You are the auditors of Mount Elgon Ltd. You are carrying out a review of the accounts for the financial year ended 31 October 2004 with a view of signing the audit report. During this review, you have noted the following matters: 1. No depreciation has been provided on plant and machinery for the financial year ended 31 October 2004. This is because the directors of Mount Elgon Ltd. feel that the value of the plant and machinery is in excess of the amount at which it is stated in the financial statements. 2. Some sections of the company‘s stocktaking records were accidentally destroyed. Consequently, the value attributed to stocks as at 31 October 2004 is only an estimation by the directors of Mount Elgon Ltd. Required: What would be your audit opinion with regard to the matter referred to in above and draft an audit report expressing your specific reservations with regard to (2) above

By not providing for depreciation the management have gone against IAS 16 which require every non-current assets to be systematically depreciated over its useful life. If the directors think there is a change in the value of the plant and machinery, IAS 16 dictates that revaluation should be done by a competent and reputable person considering the market or fair value in an active market, then in the value have appreciated the carrying amount of the item should be changed to reflect the new value and depreciated over its useful life. Therefore the directors have no excuse for not depreciating the plant and machinery which have resulted in overstating the profit for the year and total assets of the company.

In an audit opinion I will qualify and include a ‗Expect for‘ paragraph by stating that the financial statements give a true and fair view except for the directors not depreciating plant and machinery.
ii) AUDITOR‘S REPORT Board of Directors,
Onyango & Sons L.t.d.
P.O. Box 29842 Nairobi, City Square.

We were engaged to audit the accompanying balance sheet of Mount Elgon Ltd as of 31 October 2004, and the related statements of income, and cash flows for the year ended. These financial statements are the responsibility of the company‘s management.

We conduct our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation.
In carrying out the audit, we were unable to observe accurate physical inventories and due to limitations placed on the scope of our work by the accident.
Because of the significance of the matters discussed in the preceding paragraph, we do not express an opinion on the financial statement:

Omondi, John
23rd November 2004
P.O. Box 23497 NRB.