2 Generally up to 1½ marks for each matter discussed, and 1 mark for each well explained procedure:
(a) (i) Sale and leaseback
Matters:
– Correct determination of materiality
– Substance of transaction is a financing arrangement
– Appears to be a finance leaseback
– Assets and liabilities understated, profit overstated
– Adjustment recommended
– Implications for audit report if not adjusted
– Depreciation should be remeasured
Evidence:
– A copy of the lease, signed by the lessor, and a review of its major clauses to confirm that risk
and reward remains with the Group, and that the arrangement is a finance leaseback
– Review of forecasts and budgets to confirm that economic benefit is expected to be generated
through the continued use of the property complex
– Physical inspection of the property complex to confirm it is being used by the Group
– Confirmation of the fair value of the property complex, possibly using an auditor’s expert
– Evaluation of the expert’s work including the appropriateness of assumptions and use of the
correct financial reporting framework
– Agreement of the $35 million cash proceeds to bank statement and cash book
– Minutes of a discussion with management regarding the accounting treatment and including an
auditor’s request to amend the financial statements
– A copy of insurance documents stating that the Group is responsible for insuring the property
complex
– Recalculation of finance charge and depreciation, with evaluation of the bases of the
calculations