Accounting Standard (R=risk)

1. IAS 2 Inventory
Inventory must be measured at lower of cost and net realisable value.

Scrap value Slow moving stock Obselete (ready meals)

>Inventory turnover days Obsolete if kept for too long

Average inventory____ x 365 The obsolete items /inventory

Cost of sales / Purchase
IAS 2, must make provision for
slow moving stock.
There is a risk insufficient
provision for slow moving
stock.
must be written off and the
value would be 0.
R: company did not write off
the inventory when it become
obsolete.
I: over inventory and profit.

If not causing overstatement of

asset and profit.

Valuation of inventory – Work in progress

Raw material – purchase invoice
Labour – based on judgement / estimation
Overhead cost – judgement / estimation (Total overhead / average production)
There is inherent risk to value the percentage of completion of WIP. (inventory may over or
understated)
There is risk that WIP has not been properly valued.
There is risk WIP may have been overstated. (especially if the figures increase)
Thus, inventory may be over or understated.

2. IAS 8 Accounting policies, changes in accounting estimates and errors

Accounting estimates – High audit risk (fair value, WIP)

i) Inherent risk
(As the nature is complex, uncertainty, subjectivity, potential deliberate manipulation by
management)

R : Management may not always have the knowledge or experience in making these judgement.
As complex model built on significant assumption.
R : Management may deliberately manipulate accounting estimate to achieve target.
FSCMM

ii) Control risk

(Non-routine transaction)
Management may not have the same level of monitoring and controls to the other accounting process.
 Internal control may fail to prevent and detect valuation error.

iii) Detection risk (outside of our skills) (assign senior staff for complex work)
Auditor may lack of experience and knowledge.
May over rely on the expert’s report.
R : Unable to detect error in valuation and modelling technique applied by the client.

Auditor must perform work with degree of profession scepticism.

Change in accounting policies

Must be done restropectively. (mostly ask on accounting estimates)

IAS 8 which requires the following disclosures in these circumstances:

– the title of the standard or interpretation causing the change

– the nature of the change

– a description of the transitional provisions, including those that might have an effect on future
periods

– for the current period and each prior period presented, to the extent practicable, the amount of the
adjustment:

– for each financial statement line item affected, and

– for basic and diluted earnings per share (only if the entity is applying IAS 33)

– the amount of the adjustment relating to periods before those presented, to the extent practicable

– if retrospective application is impracticable, an explanation and description of how the change in

accounting policy was applied.

Change in accounting estimates

Must be done prospectively.
There is risk of potential management bias to inflate their profit.
E.g
depreciation rate or useful life of the asset – longer time
bad debt provision-lower
provision for warranty / repair / claim

MTC
Auditor must consider if the change in accounting estimate is for genuine reason to present relevant
and more reliable information.
3. IAS 10 Event after reporting period

Timeframe : After financial year end but before financial statement is authorised. (first stage)

Adjusting event :
Event that happen after year end in which condition exist as at year end. Hence, must be adjusted.

Provision – when obligation exist

Trade receivable – as per IFRS 9, financial asset to be valued at fair value based on the amount that
will be recovered by the company.

Non-adjusting event : acquire business combination

In which condition exist after the year end. Hence, must be disclosed on nature of the event and
estimate on financial statement impact.

4. IAS 20 Government grant

S: Must recognise the grant as income over the necessary period to match them with related cost
incurred in which they intended to compensate on systematic basis.
R: Company recognise the whole grant $ as income in current year.
I: Over profit & understate liability

Condition
Always attached to a condition set by the government.

If the company breach the condition of the grant, the grant will be immediately repayable and
revoked. (Business risk)

According to IAS 37, provision must be recognised when there is present obligation as a result of past
event, probable outflow and the amount can be measured reliably. (when breach the grant conditions)
R : No provision for grant repayment has been recognised when the condition is breached.
I : Overstatement of deferred income & understatement of provision

5. IAS 21 FOREX (discuss both if Group company)

-On Trading
Rate (must be translated using)

Sales and purchase (p/l) _ using Spot rate upon trading

Trade receivable and trade payable using Closing rate (bs)

R: vice versa

I: FSCMM

Gain / loss on translation

Should be recognised in profit or loss

R: recognised in OCI instead

I: FSCMM (can combine this two jadi one impact)

 -On Consolidation
Rate (must be translated using)

Income and expenses (p/l) using Spot rate upon consolidation

Assets and liabilities (bs) using Closing rate

Gain / loss on translation

Should recognised in OCI

R: recognised in p/l instead

I: FSCMM

6. IAS 23 Borrowing cost

Borrowing cost can only be capitalised if it is incurred for the construction of a qualifying asset during
construction period.
If stop – eg bcs of pandemic then tak boleh capitalise (must be expense off)

Qualifying asset is asset that takes substantial period of time to be constructed for its intended use.
(take more than one day) (R&D and construction loan)

R: Interest costs have not been appropriately capitalised and instead have been treated as finance
costs.

I: Understatement of assets and profit for the year

7. IAS 24
S: Two companies that are being controlled by the same key management personnel are related
parties.
S:
- Major shareholder and his wife are related parties, because they are a person or a close family
member of that person (wife) who control the entity A.
S: Related party transaction must be disclosed within the financial statement on the nature,
relationship, amount outstanding and the transaction.
R: No or insufficient disclosure made on the rpt.
I: FSCMM

8. IAS 33 Earnings per share (Listed entity)

Calculation

To calculate EPS, net profit attributable to ordinary shares is divided by weighted average number of
ordinary shares.
R: Miscalculate EPS not according to the standard
I:

Disclosure
Disclosure for both comparative figure on basic and diluted (this year and last year)
 S: Must disclosed basic and diluted EPS.
R : Insufficient disclosure made on basic and diluted EPS.
I: FSCMM

9. IAS 36 Impairment
Tangible asset
S: Impairment review must be made when there is an indicator.
R: No impairment review has been made.
I: Over asset or under expense if the asset has impaired in value
E.g major catastrophe, License has been revoked, Revenue significantly dropped, New regulation
resulted to the company not being able to produce machine /asset. So will have to perform
impairment testing

Intangible asset
-Goodwill
Impairment assessment must be performed on annual basis.
Indicator : profit/revenue generated by the subsidiary comp decrease

Exam :
If mention impairment assessment has been performed, so relate to below
i)Calculation
Carrying amount
Fair value less cost of sale- is complex & subjective
Value in use based on assumption of future/forecast cash flow - complex (so how company determine
it)
R: Inappropriate judgement being used

ii) If no breakdown
R: Assumption used by the management to determine the recoverable amount may not be
appropriate. (General)

-Other impairment
Indefinite useful life – Must perform review on impairment on annual basis.

Impairment arise when carrying amount exceed recoverable amount

Recoverable amount is the higher of fair value less cost to sell and value in use.
Fair value subjective, complex to determine, potential management bias.

Value in use is based on

Future economic inflow that will be generated from the use of asset at that current condition.
It is FORECAST so argument on (appropriate or not) on the :
i)Assumption used
ii)Rate used % to discount value in use to present value
iii)Management competent or not

if ada cash-generating units usually the case will relate to impairment

 Allocation of impairment expenses
i)First always allocate to goodwill
ii)Remaining assessment will be allocated to the assets/cash generating unit on a pro rata basis.
R: Management may wrongly allocate the impairment not according to the standard.

Internally generated b

10. IAS 37
Provision
According to IAS 37, provision must be recognised when there is present obligation as a result of past
event, probable outflow and the amount can be measured reliably.
R: No provision is recognised when it is probable.
I: Over profit & understate liability

Contingent Liabilities
According to IAS 37, contingent liabilities must be disclosed when there is present obligation as a result
of past event, possible outflow and the amount can be measured reliably.
R: No disclosure has been made when there is possible outflow
I: FSCMM

Contingent Assets
Must be recognised when it is virtually certain.
Disclosed when it is probable

11. IAS 38 Intangible Assets

Research and development (separately)

Research – must be expense off

Development- If not meet the criteria any of it therefore must be expense off

Amortisation policy (subsequent measurement)

If IAS 38, can only amortise when it is start to use based on the remaining useful life.
Eg first beli license the boleh guna for 10 years, but then only start guna at year 2 so amortise for 8
years only.
Definite useful life – simply amortise it
Indefinite – kena do two things
i)Must review the useful life of the asset on annual basis
ii) Must perform impairment testing on annual basis

internally generated brand name should not be recognised as intangible assets.

R: Recognises the internally generated brands as their intangible assets.

 I: Over asset

12. IAS 10 Investment Property

Define IP as land and/or building held to earn rental income or for capital appreciation or for both.
Must be held at fair value and the treatment must be consistent to all investment property.

i)Initial Measurement
-Purchase price
-Cost directly attributable on the acquisition

ii)Subsequent Measurement
Fair value model
Must be determined by IFRS 13
Over or under must be recognised in p/l
No depreciation if revaluation is carried out every year.

Cost model
According to IAS 16 PPE
Cost – Accumulated depreciation – Impairment

Change model : YES Can

But only if the change will results to relevant and more reliable information

iii)Derecognition on disposal
Permanently withdraw from its use and no further economic benefit is expected.
Gain or loss on disposal will be recognised in p/l
Calculation :
Net disposal proceed – Carrying amount = gain /loss

iv)Disclosure on :

Description of selected model for subsequent measurement

How FV is determined
Classification criteria of IP
Movement of IP during reporting period

Risk : Insufficient disclosure

13. IAS 16 PPE

The depreciation of the (asset) should be made starting the date it was ready for used.

Each part of an item of property, plant, and equipment with a cost that is significant in relation to the
total cost of the item must be depreciated separately based on when it is available to be used

There is a risk that the specific ppe are not broken down into component parts for the purpose of
determining the individual cost, useful life, and residual value of each part.

Revaluation of PPE
i)IAS 16, if one asset is revalued then all assets from the same class must be revalued.

ii)When the revaluation was made

If was not made at year end
R: The PPE may materially misstated if the value of the asset differ significantly at year end from the
date the revaluation was made.

iiI) Revaluation(IFRS 13)

Subjective and complex to determine

Inherent risk

iv)Deferred tax

Whenever there is revaluation, the value of accounting base of the asset would change.

IAS 12, deferred tax must be recognised when there is temporary difference between accounting base
and tax base.

v)Depreciation

Must be depreciated based on the new revalued amount.

R: Old amount

I: Under depreciation & Over asset

Advertising campaign need to be expensed off and cannot be capitalized as part of the asset cost.

I: Over asset & under expenses

Costs of major inspection should be capitalized and depreciated over the time until the next
inspection.
R: expensed off

I: Under profit & asset

14. IFRS 2 Share Based Payment
Equity settled - equity
To be measured at fair value at grant date
R: Vice
I: FSCMM

Cash settled - liability

To be measured at fair value at year end
R: Vice
I: FSCMM

Assumption (All employee exercise)

Inappropriate
I: FSCMM

Component of SBP
Number of shares entitled per person (based on SBP proposal plan)
X Number of executives entitled (based on Assumption)
x FV (non listed based on FV IFRS 13)
x Vesting period

15. IFRS 5 NCA Held for sale and discontinued operation

defines a discontinued operation as a component of an entity which either has been disposed of or is
classified as held for sale, and:

– represents either a separate major line of business or a geographical area of operations;

– is part of a single co-ordinated plan to dispose of a separate major line of business or geographical
area of operation.

i)Recognition All criteria must be met

PUMAS indicate highly probable

Price at which the asset is actively marketed for sale is reasonable in relation to its current fair value

Unlikely that significant changes will be made to the plan

Management must be committed to a plan to sell

Active programme to locate a buyer is initiated

Sale is highly probable, within 12 months of classification as held for sale (subject to limited
exceptions)

ii)Initial measurement

Lower of carrying amount and FV less cost to sell

 iii)Subsequent measurement

-Must stop depreciation

-Prior to classification – Must perform impairment testing on the disposal group(IAS 36)

This impairment review is when the carrying amount exceed recoverable amount. Recoverable
amount is the higher of value in use or fair value less costs of disposal.

iv) Presentation & Disclosure

Asset held for sale must be presented as current asset. Company must disclose on the description of
asset held for sale, description of the facts and circumstances of the sales and its expected timing, a
quantification of impairment loss and include reference note to financial statement.

Results of discontinued operation are presented as separate line item in p/l

v)Disclosure

Description of AHFS

Description of the facts and circumstances of the sales and its expected timing

A quantification of impairment loss

Include reference note to financial statement.

16. IFRS 15 Revenue

i)Can only be recognised when
Control has been transferred (selling goods)
Performance obligation has been satisfied (services, manufacturing asset)
R: Mgt recognide the depo received as revenue when the po has not been satisfied
I: Over revenue and under deferred income

ii) Multiple revenue stream

Must make disclosure sufficiently and accurately

iii)Multiple PO in one contract

Allocate a separate transaction price for each PO

17. IFRS 16 Leases

Must recognise a right of use asset and lease liability at the commencement date of the lease at
present value of lease payment discounted using implicit interest rate.

If the rate cannot be determined, can use its incremental borrowing rates.

Commencement date – the date asset is available for use by lessee.

ROU : able to control (direct) use of asset, must give substantially all economic benefits from the use
of assets for the whole period of use.
ROU : Must be accounted using cost model of IAS 16, unless the revaluation model is used.
 Exemption
Must be consistently applied throughout all assets within the same class

Short term lease of less than 12 months duration with no purchase option.- Can opt to recognise lease
payment as expense in SOPL for the year.
(method to recognise : Straight line basis over the lease term or on the systematic basis)

Sale and leaseback

Calculate and recognise the gain or loss of the asset in profit or loss account.

18. IAS 12

19. IFRS 8

S: deferred tax asset can only be recognized when there is future probable taxable profit.

R: Vice

I: Overstate asset

This could overstate asset.

Listed entity is required to make disclosure about its reportable segment if the individual segment
make up not less than 10% of revenue, profit or total assets of the combined operating segments.

R: Insufficient disclosure made on the reportable segment as per IFRS 8.

I: FSCMM

20. IFRS 9
Financial asset must be recognised at fair value based on the expected amount that will be recovered
by the company. Disputed - the need to recognise provision for bad debts.
R: No provision for bad debts has been recognised when the amount is not recoverable.
I: Over asset & profit

21. Capital expenditute recognised as an asset according to IAS 16 if it is probable that future economic
benefits associated with the item will flow to the entity and the cost of the item can be measured
reliably.
if it enhances economic benefit of the asset

22. As per IAS 1, any going concern uncertainties should be disclosed in notes.
R: No or insufficient disclosure has been made on the gc uncertainties.
23. Convertible debt instruments
Should be split into two separate components. This is because the component may need to pay in
current year or the debt may need to be settled by an equity distribution.
R: does not account for the separate components correctly
I: over or under equity & liability

24. Forward exchange contract

As per IFRS 9 Financial Instrument, company should recognise financial asset or financial liability
when company becomes party to the contractual provisions of instruments.

As the contract is acquired at no cost, there is risk that Papaya Co does not recognise the forward
exchange contracts as financial asset or financial liabilities.

I: FSCMM

IFRS 7

IFRS 7 requires disclosure to be made regarding financial instruments on the new loan taken out.

New audit client

There is a risk that opening balance may contain material misstatement.

There is also detection risk in which auditor has yet to develop business understanding about the
Company.

Thus, financial statements may contain material misstatement.


New business

There is a risk that the management may be relatively inexperienced in the financial services industry,
thus leading to errors in application of accounting standards.