Reference no: EM132017332

High Star Pte. Ltd. (“HS”) is a company that is licensed to operate and offer classes for professional business, finance and accounting courses. Since incorporation, it operates from two buildings, Block A and Block B, in a campus sited on a parcel of freehold land. The two buildings comprise lecture halls, seminar and tutorial rooms, staff offices, a library and an administration office. The halls, rooms and offices are adequately equipped with the “pre-requisite” teaching equipment and furniture, comprising tables and chairs, and fittings as well as the current state-of-the-art electronic and electrical teaching equipment. To cater for the planned expansion of the school, HS began constructing a new building, Block C, two years ago and it was completed in August 2015 just before the new session began in October 2015. A similar “suite” of pre-requisite teaching equipment and furniture was acquired to equip the new building,

As audit senior at ACC LLP, you have been assigned to the audit of the financial statements of HS for the financial year ended 30 September 2015. In the early stages of the final audit, in October 2015, you made the following observations. The Accountant went on a 90-day maternity leave from 15 August 2015. The newly-hired Accounts Assistant, Jane, was tasked to close the books for the financial year ended 30 September 2015 before the commencement of the audit. The last batch of tables and chairs for the last two seminar rooms in the new building (Block C) arrived on 15 September 2015. They were ready for intended use immediately. The invoice for this last batch of tables and chairs amounting to $80,000 was received by HS on 15 October 2015. Jane was unaware of the delivery of the tables and chairs, and the invoice and payment were not accounted for in the closing of books for the year. As you toured Block C, you observed that all the halls, rooms and offices were fully equipped as planned. An invoice amounting to $50,000 for the routine servicing of the state-of-the-art electronic and electrical teaching equipment was received on 15 September 2015. In closing the books for the year, Jane capitalized the amount as cost of equipment. In a meeting of the Board of Directors on 15 September 2015, it was resolved that the tables and chairs for the tutorial rooms in Block A and Block B be replaced and scrapped by the first quarter of the next financial year. The tables and chairs have no scrap value. As at 1 October 2014, these tables and chairs had a remaining useful life of three years and the carrying amount of these tables and chairs as at 1 October 2014 was $45,000. In closing the books for the year, Jane charged $15,000 (i.e., $45,000 carrying amount as at 1 October 2014 divided by 3 years of remaining useful life) as depreciation expense in the profit or loss. The accounting policy of HS requires HS to account for freehold land (PPE) at revaluation less impairment, and revalue the land at regular intervals of five years. The five year cycle for the revaluation of the land was due for the financial year ended 30 September 2015. As the Accountant was on maternity leave, no arrangement was made to commission for the revaluation. Jane, on realising this, hastily contacted a personal friend, who had recently graduated and now runs a small valuation firm, Any How Valuers Pte Ltd (“AHV”), to provide valuation services on the freehold land. You noted that the fees paid to AHV was significantly higher than the normal range of fees for similar valuation services and that HS is AHV’s first and only client to-date. Based on the valuation report, the parcel of freehold land on which the buildings are located had a revalued amount of $3,500,000. As at 1 October 2014, the carrying amount and revaluation reserve were $3,300,000 and $20,000, respectively. In closing the books, Jane accounted for the revaluation surplus of $200,000 in the profit or loss account. The accounting policy requires HS to provide for a full year’s depreciation in the year of acquisition/disposal for assets which have been in use for more than six months in the year.

(a) Discuss the implications to the audit approach arising from the Accountant’s 90-day maternity leave.

(b) Identify and explain the accounting issues and errors which could result in risk of material misstatements to the financial statements.

(c) For each accounting issue and error identified in Part (b), suggest one (1) audit procedure which would enable you to determine the extent of misstatement. (d) For the purposes of this part of the question, assume that the valuation report prepared by AHV is acceptable for audit purposes. Assuming that the overall materiality level for this audit engagement is set at $150,000, and the accounting issues and errors identified in part (b) were the only errors noted in the audit, determine the effect of the misstatements on your audit opinion (include quantifying the misstatements and assessing their effects on specific accounts)