It is 1 July 20X5. You are a manager in the audit department of Peart & Co, a firm of Chartered Certified Accountants, responsible for the audit of Lifeson Ltd for the year ended 31 March 20X5. Lifeson Ltd is an unlisted retail company which is a new audit client of your firm this year. The company’s draft financial statements recognise profit before tax of £2·15 million (20X4 – £1·95 million) and total assets of £13·8 million (20X4 – £12·7million).

The audit is nearly complete and you are reviewing the audit working papers. The audit supervisor has brought the following matters to your attention:

(ii) Investment property
Lifeson Ltd owns a building which it has used as a warehouse to store inventory. On 1 April 20X4 the building, which had not suffered any historic impairments, had a carrying amount based on depreciated historic cost of £323,000 and a fair value of £348,000. On this date, Lifeson Ltd vacated the building and moved the inventory to new larger premises.

Management decided to keep the building in order to rent it out as a storage facility to local businesses and to benefit from any increases in property valuations. On 31 March 20X5, the building had not been let and it had a fair value, according to an external valuer, of £353,000.

The draft financial statements for the current year recognise the building as an investment property at a carrying amount of £353,000 and include a fair value gain of £30,000 in profit before tax for the year. Since reclassification as an investment property, depreciation has not been charged in relation to the building. (6 marks)

Required:
Comment on the matters to be considered and explain the audit evidence you would expect to find during your review of the audit working papers in respect of the issues described above.

Note: The split of the mark allocation is shown against each of the issues above.