3 You are the manager responsible for the audit of Keffler Co, a private limited

3 You are the manager responsible for the audit of Keffler Co, a private limited company engaged in the manufacture of

plastic products. The draft financial statements for the year ended 31 March 2006 show revenue of $47·4 million

(2005 – $43·9 million), profit before taxation of $2 million (2005 – $2·4 million) and total assets of $33·8 million

(2005 – $25·7 million).

The following issues arising during the final audit have been noted on a schedule of points for your attention:

(a) In April 2005, Keffler bought the right to use a landfill site for a period of 15 years for $1·1 million. Keffler

expects that the amount of waste that it will need to dump will increase annually and that the site will be

completely filled after just ten years. Keffler has charged the following amounts to the income statement for the

year to 31 March 2006:

– $20,000 licence amortisation calculated on a sum-of-digits basis to increase the charge over the useful life

of the site; and

– $100,000 annual provision for restoring the land in 15 years’ time. (9 marks)

Required:

For each of the above issues:

(i) comment on the matters that you should consider; and

(ii) state the audit evidence that you should expect to find,

in undertaking your review of the audit working papers and financial statements of Keffler Co for the year ended

31 March 2006.

NOTE: The mark allocation is shown against each of the three issues.

3 KEFFLER COTutorial note: None of the issues have any bearing on revenue. Therefore any materiality calculations assessed on revenue areinappropriate and will not be awarded marks.(a) Landfill site(i) Matters■ $1·1m cost of the right represents 3·3% of t