Question

Pineapple Beach Hotel Co. (Pineapple) operates a hotel providing accommodation, leisure facilities, and restaurants. Its year end was April 30, 2016. You are the audit senior of Berry & Co. and are currently preparing the audit program for the year-end audit of Pineapple. You are reviewing the notes of last week’s meeting between the audit manager and controller where the following material issue was discussed.

Pineapple incurred significant capital expenditure during the year on updating the leisure facilities for the hotel. The controller has proposed that the new leisure equipment be depreciated over 10 years using the straight-line method.

Describe substantive procedures to obtain sufficient and appropriate audit evidence in relation to the above issue. (12 Marks)

(Question is 12 marks. Please give detail responses to the question. No short answers will be accepted. Need long answers since its 12 marks)

Answer 1

The auditor should test check the calculations of depreciation and the total depreciation arrived at should be compared with that of the preceding years to identify reasons for variations. He should particularly examine whether the depreciation charge is adequate keeping in view the generally accepted bases of accounting for depreciation.

As per the relevant Revised AS, the auditor must check that each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately. Such part of an item may also have different useful life over which the asset is to be depreciated. For example, it may be appropriate to depreciate separately the airframe and engines of an aircraft, whether owned or subject to a finance lease.

The auditor should review the depreciation method applied to the asset at least at the end of each financial year to confirm that the depreciation charge reflects the usage. A change in the method of depreciation should be treated appropriately as a change in an accounting estimate.

The auditor must verify that those assets under construction or installation are not depreciated until such time they are ready for intended use but these should be tested for impairment, if any