(b) You are the manager responsible for the audit of Awdry Co, a listed entity whose principal activity is the operation of a regional railway network. The audit for the year ended 28 February 20X9 is the first year your firm has audited Awdry Co. The draft financial statements recognise total assets of £58 million and profit before tax of £7·4 million. The detailed audit fieldwork has started and the audit supervisor has brought the following matters to your attention in relation to the testing of key accounting estimates:

(iii) Property development
 Awdry Co owns an industrial property which it has historically used as a maintenance depot for its engines and carriages. The company has an accounting policy of revaluing its properties to fair value and at the interim audit it was noted that the depot was recorded at a carrying amount of £2·5 million in the non-current asset register. During the first week of the audit fieldwork, the audit supervisor identified a year-end journal which has uplifted the depot to a fair value of £4·9 million in this year’s statement of financial position as at 28 February 20X9. Management has advised that this represents the estimated sales value of the building following Awdry Co’s plan to develop the building as a residential property. The client has confirmed that the property is suitable for conversion into residential apartments at an estimated cost of £1·2 million and has negotiated secured finance for the development with their bank. The development will be subject to the payment of fees to the local council’s building regulator of £173,000. (5 marks)

Required:
(i) Evaluate the client’s accounting treatments and the difficulties which you might encounter when auditing each of the accounting estimates described above; and

(ii) Design the audit procedures which should now be performed to gather sufficient and appropriate audit evidence.

Note: The split of the mark allocation is shown against each of the issues above