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Ma’am in order to respond to the audit risk of research costs being capitalised as a part of DCs, the audit response mentioned in my kit states that
“obtain a detailed breakdown of DCs capitalised. Undertake detailed testing to see if costs belong research or DCs”
Ma’am what are these “detailed tests” that auditor performs to determine if costs relate to development or research?
No I meant could you give some examples of such detailed tests/ tests of detail that auditors use to discern research and DCs?
Oh – sorry – e.g. selecting a sample of costs listed in the breakdown and tracing to supporting documentation – a purchase invoice for market research into the pricing of a product before it is launched could not be capitalised and would have to be expensed to profit or loss.
But it would be correct to capitalise some apportionment of labour cost agreed to a “job card” that shows the employee to have been working on a product in a development phase.but maam just by assessing the invoice/supporting documentation how can you know wether the purchase was for market research purposes or Development of a product?
OR
in case of job card know that employee definitely worked on developing the product rather than designing it or doing some other research related work?
If the invoice is from a marketing research company made out for “services in respect of market research” then that’s pretty clear that it’s a cost that must be expensed.
If an audit client has some sort of job card/timesheet/clockcard system then the effectiveness of controls is going to be tested. That would include the accuracy with which time is charged to different jobs. For a new product development there will be detailed specification of the project – all initial costs will be expensed but there will come a point in time when the “asset recognition criteria” are met (assumed knowledge of IAS 38 from FA/F3). So only after that point can any costs be considered for capitalisation. It’s for management to put the costing system in place to trace costs – the auditor then tests it. If the job card said the employees task was “testing a prototype” – that is an example of a development activity.
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