Australian Accounting Standards Board

Questions: 1. The value of the write off for the Allowance for Doubtful Debts is inadequate .Management are unwilling to adjust it although the amount leads to a material misstatement of Accounts Receivable.2.A retailer provides a valuation for inventory at sales price less an allowance for sales margin.3.The Block company has just been advised that its main customer who purchases 45% of its stock has just gone into liquidation.Due to the specific nature of its products Block company is unlikely to find another customer of this size.Block has been starting to have difficulties in making sufficient sales to continue operating.4.The Croucher company has been valuing its buildings using the fair value method .Its buildings are currently shown in the balance sheet at their current market value of 18.5 million. The buildings had originally cost 12 million.5.The Kaycee company values its inventory at LIFO and is unwilling to change it to FIFO as required by the Australian accounting standards.The amo unt of the misstatement is known and is limited to its effect on the inventory .6.The Genome company has prepared its financial statements but has left out details of its related party disclosures due to privacy issues.This information is required to be included under the Australian accounting standards and while the effects are material they are able to be calculated. Answers: 1. According to Australian Accounting Standards Board, AASB 108, provision for bad debts is an estimate made by the company and any changes in such estimates do not result in prior period items or correction of errors. Such change shall be recognised prospectively by the company in the period of change and in such other periods, which are materially affected. It implies there should not be any retrospective amendments. In case of material misstatements, the auditor should revise the audit planning and perform additional procedures. The auditor should further communicate with the appropriate level of management and ask them to adjust. If the management adjusts, then ok else issue a qualified or adverse opinion in the audit report. 2. According to Australian Accounting Standards Board, AASB 102, inventory should be valued at cost or net realisable value, whichever is lower. In the given case, the retailer values inventory at sales less sales margin, which is Incorrect. Hence, the auditor should ask the management to adjust such discrepancy, else issue a qualified or adverse audit opinion. 3. The auditor should carefully analyse the impact of the main customer, as his impact on the business of The Block Company is material as he purchases 45% of the stock of the company. The auditor should consider it as a material effect and make adequate disclosures about the same in his audit report. 4. According to Australian Accounting Standards Board, AASB 116, any property, plant or equipment, from which any economic future benefits are derived shall be measured and recognised at cost only. In the given case, the buildings would be valued and shown in balance sheet at the cost only, i.e. at $ 12 million. Hence, the auditor should ask the management to adjust such discrepancy, else issue a qualified or adverse audit opinion 5. According to Australian Accounting Standards Board, AASB 102, the inventories should be valued according to the First in first out method (FIFO) or the weighted average formula. Since the company refuses to change its cost formula to FIFO, as an auditor, you can give a qualified or adverse audit opinion. 6. According to Australian laws, the management of the company is responsible for the identification, disclosure and accounting of the related party transactions. If the auditor find that such related party disclosures are not being made, then, he should decide whether the financial statements of the company are misleading due to the above effects and if yes, then communicate it with those charged with governance and reflect in the audit report as qualified/ adverse opinion.