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Question 3b

You are the audit manager of Villa & Co and you are currently reviewing the audit files for several of your clients for which the audit fieldwork is complete. The audit seniors have raised the following issues:

Czech Co
Czech Co is a pharmaceutical company and has incurred research expenditure of $2·1m and development expenditure of $3·2m during the year, this has all been capitalised as an intangible asset. Profit before tax is $26·3m.

Dawson Co
Dawson Co’s computerised wages program is backed up daily, however for a period of two months the wages records and the back-ups have been corrupted, and therefore cannot be accessed. Wages and salaries for these two months are $1·1m. Profit before tax is $10m.

For each of the clients above:

(i) Discuss the issue, including an assessment of whether it is material; and (4 marks)

(ii) Describe the impact on the audit report if the issue remains unresolved. (4 marks)

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