Mar/Jun 2016 Q2(a) New Packing Machine

MMarthew7y ago

Hello Kim, The carrying value of the machine at year end is $1.4m, which is below the materiality level $1.5m. The reason why the auditor still need to obtain evidence on the machine is because the machine is purchased in the current year. As such, evidence is required to enable auditor to support audit conclusion on the machine (ie. existence, ownership and valuation). Please correct me if I am wrong. However, if I change the scenario slightly, the machine was puchased 2 years ago (ie. the existence, ownership and valuation have been verified in the previous years), and have a carrying value of $1.4m (ie. not material to financial statements). Does the auditor still need to obtain evidence on the machine? If not, what does the auditor need to do with the machine? Simply ignore it, as it is immaterial. Please correct me if I am wrong. Thank you. Regards, Marthew

KimTutor7y ago#1

There is insufficient evidence and the cost of the machine is material at $1.6m (although carried at less than materiality in the SoFP at the end of the year remember that cost of additions will be disclosed in the movements on property, plant and equipment note in accordance with IAS 16). In your alternative scenario there would not be the same issues and the examiner would not bother to provide so much information unless creating an alternative risk scenario (e.g. one of impairment) - again though, as $1.4m is after charging current year depreciation you would consider the $1.6m to be material.

MMarthew7y ago#2

Hello Kim, I am sorry I do not understand the second paragraph of your answer. If the carrying value of machine is $1.4m (ie. below current year materiality level $1.5m), when determine whether the machine is material or not why we need to consider the cost ($1.6m) of the machine being purchased 2 years ago? Thank you. Regards, Marthew

KimTutor7y ago#3

I meant if the Q indicated that an asset's carrying amount was $1.6 at the beginning of the year (say it originally cost $2m) - you wouldn't just consider the carrying amount after depreciation at the end of the year. It's true that if you already verified acquisition in a previous year you don't "re-audit" it in a later later. (But ongoing existence would be audited through physical inspection on a sample basis.) The examiner isn't going to describe something that is not an issue - so best that you don't make them up.

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