50.1K

Verified Solution

Link Copied!

Investment properties relate to three pieces of leasehold land (5,367 acres) held by the group under long term lease arrangements and a freehold parcel in kikambala. The fair value of the investment property is based on the valuation carried out by regent valuers international (k) limited independent valuers, on the basis of open market value (level 3) as adjusted for the estimated cost of eviction of squatters as explained below. The valuer is a registered valuer and has recent experience in the location and the category of the investment being valued.

The group assets have been charged to secure loan as disclosed in note 23.

Approximately 40% of the investment properties currently occupied by squatters. The company continues to pursue several avenues to reclaim the occupied properties. The estimated cost of evicting squatters amounting to sh. 376,904,000 has been adjusted in arriving at the value of investment properties.

Management has used significant judgement and assumptions in determining the appropriateness of classification of the encroached land as investment property and in arriving at the cost of evicting squatters. Given the subjective nature of the estimate it is possible that outcomes that are different from the assumption could require a material adjustment to the carrying amount of the asset. The main estimates and assumptions relate to:

• The period requires to evict the squatters
• Security resource required and their cost
• Legal cost

Despite the encroachment, the directors believe that the land occupied by squatters has an economic value to the group based on the offers already received for it and a commitment from the government to facilitates eviction as necessary. It is therefore appropriate to continue classifying the land as investment property.

Required

1. Discuss indicators of management bias in audit of fair value accounting estimates that must be considered by the auditor in accordance with the requirement of ISA 540 and in specific reference of the above case.
2. Discuss how the auditor should respond to the assessed risk of material misstatement arising from fair value estimate in the above case
3. Discuss the overall audit procedure in relation to accounting estimates
4. If the information provided to the valuer is inconsistent with the information provided to the auditor prepare the except for paragraph for inclusion in the auditor report.

Answer & Explanation Solved by verified expert

See Answer