Examiner report Flashcards
New operating segment
due to external pressure from stakeholders; + significant increase in revenue from renewables - RISK of possible management bias or overstatement of revenue
Business risks
- if licenses are decreasing, not just say its end, say about difficulties finding viable new sources of oil and gas extraction
highly regulated industry the significant impact of any breaches of that regulation, and the reputation damage and significant costs which would arise from any accidents or oil spills.
Risks with decommission - ANYTIME see 40-50 years - uncertainty attached to these costs due to the extensive timeframes involved.
the impact of the decreasing demand for fossil fuels and how a sustained decrease in the value of oil would make the Group’s operations prohibitively expensive to run.
Implications of BRs to RMM in FS!!!
if licenses revoked or not renewed - necessary cost for operating - this risk arises bc of env pressure or failure to meet new strict conditions - for FS VERY SIGNIFICANT AMOUNT OF ASSETS BEING IMPAIRED OR COSTS INCURRED
Candidates must ensure they fully evaluate the risk and its impact in order to maximise their technical and professional skills marks.
RoMM
it is significnat bc of MATERIALITY! MAGNITUDE*Likelihood! + estimation uncertainty for amortisation!
“Only the best answers made the connection between the decrease in the demand for the Group’s products and the possible impairment of the licences, as a reduction in the demand for fossil fuels may result in the early closure of some of the extraction platforms for which the licences had been granted.”
“average life used by the Group would result in some licences being amortised over too long a timeframe, resulting in overstated intangible assets and understated amortisation costs. Better answers were able to justify this as a RoMM due to the significance of the carrying amount of the licences and the estimation uncertainty which arose as a result of this amortisation policy”
RMM in operating segments
IFRS 8 -
Excellent candidates: “discuss the difficulties in assessing the disclosure due to the fact that this operating segment was not reported in the prior year and therefore no comparative information was available”
“use the scenario effectively to evaluate the risk of management bias around the Group’s new renewables division and discuss how as result of investor pressure, management may be motivated to overstate the revenue disclosed in this new operating segment. This was also an effective basis for candidates to justify why this area was identified as a RoMM.”
did not always then recognise that there was a risk of inappropriate or incomplete disclosure in the Group’s financial statements because of the new renewables division
RMM on extraction platform
say about assessing how these assets were depreciated,
any necessary impairment and the costs of decommissioning the platforms at the end of their useful life.
If procedure is requested on X - X is SIGNIFICANT RISK
Depreciation of these assets: Increased INHERENT RISK due to complexity of calculations involving signif manag judgement and risk of not correctly calc-ed
IAS 16 most important knowledge
the depreciation method used should reflect the pattern in which an asset’s economic benefits are consumed, it was likely that the Group’s policy of charging depreciation based on the proportion of oil and gas extracted was an appropriate approach
when impairment review should be conducted
assets sould be held at lower of CV and recoverable amount
If GROUP opertes in many environments - use of single discount rate is too optimistic; risks arising from complexity of calculating Value in USE
Reversal of impairment losses
IAS 36 requires that the increased carrying amount of an asset, such as property,
attributable to a reversal of an impairment loss should not exceed the carrying
amount which would have been determined, net of depreciation, had no
impairment loss been recognised for the asset in prior years.
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. PY
RMM on decommissioning
focus again on the complexity of deriving those costs, especially due to the timescales involved,
the difficulty in determining an appropriate discount factor and
the need for estimates to be reviewed and updated regularly.
It was more likely that management would understate the provision associated with the platforms and therefore also that the cost of the assets would be understated.
Audit procedures on impairment of CGU
auditing the completeness or effectiveness of the impairment review - ОНИ ВООБЩЕ НЕ ДАЮТ БАЛЛЫ за плозие ответы - нет баллов за старание! ТОлько за правильный ответ
- Design procedures to challenge management’s Assumptions!
- around the difficulty in obtaining a market value for the assets or obtaining copies of the value in use calculations prepared by management and challenging/verifying the assumptions used.
- Strong answers also went on to test whether the discount rate used by management was appropriate or
- the basis for the impairment reversals recorded in the year.
- The strongest candidates gained a professional skills mark under analysis and evaluation for designing procedures which addressed the areas of judgment and risk in verifying the impairment
auditor’s responsibilities;
his payment as a potential bribe or illegal payment and that this was likely to constitute non-compliance with laws and regulations.
explain the auditor’s responsibilities when non-compliance is identified or suspected and that further procedures would now be required in order to understand the nature of the payment and whether it was isolated.
discuss whether the auditor would have to report this to regulators outside of the Group and to consider this in terms of confidentiality.
ENCOURAGE MANAGEMENT AND TCWG TO MAKE DISCLOSURES TO RELEVANT AUTORITIES themselves
IMPACT on assessment of management’s integrity and what that might mean for audit evidence in other areas
Assessment of Group’s internal controls should be revised! modify audit plan on controls testing vs substantive testing
challenge the audit committee’s comment about why the external auditor had not detected this issue as part of the interim audit work
an assessment of the materiality of the issue as well as the difficulty in detecting instances of management override of controls.
ESG reporting mteriality
- discuss the dual aspect of materiality in this
context, with reference to not only financial materiality, but also impact materiality i.e.
how the company impacts the wider environment and other sustainability issues - tkae users of report into account and what they deem relevant
and important, thereby showing their ability to extend their existing knowledge of
materiality to this wider context. - Strong answers were also able to discuss some of the difficulties in determining materiality for sustainability information due to
numerous factors including the qualitative, forward looking nature of the information
and the inherent risk of bias in the presented information
ESG task acceptance
- consider whether need to hire an expert
- discussed the risks attached to the engagement due to the intended
use and reliance on the report, exploring the risks attached to the report being used
to award the company its certification - increased risk due to the fact that
these two outcomes were linked and therefore there was a significant risk of bias in
the information presented by management - The strongest answers also provided evaluation of the possible ethical threats which
were present, including the advocacy threat attached to the report being used by the
Greentree bank or - the possible intimidation threat by management if they did not
receive the outcome they were seeking and were therefore not able to maintain their
RGW certification - questioning what the commercial outcome of these issues might be on the company
Don’t react! think! offer alternative!
candidates also failed to appreciate that the reason there was no information
included for the prior year comparative in relation to the number of recycled bottles, was due to a change in metric enacted by management in the year
- questioned the accuracy of this information, due to the company’s reliance on the third party recycling network
- reluctance of the client in providing information on recycling rates might be an attempt by management to conceal issues or inconsistencies and better answers
went on to discuss that the team should look for other methods of verification
