Question 3b
Answer

Audit reports

Czech Co
Czech Co has incurred research expenditure of $2·1m and development expenditure of $3·2m and this has all been capitalised within intangible assets. This is contrary to IAS 38 Intangible Assets, as research expenditure should be expensed to profit or loss account rather than capitalised.

The error is material as it represents 8% of profit before tax (2·1m/26·3m) and hence management should adjust the financial statements by removing the research expenditure from intangibles and charging it to profit or loss account instead.

If management refuse to amend this error then the audit report will need to be modified. As management has not complied with IAS 38 and the error is material but not pervasive then a qualified opinion would be necessary.

The basis of opinion paragraph would need to include a paragraph explaining the material misstatement in relation to the provision of depreciation on land and the effect on the financial statements. The opinion paragraph would be qualified ‘except for’.

Dawson Co
Dawson Co’s wages program has been corrupted leading to a loss of payroll data for a period of two months. The auditors should attempt to verify payroll in an alternative manner. If they are unable to do this then payroll for the whole year would not have been verified.

Wages and salaries for the two month period represents 11% of profit before tax (1·1m/10m) and therefore is a material balance for which audit evidence has not been available.

The auditors will need to modify the audit report as they are unable to obtain sufficient appropriate evidence in relation to a material, but not pervasive, element of wages and salaries and therefore a qualified opinion will be required.

The basis of opinion section will be amended to explain the limitation in relation to the lack of evidence over two months of payroll records. The opinion paragraph will be qualified ‘except for’.