You are the manager responsible for the audit of Aspersion, a limited liability company, which mainly provides national cargo services with a small fleet of aircraft. The draft accounts for the year ended 30 September 20X8 show profit before taxation of $2.7 million (20X7 - $2.2 million) and total assets of $10.4 million (20X7 - $9.8 million).
The following issues are outstanding and have been left for your attention.
(a) The sale of a cargo carrier to Abra, a private limited company, during the year resulted in a loss on disposal of $400,000. The aircraft cost $1.2 million when it was purchased in September 1999 and was being depreciated on a straight-line basis over 20 years. The minutes of the board meeting at which the sale was approved record that Aspersion's finance director, Iain Joelton, has a 30% equity interest in Abra.
(b) As well as cargo carriers, Aspersion owns two light aircraft which were purchased in 20X5 to provide business passenger flights to a small island under a three year service contract. It is now known that the contract will not be renewed when it expires at the end of March 20X9. The aircraft, which cost $450,000 each, are being depreciated over fifteen years
(c) Deferred tax amounting to $570,000 as at 30 September 20X8 has been calculated relating to accelerated capital allowances at a tax rate of 30% under the full provision method (IAS 12 Income taxes). In a budget statement in October 20X8, the government announced an increase in the corporation tax rate to 34%. The directors are proposing to adjust the draft accounts for the further liability arising.
Required
For each of the above points:
(i) Comment on the matters that you should consider
(ii) State the audit evidence that you should expect to find in undertaking your review of the audit working papers and financial statements of Aspersion.