(b) You are responsible for the audit of Basking Co, a large, listed package delivery company. The audit of the financial statements for the year ended 31 July 2017 is nearly complete and you are reviewing the audit working papers. The financial statements recognise revenue of $56,360 million (2016 – $56,245 million), profit for the year of $2,550 million (2016 – $2,630 million) and total assets of $37,546 million (2016 – $38,765 million).

The uncorrected misstatements identified during the audit of Basking Co are described below. The audit engagement partner is holding a meeting with the management team of Basking Co next week, at which the uncorrected misstatements will be discussed.

(1) The accuracy of the depreciation charge was investigated for a sample of motor vehicles with a carrying value of $4·5 million. The investigation revealed that the accounting system had failed to correctly depreciate vehicles acquired during the year. Consequently, depreciation in the sample had been understated, and the carrying value of the vehicles overstated, by $350,000. The total value of all motor vehicles at the year end was $125 million (2016 – $131 million).

(2) In January 2017, the board of Basking Co approved a loan to, Mrs C Angel, who is a key member of the senior management team of the company. The total amount of the loan was $75,000. Following a review of the board minutes, it was discovered that the directors agreed that the amount was clearly trivial and have, therefore, not disclosed the loan in the notes to the financial statements.

(3) During the year Basking Co reduced the value of their provision for customer refunds which is recognised in the financial statements. For the past five years the value of the provision has been calculated based on 7% of one month’s sales, using an average monthly sales value. Management argued that due to improved internal processing systems, such a high rate of provision was no longer necessary and reduced it to 4%. Audit procedures found that refund levels were similar to previous years and there was insufficient evidence at this early stage to confirm whether the new system was more effective or not.

Required:
For each of the matters described above:

(ii) Assuming that management does not adjust the misstatements identified, evaluate the effect of each on the audit opinion.

Note: The total marks will be split equally between each matter. (15 marks)