Hi. Good evening. I have doubt in Green Co (audit risk) qn.
The scenario says The company began to refurbish the retail stores in order to incorporate cafes into each one. Refurbishment costs of $14.2m were recognised within PPE.
I have written
The company began to refurbish the retail stores and they have recognised the refurbishment costs of $14.2 m within PPE
There is a risk that some of the refurbishment costs may have been wrongly classified as capital expenditure and not as revenue expenditure resulting in overvaluation of PPE, understatement of operating expenses and overstatement of profit
The auditors response :
Review a breakdown of the $14.2 m to ascertain whether the nature of the expenditure is capital or revenue
Inspect supporting documentation, such as invoices, to confirm that the costs qualify for capitalisation rather than being recognised as revenue expenditure.
Is this correct?