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While reading examiner’s report for Dec 2015 exams, I came across the following:
Candidates were required to discuss the implication on the audit report if an issue surrounding research and development costs remained unresolved. Most candidates stated the issue, being that the project did not meet the capitalisation criteria, however few candidates explained the impact on the financial statements e.g. assets would be overstated and profit understated.
My question are:
1) If research and development costs are incorrectly classified and capitalised wouldn’t the assets and profit be overstated? Since an expense was recorded as an asset?2) What would be the implication on the audit report if this remained unresolved? Would this require a qualified opinion depending on whether it is material or not?
I can’t see how your first question differs from what the examiner said.
Your second point is correct. If the overstatement in assets or profit were material then a modified opinion would be needed. This would probably be a qualified opinion, but if the misstatements were pervasive then an adverse opinion would be needed.
Ok Thanks. For the first question the examiner stated profits would be understated. However, I think it would be overstated.
Ahh….yes, I see the error now. You are correct. Profits would be overstated, not understated as the examiner said. Well spotted.
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