matters to be considered Flashcards
decommissioning provision has been created at present value. discount rate is 8%, last year’s was 6%.
management said in notes estimation uncertainty, and judgemental area. no expert was used and estimate was made by management.
M-check if it’s material
A- According to ISA auditor shud have considered estimation uncertainty and tested:
-appropriateness of discount rate, rationale for increase in rate, ensure rate reflects market conditions and risk profile of entity, ensure accuracy of PV calculation and check consistency with prev years.
there is a risk of management bias, risk of incorrect amount being recognised.
also test effectiveness of controls.
value of decommissioning provision is expected to increase. audit team must FULLY UNDERSTAND the reason for reduction. could be valid reason like reduced costs.
IAS 37 says that the amount recognised as provision should be:
-best estimate of the cost needed to settle the obligation at the reporting date.
-measured at present value.
the method used to discount liability will have significant impact on measurement of provision.
higher rate will reduce PV of provision
RISK:
consider change of rate impact on FS: (provision amount and expenses)
initially, when provision is recognised, there is no impact on profit. becuz cost is capitalised.
subsequent changes in rate of provision could be charged or credited to profit, or reduction in asset value., depending on reason for adjustment.
audit team should conclude on appropriateness of how the amount of reduced provision is recognised in FS.
if any credit entries are made to profit, they should be scrutinised, as it could be creative accounting
MATTERS TO BE CONSIDERED
-materiality
-accounting/ auditing standard
-risk
-evidence
in prev years management used an expert, this year’s estimate is made by management
-increased risk of error and management bias
-be profesisonal skeptic
-maybe the expense of engaging an expert is the real reason why a management estimate has been used.
EVIDENCE OF DECOMMISIONING PROVISION EXPECTED TO BE FOUND
-calculation of management PV, arithmetically checked, agreed to documentation (source data)
-copies of source data used to calculate management estimate. details of asset, useful lives, expected date of decomiisioning, any agreement
-notes of meeting with management, justifying reason for increase in interest rate
-comparasion of this yrs estimate with last year to ensure consistency
-expected decomissioning cost details, evaluated for reasonableness by audit team
-independent estimate made by audit team, compare with management, discuss variances
-auditor’s expert estimate if audit team is not skilled enough. all workings should be evaluated by audit team.
-evaluation and conclusion on accounting entries, esp in relation to the profit impact of entries.
estimated useful life has been revised from 10 yrs to 15, because assets r lasting longer than initially anticipated.
change in this policy has been adjusted retrospectively, increase of 20 million to PPE has been transferred to RE.
annual depreciation charge has been reduced from 15m to 12m
reason for change in useful life must be properly justified , it is a requirement of ias 16 that useful lives should be reviewed at least at each financial year end.
adjustment to useful life is significant, reduction of 3m in annual charge. PBT increased by 2.3%. could be management effort at earnings manipulation, skepticism required.
accounting treatment is incorrect, change in estimate must be adjusted prospectively. they are treating it as an error rather than diff in estimate.
RE and PPE are overstated by 20m.
misapplication of accounting policy so material by nature.
evidence expected to be found for above
-notes of meeting with management discussing wrong accounting treatment and confirmation that they will correct it
-confirmation that NCA and RE have been adjusted
-physical inspection of sample of NCA report to confirm assets condition is operational
-Agreement of PPE carrying values in FS with NCA register
-written representation from management explaining justification of amended lives
-documentation proving that lives have been extended, like maintenence reports or engineer reports that show they are working efficeintly
-depreciation calculation by management, checked for arithmetical accuracy
-auditor’s own depreciation calculation compared and variance investigated
trade receivables:
audit team has discovered from analytical procedures that:
residential customers are paying later
business customers are paying earlier
there has been a new billing system introduced
unusal trend, the reasons behind this inconsistency must be explored with management
change could be due to billing system. confirm from management if this system applies to both customers or not
allowance for bad debts has increased by 45.5% ,
allowance is material to assets
increase in allowance is material to profit
this is mainly due to billing system as management is exercising more professional judgement
its unusual that a new billing system has such a significant effect on bad debts
discuss with mangaement the reason for this.
there maybe another reason for this allowance.
audit team should do walkthroughs of new system, understanding
do test of controls to see if everything is working well
evidence expected to be found for above
-walkthrough documentation for new system, to confirm understanding and the results of the evaluation of controls
-notes of discussion with management explaining assumptions used when calculating provision and the method used eg. speciifc or general provision, % of TR,
-Notes of discussion with management explaining why residential customers paying late and business ones paying early,
-aged receivables analysis, reviewed by audit team for any significant changes
for existence of receivables:
-confirmation from customers to confirm balances
-after date cash test: see if payments are received shortly after year end, to prove existence of receivables
-inquiries with credit controllers
-reconcilations
key contract cancelled after year end. but customer was facing financial issues this info was known during the year
-correspondenceis dated after reporting period but client was notified of difficulties before year end.
-adjusting event as conditions existed during the year
contract was specifically for the client, special machine constructed for them. WIP of 200k has been recognised in SOFP (design cost) contract is cancelled. management not planning to make any entries for this
according to IFRS 15, costs incurred to fulfill a contract are recognised as an asset only if:
-cost relates directly to a contract
-cost generates or enhances resources of the entity which will be used in satisfying POs in the future
-costs are expected to be recovered
contract is cancelled so costs not expected to be recovered. so the balance shud be written off
reason must be discovered why management is not amending the balance. maybe they believe the costs can be utilized for a different contract, even tho it was a special contract.
also is design cost intellectual property of us or client? if we can use it again, maybe we can capitalise under intangible asset, if it meets capitalisation criteria.
client made a payment for the contract which was recognised as a deferred current liability. what to do after cancellation?
if the amount is payable, keep it is a liability. if the amount is not payable, then release in PnL as an income.
key customer (1 out of 7) is facing financial difficulties and cancelled contract. management refusing to disclose
must be disclosed in the other information to be issued with FS.
-as per ISA, auditor must read the other info and identify any inconsistencies with FS.
-not mentioning this would be a material misstatement of fact or a material inconsistency
-discuss with management, encourage them to adjust accounting entries and discuss cancelled contract in fs. if they refuse discuss with TCWG and or company’s legal councel.
P has 3 subs. A,B and C. A sold some inventory to B for 20 million.
A receivable for 20m
B payable for 20m
inventory valued in B books at 50m
inter company balances should be elliminated on consolidation. risk that this has not been done correctly, overstating group assets and liabilities.
if there was a profit element, group inventory needs to be reduced by an adjustment for Unrealised profit. if this is not done group assets and profits will be overstated.
why is 50m recorded as inventory? if its because inventory was sold at a markup, its fine. but recognise payable also at 50m. more info is needed on why there is a mismatch between accounting records.
transaction should be disclosed in each sub FS as a related party transaction.
evidence/ procedures regarding intra group trading
-review of consolidation working papers to confirm that intercompany balances were eliminated.
-copy of sales contract to confirm whether a profit margin is part of sales price
-reconciliation of inter company balances between both subs to confirm no other items to be adjusted for eg. goods in transit
-details of inventory count held at the sub to confirm no other intercompany goods are held at yr end
-inventory movement reports to determine amount of goods transferred
