You are the partner responsible for performing an engagement quality control review on the

audit of Snipe Co. You are currently reviewing the audit working papers and draft audit report on the financial statements of Snipe Co for the year ended 31 January 2012. The draft financial statements recognise revenue of $8·5 million, profit before tax of $1 million, and total assets of $175 million.

(a) During the year Snipe Co’s factory was extended by the self-construction of a new processing area, at a total cost of $5 million. Included in the costs capitalised are borrowing costs of $100,000, incurred during the six-month period of construction. A loan of $4 million carrying an interest rate of 5% was taken out in respect of the construction on 1 March 2011, when construction started. The new processing area was ready for use on 1 September 2011, and began to be used on 1 December 2011. Its estimated useful life is 15 years.

Required:

In respect of your file review of non-current assets:

Comment on the matters that should be considered, and the evidence you would expect to find regarding the new processing area. (8 marks)

(b) Snipe Co has in place a defined benefit pension plan for its employees. An actuarial valuation on 31 January 2012 indicated that the plan is in deficit by $10·5 million. The deficit is not recognised in the statement of financial position. An extract from the draft audit report is given below:

Auditor’s opinion

In our opinion, because of the significance of the matter discussed below, the financial statements do not give a true and fair view of the financial position of Snipe Co as at 31 January 2012, and of its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards.

Explanation of adverse opinion in relation to pension

The financial statements do not include the company’s pension plan. This deliberate omission contravenes accepted accounting practice and means that the accounts are not properly prepared.

Required:

Critically appraise the extract from the proposed audit report of Snipe Co for the year ended 31 January 2012.

Note: you are NOT required to re-draft the extract of the audit report. (7 marks)