The responsibility of the external auditor is to provide reasonable assurance on the financial statements and to make sure that the material areas of the business are following the accounting standards such as IFRS, IAS or GAAP. In the current scenario of AMC Company, the amount or valuation of the plant assets is 60% of the overall assets of the organization. Therefore, the plant assets are the material area of the business and the external auditor must increase the sampling size of plant asset account’s transactions at the planning stage of the audit. (Stuart, 2012)
The treatment of plant assets must be recorded according to the ASC 360, the treatment of Property, Plant and Equipment. The other relevant accounting standard is IAS 16. In the given scenario of AMC Company, there are certain issues which are conflicting with the accounting standards of ASC 360. (Stuart, 2012)
The AMC accountant Ira states that they are transferring the amount of annual depreciation from the account of non-current assets of the current assets and then settle it by deducting the depreciation charge. This treatment of depreciation is wrong and presents misleading information. The first error is that the financial statements are presenting their assets, lower than their actual value. The depreciation amount for next year has already transferred from the non-current account to current account in prior years, which is against the accrual concept. Moreover, the wrong transferring of the depreciation charge to the current assets will show that the AMC has cash or liquid assets. Therefore, the overvalued current assets will present the wrong position of the business cash or liquid assets. The non-current assets can be transferred to the current asset account on one condition which is the selling of the non-current asset. If the business has had the going concern issues, then the management prepares the financial statements by transferring the non-current assets to the current assets account. (Stuart, 2012)
The treatment of the depreciation is also wrong because it is charged against the current assets of the business. According to the accounting standards, the depreciation must be charged to the relevant asset in the register of non-current assets. By transferring the amount of overall depreciation to the current assets, and then deducting the deprecation from the current assets is the wrong treatment. Therefore, the auditor must ask the management of AMC to maintain the accounts of every plant asset separately and calculate the depreciation of each plant separately. (Stuart, 2012)
The treatment of transferring of the assets is also wrong in the case of AMC Company. The AMC accountant, Irs states that they transfer the portion of the asset in the current assets to settle the depreciation expense. However, the accounting standard says that the assets must be clearly classified according to their attributes. Assets are either classified as ‘non-current assets’ or ‘assets held for sale’. According to the standard, the portion of the asset cannot be transferred. The asset as a whole must be transfer from non-current register to the ‘assets held for sale’ account instead of current account. (Stuart, 2012)
In the current scenario, there is another mistake of the management of AMC. The management of AMC has not conducted any impairment tests or the revaluation test on the plant assets of the business. It is highly probable that the value of plant assets is either undervalued or overvalued. (Stuart, 2012)
Work Cited
Stuart, Richard. "U.S. GAAP VS. IFRS: PROPERTY, PLANT AND EQUIPMENT AND
INVESTMENT PROPERTY AT-A-GLANCE." Dec. 2012. Web. 23 Feb. 2016. <http://rsmus.com/pdf/us-gaap-vs-ifrs-property-plant-equiment.pdf>.
