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Ques – You are planning the audit of Veryan Co, a new audit client which operates in the oil & gas
exploration industry.
Companies wishing to operate in this industry require a licence which is valid for 20 years. Veryan
Co has been in existence for 30 years and has grown its revenue at an average of 12% per annum.
During your planning meeting you were informed that the forecast profit before tax for this
financial year is $9.5 million (prior year: $6 million) based on revenues of $124 million (prior year:
$100 million).
The audit risk assessment has identified the following areas as significant risks of material
misstatement:
? Overstatement of receivables due to long outstanding debts
? Misstatement of intangible assets (licences) due to incorrect amortisation
? Overstatement of non?current assets due to impairment of exploration areas which have
been decommissioned
Ques – Match the audit risks identified with the MOST appropriate response the auditor of
Veryan Co should take for Non?current assets :
1)Physically inspect a sample of exploration areas
2)Contact a sample of customers to confirm the year?end balance
3) Ask management to adjust the financial statements
4)Review the depreciation charge for adequacy
My question – As per answer it is 4th but why cant we physically inspect it?First thing to say about this Q is that “oil and exploration” is a specialist area – you will not be examined on it in any way that requires specialist knowledge. Accounting for impairment (IAS 36) is also not examinable in AA because it is an FR examinable doc – not an FA examinable doc.
The exploration area will not be a non-current asset in the company’s books – it is the licence to explore the area that will be capitalised (as an intangible asset). The non-current assets will include, for example, oil rigs, platforms and drilling equipment. Yes, in theory, an auditor could go off in a helicopter across the North Sea and inspect rigs through binoculars – but the identified assertion at risk is not existence but valuation – so the MOST appropriate response concerns depreciation.
Ohh…now I get it..since it is a valuation assertion and not existence we will go for 4th option.. now get it thanks !
Excellent! You have learnt a really important lesson – when it comes to substantive procedures in section C of the exam – any that are not relevant to a given assertion will earn no marks.
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