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Q. Surplus plant and equipment was sold during the year, resulting in a profit on disposal of $200000
Audit risk = significant profits or losses on disposal are an indication that the depreciation policy of plant and equipment may not be appropriate . Therefore depreciation may be overstated
Could you please explain this ?Audit response = discuss with finance director regarding the depreciation policy to assess its resonableness
Does it make a difference if we discuss with the management rather than finance director ?The profit or loss on disposal = Sales proceeds – NBV
NBV depends on depreciation. If depreciatoon is too low then there will ba a loss on disposal. If too high there will be a profit on disposal.
The finance director is part of management.
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