Chapter 1 Introduction to Corporate Reporting

Question 1

1.1 Components of financial statements prepared under IFRS Standards

Answer 1

IAS 1 Presentation of Financial Statement requires a complete set of financial statements includes a statement of financial position, profit or loss and OCI, changes in equity, cash flows and notes to the financial statements.
Statement of profit or loss and OCI: items not classified to profit or loss includes gains on property revaluation, equity investments classified as FVOCI, remeasurements of defined benefit pension plans and share on property revaluation of associates income tax. Exchange differences, cash flow hedges and income tax relating to items that may be reclassified can all be items subsequently go to the profit or loss.
Other comprehensive income includes income and expenses that are not recognised in profit or loss, but instead recognised directly in equity.

Question 2

1.2 IASB Conceptual Framework

Answer 2

This includes objectives of financial reporting, qualitative characteristics of useful financial information (including fundamental characteristics of relevance and faithful representation) and enhancing characteristics (comparability, verifiability, timeliness and understandability), underlying assumption – going concern, definitions of elements of financial statements (assets, liabilities, equity, income and expenses), recognition and derecognition criteria for the elements and measurement bases.

Question 3

2.1 The role of auditing

Answer 3

The role is to enhance the degree of confidence of intended users of the accounts. It provides an independent review with an opinion on the statements. For smaller owner managed businesses, an audit is irrelevant (no separation between owner and management). An audit could still be valuable to management as:
- It provides independent scrutiny of the business by professionals.
- Additional assurance is required for third parties, such as banks.
- Promotes discipline over maintaining accounting records.
- Reports to management on identified deficiencies in the internal controls of an entity.

Question 4

2.2 Requirement for audit

Answer 4

All companies registered in the UK should be audited, exemptions for small companies. The company must meet two of the following for periods beginning on or after 1 Jan 2016:
- Annual turnover £10.2m or less
- Gross asset total £5.1m or less
- Average number of employees 50 or fewer
The conditions must be met for two consecutive years. Insurance companies, banks, plcs and where shareholders own at least 10% of the shares and ask for an audit, are all exempt from the exemptions.

Question 5

2.3 Auditing regulation

Answer 5

Audit regulation promotes comparability of accounts which are audited to the same standards and therefore improves public confidence. All assurance engagements are governed by ethics, risk assessment, terms of engagement and international standards on quality control. UK audits are also governed by companies act 2006 and international standards on auditing.