Risk of Material Misstatement

Question 1

Revenue recognition

Fee is invoiced in advanced and the revenue is recognised in full at the time of invoicing

standards
apply to the Qs
Impact

Answer 1

IFRS 15 Revenue from Contracts with Customer requires that revenue is recognized when a performance obligation is satisfied by transferring a promised good or service to a customer

the premium delivery pass spans 12 months, with service provided over time. however Co. recognizes revenue upon invoicing rather than fulfilling the performance obligation, risking non-compliance with IFRS 15.

This results in premature revenue recognition before the service is provided

Revenue overstated, deferred income (liabilities) understated

Question 2

Warehouse fire

not written down the CA of the warehouse in PPE as he is confident the company’s insurance policy will cover all costs.

standards
apply to the Qs
Impact

Answer 2

IAS 36, entities must assess at each reporting period whether an asset or CGU shows signs of impairment, such as obsolescence or physical damage. If indicators exist, the RA must be estimated.

damage to the warehouse should have triggered an IR, as required by IAS 36 Impairment of Assets. However, wrongly assumed that the warehouse insurance cancel out Co’s obligation to assess impairment under IAS 36.

Question 3

Warehouse fire

fire completely destroyes the premises

S
A
I

Answer 3

S:
Impairment is measured by comparing the an asset’s CA with its RA, the higher value of VIU and FVLCTS the asset.

A:
As the warehouse has been destroyed, it is likely the VIU is nil and the FVLCTS would also have to consider the warehouse in its current condition as the warehouse is badly damaged and the machinery needs to completely replaced.

I:
PPE overstated, Impairment cost understated

Question 4

Investment in LPS Co (JV)

W & D owning 50% of LPS Co and having equal representation on the BODs.

W’s contribution of knowledge is greater and want to consolidate instead.

Answer 4

S
IFRS 11 Joint Arrangements
JV is a JA whereby the parties who have joint control of the arrangement rights to the NA of the arrangement. JV must be recognises as Investment account for using the equity method in accordance with IAS 28 Investment in Associates and Joint Ventures.

A
Contradicts with IFRS 11, which defines control as joint in such cases. No evidence W holds veto rights to justify overall control and consolidation

(It is clear, mgmt is inflating several items on the FS such as assets, liabilities and profits, to present an appearanc of growth. Likely done to attract investors for expansion and meet the requirement of maintaining an interest cover ration 3 or higher).

I
If proceed to consol, inflate W’s SOFP and P/L. Consol will Increase W’s revenue operating profit and TA.

Question 5

Legal provision

Answer 5

S
IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a provision should be recognised as a liability if there is a present obligation as a result of past events which gives rise to a probable outflow of economic benefit which can be reliably measured

A
Fire is a past event that caused harm to people. Since the co’s employees deactivated the sprinklers, company will likely held responsible for the fire, resulting in a probable outflow of economic benefits

(As this information about fire only came to the attention of the audit team following an internet search rather than directly from mgt, this raise concerns over the integrity of the mgt).

I
Understated the expenses and liability

Question 6

Eco-friendly delivery vans

added modification that significantly reduced the distance the vans can travel

Answer 6

S
IAS 36 Impairment
Impairment is measured by comparing an asset’s CA with its RA, the higher value in use and FVLCTS the asset.

A
risk of viu is lowered due to the reduced ability of the eco-friendly vans to deliver goods efficiently and effectively. the fvlcts of the assets may also be impacted by the delivery range of the vans

I
PPE overstated, impairment expensed understated