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A) In our given case, the three particular items being accounted for are Las Vegas Group Corporation’s
land, inventory accounting policy and factory reorganization. The key issue in auditing is ensuring that the
inventory with that of property, plant and equipment existence, value and ownership are properly
accounted for with adequate provision for depreciation for given non-current assets ((Leung, Coram,
Cooper, Richardson, pg 672, 2011)). The major key in such case is that of value reconsideration regarding
the following three items. The validating motive behind such new recognition is to properly account for
the values for mentioned items accordingly. The proper valuation of the three items are closely related
with that of materiality that is defined as “… information which if omitted, misstated or not disclosed has
the potential to adversely affect decisions about the allocation of scarce resources made by users of the
financial report or the discharge of accountability by the management, including body of the entity” (Gill,
Cosserat, Leung, Cora, pg 244, 1999). In other words, those valuation were material hence the importance
of its proper valuation for this entity.
The determination of materiality depends upon a company business context. Each are different in terms of
materiality but all follows the idea of a baseline. A baseline is a benchmarking amount that which
determines the materiality level for different accounts within different financial statements (Gill, Cosserat,
Leung, Cora, pg 246, 1999). In a balance sheet an appropriate liability or asset or equity is used, in profit
and loss an operating profit or average profit or profit after tax is used and in a cash flows a net cash
provided by operating or financing or investing may be used as appropriate as a baseline (Gill, Cosserat,
Leung, Cora, pg 246, 1999). Generally auditors usually used the following as their evaluation basis for
materiality such as:
Base Materiality threshold %
Gross profit 2.0
Profit before tax 5.0
Total assets 0.1
Equity 1.0
(Source: Whittington, Pany, pg 201, 2012)
Using the above materiality threshold, it is concluded that the minimum materiality level this company on
it total asset is $40,000 for the year 1997. From the $4 million of total asset, $2 million of it include
current asset. Hence the non-current asset total value is $2 million and current asset is $2 million. Thus the
materiality benchmark for $20,000 for both the current asset and non-current asset. From the given
amounts for both the land revaluation with total value of $150,000 and that of factory reorganization with
a total value of $128,000 , it could be concluded that such amount are material hence why the director
adjusted accordingly the values for these two accounts.
Inventory maximum year of consumption had been increased from 2 years to 3 years. This occurred as the
director found the previous financial statement lack the validation to firmly conclude the net realizable
value to be less than it current recorded cost. This implies that there is an issue with in the inventory
valuation and thus the directors further increase their inventory maximum year of consumption to 3 years
in a high hope to get an accurate net realizable value for their 3 years used inventories. Given the
manufacturing nature of such company, the inventories with its cost of goods sold have significant impact
toward both the reported financial position (Gill, Cosserat, Leung, Cora, pg 539, 1999). Hence why it is
crucial for the director to get a specific and accurate valuation for their current inventories for their three
year span of operation.
Further disclosures should be made in order to further improve the quality of the current financial
statement to reach an unqualified audit opinion. In terms of inventory the following disclosures should be
made annually according to IAS 2 under its disclosure section:
The identification with categorization of inventory with their different assigned costing methods
used.
The pledging of inventories with the existence of significant purchase commitments
The existence of binding contracts for future purchases of goods
The accounting policies used in inventories measurement with cost formula
Total carrying amount of current assets according to their classifications
Inventories carrying amount carried at fair value less costs to sell
Inventories write-down amounts recognized as expense in a particular accounting period
Any write-down reversal amounts recognized in its amount of inventory recognized as an expense
Events that result in write-down of inventories
Pledged inventories as security for loan carrying amounts.
In terms of property, plant and equipment valued at cost the following disclosures should be made
annually according to IAS 16 under its disclosure section:
The deprecation methods used with the depreciation expenses
The book value for each class of property, plant and equipment.
Pledged property as security for loans
The depreciation rate or its useful lives
The restriction on title with property, plant and equipment pledged as a liabilities security amount
and existence
Contractual commitments for the acquisition of non-current assets amounts
The compensation amount from third parties for non-current assets that were damaged, given up or
lost included in Performance Statement that is not disclosed in a statement of comprehensive
income.
Disclose the capitalization of the costs regarding senior personnel and engineering design
And for other property, plant and equipment valued other than cost the following disclosures should be
made annually:
The basis of valuation with its current year
Either the valuation is that of a directors’ or independent valuation
The name of the valuer for non-current assets valued in a current year
B) The previous disclosures made for both the inventory and non-current assets are all derived on the basis
on the going concern. The basis of going concern assumes that a company will continue to operate for
infinity. However if the company is about to liquidate then the disclosures for both the inventory and non-
current assets will be then different to suit a business situation. In this specific case where the company is
going to liquidate, then it is required that a company is to disclose its uncertainties and the reason why it
prepare it financial statements without the going concern assumption (IAS 1, pg 24, 2003). In our case the
possible disclosure to be made is that the maximum loan covenant has been reached hence the company
will have to be liquate to account for its liabilities. Thus it is highly reasonable that the disclosures
regarding the inventories will be that of its net realizer value and the carrying amount of non-current assets
in a hopeful attempt to repay its existing debts (ISA 570, pg 559, 2012). The type of audit report to be
issued it that of basis of qualified audit opinion on the audited report that states :
Bibliography:
Gill. G, Cosserat. G, Leung. P, Cora. P, 1999, “Modern Auditing 5th Edition”, John Wiley & Sons
Australia Ltd, Australia.
International accounting Standards Board, 1997, International Accounting Standards, IFRS
Foundation, New York.
International Auditing and Assurance Standards Board, 2012, "Handbook of International Quality
Control, Auditing Review, Other Assurance, and Related Service Pronouncements", International
Federation of Accountants, New York.
Leung. P, Coram. P, Cooper. B, Richardson. P, 2001, “Modern Auditing”, John Wiley & Sons
Australia Ltd, Australia.
Puttick, G. Esch. S, Kana. S, 2007, “The Principles and Practice of Auditing”, Juta & Co. Ltd,
South Africa.
Whittington. R, Pany. K, 2012, “Principles of auditing and other assurance services”, McGraw-
Hill Irwin, New York.