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4 Ryder, a public limited company, is reviewing certain events which have occurred since its year end of 31 October2005. The financial statements were authorised on 12 December 2005. The following events are relevant to thefinancial statements for the yea
题目
4 Ryder, a public limited company, is reviewing certain events which have occurred since its year end of 31 October
2005. The financial statements were authorised on 12 December 2005. The following events are relevant to the
financial statements for the year ended 31 October 2005:
(i) Ryder has a good record of ordinary dividend payments and has adopted a recent strategy of increasing its
dividend per share annually. For the last three years the dividend per share has increased by 5% per annum.
On 20 November 2005, the board of directors proposed a dividend of 10c per share for the year ended
31 October 2005. The shareholders are expected to approve it at a meeting on 10 January 2006, and a
dividend amount of $20 million will be paid on 20 February 2006 having been provided for in the financial
statements at 31 October 2005. The directors feel that a provision should be made because a ‘valid expectation’
has been created through the company’s dividend record. (3 marks)
(ii) Ryder disposed of a wholly owned subsidiary, Krup, a public limited company, on 10 December 2005 and made
a loss of $9 million on the transaction in the group financial statements. As at 31 October 2005, Ryder had no
intention of selling the subsidiary which was material to the group. The directors of Ryder have stated that there
were no significant events which have occurred since 31 October 2005 which could have resulted in a reduction
in the value of Krup. The carrying value of the net assets and purchased goodwill of Krup at 31 October 2005
were $20 million and $12 million respectively. Krup had made a loss of $2 million in the period 1 November
2005 to 10 December 2005. (5 marks)
(iii) Ryder acquired a wholly owned subsidiary, Metalic, a public limited company, on 21 January 2004. The
consideration payable in respect of the acquisition of Metalic was 2 million ordinary shares of $1 of Ryder plus
a further 300,000 ordinary shares if the profit of Metalic exceeded $6 million for the year ended 31 October
2005. The profit for the year of Metalic was $7 million and the ordinary shares were issued on 12 November
2005. The annual profits of Metalic had averaged $7 million over the last few years and, therefore, Ryder had
included an estimate of the contingent consideration in the cost of the acquisition at 21 January 2004. The fair
value used for the ordinary shares of Ryder at this date including the contingent consideration was $10 per share.
The fair value of the ordinary shares on 12 November 2005 was $11 per share. Ryder also made a one for four
bonus issue on 13 November 2005 which was applicable to the contingent shares issued. The directors are
unsure of the impact of the above on earnings per share and the accounting for the acquisition. (7 marks)
(iv) The company acquired a property on 1 November 2004 which it intended to sell. The property was obtained
as a result of a default on a loan agreement by a third party and was valued at $20 million on that date for
accounting purposes which exactly offset the defaulted loan. The property is in a state of disrepair and Ryder
intends to complete the repairs before it sells the property. The repairs were completed on 30 November 2005.
The property was sold after costs for $27 million on 9 December 2005. The property was classified as ‘held for
sale’ at the year end under IFRS5 ‘Non-current Assets Held for Sale and Discontinued Operations’ but shown at
the net sale proceeds of $27 million. Property is depreciated at 5% per annum on the straight-line basis and no
depreciation has been charged in the year. (5 marks)
(v) The company granted share appreciation rights (SARs) to its employees on 1 November 2003 based on ten
million shares. The SARs provide employees at the date the rights are exercised with the right to receive cash
equal to the appreciation in the company’s share price since the grant date. The rights vested on 31 October
2005 and payment was made on schedule on 1 December 2005. The fair value of the SARs per share at
31 October 2004 was $6, at 31 October 2005 was $8 and at 1 December 2005 was $9. The company has
recognised a liability for the SARs as at 31 October 2004 based upon IFRS2 ‘Share-based Payment’ but the
liability was stated at the same amount at 31 October 2005. (5 marks)
Required:
Discuss the accounting treatment of the above events in the financial statements of the Ryder Group for the year
ended 31 October 2005, taking into account the implications of events occurring after the balance sheet date.
(The mark allocations are set out after each paragraph above.)
(25 marks)
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第1题：
3 The directors of Panel, a public limited company, are reviewing the procedures for the calculation of the deferred tax
provision for their company. They are quite surprised at the impact on the provision caused by changes in accounting
standards such as IFRS1 ‘First time adoption of International Financial Reporting Standards’ and IFRS2 ‘Share-based
Payment’. Panel is adopting International Financial Reporting Standards for the first time as at 31 October 2005 and
the directors are unsure how the deferred tax provision will be calculated in its financial statements ended on that
date including the opening provision at 1 November 2003.
Required:
(a) (i) Explain how changes in accounting standards are likely to have an impact on the provision for deferred
taxation under IAS12 ‘Income Taxes’. (5 marks)
正确答案：(a) (i) IAS12 ‘Income Taxes’ adopts a balance sheet approach to accounting for deferred taxation. The IAS adopts a full
provision approach to accounting for deferred taxation. It is assumed that the recovery of all assets and the settlement
of all liabilities have tax consequences and that these consequences can be estimated reliably and are unavoidable.
IFRS recognition criteria are generally different from those embodied in tax law, and thus ‘temporary’ differences will
arise which represent the difference between the carrying amount of an asset and liability and its basis for taxation
purposes (tax base). The principle is that a company will settle its liabilities and recover its assets over time and at that
point the tax consequences will crystallise.Thus a change in an accounting standard will often affect the carrying value of an asset or liability which in turn will
affect the amount of the temporary difference between the carrying value and the tax base. This in turn will affect the
amount of the deferred taxation provision which is the tax rate multiplied by the amount of the temporary differences(assuming a net liability for deferred tax.) -
第2题：
(ii) Explain the accounting treatment under IAS39 of the loan to Bromwich in the financial statements of
Ambush for the year ended 30 November 2005. (4 marks)
正确答案：
(ii) There is objective evidence of impairment because of the financial difficulties and reorganisation of Bromwich. The
impairment loss on the loan will be calculated by discounting the estimated future cash flows. The future cash flows
will be $100,000 on 30 November 2007. This will be discounted at an effective interest rate of 8% to give a present
value of $85,733. The loan will, therefore, be impaired by ($200,000 – $85,733) i.e. $114,267.
(Note: IAS 39 requires accrual of interest on impaired loans at the original effective interest rate. In the year to
30 November 2006 interest of 8% of $85,733 i.e. $6,859 would be accrued.)
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第3题：
(c) Wader is reviewing the accounting treatment of its buildings. The company uses the ‘revaluation model’ for its
buildings. The buildings had originally cost $10 million on 1 June 2005 and had a useful economic life of
20 years. They are being depreciated on a straight line basis to a nil residual value. The buildings were revalued
downwards on 31 May 2006 to $8 million which was the buildings’ recoverable amount. At 31 May 2007 the
value of the buildings had risen to $11 million which is to be included in the financial statements. The company
is unsure how to treat the above events. (7 marks)
Required:
Discuss the accounting treatments of the above items in the financial statements for the year ended 31 May
2007.
Note: a discount rate of 5% should be used where necessary. Candidates should show suitable calculations where
necessary.
正确答案：
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第4题：
(d) Additionally Router purchased 60% of the ordinary shares of a radio station, Playtime, a public limited company,
on 31 May 2007. The remaining 40% of the ordinary shares are owned by a competitor company who owns a
substantial number of warrants issued by Playtime which are currently exercisable. If these warrants are
exercised, they will result in Router only owning 35% of the voting shares of Playtime. (4 marks)
Required:
Discuss how the above items should be dealt with in the group financial statements of Router for the year ended
31 May 2007.
正确答案：(d) IAS27 paragraph 14, ‘Consolidated and Separate Financial Statements’, states that warrants that have the potential to give
the holder voting power or reduce another party’s voting power over the financial and operating policies of the issuer should
be considered when existence of control is assessed. The warrants held by the competitor company, if exercised, would grant
that company control over Playtime. One party only can control Playtime and, therefore, the competitor company should
consolidate Playtime. In coming to this decision all the facts and circumstances that affect potential voting rights (except the
intention of management and the financial ability to exercise or convert) should be considered. It seems, however, that there
is a prima facie case for not consolidating Playtime but accounting for it under IAS28 or IAS39.
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第5题：
19 Which of the following statements about intangible assets in company financial statements are correct according
to international accounting standards?
1 Internally generated goodwill should not be capitalised.
2 Purchased goodwill should normally be amortised through the income statement.
3 Development expenditure must be capitalised if certain conditions are met.
A 1 and 3 only
B 1 and 2 only
C 2 and 3 only
D All three statements are correct
正确答案：A
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第6题：
5 The directors of Quapaw, a limited liability company, are reviewing the company’s draft financial statements for the
year ended 31 December 2004.
The following material matters are under discussion:
(a) During the year the company has begun selling a product with a one-year warranty under which manufacturing
defects are remedied without charge. Some claims have already arisen under the warranty. (2 marks)
Required:
Advise the directors on the correct treatment of these matters, stating the relevant accounting standard which
justifies your answer in each case.
NOTE: The mark allocation is shown against each of the three matters
正确答案：
(a) The correct treatment is to provide for the best estimate of the costs likely to be incurred under the warranty, as required by
IAS37 Provisions, contingent liabilities and contingent assets. -
第7题：
21 Which of the following items must be disclosed in a company’s published financial statements?
1 Authorised share capital
2 Movements in reserves
3 Finance costs
4 Movements in non-current assets
A 1, 2 and 3 only
B 1, 2 and 4 only
C 2, 3 and 4 only
D All four items
正确答案：D
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第8题：
(c) You have just been advised of management’s intention to publish its yearly marketing report in the annual report
that will contain the financial statements for the year ending 31 December 2005. Extracts from the marketing
report include the following:
‘Shire Oil Co sponsors national school sports championships and the ‘Shire Ward’ at the national teaching
hospital. The company’s vision is to continue its investment in health and safety and the environment.
‘Our health and safety, security and environmental policies are of the highest standard in the energy sector. We
aim to operate under principles of no-harm to people and the environment.
‘Shire Oil Co’s main contribution to sustainable development comes from providing extra energy in a cleaner and
more socially responsible way. This means improving the environmental and social performance of our
operations. Regrettably, five employees lost their lives at work during the year.’
Required:
Suggest performance indicators that could reflect the extent to which Shire Oil Co’s social and environmental
responsibilities are being met, and the evidence that should be available to provide assurance on their
accuracy. (6 marks)
正确答案：
(c) Social and environmental responsibilities
Performance indicators
■ Absolute ($) and relative (%) level of investment in sports sponsorship, and funding to the Shire Ward.
■ Increasing number of championship events and participating schools/students as compared with prior year.
■ Number of medals/trophies sponsored at events and/or number awarded to Shire sponsored schools/students.
■ Number of patients treated (successfully) a week/month. Average bed occupancy (daily/weekly/monthly and cumulative
to date).
■ Staffing levels (e.g. of volunteers for sports events, Shire Ward staff and the company):
? ratio of starters to leavers/staff turnover;
? absenteeism (average number of days per person per annum).
1 Withdrawal of the new licence would not create a going concern issue.
2 May also be described as ‘exploration and evaluation’ costs or ‘discovery and assessment’.
■ Number of:
– breaches of health and safety regulations and environmental regulations;
– oil spills;
– accidents and employee fatalities;
– insurance claims.
Evidence
Tutorial note: As there is a wide range of performance indicators that candidates could suggest, there is always a wide range
of possible sources of audit evidence. As the same evidence may contribute to providing assurance on more than one
measure they are not tabulated here, to avoid duplication. However, candidates may justifiably adopt a tabular layout. Also
note, that where measures may be expressed as evidence (e.g. trophies awarded) marks should be awarded only once.
■ Actual level of investment ($) compared with budget and budget compared with prior period.
Tutorial note: Would expect actual to be at least greater than prior year if performance in these areas (health and
safety) has improved.
■ Physical evidence of favourable increases on prior year, for example:
? medals/cups sponsored;
? number of beds available.
■ Increase in favourable press coverage/reports of sponsored events. (Decrease in adverse press about
accidents/fatalities.)
■ Independent surveys (e.g. by marine conservation organisations, welfare groups, etc) comparing Shire favourably with
other oil producers.
■ A reduction in fines paid compared with budget (and prior year).
■ Reduction in legal fees and claims being settled as evidenced by fee notes and correspondence files.
■ Amounts settled on insurance claims and level of insurance cover as compared with prior period. -
第9题：
(b) You are an audit manager with specific responsibility for reviewing other information in documents containing
audited financial statements before your firm’s auditor’s report is signed. The financial statements of Hegas, a
privately-owned civil engineering company, show total assets of $120 million, revenue of $261 million, and profit
before tax of $9·2 million for the year ended 31 March 2005. Your review of the Annual Report has revealed
the following:
(i) The statement of changes in equity includes $4·5 million under a separate heading of ‘miscellaneous item’
which is described as ‘other difference not recognized in income’. There is no further reference to this
amount or ‘other difference’ elsewhere in the financial statements. However, the Management Report, which
is required by statute, is not audited. It discloses that ‘changes in shareholders’ equity not recognized in
income includes $4·5 million arising on the revaluation of investment properties’.
The notes to the financial statements state that the company has implemented IAS 40 ‘Investment Property’
for the first time in the year to 31 March 2005 and also that ‘the adoption of this standard did not have a
significant impact on Hegas’s financial position or its results of operations during 2005’.
(ii) The chairman’s statement asserts ‘Hegas has now achieved a position as one of the world’s largest
generators of hydro-electricity, with a dedicated commitment to accountable ethical professionalism’. Audit
working papers show that 14% of revenue was derived from hydro-electricity (2004: 12%). Publicly
available information shows that there are seven international suppliers of hydro-electricity in Africa alone,
which are all at least three times the size of Hegas in terms of both annual turnover and population supplied.
Required:
Identify and comment on the implications of the above matters for the auditor’s report on the financial
statements of Hegas for the year ended 31 March 2005. (10 marks)
正确答案：
(b) Implications for the auditor’s report
(i) Management Report
■ $4·5 million represents 3·75% of total assets, 1·7% of revenue and 48·9% profit before tax. As this is material
by any criteria (exceeding all of 2% of total assets, 1/2% revenue and 5% PBT), the specific disclosure requirements
of IASs need to be met (IAS 1 ‘Presentation of Financial Statements’).
■ The Management Report discloses the amount and the reason for a material change in equity whereas the financial
statements do not show the reason for the change and suggest that it is immaterial. As the increase in equity
attributable to this adjustment is nearly half as much as that attributable to PBT there is a material inconsistency
between the Management Report and the audited financial statements.
■ Amendment to the Management Report is not required.
Tutorial note: Marks will be awarded for arguing, alternatively, that the Management Report disclosure needs to
be amended to clarify that the revaluation arises from the first time implementation.
■ Amendment to the financial statements is required because the disclosure is:
– incorrect – as, on first adoption of IAS 40, the fair value adjustment should be against the opening balance
of retained earnings; and
– inadequate – because it is being ‘supplemented’ by additional disclosure in a document which is not within
the scope of the audit of financial statements.
■ Whilst it is true that the adoption of IAS 40 did not have a significant impact on results of operations, Hegas’s
financial position has increased by nearly 4% in respect of the revaluation (to fair value) of just one asset category
(investment properties). As this is significant, the statement in the notes should be redrafted.
■ If the financial statements are not amended, the auditor’s report should be qualified ‘except for’ on grounds of
disagreement (non-compliance with IAS 40) as the matter is material but not pervasive. Additional disclosure
should also be given (e.g. that the ‘other difference’ is a fair value adjustment).
■ However, it is likely that when faced with the prospect of a qualified auditor’s report Hegas’s management will
rectify the financial statements so that an unmodified auditor’s report can be issued.
Tutorial note: Marks will be awarded for other relevant points e.g. citing IAS 8 ‘Accounting Policies, Changes in
Accounting Estimates and Errors’.
(ii) Chairman’s statement
Tutorial note: Hegas is privately-owned therefore IAS 14 ‘Segment Reporting’ does not apply and the proportion of
revenue attributable to hydro-electricity will not be required to be disclosed in the financial statements. However, credit
will be awarded for discussing the implications for the auditor’s report if it is regarded as a material inconsistency on
the assumption that segment revenue (or similar) is reported in the financial statements.
■ The assertion in the chairman’s statement, which does not fall within the scope of the audit of the financial
statements, claims two things, namely that the company:
(1) is ‘one of the world’s largest generators of hydro-electricity’; and
(2) has ‘a dedicated commitment to accountable ethical professionalism’.
■ To the extent that this information does not relate to matters disclosed in the financial statements it may give rise
to a material misstatement of fact. In particular, the first statement presents a misleading impression of the
company’s size. In misleading a user of the financial statements with this statement, the second statement is not
true (as it is not ethical or professional to mislead the reader and potentially undermine the credibility of the
financial statements).
■ The first statement is a material misstatement of fact because, for example:
– the company is privately-owned, and publicly-owned international/multi-nationals are larger;
– the company’s main activity is civil engineering not electricity generation (only 14% of revenue is derived from
HEP);
– as the company ranks at best eighth against African companies alone it ranks much lower globally.
■ Hegas should be asked to reconsider the wording of the chairman’s statement (i.e. removing these assertions) and
consult, as necessary, the company’s legal advisor.
■ If the statement is not changed there will be no grounds for qualification of the opinion on the audited financial
statements. The audit firm should therefore take legal advice on how the matter should be reported.
■ However, an emphasis of matter paragraph may be used to report on matters other than those affecting the audited
financial statements. For example, to explain the misstatement of fact if management refuses to make the
amendment.
Tutorial note: Marks will also be awarded for relevant comments about the chairman’s statement being perceived by
many readers to be subject to audit and therefore that the unfounded statement might undermine the credibility of the
financial statements. Shareholders tend to rely on the chairman’s statement, even though it is not regulated or audited,
because modern financial statements are so complex. -
第10题：
(ii) On 1 July 2006 Petrie introduced a 10-year warranty on all sales of its entire range of stainless steel
cookware. Sales of stainless steel cookware for the year ended 31 March 2007 totalled $18·2 million. The
notes to the financial statements disclose the following:
‘Since 1 July 2006, the company’s stainless steel cookware is guaranteed to be free from defects in
materials and workmanship under normal household use within a 10-year guarantee period. No provision
has been recognised as the amount of the obligation cannot be measured with sufficient reliability.’
(4 marks)
Your auditor’s report on the financial statements for the year ended 31 March 2006 was unmodified.
Required:
Identify and comment on the implications of these two matters for your auditor’s report on the financial
statements of Petrie Co for the year ended 31 March 2007.
NOTE: The mark allocation is shown against each of the matters above.
正确答案：
(ii) 10-year guarantee
$18·2 million stainless steel cookware sales amount to 43·1% of revenue and are therefore material. However, the
guarantee was only introduced three months into the year, say in respect of $13·6 million (3/4 × 18·2 million) i.e.
approximately 32% of revenue.
The draft note disclosure could indicate that Petrie’s management believes that Petrie has a legal obligation in respect
of the guarantee, that is not remote and likely to be material (otherwise no disclosure would have been required).
A best estimate of the obligation amounting to 5% profit before tax (or more) is likely to be considered material, i.e.
$90,000 (or more). Therefore, if it is probable that 0·66% of sales made under guarantee will be returned for refund,
this would require a warranty provision that would be material.
Tutorial note: The return of 2/3% of sales over a 10-year period may well be probable.
Clearly there is a present obligation as a result of a past obligating event for sales made during the nine months to
31 March 2007. Although the likelihood of outflow under the guarantee is likely to be insignificant (even remote) it is
probable that some outflow will be needed to settle the class of such obligations.
The note in the financial statements is disclosing this matter as a contingent liability. This term encompasses liabilities
that do not meet the recognition criteria (e.g. of reliable measurement in accordance with IAS 37 Provisions, Contingent
Liabilities and Contingent Assets).
However, it is extremely rare that no reliable estimate can be made (IAS 37) – the use of estimates being essential to
the preparation of financial statements. Petrie’s management must make a best estimate of the cost of refunds/repairs
under guarantee taking into account, for example:
■ the proportion of sales during the nine months to 31 March 2007 that have been returned under guarantee at the
balance sheet date (and in the post balance sheet event period);
■ the average age of cookware showing a defect;
■ the expected cost of a replacement item (as a refund of replacement is more likely than a repair, say).
If management do not make a provision for the best estimate of the obligation the audit opinion should be qualified
‘except for’ non-compliance with IAS 37 (no provision made). The disclosure made in the note to the financial
statements, however detailed, is not a substitute for making the provision.
Tutorial note: No marks will be awarded for suggesting that an emphasis of matter of paragraph would be appropriate
(drawing attention to the matter more fully explained in the note).
Management’s claim that the obligation cannot be measured with sufficient reliability does not give rise to a limitation
on scope on the audit. The auditor has sufficient evidence of the non-compliance with IAS 37 and disagrees with it. -
第11题：
Under certain circumstances, profits made on transactions between members of a group need to be eliminated from the consolidated financial statements under IFRS.
Which of the following statements about intra-group profits in consolidated financial statements is/are correct?
(i) The profit made by a parent on the sale of goods to a subsidiary is only realised when the subsidiary sells the goods to a third party
(ii) Eliminating intra-group unrealised profits never affects non-controlling interests
(iii) The profit element of goods supplied by the parent to an associate and held in year-end inventory must be eliminated in full
A.(i) only
B.(i) and (ii)
C.(ii) and (iii)
D.(iii) only
正确答案：A(i) is the only correct elimination required by IFRS.
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第12题：
单选题Under SEC guidelines, a company in this situation is required either to submit revised financial statements or that they withdraw their plans for a public stock offering.Athat they withdraw their plans
Bto withdraw its plans
Cthat it withdraw planning
Dto have been withdrawn from their plans
Eit should withdraw its plans
正确答案： E解析：
根据“either…or”的固定搭配可知，填入的内容形式和“to submit”相同，故B项是正确的。 -
第13题：
Additionally the directors wish to know how the provision for deferred taxation would be calculated in the following
situations under IAS12 ‘Income Taxes’:
(i) On 1 November 2003, the company had granted ten million share options worth $40 million subject to a two
year vesting period. Local tax law allows a tax deduction at the exercise date of the intrinsic value of the options.
The intrinsic value of the ten million share options at 31 October 2004 was $16 million and at 31 October 2005
was $46 million. The increase in the share price in the year to 31 October 2005 could not be foreseen at
31 October 2004. The options were exercised at 31 October 2005. The directors are unsure how to account
for deferred taxation on this transaction for the years ended 31 October 2004 and 31 October 2005.
(ii) Panel is leasing plant under a finance lease over a five year period. The asset was recorded at the present value
of the minimum lease payments of $12 million at the inception of the lease which was 1 November 2004. The
asset is depreciated on a straight line basis over the five years and has no residual value. The annual lease
payments are $3 million payable in arrears on 31 October and the effective interest rate is 8% per annum. The
directors have not leased an asset under a finance lease before and are unsure as to its treatment for deferred
taxation. The company can claim a tax deduction for the annual rental payment as the finance lease does not
qualify for tax relief.
(iii) A wholly owned overseas subsidiary, Pins, a limited liability company, sold goods costing $7 million to Panel on
1 September 2005, and these goods had not been sold by Panel before the year end. Panel had paid $9 million
for these goods. The directors do not understand how this transaction should be dealt with in the financial
statements of the subsidiary and the group for taxation purposes. Pins pays tax locally at 30%.
(iv) Nails, a limited liability company, is a wholly owned subsidiary of Panel, and is a cash generating unit in its own
right. The value of the property, plant and equipment of Nails at 31 October 2005 was $6 million and purchased
goodwill was $1 million before any impairment loss. The company had no other assets or liabilities. An
impairment loss of $1·8 million had occurred at 31 October 2005. The tax base of the property, plant and
equipment of Nails was $4 million as at 31 October 2005. The directors wish to know how the impairment loss
will affect the deferred tax provision for the year. Impairment losses are not an allowable expense for taxation
purposes.
Assume a tax rate of 30%.
Required:
(b) Discuss, with suitable computations, how the situations (i) to (iv) above will impact on the accounting for
deferred tax under IAS12 ‘Income Taxes’ in the group financial statements of Panel. (16 marks)
(The situations in (i) to (iv) above carry equal marks)
正确答案：(b) (i) The tax deduction is based on the option’s intrinsic value which is the difference between the market price and exercise
price of the share option. It is likely that a deferred tax asset will arise which represents the difference between the tax
base of the employee’s service received to date and the carrying amount which will effectively normally be zero.
The recognition of the deferred tax asset should be dealt with on the following basis:
(a) if the estimated or actual tax deduction is less than or equal to the cumulative recognised expense then the
associated tax benefits are recognised in the income statement
(b) if the estimated or actual tax deduction exceeds the cumulative recognised compensation expense then the excess
tax benefits are recognised directly in a separate component of equity.
As regards the tax effects of the share options, in the year to 31 October 2004, the tax effect of the remuneration expensewill be in excess of the tax benefit.
The company will have to estimate the amount of the tax benefit as it is based on the share price at 31 October 2005.
The information available at 31 October 2004 indicates a tax benefit based on an intrinsic value of $16 million.
As a result, the tax benefit of $2·4 million will be recognised within the deferred tax provision. At 31 October 2005,
the options have been exercised. Tax receivable will be 30% x $46 million i.e. $13·8 million. The deferred tax asset
of $2·4 million is no longer recognised as the tax benefit has crystallised at the date when the options were exercised.
For a tax benefit to be recognised in the year to 31 October 2004, the provisions of IAS12 should be complied with as
regards the recognition of a deferred tax asset.
(ii) Plant acquired under a finance lease will be recorded as property, plant and equipment and a corresponding liability for
the obligation to pay future rentals. Rents payable are apportioned between the finance charge and a reduction of the
outstanding obligation. A temporary difference will effectively arise between the value of the plant for accounting
purposes and the equivalent of the outstanding obligation as the annual rental payments qualify for tax relief. The tax
base of the asset is the amount deductible for tax in future which is zero. The tax base of the liability is the carrying
amount less any future tax deductible amounts which will give a tax base of zero. Thus the net temporary differencewill be:
(iii) The subsidiary, Pins, has made a profit of $2 million on the transaction with Panel. These goods are held in inventory
at the year end and a consolidation adjustment of an equivalent amount will be made against profit and inventory. Pins
will have provided for the tax on this profit as part of its current tax liability. This tax will need to be eliminated at the
group level and this will be done by recognising a deferred tax asset of $2 million x 30%, i.e. $600,000. Thus any
consolidation adjustments that have the effect of deferring or accelerating tax when viewed from a group perspective will
be accounted for as part of the deferred tax provision. Group profit will be different to the sum of the profits of the
individual group companies. Tax is normally payable on the profits of the individual companies. Thus there is a need
to account for this temporary difference. IAS12 does not specifically address the issue of which tax rate should be used
calculate the deferred tax provision. IAS12 does generally say that regard should be had to the expected recovery or
settlement of the tax. This would be generally consistent with using the rate applicable to the transferee company (Panel)
rather than the transferor (Pins).
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第14题：
(iv) Tyre recently undertook a sales campaign whereby customers can obtain free car accessories, by presenting a
coupon, which has been included in an advertisement in a national newspaper, on the purchase of a vehicle.
The offer is valid for a limited time period from 1 January 2006 until 31 July 2006. The management are unsure
as to how to treat this offer in the financial statements for the year ended 31 May 2006.
(5 marks)
Required:
Advise the directors of Tyre on how to treat the above items in the financial statements for the year ended
31 May 2006.
(The mark allocation is shown against each of the above items)
正确答案：
(iv) Car accessories
An obligation should not be recognised for the coupons and no provision created under IAS37 ‘Provisions, Contingent
Liabilities and Contingent Assets’. A provision should only be recognised where there is an obligating event. There has to be
a present obligation (legal or constructive), the probability of an outflow of resources and the ability to make a reliable estimate
of the amount of the obligation. These conditions do not seem to have been met. Until the vehicle is purchased the
accessories cannot be obtained. That is the point at which the present obligation arises, the outflow of resources occurs and
an estimate of the amount of the obligation can be made. When the car is purchased, the accessories become part of the
cost of the sale. The revenue recognised will be the amount received from the customer (the sales price). The revenue will
not be grossed up to include the value of the accessories. -
第15题：
4 (a) Router, a public limited company operates in the entertainment industry. It recently agreed with a television
company to make a film which will be broadcast on the television company’s network. The fee agreed for the
film was $5 million with a further $100,000 to be paid every time the film is shown on the television company’s
channels. It is hoped that it will be shown on four occasions. The film was completed at a cost of $4 million and
delivered to the television company on 1 April 2007. The television company paid the fee of $5 million on
30 April 2007 but indicated that the film needed substantial editing before they were prepared to broadcast it,
the costs of which would be deducted from any future payments to Router. The directors of Router wish to
recognise the anticipated future income of $400,000 in the financial statements for the year ended 31 May
2007. (5 marks)
Required:
Discuss how the above items should be dealt with in the group financial statements of Router for the year ended
31 May 2007.
正确答案：
(a) Under IAS18 ‘Revenue’, revenue on a service contract is recognised when the outcome of the transaction can be measured
reliably. For revenue arising from the rendering of services, provided that all of the following criteria are met, revenue should
be recognised by reference to the stage of completion of the transaction at the balance sheet date (the percentage-ofcompletion
method) (IAS18 para 20):
(a) the amount of revenue can be measured reliably;
(b) it is probable that the economic benefits will flow to the seller;
(c) the stage of completion at the balance sheet date can be measured reliably; and
(d) the costs incurred, or to be incurred, in respect of the transaction can be measured reliably.
When the above criteria are not met, revenue arising from the rendering of services should be recognised only to the extent
of the expenses recognised that are recoverable. Because the only revenue which can be measured reliably is the fee for
making the film ($5 million), this should therefore be recognised as revenue in the year to 31 May 2007 and matched against
the cost of the film of $4 million. Only when the television company shows the film should any further amounts of $100,000
be recognised as there is an outstanding ‘performance’ condition in the form. of the editing that needs to take place before the
television company will broadcast the film. The costs of the film should not be carried forward and matched against
anticipated future income unless they can be deemed to be an intangible asset under IAS 38 ‘Intangible Assets’. Additionally,
when assessing revenue to be recognised in future years, the costs of the editing and Router’s liability for these costs should
be assessed.
-
第16题：
9 Which of the following items must be disclosed in a company’s published financial statements (including notes)
if material, according to IAS1 Presentation of financial statements?
1 Finance costs.
2 Staff costs.
3 Depreciation and amortisation expense.
4 Movements on share capital.
A 1 and 3 only
B 1, 2 and 4 only
C 2, 3 and 4 only
D All four items
正确答案：D
-
第17题：
22 Which of the following statements about limited liability companies’ accounting is/are correct?
1 A revaluation reserve arises when a non-current asset is sold at a profit.
2 The authorised share capital of a company is the maximum nominal value of shares and loan notes the company
may issue.
3 The notes to the financial statements must contain details of all adjusting events as defined in IAS10 Events after
the balance sheet date.
A All three statements
B 1 and 2 only
C 2 and 3 only
D None of the statements
正确答案：D
-
第18题：
12 Which of the following statements are correct?
(1) Contingent assets are included as assets in financial statements if it is probable that they will arise.
(2) Contingent liabilities must be provided for in financial statements if it is probable that they will arise.
(3) Details of all adjusting events after the balance sheet date must be given in notes to the financial statements.
(4) Material non-adjusting events are disclosed by note in the financial statements.
A 1 and 2
B 2 and 4
C 3 and 4
D 1 and 3
正确答案：B
-
第19题：
2 The draft financial statements of Rampion, a limited liability company, for the year ended 31 December 2005
included the following figures:
$
Profit 684,000
Closing inventory 116,800
Trade receivables 248,000
Allowance for receivables 10,000
No adjustments have yet been made for the following matters:
(1) The company’s inventory count was carried out on 3 January 2006 leading to the figure shown above. Sales
between the close of business on 31 December 2005 and the inventory count totalled $36,000. There were no
deliveries from suppliers in that period. The company fixes selling prices to produce a 40% gross profit on sales.
The $36,000 sales were included in the sales records in January 2006.
(2) $10,000 of goods supplied on sale or return terms in December 2005 have been included as sales and
receivables. They had cost $6,000. On 10 January 2006 the customer returned the goods in good condition.
(3) Goods included in inventory at cost $18,000 were sold in January 2006 for $13,500. Selling expenses were
$500.
(4) $8,000 of trade receivables are to be written off.
(5) The allowance for receivables is to be adjusted to the equivalent of 5% of the trade receivables after allowing for
the above matters, based on past experience.
Required:
(a) Prepare a statement showing the effect of the adjustments on the company’s net profit for the year ended
31 December 2005. (5 marks)
正确答案：
-
第20题：
(b) Using the information provided, state the financial statement risks arising and justify an appropriate audit
approach for Indigo Co for the year ending 31 December 2005. (14 marks)
正确答案：
(b) Financial statement risks
Assets
■ There is a very high risk that inventory could be materially overstated in the balance sheet (thereby overstating profit)
because:
? there is a high volume of metals (hence material);
? valuable metals are made more portable;
? subsidy gives an incentive to overstate purchases (and hence inventory);
? inventory may not exist due to lack of physical controls (e.g. aluminium can blow away);
? scrap metal in the stockyard may have zero net realisable value (e.g. iron is rusty and slow-moving);
? quantities per counts not attended by an auditor have increased by a third.
■ Inventory could be otherwise misstated (over or under) due to:
? the weighbridge being inaccurate;
? metal qualities being estimated;
? different metals being mixed up; and
? the lack of an independent expert to identify/measure/value metals.
■ Tangible non-current assets are understated as the parts of the furnaces that require replacement (the linings) are not
capitalised (and depreciated) as separate items but treated as repairs/maintenance/renewals and expensed.
■ Cash may be understated due to incomplete recording of sales.
■ Recorded cash will be overstated if it does not exist (e.g. if it has been stolen).
■ Trade receivables may be understated if cash receipts from credit customers have been misappropriated.
Liabilities
■ The provision for the replacement of the furnace linings is overstated by the amount provided in the current and previous
year (i.e. in its entirety).
Tutorial note: Last replacement was two years ago.
Income statement
■ Revenue will be understated in respect of unrecorded cash sales of salvaged metals and ‘clinker’.
■ Scrap metal purchases (for cash) are at risk of overstatement:
? to inflate the 15% subsidy;
? to conceal misappropriated cash.
■ The income subsidy will be overstated if quantities purchased are overstated and/or overvalued (on the quarterly returns)
to obtain the amount of the subsidy.
■ Cash receipts/payments that were recorded only in the cash book in November are at risk of being unrecorded (in the
absence of cash book postings for November), especially if they are of a ‘one-off’ nature.
Tutorial note: Cash purchases of scrap and sales of salvaged metal should be recorded elsewhere (i.e. in the manual
inventory records). However, a one-off expense (of a capital or revenue nature) could be omitted in the absence of
another record.
■ Expenditure is overstated in respect of the 25% provision for replacing the furnace linings. However, as depreciation
will be similarly understated (as the furnace linings have not been capitalised) there is no risk of material misstatement
to the income statement overall.
Disclosure risk
■ A going concern (‘failure’) risk may arise through the loss of:
? sales revenue (e.g. through misappropriation of salvaged metals and/or cash);
? the subsidy (e.g. if returns are prepared fraudulently);
? cash (e.g. if material amounts stolen).
Any significant doubts about going concern must be suitably disclosed in the notes to the financial statements.
Disclosure risk arises if the requirements of IAS 1 ‘Presentation of Financial Statements’ are not met.
■ Disclosure risk arises if contingent liabilities in connection with the dumping of ‘clinker’ (e.g. for fines and penalties) are
not adequately disclosed in accordance with IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’.
Appropriate audit approach
Tutorial note: In explaining why AN audit approach is appropriate for Indigo it can be relevant to comment on the
unsuitability of other approaches.
■ A risk-based approach is suitable because:
? inherent risk is high at the entity and financial assertion levels;
? material errors are likely to arise in inventory where a high degree of subjectivity will be involved (regarding quality
of metals, quantities, net realisable value, etc);
? it directs the audit effort to inventory, purchases, income (sales and subsidy) and other risk areas (e.g. contingent
liabilities).
■ A systems-based/compliance approach is not suited to the risk areas identified because controls are lacking/ineffective
(e.g. over inventory and cash). Also, as the audit appointment was not more than three months ago and no interim
audit has been conducted (and the balance sheet date is only three weeks away) testing controls is likely to be less
efficient than a substantive approach.
■ A detailed substantive/balance sheet approach would be suitable to direct audit effort to the appropriate valuation of
assets (and liabilities) existing at balance sheet date. Principal audit work would include:
? attendance at a full physical inventory count at 31 December 2005;
? verifying cash at bank (through bank confirmation and reconciliation) and in hand (through physical count);
? confirming the accuracy of the quarterly returns to the local authority.
■ A cyclical approach/directional testing is unlikely to be suitable as cycles are incomplete. For example the purchases
cycle for metals is ‘purchase/cash’ rather than ‘purchase/payable/cash’ and there is no independent third party evidence
to compensate for that which would be available if there were trade payables (i.e. suppliers’ statements). Also the cycles
are inextricably inter-related to cash and inventory – amounts of which are subject to high inherent risk.
■ Analytical procedures may be of limited use for substantive purposes. Factors restricting the use of substantive analytical
procedures include:
? fluctuating margins (e.g. as many factors will influence the price at which scrap is purchased and subsequently
sold, when salvaged, sometime later);
? a lack of reliable/historic information on which to make comparisons. -
第21题：
(b) You are the audit manager of Johnston Co, a private company. The draft consolidated financial statements for
the year ended 31 March 2006 show profit before taxation of $10·5 million (2005 – $9·4 million) and total
assets of $55·2 million (2005 – $50·7 million).
Your firm was appointed auditor of Tiltman Co when Johnston Co acquired all the shares of Tiltman Co in March
2006. Tiltman’s draft financial statements for the year ended 31 March 2006 show profit before taxation of
$0·7 million (2005 – $1·7 million) and total assets of $16·1 million (2005 – $16·6 million). The auditor’s
report on the financial statements for the year ended 31 March 2005 was unmodified.
You are currently reviewing two matters that have been left for your attention on the audit working paper files for
the year ended 31 March 2006:
(i) In December 2004 Tiltman installed a new computer system that properly quantified an overvaluation of
inventory amounting to $2·7 million. This is being written off over three years.
(ii) In May 2006, Tiltman’s head office was relocated to Johnston’s premises as part of a restructuring.
Provisions for the resulting redundancies and non-cancellable lease payments amounting to $2·3 million
have been made in the financial statements of Tiltman for the year ended 31 March 2006.
Required:
Identify and comment on the implications of these two matters for your auditor’s reports on the financial
statements of Johnston Co and Tiltman Co for the year ended 31 March 2006. (10 marks)
正确答案：
(b) Tiltman Co
Tiltman’s total assets at 31 March 2006 represent 29% (16·1/55·2 × 100) of Johnston’s total assets. The subsidiary is
therefore material to Johnston’s consolidated financial statements.
Tutorial note: Tiltman’s profit for the year is not relevant as the acquisition took place just before the year end and will
therefore have no impact on the consolidated income statement. Calculations of the effect on consolidated profit before
taxation are therefore inappropriate and will not be awarded marks.
(i) Inventory overvaluation
This should have been written off to the income statement in the year to 31 March 2005 and not spread over three
years (contrary to IAS 2 ‘Inventories’).
At 31 March 2006 inventory is overvalued by $0·9m. This represents all Tiltmans’s profit for the year and 5·6% of
total assets and is material. At 31 March 2005 inventory was materially overvalued by $1·8m ($1·7m reported profit
should have been a $0·1m loss).
Tutorial note: 1/3 of the overvaluation was written off in the prior period (i.e. year to 31 March 2005) instead of $2·7m.
That the prior period’s auditor’s report was unmodified means that the previous auditor concurred with an incorrect
accounting treatment (or otherwise gave an inappropriate audit opinion).
As the matter is material a prior period adjustment is required (IAS 8 ‘Accounting Policies, Changes in Accounting
Estimates and Errors’). $1·8m should be written off against opening reserves (i.e. restated as at 1 April 2005).
(ii) Restructuring provision
$2·3m expense has been charged to Tiltman’s profit and loss in arriving at a draft profit of $0·7m. This is very material.
(The provision represents 14·3% of Tiltman’s total assets and is material to the balance sheet date also.)
The provision for redundancies and onerous contracts should not have been made for the year ended 31 March 2006
unless there was a constructive obligation at the balance sheet date (IAS 37 ‘Provisions, Contingent Liabilities and
Contingent Assets’). So, unless the main features of the restructuring plan had been announced to those affected (i.e.
redundancy notifications issued to employees), the provision should be reversed. However, it should then be disclosed
as a non-adjusting post balance sheet event (IAS 10 ‘Events After the Balance Sheet Date’).
Given the short time (less than one month) between acquisition and the balance sheet it is very possible that a
constructive obligation does not arise at the balance sheet date. The relocation in May was only part of a restructuring
(and could be the first evidence that Johnston’s management has started to implement a restructuring plan).
There is a risk that goodwill on consolidation of Tiltman may be overstated in Johnston’s consolidated financial
statements. To avoid the $2·3 expense having a significant effect on post-acquisition profit (which may be negligible
due to the short time between acquisition and year end), Johnston may have recognised it as a liability in the
determination of goodwill on acquisition.
However, the execution of Tiltman’s restructuring plan, though made for the year ended 31 March 2006, was conditional
upon its acquisition by Johnston. It does not therefore represent, immediately before the business combination, a
present obligation of Johnston. Nor is it a contingent liability of Johnston immediately before the combination. Therefore
Johnston cannot recognise a liability for Tiltman’s restructuring plans as part of allocating the cost of the combination
(IFRS 3 ‘Business Combinations’).
Tiltman’s auditor’s report
The following adjustments are required to the financial statements:
■ restructuring provision, $2·3m, eliminated;
■ adequate disclosure of relocation as a non-adjusting post balance sheet event;
■ current period inventory written down by $0·9m;
■ prior period inventory (and reserves) written down by $1·8m.
Profit for the year to 31 March 2006 should be $3·9m ($0·7 + $0·9 + $2·3).
If all these adjustments are made the auditor’s report should be unmodified. Otherwise, the auditor’s report should be
qualified ‘except for’ on grounds of disagreement. If none of the adjustments are made, the qualification should still be
‘except for’ as the matters are not pervasive.
Johnston’s auditor’s report
If Tiltman’s auditor’s report is unmodified (because the required adjustments are made) the auditor’s report of Johnston
should be similarly unmodified. As Tiltman is wholly-owned by Johnston there should be no problem getting the
adjustments made.
If no adjustments were made in Tiltman’s financial statements, adjustments could be made on consolidation, if
necessary, to avoid modification of the auditor’s report on Johnston’s financial statements.
The effect of these adjustments on Tiltman’s net assets is an increase of $1·4m. Goodwill arising on consolidation (if
any) would be reduced by $1·4m. The reduction in consolidated total assets required ($0·9m + $1·4m) is therefore
the same as the reduction in consolidated total liabilities (i.e. $2·3m). $2·3m is material (4·2% consolidated total
assets). If Tiltman’s financial statements are not adjusted and no adjustments are made on consolidation, the
consolidated financial position (balance sheet) should be qualified ‘except for’. The results of operations (i.e. profit for
the period) should be unqualified (if permitted in the jurisdiction in which Johnston reports).
Adjustment in respect of the inventory valuation may not be required as Johnston should have consolidated inventory
at fair value on acquisition. In this case, consolidated total liabilities should be reduced by $2·3m and goodwill arising
on consolidation (if any) reduced by $2·3m.
Tutorial note: The effect of any possible goodwill impairment has been ignored as the subsidiary has only just been
acquired and the balance sheet date is very close to the date of acquisition. -
第22题：
You are an audit manager at Rockwell & Co, a firm of Chartered Certified Accountants. You are responsible for the audit of the Hopper Group, a listed audit client which supplies ingredients to the food and beverage industry worldwide.
The audit work for the year ended 30 June 2015 is nearly complete, and you are reviewing the draft audit report which has been prepared by the audit senior. During the year the Hopper Group purchased a new subsidiary company, Seurat Sweeteners Co, which has expertise in the research and design of sugar alternatives. The draft financial statements of the Hopper Group for the year ended 30 June 2015 recognise profit before tax of $495 million (2014 – $462 million) and total assets of $4,617 million (2014: $4,751 million). An extract from the draft audit report is shown below:
Basis of modified opinion (extract)
In their calculation of goodwill on the acquisition of the new subsidiary, the directors have failed to recognise consideration which is contingent upon meeting certain development targets. The directors believe that it is unlikely that these targets will be met by the subsidiary company and, therefore, have not recorded the contingent consideration in the cost of the acquisition. They have disclosed this contingent liability fully in the notes to the financial statements. We do not feel that the directors’ treatment of the contingent consideration is correct and, therefore, do not believe that the criteria of the relevant standard have been met. If this is the case, it would be appropriate to adjust the goodwill balance in the statement of financial position.
We believe that any required adjustment may materially affect the goodwill balance in the statement of financial position. Therefore, in our opinion, the financial statements do not give a true and fair view of the financial position of the Hopper Group and of the Hopper Group’s financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards.
Emphasis of Matter Paragraph
We draw attention to the note to the financial statements which describes the uncertainty relating to the contingent consideration described above. The note provides further information necessary to understand the potential implications of the contingency.
Required:
(a) Critically appraise the draft audit report of the Hopper Group for the year ended 30 June 2015, prepared by the audit senior.
Note: You are NOT required to re-draft the extracts from the audit report. (10 marks)
(b) The audit of the new subsidiary, Seurat Sweeteners Co, was performed by a different firm of auditors, Fish Associates. During your review of the communication from Fish Associates, you note that they were unable to obtain sufficient appropriate evidence with regard to the breakdown of research expenses. The total of research costs expensed by Seurat Sweeteners Co during the year was $1·2 million. Fish Associates has issued a qualified audit opinion on the financial statements of Seurat Sweeteners Co due to this inability to obtain sufficient appropriate evidence.
Required:
Comment on the actions which Rockwell & Co should take as the auditor of the Hopper Group, and the implications for the auditor’s report on the Hopper Group financial statements. (6 marks)
(c) Discuss the quality control procedures which should be carried out by Rockwell & Co prior to the audit report on the Hopper Group being issued. (4 marks)
正确答案：(a) Critical appraisal of the draft audit report
Type of opinion
When an auditor issues an opinion expressing that the financial statements ‘do not give a true and fair view’, this represents an adverse opinion. The paragraph explaining the modification should, therefore, be titled ‘Basis of Adverse Opinion’ rather than simply ‘Basis of Modified Opinion’.
An adverse opinion means that the auditor considers the misstatement to be material and pervasive to the financial statements of the Hopper Group. According to ISA 705 Modifications to Opinions in the Independent Auditor’s Report, pervasive matters are those which affect a substantial proportion of the financial statements or fundamentally affect the users’ understanding of the financial statements. It is unlikely that the failure to recognise contingent consideration is pervasive; the main effect would be to understate goodwill and liabilities. This would not be considered a substantial proportion of the financial statements, neither would it be fundamental to understanding the Hopper Group’s performance and position.
However, there is also some uncertainty as to whether the matter is even material. If the matter is determined to be material but not pervasive, then a qualified opinion would be appropriate on the basis of a material misstatement. If the matter is not material, then no modification would be necessary to the audit opinion.
Wording of opinion/report
The auditor’s reference to ‘the acquisition of the new subsidiary’ is too vague; the Hopper Group may have purchased a number of subsidiaries which this phrase could relate to. It is important that the auditor provides adequate description of the event and in these circumstances it would be appropriate to name the subsidiary referred to.
The auditor has not quantified the amount of the contingent element of the consideration. For the users to understand the potential implications of any necessary adjustments, they need to know how much the contingent consideration will be if it becomes payable. It is a requirement of ISA 705 that the auditor quantifies the financial effects of any misstatements, unless it is impracticable to do so.
In addition to the above point, the auditor should provide more description of the financial effects of the misstatement, including full quantification of the effect of the required adjustment to the assets, liabilities, incomes, revenues and equity of the Hopper Group.
The auditor should identify the note to the financial statements relevant to the contingent liability disclosure rather than just stating ‘in the note’. This will improve the understandability and usefulness of the contents of the audit report.
The use of the term ‘we do not feel that the treatment is correct’ is too vague and not professional. While there may be some interpretation necessary when trying to apply financial reporting standards to unique circumstances, the expression used is ambiguous and may be interpreted as some form. of disclaimer by the auditor with regard to the correct accounting treatment. The auditor should clearly explain how the treatment applied in the financial statements has departed from the requirements of the relevant standard.
Tutorial note: As an illustration to the above point, an appropriate wording would be: ‘Management has not recognised the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree, which constitutes a departure from International Financial Reporting Standards.’
The ambiguity is compounded by the use of the phrase ‘if this is the case, it would be appropriate to adjust the goodwill’. This once again suggests that the correct treatment is uncertain and perhaps open to interpretation.
If the auditor wishes to refer to a specific accounting standard they should refer to its full title. Therefore instead of referring to ‘the relevant standard’ they should refer to International Financial Reporting Standard 3 Business Combinations.
The opinion paragraph requires an appropriate heading. In this case the auditors have issued an adverse opinion and the paragraph should be headed ‘Adverse Opinion’.
As with the basis paragraph, the opinion paragraph lacks authority; suggesting that the required adjustments ‘may’ materially affect the financial statements implies that there is a degree of uncertainty. This is not the case; the amount of the contingent consideration will be disclosed in the relevant purchase agreement, so the auditor should be able to determine whether the required adjustments are material or not. Regardless, the sentence discussing whether the balance is material or not is not required in the audit report as to warrant inclusion in the report the matter must be considered material. The disclosure of the nature and financial effect of the misstatement in the basis paragraph is sufficient.
Finally, the emphasis of matter paragraph should not be included in the audit report. An emphasis of matter paragraph is only used to draw attention to an uncertainty/matter of fundamental importance which is correctly accounted for and disclosed in the financial statements. An emphasis of matter is not required in this case for the following reasons:
– Emphasis of matter is only required to highlight matters which the auditor believes are fundamental to the users’ understanding of the business. An example may be where a contingent liability exists which is so significant it could lead to the closure of the reporting entity. That is not the case with the Hopper Group; the contingent liability does not appear to be fundamental.
– Emphasis of matter is only used for matters where the auditor has obtained sufficient appropriate evidence that the matter is not materially misstated in the financial statements. If the financial statements are materially misstated, in this regard the matter would be fully disclosed by the auditor in the basis of qualified/adverse opinion paragraph and no emphasis of matter is necessary.
(b) Communication from the component auditor
The qualified opinion due to insufficient evidence may be a significant matter for the Hopper Group audit. While the possible adjustments relating to the current year may not be material to the Hopper Group, the inability to obtain sufficient appropriate evidence with regard to a material matter in Seurat Sweeteners Co’s financial statements may indicate a control deficiency which the auditor was not aware of at the planning stage and it could indicate potential problems with regard to the integrity of management, which could also indicate a potential fraud. It could also indicate an unwillingness of management to provide information, which could create problems for future audits, particularly if research and development costs increase in future years. If the group auditor suspects that any of these possibilities are true, they may need to reconsider their risk assessment and whether the audit procedures performed are still appropriate.
If the detail provided in the communication from the component auditor is insufficient, the group auditor should first discuss the matter with the component auditor to see whether any further information can be provided. The group auditor can request further working papers from the component auditor if this is necessary. However, if Seurat Sweeteners has not been able to provide sufficient appropriate evidence, it is unlikely that this will be effective.
If the discussions with the component auditor do not provide satisfactory responses to evaluate the potential impact on the Hopper Group, the group auditor may need to communicate with either the management of Seurat Sweeteners or the Hopper Group to obtain necessary clarification with regard to the matter.
Following these procedures, the group auditor needs to determine whether they have sufficient appropriate evidence to draw reasonable conclusions on the Hopper Group’s financial statements. If they believe the lack of information presents a risk of material misstatement in the group financial statements, they can request that further audit procedures be performed, either by the component auditor or by themselves.
Ultimately the group engagement partner has to evaluate the effect of the inability to obtain sufficient appropriate evidence on the audit opinion of the Hopper Group. The matter relates to research expenses totalling $1·2 million, which represents 0·2% of the profit for the year and 0·03% of the total assets of the Hopper Group. It is therefore not material to the Hopper Group’s financial statements. For this reason no modification to the audit report of the Hopper Group would be required as this does not represent a lack of sufficient appropriate evidence with regard to a matter which is material to the Group financial statements.
Although this may not have an impact on the Hopper Group audit opinion, this may be something the group auditor wishes to bring to the attention of those charged with governance. This would be particularly likely if the group auditor believed that this could indicate some form. of fraud in Seurat Sweeteners Co, a serious deficiency in financial reporting controls or if this could create problems for accepting future audits due to management’s unwillingness to provide access to accounting records.
(c) Quality control procedures prior to issuing the audit report
ISA 220 Quality Control for an Audit of Financial Statements and ISQC 1 Quality Control for Firms that Perform. Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Agreements require that an engagement quality control reviewer shall be appointed for audits of financial statements of listed entities. The audit engagement partner then discusses significant matters arising during the audit engagement with the engagement quality control reviewer.
The engagement quality control reviewer and the engagement partner should discuss the failure to recognise the contingent consideration and its impact on the auditor’s report. The engagement quality control reviewer must review the financial statements and the proposed auditor’s report, in particular focusing on the conclusions reached in formulating the auditor’s report and consideration of whether the proposed auditor’s opinion is appropriate. The audit documentation relating to the acquisition of Seurat Sweeteners Co will be carefully reviewed, and the reviewer is likely to consider whether procedures performed in relation to these balances were appropriate.
Given the listed status of the Hopper Group, any modification to the auditor’s report will be scrutinised, and the firm must be sure of any decision to modify the report, and the type of modification made. Once the engagement quality control reviewer has considered the necessity of a modification, they should consider whether a qualified or an adverse opinion is appropriate in the circumstances. This is an important issue, given that it requires judgement as to whether the matters would be material or pervasive to the financial statements.
The engagement quality control reviewer should ensure that there is adequate documentation regarding the judgements used in forming the final audit opinion, and that all necessary matters have been brought to the attention of those charged with governance.
The auditor’s report must not be signed and dated until the completion of the engagement quality control review.
Tutorial note: In the case of the Hopper Group’s audit, the lack of evidence in respect of research costs is unlikely to be discussed unless the audit engagement partner believes that the matter could be significant, for example, if they suspected the lack of evidence is being used to cover up a financial statements fraud.
-
第23题：
You are the audit manager of Chestnut & Co and are reviewing the key issues identified in the files of two audit clients.
Palm Industries Co (Palm)
Palm’s year end was 31 March 2015 and the draft financial statements show revenue of $28·2 million, receivables of $5·6 million and profit before tax of $4·8 million. The fieldwork stage for this audit has been completed.
A customer of Palm owed an amount of $350,000 at the year end. Testing of receivables in April highlighted that no amounts had been paid to Palm from this customer as they were disputing the quality of certain goods received from Palm. The finance director is confident the issue will be resolved and no allowance for receivables was made with regards to this balance.
Ash Trading Co (Ash)
Ash is a new client of Chestnut & Co, its year end was 31 January 2015 and the firm was only appointed auditors in February 2015, as the previous auditors were suddenly unable to undertake the audit. The fieldwork stage for this audit is currently ongoing.
The inventory count at Ash’s warehouse was undertaken on 31 January 2015 and was overseen by the company’s internal audit department. Neither Chestnut & Co nor the previous auditors attended the count. Detailed inventory records were maintained but it was not possible to undertake another full inventory count subsequent to the year end.
The draft financial statements show a profit before tax of $2·4 million, revenue of $10·1 million and inventory of $510,000.
Required:
For each of the two issues:
(i) Discuss the issue, including an assessment of whether it is material;
(ii) Recommend ONE procedure the audit team should undertake to try to resolve the issue; and
(iii) Describe the impact on the audit report if the issue remains UNRESOLVED.
Notes:
1 The total marks will be split equally between each of the two issues.
2 Audit report extracts are NOT required.
正确答案：Audit reports
Palm Industries Co (Palm)
(i) A customer of Palm’s owing $350,000 at the year end has not made any post year-end payments as they are disputing the quality of goods received. No allowance for receivables has been made against this balance. As the balance is being disputed, there is a risk of incorrect valuation as some or all of the receivable balance is overstated, as it may not be paid.
This $350,000 receivables balance represents 1·2% (0·35/28·2m) of revenue, 6·3% (0·35/5·6m) of receivables and 7·3% (0·35/4·8m) of profit before tax; hence this is a material issue.
(ii) A procedure to adopt includes:
– Review whether any payments have subsequently been made by this customer since the audit fieldwork was completed.
– Discuss with management whether the issue of quality of goods sold to the customer has been resolved, or whether it is still in dispute.
– Review the latest customer correspondence with regards to an assessment of the likelihood of the customer making payment.
(iii) If management refuses to provide against this receivable, the audit report will need to be modified. As receivables are overstated and the error is material but not pervasive a qualified opinion would be necessary.
A basis for qualified opinion paragraph would be needed and would include an explanation of the material misstatement in relation to the valuation of receivables and the effect on the financial statements. The opinion paragraph would be qualified ‘except for’.
Ash Trading Co (Ash)
(i) Chestnut & Co was only appointed as auditors subsequent to Ash’s year end and hence did not attend the year-end inventory count. Therefore, they have not been able to gather sufficient and appropriate audit evidence with regards to the completeness and existence of inventory.
Inventory is a material amount as it represents 21·3% (0·51/2·4m) of profit before tax and 5% (0·51/10·1m) of revenue; hence this is a material issue.
(ii) A procedure to adopt includes:
– Review the internal audit reports of the inventory count to identify the level of adjustments to the records to assess the reasonableness of relying on the inventory records.
– Undertake a sample check of inventory in the warehouse and compare to the inventory records and then from inventory records to the warehouse, to assess the reasonableness of the inventory records maintained by Ash.
(iii) The auditors will need to modify the audit report as they are unable to obtain sufficient appropriate evidence in relation to inventory which is a material but not pervasive balance. Therefore a qualified opinion will be required.
A basis for qualified opinion paragraph will be required to explain the limitation in relation to the lack of evidence over inventory. The opinion paragraph will be qualified ‘except for’.