PRACTICE MANAGEMENT

GIVU MANUFACTURERS (PTY) LTD operates a manufacturing plant in the Kwa-Zulu Natal province. During the unrests and riots the company’s premises was breached resulting in damages to the buildings and machinery including the looting of inventory from the warehouse. Management estimated the damages to the property to be R 2.4 million, machinery to be R 860,000 and inventory loss of R 720,000. However, the company only received R 3 million (property of R 2 million, machinery of R 400,000 and inventory of R 600,000) from the insurance company. Furthermore, the company received and amount of R 900,000 from the government unrest fund. The company incurred the following expenses to repair the damages to the assets:
(a) R 3 million to repair the damages to the property including an amount of R 500,000 to enhance the security features of the factory and warehouse buildings,
(b) Purchased a machine with a cost of R 1,2 million to replace a machine that was destroyed beyond repair (carrying amount of the machine was R 360,000) and R 300,000 to repair the other damaged machines. The machine that was destroyed beyond repair will be used as spare parts by the maintenance department; and
(c) R 540,000 to replace the inventory that was looted.

The community implemented a campaign with the police to track the goods looted and return goods with an estimated value of R 210,000 to the company. Management decided that the goods returned will be given to the employees, who sacrificed injury in protecting the company’s premises, for no consideration.

The practice was involved in submitting the insurance claim for the company and will also be responsible for conducting the revenue engagement for the reporting period.

Question:

(a) Discuss whether the practice rendering the services of submitting the insurance claim and conducting the review engagement with result in any breach of independence.

(b) Discuss the procedures that the practice should conduct when determining whether the goods returned by the community and the police were disclosed in the financial statements in compliance with the accounting standards.

(c) Discuss the procedures that the practice should follow when determining whether the accounting policies relating to machinery and equipment are appropriate for the company.