Theory

Question 1

What is the difference between the cost model and revaluation model?

Answer 1

• Revaluation Model:
  Most don’t revalue due to the cost of hiring an expert to do the revaluation
  Have to update it every 3-5 years
  Less verifiable, FV = subjective whereas historical cost is more reliable
  Audit fees are higher is you use a revaluation model

Question 2

Role of External Audit

Answer 2

• Examine FS to see if there are any material misstatements
• Give reasonable assurance to shareholders they’re free from material misstatements
• Consider if accounting policies are appropriate and in line with IFRS and have been consistently applied

Question 3

Materiality

Answer 3

• If an item is misstated in the accounts could it influence the decision of the users
• Material by size or nature
• Materiality benchmarks

Question 4

Operating Segment

Answer 4

• FS contain highly aggregated information
• Diversified companies may provide a range of products/services operating in different economic environments
• Different business activities are subject to:
  Different rates of profitability and growth, future prospects and opportunities, risks
• Segments determined by management:
  Business activities earn revenue and incur expenses
  Operating results are reviewed by the CODM (Chief Operating Decision Maker)
  Discrete financial information is available
• Disaggregated information gives better understanding of how profit has been generated by different segments
• Helps users’ decision making e.g whether to invest
• Enhance qualitative characterisitcs e.g reliable, faithfully represent activities
• Limitations:
  CODM chooses how to segment, so difficult to compare between companies
  May have different measures of allocating costs

Question 5

Role and Responsibilities of the Audit Commitee

Answer 5

• Monitoring the integrity of the financial statements and any formal announcements relating to financial performance => accuracy and transparency of financial reporting
• Monitoring and reviewing the effectiveness of the internal audit function
• Reviewing the auditor’s independence and objectivity => external auditor remains unbiased and not influenced by the company or management

Question 6

Importance of Corporate Governance

Answer 6

• Ensure the company is run in the interests of the shareholders
• Tackles the principal-agent problem
• Users can trust the information given in the Annual report/ investors can have confidence in the company and how its being run
• It is pivotal in ensuring:
  Clear lines of transparency and accountability
  Principles encourage ethical behaviour
  Establishes a sound internal control framework so manage risks
  Compliance with regulations

Question 7

Role of Internal Controls

Answer 7

• Processes and procedures implemented to ensure the integrity of accounts
• Aim: prevent and detect errors in accounting
• Ensure compliance with IFRS requirements
• E.g Authorisation and approval of documents

Question 8

Other Comprehensive Income

Answer 8

• Represents gains and losses recognised outside of profit
• E.g revaluation gain
• Purpose is to combine all elements of ‘gains’ into one disclosure
• OCI is a component of total comprehensive income and must be presented in the primary FS

Question 9

Does IAS 1 achieve the objective of comparability?

Answer 9

• Comparability main objective of IAS 1
• However, IAS 1 allows flexibility
• I.e choosing to analyse expenses by nature of function
• Difficult to compare because companies may:
  Classify costs under different headings (COS vs. Admin vs. Distribution)
  Different models of IP i.e FV or cost model
  Classifying exceptional items might be different
  Different sectors difficult to compare

Question 10

Explain two judgments involved when accounting for PPE

Answer 10

• Which costs to capitalise: may be pressures by professionals to incorrectly overstate costs capitalised to maximise profit (creative accounting)
• Determining UEL of asset: lengthen life to reduce depr expense impact profit
• Timing: when the asset is ready for use, if the date is incorrect can under/overstate capitalisation

Question 11

Substance over Form

Answer 11

• Company reflects commercial substance over strict legal form
• E.g in a lease from day 1 the commercial substance is the asset is controlled by the company and shown as an asset on the FS (even though they don’t own it, legal title doesn’t pass)
• Depreciate the asset as if the company owns it using the shorter of

Question 12

Role of Internal Audit

Answer 12

• Improve firm’s operations by reviewing the efficiency and effectiveness of internal controls
• Recommend improvements to management
• Risk management
• Compliance with regulations
• Fraud investigations