Discuss the accounting treatment with the management and ensure the treatment is made in accordance with ias 16

Audit risk
Question 81

Darjelling Co included $0,9m in Intangible assets, on the development of new product lines, some of which are in the early stages of their development cycle may result in overstatement of non-current assets to statement of financial position if the company capitalized the development cost whether the cost hadn’t met the criteria required in IAS 38.	Obtain breakdown of cost to ensure that whether the cost meets the criteria required in IAS 38. Review the disclosures related to development cost to check that disclosures are made in accordance with applicable standard.
The company is seeking to expand production and installed a new manufacturing line. The costs related to manufacturing line are purchase price of $2.2m, installation costs of $0.4m and a five-year servicing and maintenance plan costing $0.5m. All these costs are capitalized by the company. According to IAS 16 Property, plant and equipment maintenance plan costing $0.5m shouldn’t be capitalized as a non-current asset instead, it should be charged to the Statement of profit and loss as an expense. There is a risk that non-current has been overstated and expense has been understated to the financial statements. And also, the service costs relate to 5-year period and this represents prepayment. That’s why expenditure must be proportioned to the relevant periods by $0.1m ($0.5m/5) per period. Due to this the prepayment has been understated as well.	Review the purchase documentation for the new manufacturing line to confirm the exact cost of the servicing and relevancy to a five-year period. Discuss the accounting treatment with the management and ensure the treatment is made in accordance with IAS 16.
The company borrowed $4m long term loan from a bank and this loan must appropriately be split between current and non-current liabilities to ensure correct disclosure.	Auditors must confirm that the loan was exactly received. In addition, review the split between current and non-current liabilities and disclosures are made according to applicable accounting standards.
Due to loan received, there should be additional finance cost as the loan has 5% interest. There is a risk that the finance cost has been omitted from the statement profit or loss result in understatement of finance cost and overstatement of profit.	The finance should be recalculated and any increase agreed to loan documentation to confirm 5% interest rate. If there is payment related to interest, it must be agreed to cash book or bank statements to confirm the amount was actually paid and therefore not in payable at the year end.