Question 2 You are an audit manager of Adeoti & Co and you are currently responsible for the audit of Gbadebo limited, a

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Question 2
You are an audit manager of Adeoti & Co and you are
currently responsible for the audit of Gbadebo limited, a company
which develops and manufactures health and beauty products and
distributes these to wholesale customers. Its draft profit before
tax is £6.4m and total assets are £37.2m for the financial year
ended 31 January 20X8. The final audit is due to commence shortly
and the following matters have been brought to your attention:
Research and development:
Gbadebo limited spent £1.9m in the current year developing nine
new health and beauty products, all of which are at different
stages of development. Once they meet the recognition criteria
under IAS 38 Intangible Assets for development expenditure, Gbadebo
limited includes the costs incurred within intangible assets. Once
production commences, the intangible assets are amortised on a
straight line basis over three years. Management believes that this
amortisation policy is a reasonable approximation of the assets’
useful lives, as in this industry there is constant demand for
innovative new products.
Depreciation:
Gbadebo limited has a large portfolio of property, plant and
equipment (PPE). In March 20X7, the company carried out a full
review of all its PPE and updated the useful lives, residual
values, depreciation rates and methods for many categories of
asset. The finance director felt the changes were necessary
to better reflect the use of the assets. This resulted in the
depreciation charge of some assets changing significantly for this
year.
Bonus:
The company’s board is comprised of seven directors. They are
each entitled to a bonus based on the draft year-end net assets,
excluding intangible assets. Details of the bonus entitlement are
included in the directors’ service contracts. The bonus, which
related to the 20X8 year end, was paid to each director in February
20X8 and the costs were accrued and recognised within wages and
salaries for the year ended 31 January 20X8. Separate disclosure of
the bonus, by director, is required by local legislation.
Required:
(i) Describe FIVE substantive procedures the auditor should
perform to obtain sufficient and appropriate audit evidence in
relation to Gbadebo limited’s research and development expenditure.
[7.5 Marks]
(ii) Describe FIVE substantive procedures the auditor should
perform to obtain sufficient and appropriate audit evidence in
relation to the matters identified regarding depreciation of
property, plant and equipment. [7.5 Marks]
(iii) Describe FIVE substantive procedures the auditor should
perform to obtain sufficient and appropriate audit evidence in
relation to the directors’ bonuses. [7.5 Marks]
(iv) During the audit, the team discovers that the intangible
assets balance includes £440,000 related to one of the nine new
health and beauty products development projects, which does not
meet the criteria for capitalisation. As this project is ongoing,
the finance director has suggested that no adjustment is made in
the 20X8 financial statements. She is confident that the project
will meet the criteria for capitalisation in 20X9.
Required: Discuss the impact of the discovery on the true and
fair status of the financial statements and describe the impact on
the auditor’s report, if any, should this issue remain unresolved.
[7.5 Marks]