Table of Contents

Table of Contents
Analysis and Correction of Errors
Audit of Cash and Cash Equivalent
Audit of Trade and Other Receivables
Audit of Inventories
Audit of Biological Assets and Agricultural Produce
Audit of Accounts and Notes Payable
Audit of Provisions and Contingent Liabilities
Audit of Current and Deferred Taxes
Audit of Employee Benefits
 Analysis and Correction of Errors
Two situations when correcting errors:
1. “When the Books are still open”
○ Nominal accounts are not yet closed to real accounts when the book is
still open. Thus, the company would have made a trial balance to show
all the nominal and real accounts
○ If there were a correction to be done, it can be directly adjusted from
nominal accounts

For example, there is a correction to be done for overstated sales and

understated accounts receivable.

Accounts receivable xx
Sales xx

2. “What the books are closed”

○ Nominal accounts have been closed to real accounts, more specifically
Retained Earnings.
○ If there were a correction to be done, it should be adjusted from real
accounts only

For example, there is a correction to be done for overstated sales and

understated accounts receivable.

Accounts receivable xx
Retained Earnings xx

Nominal Accounts
● These are temporary accounts closed each year-endIng
● E.g. Income and expenses
Real Accounts
● These are permanent accounts that are carried over to the next
year
● E.g. Asset, liability, and equity accounts
Two Types of Errors:
1. Counter Balancing Errors
○ These are errors that correct by itself if remained undetected for 2
successive reporting periods
○ E.g. Accruals and Deferrals

For example, there is an understatement of ending inventory,

2021 2022

Ending Understated Ending Understated

Inventory Inventory

Cost of Sales Overstated Cost of Sales Understated

Net Income Understated Net Income Overstated

Retained Understated Retained CORRECT

Earnings Earnings

2. Non-Counter Balancing Errors

○ These are errors that do not correct by themselves even if remained
undetected for 2 successive reporting periods
○ This remains an error until it is discovered
○ E.g. unrecorded depreciation
○ are not self-correcting errors
○ remains an error until it remains undiscovered and undetected
○ Examples:
■ Failure to record the following for a year:
1. Depreciation expense
2. Amortization expense
3. Doubtful accounts
○ This means correcting entries are always required
○ Adjustment method:
■ Determine the affected accounts
■ Adjust accordingly to what values are required
○ Misstatements (Departures from PFRS)
 ■ Material amounts are those that exceed a certain benchmark →
Preliminary or Planning Materiality Level
■ Pervasive indicates that the misstatement affects multiple items
in the financial statements

→ If there is no misstatement → opinion is unqualified

→ If the misstatement is material but not pervasive → opinion is qualified
→ If the misstatement if material and pervasive → opinion is adverse

Introduction to Auditing Analysis and Correction of Errors:

Auditing is the process of examining financial statements and records to verify their
accuracy and completeness. It involves analyzing financial data, identifying errors
and omissions, and providing recommendations for improvements. One of the
primary objectives of auditing is to ensure that financial statements are free from
material misstatements, errors, and fraud.

Analyzing Financial Statements:

The first step in auditing is to analyze the financial statements. This involves
examining the balance sheet, income statement, and cash flow statement to identify
any inconsistencies or errors. The auditor also reviews the notes to the financial
statements to gain a deeper understanding of the company's accounting policies and
practices.

Identifying Errors and Omissions:

Once the financial statements have been analyzed, the auditor will identify any errors
or omissions. These may include incorrect account balances, misstatements of
revenues or expenses, and failure to disclose material information. The auditor will
also look for evidence of fraud or other illegal activities.

Providing Recommendations for Improvements:

Once the errors and omissions have been identified, the auditor will provide
recommendations for improvements. These may include changes to accounting
policies and procedures, improvements to internal controls, and training for
employees. The auditor may also recommend that the company hire a forensic
accountant or other outside expert to investigate any suspected fraud.
Correction of Errors:

Once the errors have been identified and recommendations made, the next step is to
correct the errors. This involves making adjustments to the financial statements to
reflect the correct account balances and other information. The corrections may be
made by the company's accounting staff or by the auditor, depending on the nature
and extent of the errors.

Conclusion:

Auditing is a critical component of financial reporting, providing assurance that

financial statements are free from material misstatements and errors. By analyzing
financial statements, identifying errors and omissions, and providing
recommendations for improvements, auditors help ensure that companies are
reporting accurate and reliable financial information to their stakeholders. The
correction of errors is an essential part of this process, ensuring that the financial
statements reflect the true financial position and performance of the company.
 Audit of Cash and Cash Equivalent
When it comes to the audit of cash and cash equivalents, there are several things we
have to consider.

Cash is important because it serves as a medium for multiple transaction cycles. it

also serves as:
● the reason or importance of audit tests of various transaction cycles on the
audit of cash
● aid in further understanding of the integration of the different transaction
cycles

The auditor must distinguish between:

● verifying the client’s reconciliation of the cash balance
● verifying whether cash recorded in the general ledger correctly reflects all cash
transactions that occurred

Petty Cash Fund

● A fund used to pay for small expenses
● A petty cash custodian is designated to handle the petty cash fund
● There are two methods of handling cash:
1. Fluctuating fund system
2. Imprest System
■ Most companies use the imprest system to control their cash
receipts and disbursements
■ Cash received is deposited daily to the bank, while
disbursements are made through the issuance of checks
■ This is designed to provide a manual method for petty cash
balances and how cash is being utilized by the firm.
■ The Imprest Account is created to pay small or incidental
expenses of the firm and eliminates the possibilities of
unauthorized spending as the funds are made for pre-determined
purposes.
In auditing, a petty cash count is carried out. Below is an example of the petty cash
count.

Cash Accounted for:

Bills and Coins Pxx

Vouchers xx

Checks xx

IOU xx

Other items xx Pxx

Cash Accountability:

Impest Amount Pxx

Other items that are not to be in the Petty Cash Fund xx (xx)

Cash Overage/ (Cash Shortage) Pxx/(xx)

Reconciliation between the Cash In Bank account and Cash Balance in the Bank
Statement
● During the audit of cash, these are the other documents that are used.
1. Standard Bank Confirmation
■ This is often a blank positive confirmation letter
■ This confirms the existence of certain balances and the cash held
in the bank
2. Bank Reconciliation
■ The two primary documents are the bank statement and the
check register.
■ This is customarily prepared on a monthly basis by the client as
part of internal control over cash, addressing the existence,
valuation, completeness, and rights assertion.
■ It is a process consisting of comparing the bank account balance
to the cash balance of the entity's books.
● Scrutinizing the bank statements and cash books of the
entity, adjusting balances of the entity's bank account,
adjusting the balances of the entity's books, and recording
reconciliations.
 Bank Reconciliation Statement

Petty Cash Fund

As of Date of Count

Balance per bank Pxx

Add: Deposit in Transit Pxx

Errors xx xx

Total Pxx

Less: Outstanding checks Pxx

Errors xx xx

Adjusted Balance per Bank xx

Balance per book Pxx

Add: Credit Memos Pxx

Errors xx xx

Total Pxx

Less: Debit Memos Pxx

Errors xx xx

Adjusted Balance per Bank xx

3. Proof of Cash
■ This is also called “4-column bank reconciliation”
■ This reconciles the beginning balances, receipts, disbursements,
and ending balances of both Cash in bank account and cash
balance found in the bank statement.
■ This procedure is performed when an auditor assesses that the
internal control over the cash receipts and disbursements is
weak or ineffective, which is prepared to verify the account
 balances and account transactions occurring during a specific
period.
■ Below is an example
 Audit of Trade and Other Receivables

EXTERNAL CONFIRMATION
● Is the audit evidence obtained as a direct written response to the auditor from
a third party (the conforming party), in paper form, or by electronic or other
medium.
● Oral confirmation is usually not counted.

Positive confirmation request

● Confirming party responds directly to the auditor indicating whether
they agree of disagree with the information or providing the requested
information
○ Used for small number of material account balances or if risk of
material misstatement is high (specific fraud risk factors are
present)
○ Yield high quality audit evidence as it is direct communication of
an external party
■ Positive blank confirmation request - usually used for
extreme circumstances that the auditor does not have any
faith in the records of the client, and it there is a rick of the
confirming party replying but providing no verification of
the information
Negative confirmation request
● Request that the confirming party responds directly to the auditor only if they
disagree
○ Used for the large number of immaterial account balances or if the risk
of material misstatement is low and substantiated by operating
effectiveness of relevant controls
○ Failure to respond indicates a less reliable audit evidence
○ Auditor expects a very low exception rate
○ Auditor is not aware of any matters that would cause confirming parties
to disregard the requests
○ Should not be relied on as the sole procedure
■ Negative blank confirmation request - existing risks that
confirming parties are more likely to respond when the
information is unfavorable to them rather than when those are
favorable

Response to these requests may be:

● NON-RESPONSE
○ Failure of the confirming party to respond to a positive confirmation
request, or a confirmation request returned undelivered
● EXCEPTION
○ Response that indicates a difference between information requested to
be confirmed, or contained in the entity’s records, and information
provided by the confirming party

→ In response to an exception of non-response, other substantive procedures may

be done.
● Vouching sales invoice and shipping documents may provide more
substantive evidence to support receivable balances
→ Non-responses are not automatically classified as exceptions
● Exceptions are also not automatically misstatements.
○ May be due to late recording or due to cutoff, or other
reconciling items
→ Lapping is the application of payments from one account to another, in order to
conceal payments
PERFORMING CONFIRMATION

→ The auditor should evaluate and send confirmation to all accounts, regardless of
whether it is assessed to be collectible or uncollectible, since the goal of the auditor
is to attest to the accuracy of the records, and not its collectibility.

Classification of Receivables
● Current (IAS 1. 66)
○ An entity shall classify an asset as current when:
■ It expects to realize the asset, or intends to sell or consume it, in
its normal operating cycle
■ It holds the asset primarily for the purpose of trading
■ It expects to realize the asset within twelve months after the
reporting period
● Non-Current (IAS 1. 66)
○ If it is not fit in the criteria, it will be non-current assets.

Expected Credit Losses (IFRS 9)

ECL = Amount of Loss * Percentage of default * Loss given default
Stage 1: Performing
● There is no significant decline in credit quality
● The client ought to recognize 12 months Expected Credit Losses
● Interest Income based on the gross carrying amount
Stage 2: Underperforming
● There is a significant decline in credit quality that there is no objective
evidence.
● The client ought to recognize the Lifetime of Expected Credit Losses
● Interest Income based on the gross carrying amount
● There is a rebuttable presumption that the financial instrument is
underperforming when the payments are delayed/not met more than 30
days past due
Stage 3: Non-performing
● There is a significant decline in credit quality and objective evidence.
● The client ought to recognize the Lifetime of Expected Credit Losses
● Interest Income based on the net carrying amount
● There is a rebuttable presumption that the financial instrument is
underperforming when the payments are delayed/not met more than 90
days past due
 ● Cash and cash equivalents are highly liquid assets that are easily convertible
into cash.
● Examples of cash and cash equivalents include currency, checks, bank drafts,
money orders, and short-term investments.
● Auditors must verify the existence, ownership, and valuation of cash and cash
equivalents.
● To verify existence, auditors perform bank confirmations and conduct physical
counts of cash on hand.
● - To verify ownership, auditors review bank statements, canceled checks, and
other documentation to ensure that the cash belongs to the company.
● To verify valuation, auditors review the company's accounting policies and
procedures for recording cash and cash equivalents, and compare them to
industry standards and best practices.
● Auditors also look for signs of fraud or other irregularities, such as
unexplained cash shortages or unusual transactions.
● In addition to auditing cash and cash equivalents, auditors must also test the
company's internal controls over cash, including segregation of duties,
authorization, and monitoring.
● Auditors may also review the company's policies and procedures for cash
management, such as cash handling, cash reconciliation, and cash
disbursements, to identify any weaknesses or opportunities for improvement.
● Overall, the auditing of cash and cash equivalents is critical to ensuring that a
company's financial statements accurately reflect its financial position and
performance, and that the company is complying with applicable laws and
regulations.

Audit of Inventories
The auditor is responsible to consider the physical conditions of the inventory
(LCNRV) and the internal controls that affect the cutoff, quantity, and cost of the
inventory. They should be reasonably assured that the physical inventory is properly
counted and priced.

In the audit of financial statements, the auditor should perform certain procedures
that are based on their preliminary assessment of the risk of material misstatement.
The auditor’s responses to address the assessed risks of material misstatement due
to fraud at the assertion level may include changing the nature, timing, and extent of
audit procedures (ISA 240):
● nature — physical observation, inspection, and procedure design
● timing — modification of substantive procedure testing (could be near year
end)
● extent — assessment of the risks of material misstatements due to fraud
(increasing sample size, performing analytical procedures, and doing
computer-assisted audit techniques)

Asset valuation, estimates relating to specific transactions, and other significant

accrued liabilities, and other significant assumptions should be carefully examined
as well. Because significant unusual transactions can affect the risks of material
misstatement due to error or fraud, the auditor should take into account the types of
potential misstatements that could result from significant unusual transactions in
designing and performing further audit procedures.

Summary of Inventory (IAS 2)

Measurement
● Initial Measurement of inventories is at cost
● Subsequent measurement of inventories is at
● Lower of Cost or Net Realizable Cost (LCNRV)
○ Net Realizable Cost is Selling Price - Estimated Cost of
Completion and Disposal
● When comparing cost and net realizable value, it is through this
hierarchy
1. Item by item basis
2. Per Components
3. As a whole

Below is an example of an item-by-item basis inventory writedown:

Item A B C D

Cost Pxx Pxx Pxx Pxx

NRV xx xx xx xx

LCNRV xx xx xx xx
 Cost Pxx Pxx Pxx Pxx

LCNRV (xx) (xx) (xx) (xx)

Inventory Pxx Pxx Pxx Pxx

Writedown

Inclusion and Exclusion in Ending Inventory

● Ending inventory ought to take into the count of all inventory whose legal right
is with the entity. At year-end, a physical count of the inventory is done. That
count would be the ending inventory.
● However, there is some inventory that is in transit. These inventories’ legal
right lies with the entity responsible for them, depending on the freight terms
●
List of Freight Terms
Name Place of Transfer of Right

1) FOB Shipping Point Shipping Point

2) FOB Destination Destination

3) FOB Seller Shipping Point

4) FOB Buyer Destination

5) Ex-ship Destination

6) Free alongside Shipping Point

7) Cost, Insurance, Freight Shipping Point

Cost Flow Assumption

● There are four different cash flow assumption:
1. Specific Identification Method
■ In this assumption, the cost of inventory sold is specified by the
entity.
■ This is often used for companies that have high-valued inventory.
2. First-In-First-Out Method
 ■ In this assumption, the cost of inventory sold would be the cost
of the first inventory purchased.
● First-In-First-Out (FIFO) means that the first inventory that
comes in is the inventory that is sold or out

For computation purposes,

Date Units Unit Cost Cost

Beginning

Purchase Dates

Total Goods Available Sold

● Cost of Goods sold - Units sold* Unit Cost of Beginning or
Purchase Dates if Units of Beginning is not enough
● Ending Inventory - Units left * Unit Cost of Purchase Dates
or Unit Cost of those inventory left over

3. Weighted Average - Periodic (Simple Average Method)

■ In this assumption, the cost of inventory sold would be the total
cost divided by total units

For computation purposes,

Date Units Unit Cost Cost

Beginning

Purchase Dates

Total Goods
Available for Sale (This is the
cost to be
used. Found
through
Cost/ Units)
● Cost of Goods sold - Units sold* Simple average unit cost
● Ending Inventory - Units left* Simple average unit cost

4. Weighted Average - Perpetual (Moving Average Method)

■ In this assumption, the cost of inventory sold would be the total
cost divided by total units at the time of sale

For computation purposes,

Date Units Unit Cost Cost

Beginning

Purchase Dates

Total
(This is the
cost to be
used. Found
through Cost/
Units)

Sale Date

Ending
Inventory
● Cost of Goods sold - Units sold* Simple average unit cost
● Ending Inventory - Units left* Simple average unit cost
Audit of Biological Assets and Agricultural Produce
Summary of Biological Assets and Agricultural Produce (IAS 41)

Biological Assets
● living animal or plant that shows agricultural activities
○ The asset is capable of change
○ The entity is able to manage such changes and measure the changes.
● Can be divided into two categories: Bearer and Consumable

Plant Animal

Bearer IAS 16 IAS 41

Consumable IAS 41 IAS 41

Initial Measurement and Subsequent Measurement of Biological Assets

● Biological assets are measured at fair value less cost to sell initially and
subsequently
○ Fair Value Measurement (IFRS 13) is are to be chosen in this hierarchy
1. Quoted Prices of Identical Assets
2. Quoted Prices of Similar Assets
3. Unquoted Prices
○ Change in Fair Value are encouraged to be presented in two:
■ Physical Change
■ Price Change
● Bearer Plants are treated like PPE (IAS 16) and are measured at cost

For computation purposes, physical change and price change are found through this
method.

Price Change
Particulars Ending Price at Beginning Price at Price Change
Beginning Age Beginning Age (End- Beg)

acb xx xx xx

abc xx xx xx
 Total xx

Physical Change
Particulars Ending Price at Ending Price at Physical Change
Ending Age Beginning Age (End- Beg)

acb xx xx xx

abc xx xx xx

Total Adjustment xx

FVLCTS of the Newborns xx

FVLCTS of the Deceased (xx)

Total Physical Change xx

Agricultural Produce
● Is the harvested produce of the entity’s biological assets.
● Is measured at FVLCTS before and at the point of harvest
● When it is harvested, it will be considered as “Harvest”
○ Harvest is the detachment of produce from a biological asset or the
cessation of a biological asset’s life processes.
● At that point onwards, the harvest is subsequently measured at a lower of cost
and net realizable value (IAS 2).

Observation and reperformance counts can aid in determining the existence of the
specified number of animals or the specified amount of agricultural produce.
● satisfied rights and obligations, existence and completeness by counting the
animals, produce, and/or inspecting stamped animals

The assertion of management on biological assets are substantiated by:

● recalculation tests the accuracy and completeness of data used in the
valuation of biological assets, including the far value of the assets and any
adjustments made to their carrying amounts
 ● observation involves physically inspecting the biological assets to verify their
existence, condition, and other relevant characteristics which can help to
support the valuation assertion
● inspection involves examining or obtaining evidence regarding the accuracy
and completeness of the documentation supporting the measurement and
valuation of the biological asset
● physical examination is done to verify the existence and ownership of the
biological assets by observing them physically to verify their existence,
condition, and other relevant characteristics
● inquiry is done when the auditor engages an expert to assist with the
valuation of the biological assets, particularly where complex or subjective
valuation techniques are used

Physical Examination
● Verify the existence and ownership of the biological assets by observing them
physically to verify their existence, condition, and other relevant
characteristics.
● Example: The auditor may review the entity’s internal controls over the
measurement and valuation of biological assets to determine whether there
are any weaknesses that could result in errors or misstatements.
Inquiry
● Engage an expert to assist with the valuation of the biological assets,
particularly where complex or subjective valuation techniques are used.
● Example: The auditor may review the entity’s documentation and records
related to the measurement and valuation of the biological assets to assess
the accuracy of the information provided by management.

# ***Accounting Procedures***
Biological assets are living plants and animals that are used in agricultural
activities, except for bearer plants, which are accounted for as PPE.

Agricultural activity is the management of the entity of the biological transformation

and harvest of biological assets for sale or for conversion into agricultural produce or
into additional biological assets.
- biological assets are capable of change and procreation
- change of biological assets can be managed or have stabilized condition of growth
- changes in the growth of biological assets can be measured
Immature biological assets are those not yet capable of reproduction, and similarly
to self-constructed assets, they are yet to be in a condition that is intended for
management, as such costs related to rearing such are capitalized.
## **Initial and Subsequent Measurement**

● Biological assets are initially recognized as fair value less cost to sell.
● Subsequently, they are valued at fair value less cost to sell, and when
harvested, they are initially valued as inventory at fair value less cost to sell.

📌 Contract prices and transport costs are not necessarily relevant in measuring fair
value because the fair value reflects current market conditions in which buyers and
sellers would enter into a transaction, as such, the valuation of a biological asset is
not adjusted because of a contract.

Transport costs are already deemed as part of fair value, and should not be included
as costs to sell.
Costs to sell are those incremental costs in selling the asset, such as commissions
paid to brokers and dealers, transfer taxes, and duties and fees paid to regulatory
agencies or commodity exchanges.

**Harvest of Biological Asset from Bearer Plant**

Inventory XXXX
Biological Asset XXXX
Fair Value Gain XXXX

**Write-down due to FV Adjustments**

Loss on Inventory Write-Down XXXX
Allowance for Inventory Write-Down XXXX

● Bearer plants are PPE, so they are measured at cost plus any related expenses
associated to rearing that bearer plant.
● Current Biological Assets are determined based on time to harvest:

- consumable animal / plant — expected harvest life should be 12 months or less to

be considered a current asset (such as palay)
- bearer animals — expected to be noncurrent

## **Fair Value Measurement**

In order of highest priority:

- level 1 — quoted prices from identical assets in the active market
- level 2 — quoted price from similar assets in the active market (benchmarking)
- level 3 — unobservable inputs (using valuation techniques to determine fair value,
like discounting)

📌 If the fair value of a biological asset cannot be measured reliably, these assets can
be valued using the cost model: cost less depreciation less impairment.

## **Accounting for Growth**

Growth is accounted for as a component of fair value gain, which is increased by

procreation and physical growth, and decreased by harvests and deaths.

- account for changes in fair value by keeping age constant, but fair value at different
dates
- account for physical changes by keeping the date constant, but age is different, and
then add the fair value of the newborns at the date of birth, and less the fair value of
the deaths at the date of death

To recheck this, we reconcile

Beginning Balance XXXX
Purchase of Biological Asset XXXX
Selling of Biological Asset XXXX
Price Changes XXXX
Physical Changes XXXX
Biological Assets, End XXXX

Inventory of Bio Assets, Dec 31, 2021:

3-Year Olds XX XXXX XXXX
0.5-Year Olds XX XXXX XXXX
TOTAL XXXX

** Bio Assets, End should reconcile with TOTAL.

```

## **Government Grants for Biological Asset**

Government grants are a transfer of resources from the government to a third-party
entity, which can be in cash or a non-cash asset, and can be conditional or
immediate in nature.
This is governed by IAS 41 for Biological Assets, but in general (for PPE, etc.), it’s IAS
20.
In general, the government grant is recognized as income if it is reasonably certain
that it is to be received, or if the entity is qualified to receive it.
● - If conditions are not met or if it is a long-term condition, the government
grant is recognized as a deferred/unearned income up until the point where
the entity is qualified to receive it, which will be reduced against income.
● - If conditions do not become met or the entity is disqualified for the grant,
then the deferred income is reduced by a refund in cash.
● - For immediate assistance, it is immediately recognized as income against a
receivable.
● - For assistance of planting bearer plants, it is immediately recognized as
income because the grant is recognized to offset the costs in planting the
bearer plant in that reporting period.
● - For management of bearer plant plantation, it is deferred and recognized over
the useful life of the bearer plant.

● Grants related to assets can be recorded in the SFP as a deferred income

account or a deduction to the carrying value of the asset related
● Grants related to costs can be recorded in P&L as either a gain/loss in that
period as other income or separately, or as an offset to the cost related to the
grant.
● The alternatives are called the net method of presentation.

# ***Auditing Procedures***
● Observation and reperformance counts can aid in determining the existence of
the specified number of animals or the specified amount of agricultural
produce.
● - satisfied rights and obligations, existence and completeness by counting the
animals, produce, and/or inspecting stamped animals

The assertion of management on biological assets are substantiated by:

● - recalculation tests the accuracy and completeness of data used in the
valuation of biological assets, including the far value of the assets and any
adjustments made to their carrying amounts
● - observation involves physically inspecting the biological assets to verify their
existence, condition, and other relevant characteristics which can help to
support the valuation assertion
● - inspection involves examining or obtaining evidence regarding the accuracy
and completeness of the documentation supporting the measurement and
valuation of the biological asset
● - physical examination is done to verify the existence and ownership of the
biological assets by observing them physically to verify their existence,
condition, and other relevant characteristics
● - inquiry is done when the auditor engages an expert to assist with the
valuation of the biological assets, particularly where complex or subjective
valuation techniques are used
 Audit of Accounts and Notes Payable
Summary of Accounts and Notes Payable
Liabilities (Conceptual Framework; IAS 1)
● Present obligation of an entity to transfer economic resources as a result of a
past event
● These are classified into current and non-current liabilities:
○ Current Liabilities
■ Criteria
● it expects to settle the liability in its normal operating
cycle;
● it holds the liability primarily for the purpose of trading;
● the liability is due to be settled within twelve months after
the reporting period; or
● it does not have the right at the end of the reporting period
to defer settlement of the liability for at least twelve
months after the reporting period.
■ Measurement
● Undiscounted amount or estimated amounts
○ Non-Current Liabilities
■ Liabilities that don’t fit in the criteria
■ Measured at discounted amount

Events after the Reporting Period that might affect the presentation of Liabilities
● Refinancing
○ If the company has the discretion and intention to refinance a current
liability before or at year-end, it will be a non-current liability. Otherwise,
it’ll be considered a non-adjusting event
● Breach of Terms
○ If a waiver of the breach was given before or at year-end, it will be a non-
current liability. Otherwise, it’ll be considered a non-adjusting event
 Audit of Provisions and Contingent Liabilities
Liabilities (Conceptual Framework; IAS 1)
● Present obligation of an entity to transfer economic resources as a result of a
past event

Provisions
● A provision shall be recognized when:
○ an entity has a present obligation (legal or constructive) as a result of a
past event;
○ it is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; and
○ a reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision shall be recognized.

Provisions are liabilities of uncertain timing or amount, but not both (IAS 37.10).
When an entity has a present obligation owing to a past incident, a likely outflow of
resources is necessary to satisfy the liability with a reliable estimate of its amount,
then a provision is recognized.

Provisions are measured at the amount that would be required to settle the
obligation of transfer to a third party at the end of the reporting period, otherwise
known as the best estimate (IAS 37.36). It is discounted at current value while taking
into account risks and uncertainties. The best estimate is determined by (in order of
hierarchy):
● Most probable amount
● Expected value – sum of all probability-weighted amount
● Midpoint of the range - used especially if the amounts in the range are all of
equal probability

Contingent liability
● a possible obligation that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the entity; or
● a present obligation that arises from past events but is not recognized
because:
○ it is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation, or
 ○ the amount of the obligation cannot be measured with sufficient
reliability.
Contingent asset
● is a possible asset that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the entity.

Condition Asset Liabilities

Remote (<50%, highly None None

unlikely)

Possible (50%, equally None Disclosure as a

likely) contingent liability

Probable (>50%, more Disclosure as a Recognition and

likely) contingent asset disclosure as a provision

Virtually Certain (close to Recognition and Recognition and

100%) disclosure as an asset disclosure as a liability

IAS 37 Provisions and Contingent Liabilities versus IFRS 15 Revenue of Revenue from
Contracts with Customers
There are some estimated liabilities that could be either a payable or an
unearned income depending on whether or not the transaction is considered as a
sale and a separate performance obligation.

IAS 37 Provisions and Contingent IFRS 15 Revenue of Revenue from

Liabilities Contracts with Customers

Description This does not consider the This considers the liability as a
liability as a separate separate performance obligation
performance obligation that that forms part of the sales.
forms part of the sales.

Recognition Provision/ Payable Unearned Income

Measurement Estimate hierarchy: 5 Step Model

1. Most probably amount 1. Identify the contract
 2. Expected Value method ● “Does the
3. Midpoint method transaction
transfer
substantively all
the risk and
rewards of the
assets?” If yes, it’s
a sale
2. Determine the
performance obligations
and their nature
● “What are the
things to be
accomplished and
how are they
accomplished?”
● At a point of time
vs over a period of
time
3. Determine the
Transaction Price
4. Allocate the transaction
price to each performance
obligation
● The allocation base
is on standalone
selling price
5. Recognize revenue of the
performance obligation
according to its nature

Warranties and Premiums

Warranties can be separated into assurance-based or service-based warranties:
● assurance-based warranties — product is assured to function as intended or agreed-
upon
○ warranty is together with the product, and is not treated as a separate
performance obligation
○ governed by IAS 37 — warranty expense & warranty liability

● service-based warranties — provide service aside from the assurance of functionality

○ service is sold separately and should allocate the transaction price to the
service and product
○ governed by IFRS 15 — cost of warranty & unearned revenue - warranty
○ gross income is unearned revenue less cost of warranty
 →There is a five-step model under IFRS 15 regarding contracts with customers:
● STEP 1: Identify the Contract — determine if the rights and obligations associated
with the transaction are really passed onto the seller
● STEP 2: Determine the Performance Obligation — determine the promises in the
contract and how the contract is consummated
● STEP 3: Determine the Transaction Price
● STEP 4: Allocate the Transaction Price to the Different Performance Obligations — on
the basis of stand-alone price of each performance obligation
● STEP 5: Recognize Revenues on the Performance Obligations
○ at a point in time (sales)
○ over time (unearned income)

A customer option to acquire additional goods or services for free or at a discount is

accounted for under the said standard if the option provides the customer a material right
that the customer would not receive without entering into that contract. Otherwise, it is
accounted for as a provision.

According to IFRS 15:

● Sales with Premium
Cash / Accounts Receivable XXX

Sales XXX

Unearned Premium Revenue XXX

○ Sales are allocated transaction price recognized at a point in time

○ Unearned revenue is allocated transaction price recognized over time

● Purchase of Premium
Premium Inventory XXX

Cash / Accounts Receivable XXX

● Redemption of Premium
Unearned Premium Revenue XXX

Sales XXX

○ Assume that premium inventory is sold separately

Cost of Sales XXX

Inventory XXX
 ○ Assume that premium inventory is sold separately
● Expiry of Premium with Remaining Unearned Balance
Unearned of Premium Revenue XXX

Gain on Expiry of Premium XXX

Provisions are liabilities of uncertain timing or amount, but not both (IAS 37.10). When an
entity has a present obligation owning to a past incident, a likely outflow of resources is
necessary to satisfy the liability with a reliable estimate of its amount, then a provision is
recognized.

Provisions are measured at the amount that would be required to settle the obligation or
transfer it to a third party at the end of the reporting period, otherwise known as the best
estimate (IAS 37.36). It is discounted at current value while taking into account risks and
uncertainties. The best estimate is determined by (in order of hierarchy):

- most probable amount

- expected value — sum of all probability-weighted amount
- midpoint of the range — used especially if the amounts in the range are all of equal
probability

Contingent liabilities are possible (50% probability) obligations from previous events, the
existence of which is contingent on the occurrence or nonoccurrence of an uncertain future
event. Unless the probability of a resource outflow is remote, contingent liabilities are
disclosed. They are constantly analyzed to estimate the likelihood of a resource outflow,
making it a provision.

- **highly probable / virtually certain (~100%)** — recognize in the books and disclose in the
notes
- **probable / more than likely (> 50%)** **(provisions)** — recognize in the books and
disclose in notes
- **possible / equally likely / likely (50%) (contingent liabilities)** — disclose in notes
- **remote / less likely (< 50%)** — disregard
📌 For contingent assets:
- **highly probable** — recognize and disclose
- **probable (contingent asset)** — disclose
- **possible** — disregard
- **remote** — disregard

This is because of the concept of prudence or conservatism. When applying judgement, the
supposed judgement should not overstate incomes and assets, and not understate
expenses and liabilities.

If it becomes likely that an outflow of future economic benefits will be required for an item
previously treated as a contingent liability, a provision is recorded in the financial
statements of the period in which the likelihood changes (except in the extremely rare
circumstances where no reliable estimate can be made).

## **Warranties*
Warranties can be separated into assurance-based or service-based warranties
- **assurance-based warranties** — product is assured to function as intended or agreed-
upon
※ warranty is together with the product, and is not treated as a separate performance
obligation
※ governed by IAS 37 — warranty expense & warranty liabilies
- **service-based warranties** — provide service aside from the assurance of functionalit
※ service is sold separately and should allocate the transaction price to the service and
product
※ governed by IFRS 15 — cost of warranty & unearned revenue - warrant
※ gross income is unearned revenue less cost of warranty

📌 There is a five-step model under IFRS 15 regarding contracts with customers:

- STEP 1: Identify the Contract — determine if the rights and obligations associated with the
transaction are really passed onto the seller
- STEP 2: Determine the Performance Obligation — determine the promises in the contract
and how the contract is consummated
- STEP 3: Determine the Transaction Price
- STEP 4: Allocate the Transaction Price to the Different Performance Obligations — on the
basis of stand-alone price of each performance obligation
- STEP 5: Recognize Revenues on the Performance Obligations
- at a point in time (sales)
- over time (unearned income)

## **Premiums**
A customer option to acquire additional goods or services for free or at a discount is
accounted under the said standard if the option provides the customer a material right that
the customer would not receive without entering into that contract. Otherwise, it is
accounted for as a provision.
According to IFRS 15:
**Sales w/ Premium:**
Cash / AR
Sales
Unearned Premium Revenue
* sales are allocated transaction price recognized at a point in time
* unearned revenue is allocated transaction price recognized over time

**Purchase of Premium:**
Premium Inventory
Cash / AR

**Redemption of Premium:**
Unearned Premium Revenue
Sales
* assume that premium inventory is sold separately

Cost of Sales
Inventory
* to recognize a decrease in inventory

**Expiry of Premium w/ Remaining Unearned Balance:**

Unearned Premium Revenue
Gain on Expiry of Premium
```
## **Contingent Liabilities**
The auditor must first identify litigations which may give rise to a risk of material
misstatement, the procedures involved are:
- inquiry of the management and others within the entity, including in-house legal counsel —
auditor should prepare letter of audit inquiry and send it to legal counsel
- reviewing minutes of meetings of those charged with governance and correspondence
between the entity and its external legal counsel
- reviewing legal expense accounts — material amounts may indicate an underlying legal
issue

If the auditor identifies a risk of material misstatement, the auditor should seek direct
communication with the external legal counsel through a letter of inquiry. If the direct
communication is prohibited by law, regulation, or the respective legal professional body, the
auditor shall perform alternative audit procedures. If the auditor is unable to obtain
sufficient appropriate evidence, the opinion in the auditor’s report should be modified.

Written representation should also be requested from the management and those charged
with governance that all known actual or possible litigations whose effects should be
considered when preparing the financial statements have been disclosed to the auditor and
accounted for using the correct and applicable reporting framework.

The auditor must perform:

- risk assessment procedures
- identify and assess the risk of material misstatement
- respond to the assessed risk
- perform further substantive procedures to respond to significant risks
- evaluate the reasonableness of the accounting estimates and determining misstatements
- determine whether disclosures are in accordance with the relevant framework
- identify if there are indicators of possible management bias
- obtain written representation
- document their conclusions
Overall, the auditor should check the reasonableness of the estimates particularly relating to
liabilities, which they can look at past data or benchmark to similar companies.

## **Restructuring Provisions**
Restructuring provisions should only be done for costs incurred to:
- closing of a business
- winding off the operations
- termination of employees
📌 Retrenchment pay is similar to severance pay, and is part of the restructuring provisions
because it is for the termination of the employees.

## **Solving**
For premiums:
- remember that unearned income is cumulative up until the point where they expire or the
bargain is not available
- to get the earned revenue: # of coupons redeemed / # of coupons needed to redeem / total
premium inventory to be claimed up until that point x allocated transaction price of the
premiums
```
Unearned Premium Revenue, beginning XXXX
Unearned Premium Revenue allocated for the year XXXX
Unearned Premium Revenue, unadjusted XXXX
Less: Redeemed Premiums
Coupons Redeemed XXXX
Coupons Needed for Redemption XXXX
Premium Inventory Redeemed XXXX
Estimated Unclaimed Premium Inventory XXXX
% of Redemption of Inventory XX%
Unearned Premium Revenue, unadjusted XXXX (XXXX)
**Unearned Premium Revenue, ending XXXX**

For contingent liabilities:

● - take note of possible events after the reporting period which may require
adjustments to the financial statements:
○ - settlements out of court
○ - estimated liabilities are adjusted for the actual price if they adjusting events
are present
 Audit of Current and Deferred Taxes

Summary of Income Taxes (IAS 12)

There is a tendency for Accounting Income not to match or equate to Taxable income.
The discrepancy between the two can be attributed to:
1. Permanent Differences:
● These are non-taxable income or non-deductible expenses
● For example,
i. Income that are subject to final taxes
ii. Fines, penalties, and surcharges arising from violations of
laws
iii. Deduction in excess of limit (interest expense or EAR)
iv. Premium on life insurance paid on behalf of the employees
where the entity is the beneficiary
2. Temporary Differences
● These can be either future taxable incomes or future deductible
expenses. The main reason for these differences is due to timing
differences between the accounting method of recognition and
taxation.

Deferred Tax Liabilities Deferred Tax Assets

(Future taxable incomes) (Future deductible expenses)

Income Accounting income is less Accounting income is greater

than Taxable income than Taxable income

Asset The carrying amount of the The carrying amount of the

asset is greater than the tax asset is less than the tax base
base of the asset of the asset

Liability The carrying amount of The carrying amount of

liability is less than the tax liability is greater than the tax
base of liability base of liability
 Audit of Employee Benefits
Employee Benefits
● Are all forms of consideration given by an entity in exchange for services
● There are four types of employee benefits:
1. Short-term employee benefits
2. Postemployment Benefits
3. Other long-term employee benefits
4. Termination benefit

Short-term employee benefits

● are employee benefits (other than termination benefits) that are expected to
be settled wholly before twelve months after the end of the annual reporting
period in which the employees render the related service.
● include items such as the following, if expected to be settled wholly before
twelve months after the end of the annual reporting period in which the
employees render the related services:
○ wages, salaries, and social security contributions;
○ paid annual leave and paid sick leave;
○ profit-sharing and bonuses; and
○ non-monetary benefits (such as medical care, housing, cars, and free or
subsidized goods or services) for current employees

● When an employee has rendered service to an entity during an accounting

period, the entity shall recognize the undiscounted amount of short-term
employee benefits expected to be paid in exchange for that service
○ as a liability (accrued expense) after deducting any amount already
paid.
■ If the amount already paid exceeds the undiscounted amount of
the benefits, an entity shall recognize that excess as an asset
(prepaid expense) to the extent that the prepayment will lead to
○ as an expense
● For paid sick leaves and vacation leaves, there are two types:
1. Non-accumulating
■ All that was used/incurred during the year is expensed
immediately
2. Accumulating
 ■ When an employee opts to use their leave, the FIFO method is
used.
■ Any change in the wage rate is treated prospectively as a change
in accounting estimate
■ These can either be vesting or non-vesting.

Other long-term employee benefits

● are all employee benefits other than short-term employee benefits, post-
employment benefits, and termination benefits.
● Are treated like defined benefits plan

Termination benefits
● are employee benefits provided in exchange for the termination of an
employee’s employment as a result of either:
○ an entity’s decision to terminate an employee’s employment before the
normal retirement date; or
○ an employee’s decision to accept an offer of benefits in exchange for the
termination of employment.

Post-employment benefits
● are employee benefits (other than termination benefits and short-term
employee benefits) that are payable after the completion of employment.
● Could be two different types of plans, which are defined contribution plan and
defined benefit plan

Defined Contribution Plan

● The employers would give a fixed contribution to a separate fund or entity
annually. Later on, this fund would be given to the employees.
● Initial and subsequent measurement remains undiscounted
● All actuarial risk lies with the employees

Year 1 Year 2 Year 3

Beginning Balance Pxx Pxx Pxx

Contribution xx xx xx

Incurred (xx) (xx) (xx)

Prepaid (Accrued) Expense Pxx Pxx Pxx

Defined Benefit Plan
● The employers promise certain amounts to be given to the employee on and
after retirement.
● Initial and subsequent measurements are in discounted amounts using the
projected unit credit method.
● All actuarial risk lies with the employers.

Worksheet method from the Standard

Rate to be used high corporate Defined Benefit Cost Net Defined Asset or
bonds rate Liability

Profit or OCI Fair Value Defined

Loss on Plan Benefit
Asset Obligation

Beginning Balance xx xx

Current Service Cost xx xx

Past Service Cost xx xx

Interest Expense on Defined xx xx

Benefit Obligation

Interest Income on Fair Value on (xx) xx

Plan Asset

Contribution xx

Benefits Paid (xx)/xx (xx) (xx)

Remeasurement on DBO xx/(xx) xx/(xx)

Remeasurement on FVPA (xx)/xx xx/(xx)

(Actual Return- Interest Income)

Total xx xx xx xx

Change in Asset Ceiling xx/(xx)

Interest Expense on Effect of xx

Asset Ceiling

Total xx xx xx xx