Darjeeling

Question 1

Co has spent $0.9m, which is included within intangible assets, on
the development of new product lines, some of which are in the early stages of their
development cycle.

Answer 1

According IAS-38 intangible assets:
The standard requires to research and development costs -to be expensed.
Only developmental costs be capitalized -intangible assets
Here company has included all expenditure as an IA
Risk of intangible assets being overstated. Expenses being understated.

Response:
Obtain -break down of expenditures-ensure it relates -development of new products
Discuss accounting treatment-ensure accordance with IAS-38

Question 2

Co has capitalized $2.2m, installation costs of $0.4m and
a five‐year servicing and maintenance plan costing $0.5m.

Answer 2

According to IAS-16 PPE,
Cost of asset includes PP+ Directly attributable cost.
IAS-16 does not allows servicing and maintenance cost to
be capitalized.
Maintenance cost-5 year-charged to P & L.
The upfront payment-recognized as Pre payment. for 5 years
As the service-received-Relevant proportion-charged to P & L.
(0.5 m/5)=0.1 m-should charged to P & L
PPE-overstated Prepayments understated

Response:
Review the purchase documentation-confirm the exact cost of servicing and it relates to 5 year period.
Discuss the A/c ing treatment-is in accordance with IAS -16

Question 3

Company borrowed $4m from
the bank which is to be repaid in instalments over eight years and has an interest rate of 5%

Answer 3

Loan need to split correctly-current and non current liabilities.
Current and non current -misstated-is split is incorrect.
Response:
Confirm $ 4 million received.
Split between current and non current -recalculate
Disclosure should be reviewed-ensure compliance with a/c ing standard and local legislation
Obtain bank confirmation letter-review for any security.

Question 4

The finance cost is 5%.

Answer 4

Risk -omission of finance cost from P&L
Results-understated finance cost overstated profits.
Response:
Finance cost should be recalculated
Interest payment should be agreed to cash book and bank statement.

Question 5

Company intends to
undertake a stock exchange listing in the next 12 months

Answer 5

Co will need to present FS which show the best possible position and performance.
Risk of manipulation of FS.

Response:
Deploy experienced audit team
Adequate time should be allocated for team members- to understand the company
Maintain professional skepticism.
Alert to risk.
Significant estimates and judgments -reviewed
Audit team breifing.

Question 6

Company offered extended credit terms to customers in order to boost revenue.

Answer 6

Increased risk over the recoverability of the receivables.
Receivables’ overvalued
Expensed understated.
Response:
Review the test of controls-surrounding to identify the recoverability of receivables.
Extended post year end cash receipts testing
Review the aged receivables ledger
Consider the adequacy of any allowance of receivables.

Question 7

Co announced Price promise. that
it would match the prices of any competitor for similar products purchased. Customers who
are able to prove that they could purchase the products cheaper elsewhere are asked to
claim the difference from Darjeeling Co, within one month of the date of purchase of goods,
via its website.

Answer 7

Co should account price promise as the in accordance with IFRS-15
The company-may required to pay refund.
this amount should be recognized as refund liability.
one month-completed-recognize as revenue.
highly subjective area-new to the area,
Overstated revenue,

Response:
Discuss the mgt the basis of refund liability $ 0.25 m,
Obtain supporting documentation to confirm the Reasonableness of the assumptions calculations.

Question 8

Darjeeling Co has stopped further sales of
one of its paint products and a product
recall has been initiated for any goods sold
since June.0

Answer 8

Results in refund to cusotmers.
Sales will have to removed from the previous FS
refund liability recognised
inventory will have to be updated-written down value.
Overstated revenue
Response:
review the list of sales of the paint product made between june and the date of recall
Agree the sales has been removed
inventory included
Refund should be paid-if not review the current liabilties.

Question 9

Management is investigating whether the paint consistency of the faulty products can be
rectified and subsequently sold.

Answer 9

inventory may be overvalued as its NRV below its cost
Response:
confirm cost and NRV of the affected paint products held in inventory on a line line by basis
Discuss with Finance director-any write down will be made ,any modification required to rectify the product.