3 Matters To Consider, Audit Procedures & Audit Evidences

Matters to consider ,
Audit Procedures G Audit Evidences

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:÷ i÷ :÷ ÷: ÷ :/
Matters to
-
consider IFRS
.
16 = Leases Initial
-
Recognition :
-
Examiner will provide different accounting
-
As
per IFRS 16
EI leases should be
recognized Right to use asset xxx -
Pug lease
payment
transactions and to directly attributable
students will be required as
right to use asset
along with
obligation
to cash xxx t
discuss that what matters

they will consider
pay .
bligati\ cost
at t Advancee Rental t
while
doing audit
of that transactions
Right to use asset will be valued
-
.
Present value
payment plus directly Remaining value
Directly attributable
matters to consider can include :
of minimum lease
-
cost
Relevant standard attributable transaction cost subsequent
rules
of Accounting
-
.
comment on
Management treatment -
Following two leases can claim exemption from Amortization Exp .

xxx
Amortization of
→
capitalizationTees right to asserting

Risks in those transaction will be
Righttouseasetxxx lease
righ
-
use
Heads
affected directly expenses out in peal Interest Expense xxx
Unwinding of discount
-
.
Materiality 1, Lease
having cancellable
period of less
Leaseobligationxx
-
non
→ Payment of
short Lease
Any other relevant matter which needs than 9- → lease
obligation cash lease rental
-
xxx
year
to be considered 2) Lease low value assets → low value asset xxx
-
of lease -
Examtechnique -
Non cancellable period of less than
year means
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:÷ ÷ ÷ ÷ ÷ ÷ ÷i ÷ :÷ ÷ ÷ ÷ ÷ ÷ ÷ ÷ :÷ ÷ ÷ ÷ ÷ ÷ ÷ ÷:÷÷÷÷÷÷÷:÷÷÷÷:÷:÷÷÷÷÷ ::
"
obtain Leaseback term should be

Inspect leases I, G
remaining useful life
-
-
.
Evidence document asset term G considered

Auidenee will start with -
Low value is a
subjective its value
considered
-
Copy of will
vary from Company to
company usually .
low value 3
Repurchase option price should be
Extract maintenance responsibility of asset

asset-indudee.com/suter,gixtureseagittin#
-
3,
of
.
Minutes
of
discussion -
Once lease is
recognized as
right to use asset ,
-
IFsaleconditiongIFRS-151.sn#@satisfiI
(
Recalculation then ↳ Asset b is leased period its
schedule
every year following adjustments will be
required back
for major of
-
Confirmation document 1,
Amortization of Right to use asset at lower
of remaining useful life
-
sin:'m:::÷÷÷÷:
.is?.atgdi::i:ri::.o.g..n..-whatwillitverif#
t.m.tei.im#.T::i::::h : ::
. evidence :S: em
2,
Unwinding of discount done
obligation ownedas.se/-earlierGhasthentakenitonleaseb#
of lease
is
3,
Payment of lease rental is recorded s -
It should net be recorded as a sale .
4,
liability is split b/w current G Non current -
Asset will continue to be

recognized in Fs at
value
-
portion .
Carrying
-AmountreceiuedwiHberecordedasalo#
I
:÷ ÷ f÷ i÷ ÷
IFsaleconditiongIFRS-15issatie.fi# Ef saleealeasebact
.
-
(
↳ Asset $100.000
for majority of
b Leaseback term net Cv
of
-0
is - =
sie:p:::#'i'E. 's:i:i is:B.io#Ei.u:::ei

'
* market
I
price
. .
3 maintenance
of
asset responsibility leased back
for 2
-
is
,
years
=
of Pv
Buyer of
lease rentals $40.000 -
-
=
I
#
Asset
> I, will be de
recognized from FS
:÷ :÷ ÷i ÷ ÷
5
:÷ ÷:
Balancing
÷: ÷ ÷ :÷ ÷ :±i"i÷:
value will be recorded as
gain
QIlossondispoe.IR#ouseAssetxxx
Cash Xxx
Loss on disposal
Asset xxx
lease
obligation
xxx
gainondisposalx#
⑧
Section B – BOTH questions are compulsory and MUST be attempted
2 (a) You are an audit manager in Coram & Co, a firm of Chartered Certified Accountants. The audit of one of your
FEET # I
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-
E
clients, Clark Co, for the year ended
-
31 May 20X8 is nearly complete and the auditor’s report is due
-
to be issued
-
next week. Clark Co is an unlisted, family owned business which specialises in the service and repair of both
I and =sites,
-
commercial I privately owned motor I vehicles. The company operates I from seven geographically distinct
each of which is considered a separate cash generating unit for impairment review purposes. The draft financial
-
statements recognise I
-
profit before taxation for the year of $2·3 million and total assets of $22 million.
-
The schedule of uncorrected misstatements included in Clark Co’s audit working papers and prepared by the audit
-3 I I
-
I
supervisor is shown below. You are due to attend a meeting with the finance director of Clark
-
Co tomorrow, at
which the uncorrected misstatements will be discussed.
- -
Statement of profit or loss

-
Statement of financial position
Schedule of uncorrected misstatements
- e
Debit Credit # Debit Credit
$ $ $ $
(i) Lease of testing equipment
= – lease assets
475,000
– lease liabilities 475,000
(ii) Legal claim
– contingent assets 1,200,000
– provision for liabilities 1,200,000
(iii) Asset impairment
– assets 85,000
– expenses 85,000
––––––– ––––––– –––––––––– ––––––––––
Totals 85,000 – 1,675,000 1,760,000
––––––– ––––––– –––––––––– ––––––––––
¥
In the jurisdiction in which Clark Co operates, all motor vehicles over three years old are required to undergo
- -
-
y # T -
an annual test of vehicle safety and roadworthiness. The annual test requires specialist testing equipment
J on a regular basis.=
-
which is inspected by
-
T o officials
government -
I
Following inspection visits inI
May 20X8, the
government inspection report required Clark Co to replace the testing equipment at three of its sites. In order
j¥¥ -E-aZ¥iea⇐
to comply with this requirement, Clark Co has agreed to lease new testing equipment from a leasing company
on six-month leases. Under the terms of the leases, the company has no option to purchase the equipment.
The client od
has capitalised ¥¥
The testing equipment was made available for use by Clark Co at each of the three sites on 31 May 20X8.
T leases with a total carrying amount of $625,000 at two of the sites but has elected
5=7-0⑤-
to take advantage of the IFRS 16 Leases exemption not to capitalise short-term leases at the largest of the
three sites. As a result, the present value of the lease payments of $475,000 relating to this site has not been
recognised on the company’s statement of financial position. (7 marks)
(ii) Legal claim

A customer of Clark Co successfully sued the company for negligence in April 20X8 after suffering a personal
injury at one of its sites. The court awarded the customer $1·2 million in damages and this had not yet
been paid as at 31 May 20X8. The audit working papers include a copy of a verified letter dated 25 May
20X8 from an insurance company confirming that the claim is fully covered under Clark Co’s public liability
insurance policy. On the basis that the company has no net liability as a result of the claim, the finance
director has not recognised any amounts in the financial statements and has not made any disclosures in
relation to the matter. (5 marks)

During the year, a significant new competitor entered the market place at one of Clark Co’s seven sites. As a
result, the site has experienced a decline in market share and revenue. The company has therefore conducted
an impairment test on the site’s assets. The company’s working papers for the impairment test have been
audited and the following figures have been agreed by the audit team:
8
Site assets
$
Carrying amount on statement of financial position as at 31 May 20X8 3·6 million
Value in use 2·9 million
Fair value 3·9 million
Related costs of selling the assets:
– legal costs 126,000
– transaction taxes 174,000
– costs of removing the assets 85,000
– costs of reorganising the business following the asset disposals 96,000
On the basis of the results of these figures, the client has calculated the recoverable amount of the assets as
$3·6 million and concluded that the site has not suffered an impairment. No adjustments have therefore been
made to the financial statements in this regard. (5 marks)
Required:
Recommend and explain the matters which should be discussed with management in relation to each of the
TEE E-
proposed adjustments, including an assessment of their individual impact on the financial statements and on
the auditor’s opinion if management does not make the proposed adjustments.
Note: The split of the mark allocation is shown against each of the issues above.
(b) Your client portfolio as an audit manager at Coram & Co also includes Turner Co which is a listed financial
institution offering loans and credit facilities to both commercial and retail customers. You have received an email
from the audit supervisor who is currently supervising interim testing on systems and controls in relation to the
audit for the year ending 31 October 20X8. The email gives the following details for your consideration:
One of the audit team members, Janette Stott, has provisionally agreed to take out a loan with Turner Co to finance
the purchase of a domestic residence. The loan will be secured on the property and the client’s business manager
has promised Janette that he will ensure that she gets ‘the very best deal which the bank can offer.’
The payroll manager at Turner Co has asked the audit supervisor if it would be possible for Coram & Co to provide
a member of staff on secondment to work in the payroll department. The payroll manager has struggled to recruit
a new supervisor for the organisation’s main payroll system and wants to assign a qualified member of the audit
firm’s staff for an initial period of six months.
Required:
Comment on the ethical and professional issues raised in respect of the audit of Turner Co and recommend
any actions to be taken by the audit firm. (8 marks)
(25 marks)
9 [P.T.O.
I
Asmisstatementismaterialtofsthereforeitcfleo.se
coramE.co#Ca)i-7marks-
of Testing equipment leadtoQualifiedauditopi.nl# which is net capitalized
worth $475.000 represents 2. It.
of
assets
therefore
material to Fs .
As
per IFRS 16 Clark Co can claim
exemption from
-
.
capitalization leases
of testing equipment
of
lease on
,
these leases
as are
of
six months which
, qualifies
These
for exemption as it
foris less than 9-
year
.
leases can be
directly expensed out in relevant
period
However IFRS 16
requires that if exemption from
lease capitalization is claimed on one lease then
it should be claimed on all similar leases .
Clark co .
has to either capitalize all leases G
them it should
dis
apply exemption on all
of 012
claim exemption on all leases G capitalize none
o f te n
treatment
management of Clark Co. has done
wrong
by capitalizing two leases 9
by claiming exemption
third lease similar terms should
on which is
of
.
They
either capitalize
of them 012 exemption all 3 claim
onallojthe3leo.se#
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:÷i÷÷÷÷÷i÷÷÷÷::÷i:÷ ÷
.
leases .
It is to note that if exemption is claimed
on one lease then all similar leases will also
benotcapitalis#
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Page
Page 147 171
of 416
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Copy of Bank statement to sale

proceeds of
Aderenioup last-Ever
verify
1535M
-
Leisure sold leisure

complex was
for $35 m which
represents of complex .
assets FS Further term

233%
of therefore material to
copy of Lease
agreement to
verify lease back
-
.
recorded $8m
represents
gain on
disposal of
401 .
oj2oyea#
OFPBTthereforematerialtofs.LA
der
Group property complex
has leased back
for
This
majority of remaining useful life after selling it
its .
that Ea rewards leisure complex

shows risk
of are
not
transferred from Ader Group ,
as a result
of
this sale G leaseback transaction .
Leaseback
period is
2oyearsoutojremainingusefullifegzlyears.fr/her
rental
arrangement
basis leaseback
if of are
also considered ,
they also show that Ader Group has
:÷i÷÷÷÷÷÷
÷÷÷÷÷÷÷÷÷i
net
loan .
÷÷÷÷÷÷:÷ ÷ ÷:
÷÷÷i÷÷÷÷÷ sold
by Ader
group rather it has
just taken a
How#yjawhihdiaUhataad
leaseback
of
leisure complex satisfies condition
of
sale
at market price It
is
repurchase condition can
.
it to last
be
argued that only relates one
as year
end
of useful life at
of zoyears
lease term this
,
jactorisnotsigniyico.nl#
Management of Ader group wrongly recorded this has
transaction Sale leisure which has

of assets complex
as
understated current to
non due de
recognition
leisure and overstated due to
of complex ,
profits
recognitionojgainondispoe.ci#
2 (a) It is 1 July 20X5. You are a manager in the audit department of Peart & Co, a firm of Chartered Certified
I
-
Accountants,
F- responsible for the audit
I • -
toe
of Lifeson Co for the year ended 31 March 20X5. Lifeson Co is an unlisted
retail company which is a new audit client of your firm this year. The company’s draft financial statements
-0T
-
=profit before tax of $2·15 million (20X4 – $1·95 million) and total assets of $13·8 million (20X4 –
recognise
$12·7million).
The audit is nearly complete and you are reviewing the audit working papers. The audit supervisor has brought
To matters toI.
- -
the following your attention:
EEE
(i) Sale and leaseback transaction
##
On 31 March 20X5, Lifeson Co sold a property to a leasing company, Clive Co, for its fair value at this date.
←
egg -
-
- -
The property is situated in a sought after area with a high demand for rental properties for retail purposes.
-EEEE⇐E
Clive Co has assessed the remaining life of the property to be in excess of 50 years, and under the terms of
the sales agreement, Lifeson Co will lease the property back from Clive Co for a period of ten years. Lifeson
Co has treated the transaction as a sale and leaseback transaction in accordance with IFRS® 16 Leases,
.
and derecognised the property in its financial statements and recorded a sale in accordance with IFRS 15
I I
A6→2T¥"$IT$3II
Revenue from Contracts with Customers. (8 marks)
(ii) Investment property
#
Lifeson Co owns a building which it has used as a warehouse to store inventory. On 1 April 20X4 the
- fo r T -
-z
building, which had not suffered any historic impairments, had a carrying amount based on depreciated
⇐E=€¥_ IFI
historic cost of $323,000 and a fair value of $348,000. On this date, Lifeson Co vacated the building and
moved the inventory to new larger premises. Management decided to keep the building in order to rent it out
as a storage facility to local businesses and to benefit from any increases in property valuations. On 31 March
'
=
20X5, the building# had not been let and it hadT a fairo
⑧
value, according to an external valuer, of $353,000.
The draft financial statements for the current year recognise the building as an investment property at a
F-
-2*-1
carrying amount of $353,000 and include a fair value gain of $30,000 in profit before tax for the year. Since
reclassification as an investment property, depreciation has not been charged in relation to the building.
I Esaias
-
(6 marks)
(iii) Shopping mall .
we
Lifeson Co purchased a shopping mall on 1 April 20X3 for $9·5 million. At the date of purchase, the mall was
estimated to have a remaining useful life of 20 years and a nil residual value. On 31 March 20X4 following
an impairment review, the property was written down to its recoverable amount based on value in use of
$8·25 million and an impairment loss of $775,000 was recognised in the statement of profit or loss for the
year ended 31 March 20X4.
Lifeson Co conducted a further impairment review as at 31 March 20X5 which indicated that the property’s
recoverable amount, based on value in use, was now $8·85 million. As a result, Lifeson Co has recognised an
impairment reversal of $1·034 million in its profit before tax for the current year. The impairment reversal of
$1·034 million has been calculated as its new recoverable amount of $8·85 million less its carrying amount
of $7·816 million. The audit supervisor has prepared the following working paper which summarises the
accounting transactions in relation to the shopping mall:
8
Summary of transactions
Date $ million Accounting treatment by management
1 April 20X3 Cost of asset 9·500
Depreciation (9·5m/20 years) (0·475) Depreciation charge for the year to 31 March
20X4
Impairment (0·775) Impairment loss charged to profit for the year
to 31 March 20X4
31 March 20X4 Year end carrying amount 8·250
20X5
7·816 Carrying amount prior to impairment review
Reversal of impairment 1·034 Reversal of impairment credited to profit for
the year to 31 March 20X5
––––––
––––––
(6 marks)
Required:
##⑧mnLE##
Comment on the matters to be considered and explain the audit evidence you would expect to find during your
-
review of the audit working papers in respect of the issues described above.
(b) It is now 1 September 20X5 and the auditor’s report on Lifeson Co’s financial statements for the year ended
31 March 20X5 is due to be issued in the next few days.
Following discussions with management, you are satisfied that the sale and leaseback transaction has been
treated correctly and that you have gathered sufficient and appropriate audit evidence to support this treatment.
However, management has indicated that they are not willing to make any further adjustments to the financial
statements in relation to the investment property or shopping mall and you are now considering the form and
content of the auditor’s report in relation to these matters.
Required:
Discuss the implications for the auditor’s report on the basis that no further adjustments have been made to
the financial statements in relation to the investment property or shopping mall. (5 marks)
(25 marks)
9 [P.T.O.
:÷i ÷ f /
casi-8marr.es
Lifeson copy of lease
agreement to
verify lease back term
-
the property its

Lifeson Co.
has sold when
remaining gloyea#
useful life
in excess 50 and then
of
was
years ,
took it back
it
for loyears This shows
on lease .
that
major risk 3 rewards of property transferred were
as leaseback is net
for major remaining life It .
satisfiessaleconditionasperIFRS.IS#
treatment
Management has done correct by recording
IFRS
sale
of property because ,
as
per 16
if
condition IFRS 15
sale
satisfied given
in is
-
then sale G leaseback transaction

in
property ,
shouldbederecognizedass
However as
per IFRS 16
,
Lifeson should record
to asset leaseback term

right use
for of
:÷÷i÷÷÷÷÷
i÷÷÷÷÷÷
Apparently Lifeson Co. management has not
transaction
recorded leaseback portion of
.
They
have not recorded to asset
right use
noir
to
obligation This assets
pay will vis their
.
{liabiliti#
-
agreement G copy of Bank statement

copy of sale
touerifye.ae/3roceedgproperty.-
copy of surveyor report to
verify that
property
-
had 50
useful life
in
of
excess
remaining years
ondategs#
:÷i ÷ f /
Ins 40
+
-
= Investment Property
-
This
accounting applies standard on
properties which
are held
by organization with an intention to earn
rentalincomeandlorcapitalgain.es
Property IAS held in business 16
for
is use
-
-
Property is held with intention to sell -
IAS -2
-
in business
activity
Property held but business IFRS -5
for
is sale -
is net of selling properties

IAS
:i÷÷i÷÷÷÷÷÷÷
÷÷÷÷÷
-
-
40
2, fair value model .

In this model property is
valued at Fair value at each end

year
and recorded PGL
gain ( loss
is in . No
Depreciation is
charged .
-
whichever model is selected should be used
consistently ,
as it will be a matter
Policy
of then
.
If Co wants to the model it has

change
.
to rules IAS relation to

follow of
8 in
change
-
gAccountingpoli#
-
If
Organization changes
an
of
asset use an
standard
such that
accounting for that property is
be revalued
changing ,
then that property will
to
according existing standard rules ,
and will then
betransyerredinnewaaountingstanda#
Accountants, responsible for the audit of Lifeson Co for the year ended 31 March 20X5. Lifeson Co is an unlisted
-00
②
recognise profit before tax of $2·15 million (20X4 – $1·95 million) and total assets of $13·8 million (20X4 –
$12·7million).
the following matters to your attention:
(ii) Investment property
-
=
Lifeson oooo
Co owns a building which it has used as a warehouse to store inventory. On 1 April 20X4 the
-
z-TT-EEI.EE
z
F-
20X5, the building had notI 1--5-8-28
been let and it had a fair value, according to an external valuer, of $353,000.
=②=@EE§g
(6 marks)
(iii) Shopping mall
Lifeson Co purchased a shopping mall on 1 April 20X3 for $9·5 million. At the date of purchase, the mall was
recoverable amount, based on value in use, was now $8·85 million. As a result, Lifeson Co has recognised an
$1·034 million has been calculated as its new recoverable amount of $8·85 million less its carrying amount
8
20X4
to 31 March 20X4
20X5
––––––
––––––
(6 marks)
Required:
Comment on the matters to be considered and explain the audit evidence you would expect to find during your
I T I
Required:
(25 marks)
9 [P.T.O.
:/ /
Ca) Canaries
Lifeson
-
Investment at $353.000
property valued represents 251 .
assets to FS fair
therefore material
gain
value
of
.
of represents 13% of PBT therefore immaterial

$30,000
toFsindiuidual#
should Fair value
Lifeson
G record $25,000
gain of
.
revaluation because $25,000 will

gain
in reserve
treated
accounting
be under IAS As standards
16
per
-
that
of property changed
whenever use is such
to be
accounting standard has
changed then property
to FV
should be revalued its
according to existing
i÷÷÷÷÷÷÷÷÷÷
: ÷÷÷÷÷i÷÷÷÷÷÷÷÷÷
Management has
wrongly included this $25,000
gain
in PGL under IAS -
40 . It has Ols
profits 3 Uls
Revaluation $25000 should be

gain of
reserves as
,
recordedinreualuationreserueaspert.AE#
Under IAS-40 Co. fu model
,
Lifeson
has
adopted
as it has valued
property at its fu at
year
end
and has also not

charged depreciation It .
is
IAS 40 FV $5,000
permitted under and -
gain of
be recorded PGL fu
can in as increase
after
classification to
of IAS 40 is 45000 which is
duetofuincreasefrom4348.oootos353.io#
market data to
Extracts
of verify Fu of property
-
$348 Fu
of property
l 20×4 4 April
of ,
ooo on
of
$353oooon3lMarch20X#
:/ :÷ ÷ i: ÷ : ÷
E¥
÷i÷:
IAS -36 Impairment Indicator
for impairment factors
= -
means which result in Had there Had there
I
#
I
-
This
accounting standards applies when value
of property fall of recoverable amount . when recoverable amount beentmpair .
beennotmp
indicator
sudden
fall falls it creates
for impairment if cost 100.000
as 100.000
suffers
.
an -
If Recoverable amount
of asset
falls below its
carrying recoverable amount has
fallen
below
carrying
value
of originalbep.abfo.ge#ars--1aooo4aooo)Cl0
90000
asset to NBU at end 90.000
Value , then asset is considered as
Impaired .
, then impairment needs be booked .
Indicators of tea
Depreciation ( lo ) ( 10000)
.at :÷÷÷÷÷÷÷¥÷÷.in?s::.:::e.in:i.cat::..oo
asset i
ooo
'
-
,
50,000
Carrying value Recoverable Amount asset . 80,000
t b Natural Disaster 4, Bad Economic

Depreciation5.jo#rs--625oC625o)C10.
43,750 70.000
higher of 2 New
technology changes NBV years
-
-
:÷÷÷÷
÷÷÷÷÷÷÷i÷÷÷÷÷
value in use means value which
Org
.
can
generate
-
-
:÷ ÷ i÷ ÷ ÷ ÷ ÷ ÷:
Impairment
:*
loss can be reversed

for all assets
except
:÷÷÷÷:÷i÷÷÷÷
-
CGU
:÷ ÷i÷ ÷ ÷ ÷ ÷ ÷ ÷
is a smallest
group of
assets which can be
It Present
by that asset cash
if
value
of goodwill their
includes within Cen canned
using recoverable amount has increased
again
valued
for impairment purpose Assets
.
-
.
of impairment
Reversal restricted at
flows which
organization can
generate through use is
towery
be valued
separately for impairment purpose They
-
ojthatae.se# b
Original Impairment loss have to be valued
together Reason of this
.
is
Assets which not depreciated amortized 3 asset date reversal

fact either Fu cost to ER
Difference that
Cv sell
of of
-
are nor on a less value
tested This had calculated

separately
shall be
for impairment each
year
.
role had
of
there been no
impairment G Cv in use those assets cannot be .
donot applies on land .
therebeenimpairment.es Every organization will have a

different composition
Goodwill
1,
of Chu .
2) Assets with
indefinite useful life whole CGU is assessed
for impairment together
-
.
Asset available but IF then

which
for CGU
impairment impairment
3, is use loss will be
suffers
-
itscommercialusehae.no/-start# allocated in
following sequence
CGU assets
on :
All other
-
depreciated G
assets which are V t
,
specific asset
affected
amortized in normal tested
for
V 2, Goodwill CGU
of
manner are
Pro
impairmentwhenindicatoraris V 3 rate allocation
of remaining impairment
loss
Land is
net depreciated but it is also tested rest the assets
of
-
on
jorimpairmentwhenindicatoran.se# usually CGU

for impairment when indicator
is tested
-
arises However included in CGU then

if goodwill
.
is
whdeCGuwillbetestedForimpairmenteveryye#
Accountants, responsible for the audit of Lifeson Co for the year
TTT
ended 31 March 20X5. Lifeson Co is an unlisted
recognise profit before tax of $2·15 million (20X4 – $1·95 million) and total assets of $13·8 million (20X4 –
$12·7million).
the following matters to your attention:
✓
✓(ii) Investment property

Lifeson Co owns a building which it has used as a warehouse to store inventory. On 1 April 20X4 the
20X5, the building had not been let and it had a fair value, according to an external valuer, of $353,000.
(6 marks)
(iii) Shopping mall
F Lifeson Co- ②
purchased a shopping mall on 1 April 20X3 for $9·5 million. At the date of purchase, the mall was
o_0
- - - -
-
- - -
- -
-6-80*88
-
-

on value in use, was nowE
-
=amount, based # Ian

-
recoverable $8·85 million. As a result, Lifeson Co has recognised

- -
=→-
$1·034 I
million has been calculated as its new recoverable amount of I I
$8·85 million less its carrying amount
- - d - -
-
ttfdherebeenI-mpairmentrebeenno-Impairmm.IE#rFish
eciaEo-cYoI :# ,
Depreciation -
-
933*-6434 ) (outs)
)
→low bOrigin#=0775
2)
Digg og cu
--O€F 8
=
:
-
20X4
to 31 March 20X4
31 March 20X4
Revis
Year end carrying amount
¥8
8·250
E. as
20X5
:
––––––
31 March 20X5 Year end carrying amount 8·850 -
②
––––––
(6 marks)
Required:
Comment on the T matters toTbe considered and explain the audit evidence you would expect to find during your
Z
Required:
(25 marks)
9 [P.T.O.
:÷i ÷f /
Lifeson Ca)i Canaries
-
Reversal the worth

of impairment during
recorded
year
41034M
represents 48%
of PBT and 741 .
of
assets
thereforematerialtofs.AT
per Lifeson IAS 36
,
co .
cannot record reversal of
impairment on
shopping mall
of more than ,
lower
of
two first
original impairment
amounts .
amount is
which $0775m and second amount

difference
is is
of impairment
Cv reversal date CV had
of of
on
there been no impairment and Cv had there been
impairment Difference of these

.
two CU is $0734m .
Reversal
of impairment should be
of maximum
$0.734 m .
lihawrngyrecorddreuersagimpa.net
limit
41034M 3
of failed to consider maximum
of
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-
e- IF
-
-
IT z -
I ③ OF -
Hoffer #
4137 m -
$128 m=$9②
4h28am - -
-
- - - -
X -55€
¥±±*¥E¥;%ntz = = -2g
- -
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go
- - -
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mu
"
T T -
Page
Page 117 141
of 416
! /
Osier Cb)-7marks_
Impairment loss recorded
during the
year
worth 49M
represents8.4t.JP/3TtherejorematerialtoF#
As allocate
per IA536 ,
loss
Osier co .
should impairment
Retail
of
cash
generating unit
of
outlets to
goodwill of
retail outlets and then impairment loss
first remaining
should be allocated on
pro rata basis on
remainingassetc.ge#
Management has wrongly allocated impairment tangible on
assets CGU
pro rata basis first rather than
of
on
,
allocating
it then
allocating on
goodwill first and
remaining impairment basis

rata other
on
pro on
tangibleae.se/sgCE#
overstated
Management has
goodwill balance
by
to it
not allocating impairment first They understated
. have
other
tangible assets
by allocating impairment loss
tothemj.rs#
÷i÷÷÷÷÷÷
-
: ÷
iniiiiiii ÷
copy of
÷ ÷
verify fair
÷ :÷ ÷
correspondence with
value retail
of the
outlets
interested
of
parties
$125 m
,
to
which
calculated basis received

is
from on
of offers
interestedparl.ie#
t
clients, Clark Co, for the year ended 31 May 20X8 is nearly complete and the auditor’s report is due to be issued
#
commercial and privately owned motor vehicles. The company operates from seven geographically distinct sites,
statements recognise profit before taxation for the year of $2·3 million and total assets of $22 million.
supervisor is shown below. You are due to attend a meeting with the finance director of Clark Co tomorrow, at
Statement of profit or loss Statement of financial position
Schedule of uncorrected misstatements Debit Credit Debit Credit
###
$ $ $ $
– lease assets 475,000
(ii) Legal claim
e - 85,000
– assets
– expenses →
85,000
––––––– ––––––– –––––––––– ––––––––––
Totals 85,000 – 1,675,000 1,760,000
––––––– ––––––– –––––––––– ––––––––––
which is inspected by government officials on a regular basis. Following inspection visits in May 20X8, the
The client has capitalised leases with a total carrying amount of $625,000 at two of the sites but has elected
(ii) Legal claim

relation to the matter. (5 marks)
✓(iii) Asset impairment

-
Z
n g - - - - -
JEEZ =
-
==
F-
8
Site assets
Carrying amount on statement of financial position as at 31 May 20X8

a-
I $
3·6 million -
$3m§E¥#=#EEEo*
O 174-0126
g-
-
$3.9
-
-

-

②o
Em .EE#.isoE-s$E.ooo
- - - 2
of
-
-

'
Required:
I
2 - T -
I
T 2 -
-
= e
- -
Required:
" any actions to be taken by the audit firm. (8 marks)
$85jwg→$3m② (25 marks)
⇐±
Fair
uawtfelessq.to#higherq
÷¥:¥÷÷÷n¥÷¥E÷
-g#←
9 [P.T.O.
:÷ ÷ ÷ ÷f /
5marks
Coram Co .
-
Ca) iii -
loss $85.000
Adjustment in
impairment required of
represents 3.69% of PBT therefore immaterial to FS
individually
As Co should include all cost
per IAS 36
,
Clark .
which are
required to sell
affected site Assets while
Fu to that site
estimating less cost sell
of
Assets .
This will include
legal cost
of $126.000 ,
transaction tax $174 ooo and cost

of .
of removing
:÷÷÷i
i÷÷÷÷÷÷i ÷÷÷÷
÷÷÷÷÷÷
÷÷÷÷÷÷÷÷
$85.000 .
It has increased recoverable amount 4
thereforereducedimpairmenl.to#
This misstatement has overstated 9 site
profits
assetsbyls85.ae#
As misstatement is immaterial to Fs
therefore it
will not
affect audit opinion individually .
However
it audit combined with

may affect opinion when
⑧
other misstatements .
!:"÷. .#÷ ÷i ÷ ÷ ÷
of f .in/.: :f.: .f
IAS Provisions Liabilities E. Case1Case2Case3Case4Case5Ca# Provisions
Contingent
37
contingent warranty
-
→
,
-
Asset Present
obligations ✓ r r r X V -
warranty given by organization

"'
÷:÷÷:÷:÷÷i÷:÷÷÷÷÷÷÷÷:*:÷÷÷i÷÷ ÷: ÷
" "
:*::*:* :c:#
Provision
:÷÷÷÷÷÷÷÷÷÷:÷÷ .
3 Conditions are
satisfied : Do
Nothing contingent Liability Do
Nothing Disclosure sale .
Present liability Provision

warranty
obligation
will
↳
for
-
I
Probable be recorded
outflow if
2
, Disclosure chances
of
l outflow
-
3,ReliabkEstima# contingentasset
:
contingent Asset means
any
due to
warranty claims are Probable OE
greater
Presentation means that
organization must have
inflow
which uncertainhas amount of uncertain
warranty provision will be recorded
according
to Reliable
- -
Asset
timing Contingent
recorded to
of outflow
according Estimate
obligation This Present
to be is
an
pay obligation can .
.
.
of
two
types :
following chances of Inflows

-
opening warranty provision xxx
Legalobligation organization current sales

any legal Chancesogtrylow warranty provision
1, has xxx
year
-
: on
filed (
to Remote less than to )
requirement 0¥ obligation pay
lot Do
Nothing warranty provision utilized due claims xxx
-
- . -
.
Possible Between
New Law lot to 50 't Do
Nothing -warrantyProuisionsexpired(x#
-
-
to 95T Disclosure
court order → Probable Between 50T
closing
-
- .
- .
dvirtuallycertain-Aboue95t-Recei.ua#2sConstru-tiueobigation
Contractual
obligation
-
obligation 5ypes of : This is created There are

provisions as
per IAS 37 .
Onerouscontractprouision
to Provision It made
expectation legal contracts
created 1 case is
for
due valid
among people is a
provision loss
making
-
,
.
Provision Present
that
organization will
pay
to them warranty contract made
organization
creates
obligation
2,
by
.
-
a .
Public announcement 3, Onerous contract Provision
:÷÷÷÷÷÷÷÷÷÷÷:÷÷÷÷÷÷÷
done
: ÷ ÷:
-
:÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷:÷÷
÷÷÷t÷÷÷÷÷÷÷÷ Between Provision
filed against
zpenattywhichcanpaidtoterminatethecontract.pe
obligation as claim is co .
Possible to 501
if of outflow
lot will be recorded chances
Decommissioningcostprouis.io#
-
-
Probable Between 50% to 95 't that OE

Legal Probable
greater These cost
under case are
ER provisions made
for Decommissioning
are
-
- -
certain Above 951 asset

virtually and
organization
can
reliably estimate that
outflow Compulsory Disposal cost
of an
- -
.
.
Reliablectimate that estimate This

organization provision is made following in
•
means can -
manner :
that
the0utjlowsreliab# b
compulsory Disposal cost will be incurred in
estimated
future
is .
3 Present value is calculated

of
it
according to
rates
interest
of high quality corporate bonds .
this be recorded
3, Now
present value will
÷ i÷: ÷ ÷ i÷:.
with
in cost
of
asset
along provision liability .
4, Each discount recorded

year unwinding
will be
of
on
prouisionliabilityasitisatp.ua/ue .
Interest Expense xxx
Provision
-
Restructuringcostprouision
Provision cost
can be made
for restructuring if
-
organization is
going for restructuring
and all of
:÷ ÷ ÷ :÷ :÷ :÷ : #
clients, Clark Co, for the year ended 31 May 20X8 is nearly complete and the auditor’s report is due to be issued
commercial and privately owned motor vehicles. The company operates from seven geographically distinct sites,
statements recognise profit before taxation for the year of $2·3 million and total assets of $22 million.
A -
supervisor is shown below. You are due to attend a meeting with the finance director of Clark Co tomorrow, at
Schedule of uncorrected misstatements Debit Credit Debit Credit
$ $ $ $
•

– lease assets 475,000
- (ii) Legal claim
I
=
– assets 85,000
– expenses 85,000
––––––– ––––––– –––––––––– ––––––––––
Totals 85,000 – 1,675,000 1,760,000
––––––– ––––––– –––––––––– ––––––––––
-
which is inspected by government officials on a regular basis. Following inspection visits in May 20X8, the
The client has capitalised leases with a total carrying amount of $625,000 at two of the sites but has elected
-Ei
FEE
(ii) Legal claim
.
¥
I#I-②5@
relation to the matter. IE

(5 marks)

8
Site assets
$
Carrying amount on statement of financial position as at 31 May 20X8 3·6 million
Required:
HE
Required:
any actions to be taken by the audit firm. (8 marks)
(25 marks)
9 [P.T.O.
:i÷ ÷ ÷ /
Coram Co . (a) Ii -
5 marks
+
filed against Company of 412am

Claim
represents
5.45tojassetsthereforematerialtofs.ph
-
per
s IAS 37 liability for
,
Clark G .
should record
this due to court order to

claim as
pay $12 m
,
chancesgoutflowhauebecomevirtuallycertain.cn
the per other hand ,
as IAS -37 receivable
from insurance
Company can also be booked as
letter that claim

company
is
verified of
insurance
covered insurance shows that chances

in
policy
ginjowareuirtuaHycerta#
Clark Co cannot set
off receivable from
.
insurance co .
with to
payable customer as
per court order
,
because
Clark has net settlement

G .
no
legal right of .
:÷÷÷i÷÷÷÷
: ÷ i ÷ ÷÷÷÷÷÷÷
-
- - S T
-
Te - I
_€
-
- -
=
-
-8 →--② -→==TE
#÷E I EI
-
-
=
-
-
-
I
-
-
=
-
- -
-
-
-
E
€=
FEI or
-
=
Page
Page 117 141
of 416
1
Osiercompany LI comarcas
-
-
warranty provision recognized of 87M represents

6.51 PBT 9 assets to
of
0.3%
of therefore material
.
Income5tatementbutimmaterialtoso#
Warranty provision of
osier
Company is made
by
sales
Director . It needs to be considered as sales Director
to
is not the
right person estimate
warranty provision ,
assalesdirectordonotdealswithwarrantyclaims.pro
charged during
vision
year of apparently the $05 m is
less than Claims

required provision .
filed during the
$19 m 9 increase in sales

year of
revenue show
thatprouisionforcurrentyearehouldbehi.gl#
Provision reversed
of
431M
represents 26.9%
of opening
It creates
warranty provision .
a risk
of manipulation
that have calculating
osier G .
may changed its basis

of
warrantyprovisiontoreduceitswarrantgprouisionliabi.li#
If warranty provisions
wrongly estimated then are
thiswillmisstateprofilsealiabilities.ae
Copy of warranty coverage contracts to
gain
detail about
9 other terms
of warranty offered ,
its tenure
the
List
filed during to
claims
of year verify
-
warranty provision utilized .
list Expired warranty contracts to that

of verify
-
.prouisionrelatedtothemisreuers#
-
-
-
- -
Z
- -
T T -
-
- -
- -
=p
-
€1
8%
→ 848dm
x $211,4
, 3¥ .
teepee II I I
Io I I -4g ZEIT Istaf
II IE⑤@o-⇐
-
-
-
I -
J T I 2 - -
EEE
-
EEE
a- 5-
Page
Page 104 128
of 416
T - -
Page
Page 105 129
of 416
:÷i f /
Pigeon
-
Ca)-l0mar IFDecommissioningprouisionisestimatedwronglyt
Decommissions provision of $430 million
represents 22%
of thiswillmisstateprofitsandliabilil.ie#
assetsthereforematerialtofs.ee Copy of
contracts which create
Decommissioning liability
It needs to be considered that to
verify its terms 9 expected dates
Decommissioning provisions .
reduced
from $488 m to 443am
,
despite that no
-
Recalculation schedule to
verify accuracy of Decommissioning
Decommissioning
has started
yet Major Decommissioning provisions calculated
by management
.
start Provision should increased Extracts market data to interest

will
from have
verify change
2025
-
in
of
.
due to
decrease
unwinding of discount
be
adjustment Only . reason
estimation
ratesojhighqualitycorporatebondsfrom61.to#
of
in
provision can
change in
techniquebymanagementwhichcarriesriskgmanipolal.io
:÷÷÷÷i :i÷÷÷÷÷÷
÷÷÷÷÷÷
i÷÷÷÷÷÷÷÷÷÷
interest
p rov i s i o n
rate to reduce present value
of decommissioning
Decommissioning provision for each

facility should be
calculated
separately Majority of Decommissioning
.
will
incur between 2025 to 2040 ,

but whole
decommissioning
continue
will till 2046 .
A risk exist
management
that
may net
have estimated decommissioning provision for
eachfacilityseperately.IT
to needs
year
be considered that in current
estimated
decommissioning provision was
by management
itself Expert was
riot used
by management on the
.
basis that it expensive It creates risk

of
was .
manipulation and error as

management may
lack
to estimates in voted
expertise make
complex in
decommissioningprou.si#
.:i÷n/:÷ca÷n ÷oIb÷e÷uialu#
IAs-38=IntangibkAss ResearchGDeuebpmentoutJl IF
life of intangible asset
indefinite then also
-
is
IAS 38 deals with to Read

relating
also
yearly impairment
to with
This
accounting standard deals with issues
relating issues
outflows reviews will be done
along
- - -
Research
Intangible Assets .
-
is a
phase when
organization is
doing attemptojlifeestimal.io
initial
Intangible j following
asset
recognized Fs
investigation of information Outflows made
-
can be in in
.
Research
conditionsaresatisj# phase are out expensed .
is
Benefit from that intangible asset should be
Development is a
phase when
organization applies the
-
separately identifiable information it has

gained
in research phase Outflows
. .
For capitalised Development phase d out

Ef Advertising outflows cannot be made in are also
expense
. -
intangible as
benefit of asset because
unlessjollowingcriteriaissatisfied
aduertisementisno±identiJiableseperate bfconomicfeasibility
It needs to be considered :
Organization has ability to control that intangible that whether

organization suffecient
2 has Economic
,
asset .
resourcestocompletetheprg.ec#
For net recorded 2.Technicalf-easibii.ge Availability of soffecient
E¥ s
usually Employees are as
-
to development
intangible asset as
they cannot be technical
knowledge complete the
÷÷¥i÷÷÷÷÷÷÷÷÷ :÷÷÷i÷÷i÷÷÷÷÷÷÷÷
÷÷÷÷÷÷÷÷÷÷ ability to use
OE sell that asset ,
once it is
developed .
conditions
- Once all 3
satisfied then intangible are
,
ItcanTndudeconsiderationglegalmatt#
assetcanberecogniz.ec# bsteliablemeasurementogoutjlows
to
Organization
the
:
Intangible asset
will its should able be
be
amortized useful over
outflows reliably measure
-
ofdeuelopmentpho.se#
I
'
will If AI 6 conditions
satisfied
indefinite then asset
life is
intangible be
of the
above
-
are
,
then
subject
to
yearly impairment testing Along .
with this
every outflows made in development phase can be
yearligeestimationwillbeattempted.ca/sitalizedasanintan
gibeau
-
If asset
intangible
its till is available
for
use
,
but Capitalization will continue un -
development of project
commercial use has net started ,
then amortization iscomple#
will net be done
,
rather just impairment review
Amortization will start once commercial use
of
willberequiredeueryye.ci#deuelopedprojecthasstar
If
project is developed bet its commercial has use
notstarted,thenyearlyimpairmentreviewswiHbed#
e¥I-Eaa@#I=
=
it
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EEE "
⑤⑥ -
fog -_⑤ If
-
z
-
I # I
Page 457
:÷ ÷ ÷ :
Setter stores → Cc) -
5 marks
=
Distribution license worth $15 m assets

represents 5T .
of
therejorematerialtofs.se/ter
Stores should
amortize this distribution license
5months ended
for January it
in 31 2013 as was
year
acquired on 1
September 2012 4 5months have
completed
till
41.25mi
year
end .
Amortization charge will be
:÷i ÷ ÷ ÷ :i÷ ÷ :÷ ÷i÷ ÷ :÷

- -
③ TEE →
← -
JE II -
TEE E-
⇐ EE -5--5 EEE
-
18m€②
F#¥ ¥*F← FEED
- ee g e-
E¥EEEEIE⇐E⑤
EE
EEEEIIEIEE
- 3£ -1daL
-15
SEE II
←
gmo¥
31 Dec 015
une 015
Page
Page 131 155
of 416
'afted→Ad¥g€===E¥EE
condition
→ enzo
- TA E t
get ③
- -
E-I-so.EE#-z--IEEgJg
÷ Te Te *
-_@
TEIFI ITS
Cf TT
Ig
#
-
Eee -
Ea
# ⑧
Materiality IFRS 7- months -15
③Recognition of revenue
for
as
per
Event
Ab -
to =
Adjusting
# write -
off
-
WIP
Realize deferred
income
#
customer
# Disclose loss
of major
mmeutonmanag9Head#
Page
Page 132 156
of 416
:÷ ÷:f÷ ÷:÷ f
Kowtow LossoJmajorcustomershouldbedisdosedinF#
Cb)iMatterstobeconsideredGactionstobetak# Cb)iiAuditEvide
Kowloon co
work in
progress recognized on Bmc contract worth -
Copy of contract made between . and Bmc
assets to detail about terms contract

$350,000 represents 461 of therefore material
gain of ,
specifically
those
toff in relation to contract cancellation
$350.000 Bmc
As
per IFRS 15 Kowloon co should Breakup of WIP
recognized of
on
-
some
recognize
-
contract that what the included 9 their

portion of Bmc contract revenue as contract is
of
are
components
18 months cost
for construction of a machine
,
and at
year
end
of 31 December 2015 six months
of
contract -
Extracts
of Market data 9 Valuer
report to
gain
IFRS detail about Net realizable WIP
have been completed As value
of after
15 as
.
per revenue can
cancellation contract needs to be written down

berecognizedasperstagegcomplel.io# of
.
:÷÷÷÷÷i
÷÷÷i÷: ÷÷÷÷÷÷÷
÷:÷÷÷÷÷÷÷÷÷ : ÷ : ÷ ÷±÷÷: ÷ ÷i ÷ ÷÷÷÷÷÷÷÷
WIP will have low value .
Machines
being developed
Bmc
for specific requirement of
G
were
after
cancellationojcontracttheywillhauev.lowNRV.pt
-hr ther
deferred be
income $200.000 should also
of
cancellation
recognized as other income , because
after
Kowloon
of contract Co. has no
liability against
this amount Kowloon co not return this
paid .
.
will
amountasithasinuestedgreateramount.nu#
Finance Director Co. not
of Kowloon making any
is
cancellation
adjustment for contract .
This will Ols
WIP $350,000
by ,
deferred income
liability by $200.000
Gprogitsbyll50.io#
Finance director comment that loss Bmc
of
as a
customer will not be disclosed in

integrated report
will misstate
integrated report . Bmc was a
significant
customer Kowloon G G it the
of of
. was one
contracts Kowloon Co.

seven on which was
working .
:i÷ : ÷ ÷ i ÷ ÷
IFRs-I5=Reven# 4sAHocationgtotalcontraetpn.ee
-
As
per IFRS -15 ,
revenue will be
recognised when -
IFRS - 15
requires recognition of each performance
revenue
jollowingjiuestepsaresatisj.IO bligation separately therefore it

, required to is
btdentifycontractualfight
to
allocate total contract price
performance on each
-
first step is
identify contractual
right under which
obligation .
organization will
get
Economic
benefit -
Allocation
of
total contract price is based on
probable at
of eae=h Performance obligation
It must be time sale that Economic standalone value
of
-
.
benefit entity under that contractual

will
flow to Eiga Apple co .
-
Bundle -
IPad pro A- Ear

pods =
$910
right Performanceobligations standaloneprice
$1.000
Allocation
b IPad Pro
4Identyyperjormanceobligal.io#
801 .
$752
As per IFRS 15 3 Ear

pods $25021.8188
for
each
Performance revenue
- -
$1,250 $940
obligation within contract will be booked separately loot .
:÷÷÷i÷÷÷÷÷÷÷÷
÷÷÷÷i
is
÷÷÷÷÷÷ uncertain 9 it
depends
=
to
on
future ,
then revenue
-
-
Revenue
for
each
performance obligation
i'
will be
± .
.
can be booked
according management best
recognized separately .
estimate derived For when

from past practice goods recognized
.
,
revenue will be risks
Revenue
Eg . - in case
of
sale ER Return basis 4 rewards are
transferred .
contracts uncertain and it usually depends For

is on services
,
revenue will be
recognised when
future that how

many goods
will be sold 8 how
benefit is received
by
customer .
For construction contracts

many
will be returned .
As
per IFRS
-
15 in such a revenue will be
recognized
situation revenue will be
recognised through according to
stage of completion .
Stage of
managementbestestimatederivedfrompastpro.cl# completion can be measured
through either
of
the
following policies :
tbworkcertiof fiedmodelstageValueofcertifiedbyustomerxloo
completion =
Total value contract

of
3IncurredCostM
Stage of completion Costincurredtodatexloo

-
TotalExpectedaf
T T -
T - - -
Te
T - -
g-
- - - - -
-
② - - - - -
- - - -
-5--5-50
-
I -
Q - - - -
-
III -
-
I =
FEET I
I -5-7 E TEI
EE ZITI
-
- -
-
Z E
-
③
Page
Page 118 142
of 416
:i÷÷f I
Rocket Cali -
7-marked
Revenue recognized on two sales invoices worth
$l7mrepresentstltgrevenue,thereforematerialtof
As
per IFRS -15 ,
Rocket co .
cannot recognize revenue
on these two sales invoices

,
because risk 3 rewards
to customers
of goods
are not
transferred yet sending
.
third do net
goods to
party for storage satisfy
contractual
obligation of Rocket co .
noir transfers risk
Grewardstocust.com#
Finance Director 's that Rocket
argument co . has
satisfied its
performance obligation by disputing goods
to
storage facility
is
wrong
As per contract obligation
.
:i÷÷:÷÷÷
i÷÷÷÷÷÷
:i÷÷÷÷÷
dispached
third
party
goods
so that
of
two
goods
customer to an
despatch note G invoice

unrelated
recognition By doing this

can be raised
for revenue .
heismanipulatingrevenueE.pro#
Auditor should review other sale transactions near
the end that

year
to check whether
right cutoff
isJdlowedonthem#
Misstatement in revenue
recognition should be
communicated to TCWG as it is material to FS
{itcanajjectauditoropini#
IESE E
E z -2
-
To I F-T IT #
E EET - -
=
E-
-
II -2-2
Z
-
Page 458
:÷ ÷ : ÷ ÷ f
kobainco.ee Cb-6marks_
Profit booked on
goods sold under
consignment stock
44M $3m=
arrangement worth Slim represents 66%
of
-
PBTtherejorematerialtofs.LA
per IFRS goods consignment -
15
,
sold under stock
arrangement have uncertain revenue which depends on
future Revenue the basis

should be
recognized on
of
.
Kobain estimate
management from
G .
best derived
pastpract.ie#
Further it can be
argued that risk 8 rewards
of
goods
sold under
consignment stock
arrangement have
not been
transferred as Koba in Co .
has the
legal
±÷ ÷ ÷ ÷ ÷: ÷:÷ ÷ ÷ ÷ ÷ t÷ ÷ ÷
arrangement .
This
by has as revenue $4mG understated
inuentoryby$3#
Copy of consignment stock arrangement
-
contract to
terms sold
verify which
goods
under are such as
,
period returned
in which
goods can be
,
Kobain G .
to title
ability change price G
legal of jewellery
clause
Third
-
party confirmation from vendor on

inventory
havingvalueg$4mheldbythem
:÷f ÷ ÷ ÷ :÷ ÷ :f÷ ÷ i:÷
IFRs-2SharebasedPaymen# ② IF active market There
of goods
exist two
no are
types of share
-
deals with 9 received cannot

This
accounting standard services
i.e they based
payments
.
-
transaction which involve

payments through be valued
,
then transaction will be b cash settled
Payments
Sharesotshareoptions valued at value 01 share 3 Equity settled
Payments
of
shares .
For Eg shares 0¥
org give options given Equitysetteledpaymenls
. an . can .
For
share
options against of
purchase EI If 7. ooo share options are
given In this transaction
Equity Blares
.
-
machine 012 to to then

employees against as a bonus employee ,
issue will be
given
on
maturity of
of any good
while transaction
their services 0¥ Purchase will arise valuation as
employee
OEseru services dont have an active market .
-
This transaction will be
÷
EI
:÷÷÷÷÷÷::÷÷÷÷÷÷÷÷÷
.
If 1. ooo share options are
given
be used to value share
options ,
so
:÷÷÷÷
Itisneverreualuedatyearend
:
against purchase of
a machine worth
thattransactioncanbeuo.lu#CashsetteledPayment
$70.000 transaction will IF based to In settled
then whole share
payment relates more cash transaction
-
-
, ,
than
be valued at value
of
machine ice one
period then expense will be
Org pays net cash in settlement .
.
cash settled transaction

$70.000 spread vesting period
over .
-
is
-
7-oooo recorded
Machine as a
liability . It is valued
Equity 7- oooo
at fu at end
year
.
- →
Expense Asset xx .
Liability
conditions RE
There be two
types conditions value will be reversed
market to
of relate
factors
can in Non in
-
- .
Share Cancellation Plan

plan
of
a : other than market share
price .
b Market conditions conditions cancelled then

affect
market number If Share plan
of
-
Non -
is
3 Non Market conditions will be able to vest share

employees who
remaining expense of plan will
market recorded
Market conditions
options .
Impact of non condition be in accelerated manner
Market Conditions relate to movement considered in

both
Equity settled 9 whole will
remaining expense
-
in is i
Cash settled be recorded in

of cancellation
Market price Share
plan year
of a
.
market conditions it X Expected X Value X 1/3

fluctuate affects of
when
Expected No
of number
-
.
value
of option
.
Employees who of
option that each
option I ,
settled transaction will be able to vest vest

-
In Equity ,
value
of
will Exercise
option date value market Period

remains
fixed at
grant
.
market condition
ie impact of changes in ,,
market condition market condition

Equity Cash
ignored
are . Non Non .
-
However in Cash settled transactions I
Modification plan
Share Fu
impact of option of option
Fu
value
of option can
fluctuate
oi in
considered YIE
of
market condition is IF Share plan is
modified in such
away on
grant date at
.
-
Non Market
Conditions t plan
h a
expense is increased
t ,
then and then plan will be reversed
market conditions Plan incremental expense will be recorded in RE

of
Non share over
-
.
include till certain

remaining vesting period
can condition to work
up -
.
time
period CThis is called service condition) -
However
if share plan is
modified'Tsuch a
way
012 a condition to achieve certain
Performance that plan expense is reduced , then expense
CThis is called
Performance conditions) .
as
per original plan will continue to
recorded On maturity
be .
of plan ,
excess
(
--:÷¥
%%=
2 The audit of Bradley Co’s financial statements for the year ended 31 August 20X5 is nearly complete, and the
#
%aa.
@FI#
auditor’s report is due to be issued next week. Bradley Co operates steel processing plants at 20 locations and sells
its output to manufacturers and engineering companies. You are performing an engagement quality control review on
the audit of Bradley Co, as it is a significant new client of your firm. The financial statements recognise revenue of
$2·5 million, and total assets of $35 million.
(a) One of the audit assistants who has been working on the audit of Bradley Co made the following comments when
discussing the completion of the audit with you:
‘I was assigned to the audit of provisions. One of the provisions, amounting to $10,000, relates to a legal claim
made against the company after an employee was injured in an accident at one of the steel processing plants. I
read all of the correspondence relating to this, and tried to speak to Bradley Co’s legal advisers, but was told by
the finance director that I must not approach them and should only speak to him about the matter. He said that
he is confident that only $10,000 needs to be recognised and that the legal advisers had confirmed this amount
to him in a discussion of the matter. I noted in the audit working papers that I could not perform all of the planned
audit procedures because I could not speak to the legal advisers. The audit manager told me to conclude that
provisions are correctly recognised in the financial statements based on the evidence obtained, and to move on
to my next piece of work. He said it didn’t matter that I hadn’t spoken to the legal advisers because the matter
is immaterial to the financial statements.
‘We received the final version of the financial statements and the chairman’s statement to be published with the
financial statements yesterday. I have quickly looked at the financial statements but the audit manager said we
need not perform a final detailed analytical review on the financial statements as the audit was relatively low risk.
The manager also said that he had discussed the chairman’s statement with the finance director, so no further
work on it is needed. The audit has been quite time-pressured and I know that the client wants the auditor’s
report to be issued as soon as possible.’
Required:
Explain the quality control and other professional issues raised by the audit assistant’s comments, discussing
.
any implications for the completion of the audit. (10 marks)
o
(b) The schedule of uncorrected misstatements included in Bradley Co’s audit working papers is shown below,
- -
including notes to explain each matter included in the schedule. The audit engagement partner is holding a
meeting with management tomorrow, at which the uncorrected misstatements will be discussed.
-53¥
pong
E
T
Debit Credit Debit Credit
$ $ $ $
1. Share-based payment scheme 300,000 300,000
-
-
2. Restructuring provision 50,000 50,000
3. Estimate of additional allowance
required for slow-moving inventory 10,000 10,000
–––––––– ––––––– ––––––– ––––––––
Totals 310,000 50,000 50,000 310,000
–––––––– ––––––– ––––––– ––––––––
Notes:
1. A share-based payment scheme was established in January 20X5. Management has not recognised any
Is
amount in the financial statements in relation to the scheme, arguing that due to the decline in Bradley Co’s
%hN¥i①
share price, the share options granted are unlikely to be exercised. The audit conclusion is that an expense
As Equity settled Plan
and related equity figure should be included in the financial statements.
2. A provision has been recognised in respect of a restructuring involving the closure of one of the steel
processing plants. Management approved the closure at a board meeting in August 20X5, but only
announced the closure to employees in September 20X5. The audit conclusion is that the provision should
not be recognised.
3. The allowance relates to slow-moving inventory in respect of a particular type of steel alloy for which demand
has fallen. Management has already recognised an allowance of $35,000, which is considered insufficient
by the audit team.
8
Required:
(i) Explain the matters which should be discussed with management in relation to each of the uncorrected
it misstatements; and
- -
(ii) Assuming that management does not adjust the misstatements, justify an appropriate audit opinion and
explain the impact on the auditor’s report.
The following mark allocation is provided as guidance for this requirement:
o
(i) 10 marks
(ii) 5 marks
(15 marks)
(25 marks)
9 [P.T.O.
Braddy Co .
(b) i -
Transaction 1--107=331
Share based transaction worth $300.000
represents bit
of revenue 9 081
of
assets
°o° material to Income statement but immaterial
to SOAP .
Braddy Co . should record Share

based plan
it settled
expense ,
as is an
equity plan
which market conditions should
changes
in in
ignored Management argument

be . that expense
Should not be recorded due to decline
in market share
price is as in
wrong ,
settled market conditions

equity plan charges in
are not considered .
Further it should be discussed that

Braddy
Co should record settled
expense of Equity
.
to Fu at
Share plan according grantfailure
date G
to
spread it over
vesting period .
record plan ok G Us
share has
profits
Equity .
3 (a) The IAASB has published the Exposure Draft, Proposed ISA 540 (Revised) Auditing Accounting Estimates and
Related Disclosures (ED-540) stating ‘The objective of ED-540 is for the auditor to obtain sufficient appropriate
audit evidence to evaluate whether accounting estimates and related disclosures are reasonable in the context of
the applicable financial reporting framework, or are misstated. ED-540 includes enhanced requirements for risk
assessment procedures and the auditor’s work effort in responding to the assessed risks of material misstatement
to support this evaluation.’
Required:
Explain why accounting estimates are considered to be a source of high audit risk and discuss the reasons for
the development of ED-540 commenting on its proposals for an enhanced risk assessment in relation to the
audit of accounting estimates. (8 marks)
(b) You are the manager responsible for the audit of Awdry Co, a listed entity whose principal activity is the operation
=
¥0
of a regional railway network. The audit for the year ended 28 February 20X9 is the first year your firm has
②
d-
-2--0-0
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:
55×10.000×4405×44=4.825,002
Eggs
t.fi#iatffglEZ---C
(i) Cash-settled share-based payment scheme
On 1 March 20X8, Awdry Co granted 550,000 share appreciation rights to 55 executives and senior
employees of the company with each eligible member of staff receiving 10,000 of the rights. The fair value of
the rights was estimated on 28 February 20X9 by an external expert using an options pricing model at $4·50
each. Awdry Co prides itself on good employee relations and the senior management team has estimated that
-
all 55 staff will qualify for the rights when they vest three years after the granting of the rights on 1 March
-
20X8. The company has recognised a straight line expense in this year’s draft accounts of $825,000.
(6 marks)
(ii) Regulatory penalties
Awdry Co has been subject to a review by the national railways regulator following a complaint from a member
of staff with safety concerns. The regulator identified breaches in safety regulations and issued a penalty
notice on 30 September 20X8. Awdry Co has appealed against the initial penalty payable. Negotiations
with the regulator are still ongoing and the amount payable has not yet been finalised. Awdry Co currently
estimates that the total penalty payable as a result of the breach will be $1·3 million which it expects to repay
in equal annual instalments over the next ten years with the first payment falling due on 1 March 20X9. The
company’s draft statement of profit or loss for the current year recognises an expense of $1·3 million and the
draft statement of financial position includes a liability for the same amount. (6 marks)
(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)
10
②_
Required:
I It
(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
-
=③ evidence.
(25 marks)
End of Question Paper
11
CBI Transaction I
Awdry Co Gmarks
Apparently Awdry
Co
management
has recorded
-
. = .
recorded settled used word

Expense as
per Cash
expense correctly .
However
they
plan worth $825.000
represents 11 l 't
.
of PBT
straight line expense ,
which needs to be
G I 41 assets ol material to
of both considered second
in expense may
-
as
year
Is ?
G SOFI not be
first
same as because value
year
at
-
Review Share
option agreement to
verify of option in Cash settled plan
changes
options number G end
number
of of employees each
year
.
exorcise
period . Auditor will
face difficulty in
auditing value
Review to it estimate
market data
verify assumptions share is
of option as
•
an .
used
by expert option pricing model Employee
share
options customised
in
of
are
market these
for valuing share
options . nature ooo no active
of
Recalculate valuation done
by Expert to Share options exist .
Assumptions be
may
-
difficulty
expert create
verify
which will
of option
value calculated used
accuracy of by
.
Cash settled auditor

for
share plan expense should be .
valued at Fu end
of option at
year along
with Expected G
number
of employees
expected number
options that will
vest
of
.
Expense should be spread over

3g ears
period
vetting . A
corresponding liability should
be recorded with Expense .

:f÷ ÷ i ÷: ÷: ÷
Consolidation =
IFRS-3.IFRS-10.IFRS-H.int# -InvestmentisdassiJiedasanAswhenPar# 4,
Contingentconsideration : Parent co . will
pay
co but it
significant influence consideration at
has decision date
There
your types
investments
company
in
making of
other
future
which a is
of
-
are a .
conditional
can do :
Company .
to certain
targets .
Parent It Present
significant
Associate that value at
Subsidary influence
co
representation
I 3
of
,
,
-
means .
has -
is value
2,Jointventure4sMinorInueetmen# in Board Directors other co Expected value

of of
.
Parent It do not have to control

Investment is
classified subsidy if company majority in BOD Amount
payable
in
future
is
multiplied
-
as
-
-
control decision % to calculate

can decisions
of Subsidary
Co .
making .
with
probability
It must have No joint control clause exist Expected value
ability to control
-
-
exercise on . .
Significant influence
That
Strategic operational and financial decisions is
gained through Expected value is then multiplied
-
-
to calculate Present
Ability to exercise control can be
gained
due a
shareholding of
20% of shares with discount
factor
-
more
,
to 3 clause AoA
va#
Any
: in
than contract with SHS

OB with Good-will time
shareholding of Any Company calculated at acquisition
50% 3, is
of
-
more
- .
Contract Associate also accounted under

Equity of sobsidary
between shareholders
for
- -
is .
- Clause in Articles
of
Association .
Aceountinginconsolidate.DE# -
Cost
of Investment xxx
If investment then Investment minorinvestment Fair at acquisition date

classified subsidary classified when value
is is
shareholding
Nci xxx
of
-
as
-
as
-
:÷÷i÷÷÷÷÷÷÷
.÷÷÷÷÷÷÷i÷÷÷÷÷÷÷÷
has
Joint
power
of joint decision
making
in other co .
canned
I, Cashconsideratio
to
: In this method Parent co .
pays
:÷÷÷÷÷÷e
:÷ ÷ ÷ ÷ ÷:÷ ÷ ÷ ÷ i
G
to
liabilities
its fair
are
identified and
they are valued
.
decision
making
that SH cash other co Shareholders value acquisition date
for
-
any
means .
.
on
take It amount Fair

decisions
of
co alone Consent
of EI Sts is valued at
of
cash
paid as
goodwill calculation
purpose This is called
-
. .
.
Consideration
is
required value
adjustment
.
.
.
Joint control sharesconsideral.io# method Parent Co done Consolidated

is obtained when 2 In this
gives As fair value
adjustment is in
-
.
-
,
There two its shareholders FS

b are SHS and both own 501 own shares to other co : its
respective defer tax G Excess
. .
o
It Parent to recorded
depreciation adjustments
at co
shares each is valued market price of
also need be
-
.
2
, clause
of Joint control exist in AOA 0¥ in shares .
inConsolidated#
This
Deyerredconsiderationeo
contract between sits . 3, means that Parent co .
Joint venture at date

-
investment is
subject to Equity will consideration
pay a
future
.
at Present
AccountingrulesinConsolidatedF# -
It is valued value
of future
PU
flow
cash
g payable
i .
÷ ÷ ÷ ÷ ÷ ÷ i:÷f ÷ :÷
at
Intra
group
transactions need to be
adjusted in Non
controlling interest is calculated each
year
end :
EI soo Net Assets sion

- - -
. :
Consolidated FS Fair value NCI

acquisition date Pco 90-1 shares
of
on xxx
-
owns
-
. .
.
If Add PG
any
stock
of
intra
group
transactions is in transit Post acquisition of profit of
Sco xxx sold 101 shares
for $3m
-
share
-
:
-
. .
. .
then that stock should be assumed Less URP ( xxx)

as
Adjustment
-
:
-
received
by co .
which was
expected to receive
-
Less:DiuidendpaidC# Cash $3m

rnessdeirudaeted
"
Gain
it .
gxx disposal er on =
IF transaction Consolidated calculated Neilson

any goods
intra remain
of group
reserves are
-
-
.
Parent Retained
unsold in
receiving co
inventory then co
Earning
xxx
-
. .
unrealized profit should be eliminated which

Subsidary Co poet acquisition If
Foriegn subsidary it
xxx has
reserves 9
-
involved
-
.
is
intra
group
sale
adjustment
URP xxx
different presentation currency then its Fs will be
-
was on
-
translated Parent 's

Eg Jostle profit $400
Diuidendpai.cl# to
currency
-
-
. .
-
/ §
↳^ # t • ^ -
Income statement is translated

through
50k¥30 IF Subsidary is
acquired during the
year then its
Average Exchange rate
soidgorss.jo
-
Prod"
,
statement consolidated SOFP translated

through closing Exchange
will
for part of
be
subsidiary co income the is
-
costI300 3rd consolidated because rate

SOFP is as whole
year
a
.
party
- -
-
it is an as at position -
Equity Accounting is done

for
Associates 3 Joint
±÷÷÷÷÷i÷÷÷±÷÷÷t .
:÷÷÷t÷÷÷÷÷÷÷÷
: :::÷÷:÷÷÷ .
Outstanding balance "

receivable G
' d
intra Ncl
of group of Profit of post Acquisition period
-
-
share xxx
should be eliminated Cash Less : Dividends Received (xxx)

payable
. xxx -
Income PGL
In Consolidated statement loss
ondisp lesso.IM/sairment(#
-
- -
, .
PGL
Intra
group
sale value should be eliminated gain disposal
Carrying
etxx
on
-
-
Revenue Sco
from 9 Cost
of
sale .
goodwill xxx
-
- URP amount should be added in cost #setxx

it IF sold the
of
sales as will reduce
closing shares
of subsidary but are control
-
stockva# not lost then continue to be

subsidary
is ,
will
transaction blue
consolidated
before It will
as be .
a
Equity holders .
NCI balance will be increased
by
% Net Assets
of shares sold multiplied with 56 .
Gain QR loss disposal of will

value .
on shares
be recorded in
Equity net in PGL
,
.
4 You are an audit manager in Brearley & Co, responsible for the audit of the Hughes Group (the Group). You are
= the I
reviewing -financial
audit working papers for the consolidated 2 -2--0
statements relating to the year ended 31 March
⑤ 2018. The Group specialises in the wholesale supply of steel plate and sheet metals. The draft consolidated financial
EEE -
statements recognise revenue of $7,670 million (2017 – $7,235 million), profit before taxation of $55 million (2017
– $80 million) and total assets of $1,560 million (2017 – $1,275 million). Brearley & Co audits all of the individual
T as wella e =
-
company financial statements as the Group consolidated -The audit senior has brought the
financial statements.
following matters, regarding a number of the Group’s companies, to your attention:
-
Potentiated
- -
IOI →
subsidy
¥¥⑤t€€⑤-€F②#gagt
>
(a) Dilley Co
The Group purchased 40% of the share capital and voting rights in Dilley Co on 1 May 2017. Dilley Co is listed on
an alternative stock exchange. The Group has also acquired options to purchase the remaining 60% of the issued
shares at a 10% discount on the market value of the shares at the time of exercise. The options are exercisable for
Favour
18 months from 1 May 2018. Dilley Co’s draft financial statements for the year ended 31 March 2018 recognise
oentity-gg-IE-EG.SE#mxyz
-
revenue of $90 million and a loss before tax of $12 million. The Group’s finance director has equity accounted for
Dilley Co as an associate in this year’s group accounts and has included a loss before tax of $4·4 million in the
FETT
consolidated statement of profit or loss. (7 marks)
(b) Willis Co
Willis Co is a foreign subsidiary whose functional and presentational currency is the same as Hughes Co and the
remainder of the Group. The subsidiary specialises in the production of stainless steel and holds a significant
portfolio of forward commodity options to hedge against fluctuations in raw material prices. The local jurisdiction
does not mandate the use of IFRS Standards and the audit senior has noted that Willis Co follows local GAAP,
whereby derivatives are disclosed in the notes to the financial statements but are not recognised as assets or
liabilities in the statement of financial position. The disclosure note includes details of the maturity and exercise
terms of the options and a directors’ valuation stating that they have a total fair value of $6·1 million as at
31 March 2018. The disclosure note states that all of the derivative contracts were entered into in the last three
months of the reporting period and that they required no initial net investment. (6 marks)
- (c) Knott Co
=
Knott IE%%**¥EIE②
Co is a long-standing subsidiary in which the Group parent has a direct holding of 80% of the equity and
IEEE IEEE
-
voting rights. Audit work on revenue and receivables at Knott Co has identified sales of aluminium to its parent
= in March
company e- 2018 with a total sales value of $77 million which have been recorded in the subsidiary’s
financial statements. Audit procedures have identified, however, that the receipt of aluminium was not recorded
Z FEESE
by the parent company until 2 April 2018. The group has made no adjustment for this transaction in the draft
-←o
consolidated financial statements. Knott Co makes a 10% profit margin on all of its sales of aluminium.
(7 marks)
Required:
Comment on the matters to be considered and explain the audit evidence you should expect to find during your
-
i -
review of the Group audit working papers in respect of each of the issues described above.
(20 marks)
[P.T.O.
Page 123
.f:i÷ ÷ ÷ ÷
tlugheseroup la)→DiHeyCo.-7ma k)→knottCo.-7mark#
tax consolidated Fs Intra Knott co to Parent
Loss
before of Dilley
co included . in
group
sale made
by . co .
$4.4
of represents 81 of group profit before tax
m worth $ 77M
represents It .
of group
revenue
therefore
thereforematerialtomaterialtofs.AE
per IFRS by stock transit sale made Knott
Hughes group should share intra G
group
in
of
-
to assume .
to Parent assumed
options held
of Dilley
G .
shares
of
60%
holding
as co .
of
$77 m should be as
exercised
for control evaluation purpose as those share
receiuedbyparentco.ae/-yearendog3lMarch2#
to to to received
options
favourable Hughes group
are
Inventory of stock due lot in transit assumed be
.
discountinexcercisepriceclause.by Parent co will .

be unsold at
year
end as it
hot and Parent co at end

Hughes group actually Dilley not received
by
shares in co
year
owns .
was even
- .
exercised to eliminated
if these Got options are also assumed as
Unrealized profit needs be
of
477mmol .
then control evaluation purpose holding will be 477M Knott earned it intra
for
co
of profit of
as .
on
loot shares .
Considering this
Dilley G . should be
group
sale and this
inventory is unsold
for group
treatedassubsidargjorconsolidatedfspurpfatyearend.tt not considered intra 9
if payable
Director has further receivable
of Hughes group group
inane exist in
:÷÷÷i:i÷÷÷÷÷÷÷÷÷
paid
÷÷÷÷÷÷
for
:÷ ÷ ÷i ÷ ÷ ÷ ÷ :÷: ÷ ÷ i÷:÷ ÷ ÷: ÷i÷ ÷ ÷ :÷ ÷ ÷
acquisition
of
401 .
shares as stock in transit
of
intra
group
sale is not
to recorded Further unrealized

copy of share
option agreement to
verify option profit is ok as
profit
-
.
purchase of
60't shares at lot discount to Market is not eliminated .
Lastly receivable are Ols as
priceontxcercise.de# receivable recorded

by Knott co .
on intra
group
sale is not eliminated .
Ftractsgubseguenteventstouer.gg/hattock
at transit received Parent end
in
year
was
by
G .
at later date
transaction to
copy of group policy for
intra
group
-
verify lot Profit earned by Knott intra

.
G . on
grouts
I-III
--sT@-#_
- - -
-
e- = =
-
-
Gm
⑤* 8=-0 =@ E
II -3--02 Toooo
I 2 -
I -
÷
Page
Page 147 171
of 416
:L /
(a) ii to
Ader
Group → 8marks
copy of Bank statement
verify Purchase consideration
- -
Baldrick Co $l8m represents

of paidJoracquisitiongBaldrick
.
assets worth bit
groupassetsthergorematerialto# Minutes with to

management
Discussion
of gain
-
Baldrick detail
Ader
Group should treat Co . as a
subsidarg about basis
of
claim that
operations are
because
notintegratedanduerifyitsauthenticity.fr sufficient
its
shareholding of 52-1 . shares is
control
Apparently
acquiring
.
no restriction exist
clause Association OE
in
form of any Articles
of
in
in contract between shareholders which restrict Ader
GrouplsabilitgtoexcercisecontrolonBaldr.tk#
Considering Ader
Group 's control on Baldrick G .
complete consolidation of
Baldrick Co . Fs should be
done Its statement

as a
subsidiary . income will be
acquired
consolidated
for 3 months as shares were
and end
January
in 2015 31 March 2015
year is .
SOAP will be consolidated whole as it is an
asatposil.io#
Management of Ader
Group has riot done consolidation
i÷÷÷÷÷÷
:÷÷÷i:÷:÷÷÷÷÷ ÷ ÷ ÷ ÷ ÷
31 March 2015 .
They may
loss
have
making
made
in
year
false argument
end
of
of integration
lack to avoid
of of operations
consolidation Baldrick G. due to its
of
as
,
consolidation be
as
subsidiary group
results will
badly
affectedbecauseitisinloe.se#
copy of
share
purchase agreement to verify 52't
-
shares Baldrick
of
Co .
purchased by Ader
Group on
lJanuarg20#
:÷ i÷f ÷ ÷ :i÷ ÷ f÷ :i÷ i÷ f
IFRS 9 -
=
Financial Assets Financial Assets
# +
-Right-
This
accounting standard deals with
classification and
-
valuation Financial Assets Debt instruments include

of
issues
-
-
.
financial Assets include : It includes Sheree E) to receive cash

of
>
-
y
a , cash
Equitydnstruments other entities held
by Right to receive shares Debtdnstruments
#
Right
tradition
to Receivables
Organization
2 , receive cash → Loans .
given by entity investment in

,
loan notes
Faet¥L Fairvaluethroughocl
3, Shares
of
other entities → Investment in shares •
Transaction cost is -
Transaction cost will

FaihoughP Amortize Fairvaloethrooghocl
which are Minor investments recorded in PGL be recorded in 04 -
Debt instruments -
Those debt instruments which will be -
These are the
Right to
4, shares→ Future contracts Fair Fair till
valued at valued at held term G
maturity
for long
receive value held debt instruments
which are
for are
-
-
5,
Derivative contracts to
entity
favourable
which at at end short term
classified this head be held
are value each each
year year E¥ in which will
.
,
. .
↳ Contracts characteristics end with a loss

being investment valued at Present value cash term bet
which have
following gain of flows for long
-
. -
in
settled Gain Hoss will be recorded debentures fair value measurement

future for
Oct
be No not till
maturity
I, will in -
in -
2, No initial investment of low revaluation G disposal -
long term shares ie .
trading -
Each
year unwinding of
discount -
valued at
investment will be recorded intention is to hold •

Derivative contracts will be done .
Fair value at each
:
:÷i÷÷÷i
÷
-
÷
in PGL .
:i÷ ÷ :÷ ÷ ÷ ÷ :÷ i÷ ÷ ÷ ÷i
a
such
Business model
debt instruments
to
till
hold
maturity .
2,
Contraae : This
test that
flows
means
cash
that debt instrument should

from
contract E
be
fixed in
they
should not be other than
Principalities
:/ : ÷ H ÷ : ÷ i ÷
Set-off
financial
35tage3indicatorss-objectiuec-uidencesrelat.mg# discovered
bfairvaluetledge
financial Asset set to
can be
off against a
debt impairment are This
hedge created
hedge the Fu
changes
-
is
-
.
Incurred loss debt G liabilities

Liability if following conditions are
satisfied : -
model is
applied G is
of recognized assets .
b There should be a
legal right of net
written Eof Hedge for Fu
change of inventory
-
settlement
Hedging Hedge for Fu
change
investments
of Plant
-
to to
3
Organization must intend to do net settlement
Hedging reduce risk In order
hedge Hedge for Fu
change of
E
Equipment
-
-
means .
Both item instrument will

3)
Timing of cash flows should be same risk
different Forward
hedging instruments used
Hedge G
Hedge
-
.
are .
alls conditions Contract be valued at Fair

When
satisfied only then value
-
-
are .
future contract Gain l

setggcanbedon# loss
of hedge instrument will be
- -
contract
Impairmentojfinanciaiasset option recordedalongwithgo.in/lossgtledgeite#
-
from
If value Asset
of
financial
falls suddenly then it
Hedge accounting perspective Hedging activity is
2.cashjow-t.de
-
-
:
,
divided two heads It

suffer impairment cashflow through
loss
may is
hedge for future
.
on : -
a
Financial valued fair acquired

Normally Assets are at Fair value 1 value
hedge which
Hedge item will be
- .
therefore impact of impairment adjusted cashflow hedge

This that
Hedge item not
is auto in 2 .
-
means is
,
fair value
changes .
-
for
hedge accounting purpose two terminologies are used
recognized in FS
Amortized cost
category Gain l loss Fair
Debt instruments
classified in b
tedgeitem subject matter risk
of
value
change Hedge
-
-
means whose on
are
not valued at Fair value
,
rather they are has to be minimized .
instrument is
parked in Oct
,
until Hedge item
÷ ÷ ÷ ÷ ÷ ÷ ÷ ÷: ÷÷ ÷ ÷ :÷ ÷:÷ ÷:÷ :÷ ÷ ÷: ÷÷÷÷÷:÷÷÷÷:÷÷÷÷÷÷÷

usually based on past practice .
.
-
future contract
÷
:÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷÷
credit losses expected to arise next 12
-OptionContr
-
in
predicted Basic
of Hedge accounting
months to
m.at#h-GeneralAHowanceisrecordedagainstde principle is
. -
are
Fair Item instrument

Hedge value
changes of Hedge
3
Indicator
2¥ These specific indicators in
: are :
Same
of credit
loss but still
,
net objective indicator an . -
period
It usually includes indicators specific to any debt -
same statement
like
delay in payments falling financial position
,
.
-sameLineitem
Credit
of lifetime predicted of
-
losses that debt
-5peciJicaHowanceisrecord#
T I
-
II
-
-
-
-
I -
-
Esses =
-
-
FIf¥F ←
←
these ⇐right
.ws#zE-E-z=---=@-@-
,
I
- ③ --③
-
- -8
Page 462
:÷ ÷ ÷ ÷i
Robstero.lajii-financialh.se#-5marks-
Financial Asset
recognised of
$126m
represents
2.8tgassetsthereforematerialtoFS.AE
per IFRS Robster correctly classified
-9
,
Co . has its
investment PGL head

through
value
fair
in shares in
it is short term investment which held

for
as a is
trading.Gainofs350.oooiscorrectlyreeognigedinpe.LI
However has
management wrongly classified this investment
in Non current Assets It is as it should be

wrong
.
classified as current Asset

considering its held
for
trading status .
Non current Assets are as E. Current
÷÷:÷÷÷:÷÷÷÷:÷:÷: ÷÷÷i
4 You are an audit manager in Brearley & Co, responsible for the audit of the Hughes Group (the Group). You are
•
I
reviewing the audit t
working f
papers ②
for the consolidated financialI I
statements relating to the year ended 31 March
-
2018. The Group specialises in the wholesale supply of steel plate and sheet metals. The draft consolidated financial
II
statements recognise revenue of $7,670 million (2017 – $7,235 million),z =
- -
profit before taxation of $55 million (2017

-
- -
– $80 million) and total assets of $1,560 million (2017 – $1,275 million). Brearley & Co audits all of the individual
STAI T
company financial statements as well as the Group consolidated financial statements. I the
The audit senior has brought
-
-
- -
following matters, regarding a number of the Group’s companies, to your attention:

-- -
E-
-
(a) Dilley Co
The Group purchased 40% of the share capital and voting rights in Dilley Co on 1 May 2017. Dilley Co is listed on
an alternative stock exchange. The Group has also acquired options to purchase the remaining 60% of the issued
shares at a 10% discount on the market value of the shares at the time of exercise. The options are exercisable for
18 months from 1 May 2018. Dilley Co’s draft financial statements for the year ended 31 March 2018 recognise
revenue of $90 million and a loss before tax of $12 million. The Group’s finance director has equity accounted for
Dilley Co as an associate in this year’s group accounts and has included a loss before tax of $4·4 million in the
consolidated statement of profit or loss. (7 marks)
'ai↳m
"
€07
(b) Willis Co > derivatives
e -
y
-÷@#
Willis Co is a foreign subsidiary whose functional and presentational currency is the same as Hughes Co and the
-
-
T
-
remainder of the Group. The subsidiary specialises in the production of stainless steel and holds a significant
T - I I -
portfolio of forward commodity options to hedge against fluctuations in raw material prices. The local jurisdiction
I
does T
not mandate #
the use of IFRS Standards and theI 7-
audit senior has noted Toooo
that Willis Co follows local GAAP,
-=E=⇐ eE=E@=
whereby derivatives are disclosed in the notes to the financial statements but are not recognised as assets or
liabilities in the statement of financial position. The disclosure note includes details of the maturity and exercise
terms of the options and a directors’ valuation stating that they have a total fair value of $6·1 million as at
31 March 2018. The disclosure note states that all of the derivative contracts were entered into in the last three
F -③
-
=
-
months I
of the reporting period and that they required no initial net investment. (6 marks)
re(c) Knott Co
-
Knott Co is a long-standing subsidiary in which the Group parent has a direct holding of 80% of the equity and
voting rights. Audit work on revenue and receivables at Knott Co has identified sales of aluminium to its parent
company in March 2018 with a total sales value of $77 million which have been recorded in the subsidiary’s
financial statements. Audit procedures have identified, however, that the receipt of aluminium was not recorded
by the parent company until 2 April 2018. The group has made no adjustment for this transaction in the draft
consolidated financial statements. Knott Co makes a 10% profit margin on all of its sales of aluminium.
(7 marks)
Required:
Comment on the matters to be considered and explain the audit evidence you should expect to find during your
2 -
I #
- -
review of the Group audit working papers in respect of each of the issues described above.
(20 marks)
[P.T.O.
Page 123
:÷ i÷ ÷ ÷
thghese.ro#-Cb)willisCo.-6marks-
Derivative contracts $6 .IM ill
having value
of represents .
0JPBTthergorematerialto#
FS
Hughes Group
translate should Willis co .
, according
to IFRS consolidated to
as FS will be
according
IFRS
group follows IFRS
As Willis Co.
.
whole
except ,
its Fs translated
therefore will be
from
local
reportingframeworktoIFRS.AE
per IFRS Hughes -9 should Derivative
recognize ,
group FS
contract Willis Consolidated at value
of
co
fair
. in
PGL
through .
As Derivative contract has
fair value
of
$6 .IM it Financial
,
therefore
will be
recognized as
AssetalongwithgaininPGLgs6.LI
Management of Hughes group net recognised has
Derivative instrument Consolidated FS in as Willis co .
GAAP
has not
recognized as
per Local It is
. a
i÷÷÷÷÷÷÷÷÷÷÷÷
÷÷÷÷÷÷i÷÷÷
⇐
E-
HI
T T
Page
Page 154 456
178
of 416
t⑤
-
=
a-
→
Dominoes
Page 457
HI
Page 459
HE
[
Page
Page 173 197
of 416
22€ It € #
€0 of
thayer # Prod OH
-
Material
-
⑥I
.
- - - -
-
I-III
-
I - -
¥ EFFETE
-
✓
→
Doze labs
✓ →
Dominate
- -
Page
Page 117 141
of 416
I
Osier Ca)→7mar
$21 m
Inventory of osier co .
worth represents 1091 .
of
assetsthereforematerialtoF#
Direct labour cost allocated unit is on each produced
the basis estimated production time A risk exist
of
on .
that
production time is
wrongly estimated as a result
ofwhiohdirectlabourcostiswronglyallocated.pl?roduction
overheads are
of
also allocated on the basis
forecast annual units

,
which also
carry a risk
of wrong
allocation Further
if forecast
is not correct .
another risk
that adjusted have Kender

management may
is over
allocationwrong.ly#
IF estimations done
of inventory
then valuation
wrong
are
,
affected be
of closing
misstate
will which will value
,
stockEprgi#rental
copy of documents
and such as cost
agreements
-
for other
production OH to
verify the
fixed
cost
amount
Minutes
of discussionannual management to basis
with
verify
-
units that
of estimating forecastactual units
and how much
forecast vary from

.
Extracts subsequent period adjustments to

verify
of
-
adjustmentforouerlunderabsorbed.co#
•
-_@ Feed # -
= = - -
-
- -
= -
F -
-
Doneinclass
¥707 - -
- e
- - -
⑤E
-
I# EE E
- - -
- -
=
-
- -
⇐ FEET -
EEE
b- - -
-0
- -
-
TL
- - -
-
in
E #
I
#
I-III I
Page
Page 104 128
of 416
f-
IT
Page
Page 105 129
of 416
:i÷ : f ÷ :÷f
Pigeon CDTradeReceiuo.be# → 7- marks
(b)
Depreciation → Smarts Trade Receivables worth $450 m represents 23.6-1
of
.
Prior recorded to
period adjustment
worth $2 om
in relation
change
assets
in
assetsthereforematerialtoFf
introduced
life of assets
of New
Billing system
represents lost
during.
year
the creates
thergorematerialtofs.ci risk
of misstatement
if
raised at
wrong as invoices are
IAS dates then it debtor This

As
per 8
Goldfinch Co should record
change misstate
ageing analysis
in can
-
. .
willaggectmanagementjudgementgdebtorallowances.ci
prospective adjustment
assets it
life of as a ,
as is
change in estimate .
Depreciation
to
over
remaining useful
Debtor receivable
days Residential
showing abnormal trend
are
customers increased
Debtor
life will be
adjusted according revised
remaining
as
days of
usejullife.by that customers
12 't
,
whereas
of
Business reduced
by
wrongly recorded
it This
happened despite that debts
Management of Goldfinch 91
co has Business
of
. .
.
It assets increased to
as a
prior period adjustment has Ols G customers have
greater as
compared
.
Retainedc-arningbyszom.residentialcusl.com#
A Additional
management of Goldfinch co may
used
exist that
risk
judgements by management while .
are
have
intentionally manipulated life of assets E. increased debtor allowances It
making of
.
carries a risk
: ÷:÷ i÷ ÷ ÷ ÷i:÷ ÷÷i:÷÷÷÷÷÷÷÷÷÷÷÷÷

:÷i÷÷÷÷÷÷
predation charge
÷÷÷÷÷
shipwithGddfinehgrouptoverijytheirimpairment.de
Recalculation
verify
by management
schedule
of
calculated
to
accuracy revised
E) Extracts to assets
of
NCA
register verify cu
of
on
date
of change life depreciation in as revised
chargewillbecakdatedontha#

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3 Matters To Consider, Audit Procedures & Audit Evidences

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Matters to consider ,

Audit Procedures G Audit Evidences

discuss that what matters

Following two leases can claim exemption from Amortization Exp .

capitalizationTees right to asserting

obtain Leaseback term should be

Evidence document asset term G considered

Extract maintenance responsibility of asset

It should net be recorded as a sale .

Asset will continue to be

sie:p:::#'i'E. 's:i:i is:B.io#Ei.u:::ei

Statement of profit or loss

(ii) Legal claim

(iii) Asset impairment

it should be claimed on all similar leases .

Copy of Bank statement to sale

Leisure sold leisure

assets FS Further term

that Ea rewards leisure complex

transaction Sale leisure which has

the following your attention:

the property its

then sale G leaseback transaction

to asset leaseback term

agreement G copy of Bank statement

Property is held with intention to sell -

is net of selling properties

2, fair value model .

valued at Fair value at each end

If Co wants to the model it has

to rules IAS relation to

of represents 13% of PBT therefore immaterial

revaluation because $25,000 will

Revaluation $25000 should be

and has also not

, then impairment needs be booked .

t b Natural Disaster 4, Bad Economic

loss can be reversed

Assets which not depreciated amortized 3 asset date reversal

tested This had calculated

donot applies on land .

therebeenimpairment.es Every organization will have a

Asset available but IF then

jorimpairmentwhenindicatoran.se# usually CGU

arises However included in CGU then

✓(ii) Investment property

year ended 31 March 20X4.

=amount, based # Ian

recoverable $8·85 million. As a result, Lifeson Co has recognised

accounting transactions in relation to the shopping mall:

Reversal the worth

which $0775m and second amount

there been no impairment and Cv had there been

impairment Difference of these

remaining impairment basis

calculated basis received

(ii) Legal claim

✓(iii) Asset impairment