(a) (i) Additional information needed to plan the audit of land includes the following:
– Details of the reason for the purchase, to understand the business rationale, e.g. is the land held for capital appreciation?
– Does management have any specific plans for how Faster Jets Co may make use of the land in the future, e.g. are there plans to construct buildings and if so what will be their purpose?
– The date of purchase to ascertain how long it has taken for the land to increase in value by $2 million and whether this seems reasonable.
– Whether the land was purchased for cash or if finance was taken out to raise the $12·5 million paid.
– Who is renting the land? This could establish whether the arrangement is with a related party.
– The type of rental arrangement and whether it constitutes a finance or operating lease.
– What is the land being used for? As the legal owner, Faster Jets Co should be aware of its use and any associated risks, e.g. activities close to airports may convey security risks, e.g. terrorism.
– The location of the purchased land – this is necessary to plan the logistics of the audit.
– Does the company hold any other investment property, and if so, is that also held at fair value? The accounting treatment should be consistent for all investment property.
– What is management’s rationale for the accounting policy choice to measure the land at fair value? It will result in profit for the year including the $2 million fair value increase.
– Establish who holds the title deeds to the land as this may need to be inspected.
(ii) Matters to consider before placing reliance on the work of the auditor’s expert
ISA 620 Using the Work of an Auditor’s Expert contains requirements relating to the objectivity and capabilities of the auditor’s expert, the scope and objectives of their work, and assessing their work.
Objectivity
According to ISA 620, the auditor shall evaluate whether the auditor’s expert has the necessary objectivity and that this should include inquiry regarding interests and relationships which may create a threat to the expert’s objectivity. The audit firm will need to ensure that the expert has no connection to Faster Jets Co, for example, that they are not a related party of the company or any person in a position of influence over the financial statements. If the expert’s objectivity is threatened, less reliance can be placed on their work.
Competence
ISA 620 also requires the competence of the expert to be considered; this should include considering the expert’s membership of appropriate professional bodies. Any doubts over the competence of the expert will reduce the reliability of audit evidence obtained. The expert should in this case have experience in valuing land, and be familiar with the framework for measuring fair value in accordance with IAS 40 Investment Property and IFRS 13 Fair Value Measurement.
Scope of work
ISA 620 requires the auditor to agree the scope of work with the expert. This may include agreement of the objectives of the work, how the expert’s work will be used by the auditor and the methodology and key assumptions to be used. In assessing the work performed by the expert, the auditor should confirm that the scope of the work is as agreed at the start of the engagement. If the expert has deviated from the agreed scope of work, it is likely to be less relevant and reliable.
Relevance of conclusions
ISA 620 states that the auditor shall evaluate the relevance and adequacy of the expert’s findings or conclusions. This will involve consideration of the source data which was used, the appropriateness of assumptions and the reasons for any changes in methodology or assumptions. The conclusion should be consistent with other relevant audit findings and with the auditor’s general understanding of the business. Any inconsistencies should be investigated as they may indicate evidence which is not reliable.
(b) (i) The difficulties in measuring and reporting on social and environmental performance
It is common for companies to produce a report on corporate social responsibility (CSR), and in some countries this is a requirement. CSR reports contain a wide variety of key performance indicators (KPIs) relating to the social and environmental targets which the company is aiming to achieve. It can be difficult to measure and report on social and environmental KPIs for a number of reasons.
Measurements of social and environmental performance are not always easy to define. For example, Faster Jets Co aims to develop an education programme, which is vague in terms of measurement. The measurement only becomes precisely defined when a KPI which is capable of being quantified is attached to it, for example, the number of free education days provided in a year.
It can also be difficult to identify key stakeholders and the KPIs which each stakeholder group is interested in.
Also, targets and KPIs may be difficult to quantify in monetary terms. For example, Faster Jets Co’s provision of free flights to charitable organisations can be quantified in terms of the number of flights donated, but the actual value of the flights is more questionable as this could be measured at cost price or market value. The monetary value may not even be very relevant to users of the CSR report.
In addition, systems and controls are often not established well enough to allow accurate measurement, and the measurement of social and environmental matters may not be based on reliable evidence. However, this is not always the case, for example, the accounting system should be able to determine accurately the amount of cash donated to charity and the amount spent on vehicle fuel.
Finally, it is hard to compare these targets and KPIs between companies, as they are not strictly defined, so each company will set its own target. It will also be difficult to make year on year comparisons for the same company, as targets may change in response to business activities.
(ii) Procedures to gain assurance on the validity of the performance measures
– Obtain a summary of all amounts donated to charitable causes and agree a sample to the cash book.
– For large donations above a certain limit (say $10,000) confirm that authorisation for the payment has been made, e.g. by agreeing to minutes of management meetings.
– Review correspondence with charities for confirmation of the amounts paid.
– Review relevant press releases and publicity campaigns, e.g. the free flight scheme and the local education schemes are likely to have been publicised.
– For the $750,000 spent on the local education scheme, obtain a breakdown of the amounts spent and scrutinise to ensure all relate to the scheme, e.g. payments to educators.
– Obtain a sample of classroom registers to confirm attendance of children on certain days.
– For the free flights donated to charity, perform analytical review to confirm that the average value of a flight seems reasonable – the average being $700 ($560,000/800).
– For a sample of the 800 free flights, obtain confirmation that the passenger was a guest of Faster Jets Co, e.g. through correspondence with the passenger and relevant charity. 
– Agree a sample of business miles travelled in vehicles to a mileage log, and fuel costs to employee expenses claims forms and the general ledger.