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:

(b) Depreciation
The draft statement of financial position includes plant and equipment, unrelated to gas production and storage facilities, with a carrying value of $65 million. There was a change in the estimation technique used to determine the depreciation in respect of these assets during the year. Depreciation was previously calculated on a straight line basis over a 10-year useful life, but from 1 July 2016, the useful life has been amended to 15 years. The finance director explained to the audit team that the review of estimated useful life has been made on the basis that the assets are lasting longer than originally anticipated.

The change in depreciation policy has been accounted for as a prior year adjustment, resulting in an increase of $20 million to property, plant and equipment and to retained earnings. The depreciation expense recognised in draft profit for the year to 30 June 2017 is $12 million (2016 – $15 million). (8 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.