Week 6 PC Auditing

Question 1

OFSL Risk assessment

Answer 1

Overall financial statement level risk factor

need conclusion on whether the OFSL risk is high or low. Different from account balance level risk.

Question 2

Materiality

Answer 2

Level of materiality based on the user’s level of tolerances. Information is material if omitting it or misstating it could influence decisions that users make on the basis of the entity’s F/S

Question 3

CAS 32 - percentage applied against materiality base

Answer 3

5% to 10% of normalized income before tax

0. 5% to 2% of total asset
1. 5% to 2% of revenue
2. 5% to 2% of revenue
3. 5% to 5% of equity

Question 4

How to normalized/adjust income before tax

Answer 4

unusual and non recurring revenue and expense
special management bonus
unusual gain/loss on disposition of PPE

Question 5

Percentage of performance materliaty

Answer 5

60% to 75% of overall materiality.

set amount (lower than materiality) to reduce likelihood that the aggregate uncorrected and undetected misstatement will exceed materiality

Can use risk factors for performance materiality

Question 6

Materiality for a specific class of transaction

Answer 6

any user with specific interest
if default - sensitive to AR and inventory
significantly impact decisions

Question 7

IFRS 15 - Revenue from contracts with customer

Answer 7

Replaces IAS 18 Revenue and IAS 11 Construction Contracts.

Question 8

Performance obligation

Answer 8

A promise in a contract to transfer goods/services that is distinct or a series of distinct g/s that are substantially the same and have the same patter of transfer to the customer

Question 9

What are the 5 steps when recognizing revenue

Answer 9

1) Identify the contract(s) with the customer (have commercial substance and probability of collecting entitled considerations)
2) Identify the performance obligation(s) in the contract (separately identifiable?)
3) Determine the transaction price (fixed amount of customer consideration or other forms of consideration)
4) Allocate the transaction price (if contain financing - may adjust for time value of money)
5) Recognize revenue when a performance obligation is satisfied (by transferring a promised g/s to customer)

Question 10

Example: Company’s late fee policy is paying $25 to buy the CD after 30 days. many customers disagree with the policy and refused to pay the fee or just simply return the CD

Answer 10

Problem: OVS may be overly aggressive when recognizing revenue. Problem is whether revenue should be recognized.

There are three options:

1) recognize all revenue
2) recognize a portion and defer the remaining to a later date
3) Recognize all revenue and record an allowance for doubtful account for those CD return late or never return

Use IFRS 15…

Since it is a new policy, may not have enough data to accurately determine Allowance for doubtful account. should only recognize revenue that have received so far and reverse remaining revenue/AR

Question 11

E.g. If a company set up a loyalty program in which no liability has been recorded in f/s

Answer 11

Need to look at IAS 37 Provisions, Contingent Liabilities and contingent assets.

Question 12

When to recognize a contingency?

Answer 12

IAS 37.10 states that when:

1) an entity has a present obligation (legal/constructive) as a result of past events; and
2) It is probable (more than 50%) that an outflow of resources will be required to settle the obligation; and
3) a reliable estimate can be made of the amount of the obligation.

Question 13

E.g. What if there are many used CD that are waiting to be discarded.

Answer 13

The issue is that those CD may be overvalued on the b/s in inventory and consider IAS 2 Inventory

Question 14

What do IAS 2 inventory require inventory to be carried at?

Answer 14

Requires inventory to be carried at the lower of cost and net realizable value