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  • 3 Marks

AA – Dec 2022 – L2 – Q5c – Audit and Assurance Evidence

Explains three assertions relevant to the audit of tangible non-current assets.

You were recently appointed by Danso & Co Chartered Accountants. You were part of the team that audited a construction company with a huge asset base. Your Manager reviewed your file and raised questions that audit evidence obtained was not relevant since it did not address any assertions of property, plant, and equipment. ISA 500: Audit Evidence requires that audit evidence must be sufficient, relevant, and reliable.

Required:
Explain THREE (3) assertions relevant to the audit of tangible non-current assets

Assertions relevant to the audit of tangible non-current assets:

  • Completeness: Ensuring that all non-current assets are recorded in the financial statements.
  • Existence: Verifying that the assets physically exist and are in the company’s possession.
  • Valuation: Checking that the assets are correctly valued, including the accuracy of depreciation calculations.
    (3 marks)
  • 5 Marks

CR – Mar 2023 – L3 – Q3a – Non-current assets: sundry standards (IAS 16, IAS 23, IAS 20 and IAS 40) ,IAS 36: Impairment of Assets,

Discuss the impairment of a printing machine owned by Dajanso Plc, including necessary computations.

Dajanso Plc owns a number of printing shops across the country. On 1 January 2021, the carrying amount of Dajanso’s largest printing machine was GH¢65 million. The machine had a remaining useful life of five years and a residual value of GH¢7 million using the cost model. Due to a fall in demand for printed books, management conducted an impairment review of the printing machine on 30 June 2021.

At this date, the estimated selling price was GH¢55 million, including GH¢4 million, which would be received after reconditioning the asset. Agent fees would be 5% of the appropriate fair price. If the machine is kept in use, it is estimated to generate real cash flows of GH¢20 million a year over its remaining life (now estimated to be three years), with a revised residual value of GH¢6 million. The following discount rates are applicable:

Rate Type Pre-tax Nominal Pre-tax Real Post-tax Nominal Post-tax Real
Discount Rate (p.a.) 11.9% 8.3% 10.5% 6.6%

Required:
In line with IAS 16 Property, Plant, and Equipment and IAS 36 Impairment of Assets, recommend how Dajanso would account for the plant in its financial statements for the year ended 31 December 2021. Show appropriate computations where necessary.

  • Carrying Amount at 30 June 2021:
    The carrying amount of the machine was GH¢59.2 million (GH¢65 million less depreciation of GH¢5.8 million). Depreciation is calculated as:
    (65−7)×15×612=GH¢5.8million(65 – 7) \times \frac{1}{5} \times \frac{6}{12} = GH¢5.8 million
  • Fair Value Less Cost of Disposal (FVLCOD):
    Fair value: GH¢55 million
    Reconditioning cost: GH¢4 million is included in the fair value, so it does not need to be deducted.
    Less: Agent fees = 5% of GH¢55 million = GH¢2.75 million
    FVLCOD = GH¢52.25 million
  • Value in Use (VIU):
    Discount the estimated real cash flows of GH¢20 million per year over three years, using the pre-tax real discount rate of 8.3%.
    GH¢20million×3−yearannuityfactor(2.563)=GH¢51.26millionGH¢20 million \times 3-year annuity factor (2.563) = GH¢51.26 million
    Residual value = GH¢6 million GH¢6million×3−yeardiscountfactor(0.787)=GH¢4.72millionGH¢6 million \times 3-year discount factor (0.787) = GH¢4.72 million
    Total VIU = GH¢55.98 million
  • Impairment Loss:
    The recoverable amount is the higher of FVLCOD and VIU. Here, VIU is higher at GH¢55.98 million.
    The impairment loss is the difference between the carrying amount and the recoverable amount:
    Impairmentloss=GH¢59.2million−GH¢55.98million=GH¢3.22millionImpairment loss = GH¢59.2 million – GH¢55.98 million = GH¢3.22 million
    This impairment would be recognised in the profit or loss statement.
  • Depreciation:
    After recognising the impairment loss, the machine’s new carrying amount is GH¢55.98 million.
    Depreciation for the remaining six months of the year would be:
    (55.98−6)×13×612=GH¢8.33million(55.98 – 6) \times \frac{1}{3} \times \frac{6}{12} = GH¢8.33 million
    The total depreciation for the year would be GH¢14.13 million (GH¢5.8 million before impairment and GH¢8.33 million after).

Marks Allocation:

  • Carrying amount and depreciation: 0.5 marks
  • Fair value calculation: 1 mark
  • Value in use calculation: 1.5 marks
  • Impairment loss calculation: 0.5 marks
  • Depreciation calculation: 1 mark
    (Total: 5 marks)

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