You are the manager responsible for the audit of Keffler Co, a limited company engaged in the manufacture of plastic products. The draft financial statements for the year ended 30 September 20X2 show revenue of $47.4 million (20X1 - $43.9 million), profit before taxation of $2 million (20X1 - $2.4 million) and total assets of $33.8 million (20X1 - $25.7 million).
The following issues arising during the final audit have been noted on a schedule of points for your attention.
In October 20X1, Keffler bought the right to use a landfill site for a period of 15 years for $1.1 million.
Keffler expects that the amount of waste that it will need to dump will increase annually and that the site will be completely filled after just ten years. Keffler has charged the following amounts to the statement of profit or loss and other comprehensive income for the year to 30 September 20X2
- $20,000 licence amortisation calculated on a sum-of-digits basis to increase the charge over the useful life of the site
- $100,000 annual provision for restoring the land in 15 years' time
(b)A sale of industrial equipment to Deakin Co in November 20X1 resulted in a loss on disposal of
$0.3 million that has been separately disclosed in the statement of profit or loss and other comprehensive income. The equipment cost $1.2 million when it was purchased in October 1998 and was being depreciated on a straight-line basis over 20 years.
In October 20X2, Keffler was banned by the local government from emptying waste water into a river because the water did not meet minimum standards of cleanliness. Keffler has made a provision of $0.9 million for the technological upgrading of its water purifying process and included $45,000 for the penalties imposed in 'other provisions'.
Required
For each of the above issues:
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 Keffler Co for the year ended 30 September