,000, the amount of $180,000 for which there is no sufficient appropriate audit evidence is material (28% of profit). I assume that the remainder of the contstruction costs are supported by documentation such as supplier invoices.
This would therefore lead to a modified audit opinion, probably an ‘except…for’ qualification rather than a disclaimer as the problem is not pervasive.
Note that strictly you should talk about modifying the audit opinion, not the audit report though the term ‘modified report’ is often used colloquially to mean ‘modified opinion’..
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