You are currently engaged in the external audit of Supa Glass Limited (SG) for the year ended

Question

31 August 2018. SG is listed on the JSE Securities Exchange. The audit must be completed
before 15 September 2018.
SG is a new audit client to your audit firm and you have already gathered information to gain
an understanding of the entity and its environment, including its system of internal control.
STRATEGIC OVERVIEW
SG is a highly focused business based on a customer-driven culture that places partnerships
with customers at the core of its business. Their drive for operational excellence has enabled
the delivery of lower costs, improved efficiencies and innovative products.
Strong cashflows from operations in previous years have enabled the group to comfortably
fund investments in capacity and its existing operations and to expand capacity. In the
current financial year, operating profit has however been negatively impacted by the effect
of a strong rand on selling prices of tableware which competes directly with imported
products. The company has therefore decided to increase exports and to also sell to smaller
customers from a warehouse in Kempton Park. A long-term lease agreement has been
entered into for the warehouse.
Commercial container glass is made by melting sand, soda ash and limestone in furnaces
using recycled glass ("cullet"). The loading bin of the furnace is filled with a batch of these
raw materials. The raw materials are continuously fed to the furnace where these are
converted to molten glass and maintained at temperatures in excess of 1,500° C. Molten glass
is continuous withdrawn through a channel where it flows to the refinery area of the furnace
and is cooled to approximately 1,100° C, before being distributed to the various glass-making
machines via the forehearths.
The molten glass then enters the feeder in the bottle-making machine, where the molten glass
is cut into pieces of predetermined weight ("gobs"). Each of which is required to make a single
bottle. These gobs of molten glass are then individually fed into moulds.
The furnaces are fully computerised and critical parameters are controlled within very close
tolerance margins. SG's furnaces are designed to be the most modern in the world with a
production flexibility of more than ten years. The lifespan of the refractory (lining) part of the
furnace is only three years. The company must rebuild a furnace after the three-year lifespan
of the refractory by replacing only the refractory of the furnace.
PROPERTY, PLANT AND EQUIPMENT
Accounting policy: Property, plant and equipment Property, plant and equipment are carried
at cost, less accumulated depreciation and impairment losses. Depreciation is charged on a
straight-line basis over the estimated useful lives of each component of an item of property,
plant and equipment. Land is not depreciated. The estimated useful life of plant and
machinery is between three and ten years. Where appropriate, and if material, expected
residual values are taken into account in determining the depreciable values of assets.
Accounting policy: Investment property Investment property is stated at fair value in the
balance sheet date. Gains or losses arising from changes in the fair value of investment
property are included in profit or loss for the period in which they arise.
Acquisitions Capital expenditure of SG amounted to R416 million in the current year. The
capital expenditure projects were:
 Cullet expenditure of R116 million - refractory rebuilt at the end of its three-year
useful life;
 Glass recycling cullet plant in Pretoria, constructed by an established international
engineering company;
 Glass forming machines at the Wadeville plant, bought in Italy and installed by the
company; and
 A third furnace at the glass manufacturing plant in Clayville, constructed by an
established international firm.
The glass manufacturing facilities operated at full capacity and also above the standard
efficiency. In addition to the above capital projects, the Bellville furnace will be rebuilt during
July 2019. The estimated cost of the project, adding 50 000 tons of capacity. This will result
in a 25% increase in the total glass capacity of SG.
Disposals SG sold special glass-blowing equipment, used for the manufacture of lead-cut
glass, with effect from the White River studio. The artist and this equipment was on loan/hire
to SG from the artist's studio due to delays by the building contractors in the completion of
his studio. The equipment had already been packaged and full payment for the equipment
was received, but the artist requested the company not to deliver it. Ownership of the
equipment still lies in White River.
Investment property The investment property relates to properties that are no longer needed
for retail purposes and are available for rental to third parties. The fair value of the
investment
property was determined by the estate agent responsible for the management of the
company's property portfolio.

REQUIRED:
(a) Based on the information provided and as part of the formulation of your audit plan,
identify the risks of material misstatement at the assertion level for the account balance of
property, plant and equipment. For each of the risks identified, also indicate which
assertion(s) will be affected by the risk. Do not deal with assertions concerning presentation
and disclosure. (20)
(b) Describe the audit procedures that you should perform in respect of the acquisition and
disposal of property, plant and equipment during the year and the valuation and allocation
of property, plant and equipment for the year ended 31 August 2018 at Supa Glass Limited.

Answer 1

(a) Risks of Material Misstatement at the Assertion Level for Property, Plant and Equipment

1. Risk of Improper Capitalization of Expenditures

• Description: There is a risk that capital expenditures may be incorrectly capitalized instead of being expensed. For example, operating expenses might be recorded as capital improvements.
• Affected Assertions:
  • Existence: Incorrectly capitalized expenditures may lead to overstated balances.
  • Completeness: There could be missing or omitted costs that should be included in the asset values.
  • Valuation: The assets may not be recorded at their appropriate values.

2. Risk of Overstated Useful Lives and Residual Values

• Description: The estimated useful lives and residual values of property, plant, and equipment may not reflect the actual expected periods of use and values at the end of useful life, potentially leading to inadequate depreciation expense recognition.
• Affected Assertions:
  • Valuation: Inaccurate estimates could result in an overstated asset balance.
  • Allocation: Assets may not be allocated correctly to the appropriate period for depreciation.

3. Risk of Impairment

• Description: There is a risk that property, plant, and equipment may be impaired due to changes in market conditions or operational functionality, and that such impairment is not recognized or measured appropriately.
• Affected Assertions:
  • Valuation: Failure to value assets properly may lead to overstatement of asset values.

4. Risk of Ownership Issues Related to Disposals

• Description: The sale of glass-blowing equipment while ownership remains with the artist could result in misstatements regarding asset disposals.
• Affected Assertions:
  • Existence: The asset should not be recorded as disposed if ownership has not transferred.
  • Rights and Obligations: There may be a lack of clear ownership documentation affecting the company’s rights to the equipment.

5. Risk of Incorrect Fair Value Measurement for Investment Property

• Description: The valuation of investment property is based on estimations and assumptions which might not reflect fair market conditions.
• Affected Assertions:
  • Valuation: Fair value might not be correctly determined leading to misstated values.

6. Risk Related to Inadequate Disclosure of The Rebuilt Furnace

• Description: The need to rebuild the furnace presents a risk concerning the timing and proper allocation of costs to the asset.
• Affected Assertions:
  • Valuation: Incorrectly including or excluding costs related to the future rebuild may distort asset valuation.

(b) Audit Procedures for Acquisition and Disposal of Property, Plant, and Equipment

1. Acquisition Procedures

• Review Supporting Documentation: Obtain and verify contracts, invoices, and payment records for capital expenditures to ensure they relate to property, plant, and equipment.
• Test Capitalization Policies: Review the company’s policies for capitalization to check compliance with applicable accounting standards (e.g., IFRS) and confirm that such policies are consistently applied.
• Evaluate Useful Lives and Residual Values: Test assumptions regarding useful lives and residual value estimates on selected assets against industry standards and company experience.
• Inspect Physical Assets: Physically inspect significant capitalized assets to confirm their existence and assess whether they are being utilized as intended.
• Assessment of Asset Condition: Evaluate if additions (e.g., the glass recycling plant and furnace) are functioning effectively and make note of any impairments that could exist.

2. Disposal Procedures

• Review Disposal Records: Inspect the documentation related to the disposal of the glass-blowing equipment to ensure accurate recording of the transaction and the receipt of payment.
• Confirm Legal Ownership: Verify ownership resolve regarding the glass-blowing equipment; consult legal documentation to understand ownership challenges and assess the accounting treatment.
• Assess Impact on Financial Statements: Determine how the disposal impacts the financial statements, including assessing potential gains/losses.

3. Valuation and Allocation Procedures

• Evaluate Fair Value Estimates: For investment properties, review the valuation methods used by the estate agent and assess their appropriateness for measuring fair value in line with the company’s accounting policies.
• Perform Impairment Tests: Conduct necessary impairment testing on property and equipment according to relevant accounting standards, especially considering changes in market conditions or any signs of impairment.
• Review Depreciation Calculations: Test the calculations of depreciation expense for property, plant, and equipment to ensure accuracy based on the established useful lives and residual values.
• Related Party Transactions: If applicable, identify and evaluate any related party transactions in relation to property plant and equipment to ensure full disclosure and correct accounting treatment.

These audit procedures should address the risks identified and provide assurance regarding the accuracy and completeness of the property, plant, and equipment balances and related disclosures in the financial statements of Supa Glass Limited.