You are a manager in the audit department of Pigeon & Co, a firm of Chartered Certified Accountants. You are responsible for the audit of Goldfinch Gas Co, a company which is the main supplier of gas to business and residential customers across the country.

The audit fieldwork for the year ended 30 June 2017 is nearing completion. The draft financial statements recognise profit before tax of $130 million (2016 – $110 million), and total assets of $1,900 million (2016 – $1,878 million).

You are reviewing the audit files and the following matters have been noted for your attention by the audit senior:

(a) Decommissioning provision
A provision of $430 million (2016 – $488 million) is recognised as a long-term liability. The provision is in respect of decommissioning a number of gas production and storage facilities when they are at the end of their useful lives. The estimate of the decommissioning costs has been based on price levels and technology at the reporting date, and discounted to present value using an interest rate of 8% (2016 – 6%). The timing of decommissioning payments is dependent on the estimated useful lives of the facilities but is expected to occur by 2046, with the majority of the provision being utilised between 2025 and 2040.

The accounting policy note discusses the methodology used by management for determining the value of the decommissioning provision and states that this is an area of critical accounting judgements including key areas of estimation uncertainty. The estimate has been made by management. In previous years, a management expert was engaged to provide the estimate but as this was expensive, management decided to produce their own estimate for the year ended 30 June 2017. (10 marks)

Required:
Comment on the matters to be considered, and explain the audit evidence you should expect to find during your file review in respect of each of the issues described above.

You are NOT required to explain the potential impact of the matters on the auditor’s opinion or report.

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