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Question pigeon&co Its q2 in s/d 17 paper
Regarding part A
In examiner answer its written
“The use of 8% to determine the discount factor rather than 6% will have reduced calue of provision “Could u explain this and what should have been done?
Should we always stick to the older discount factor (here its 6%) ?Thats why we are asking why changing and using 8%?
The discounting of the provision is to give as accurate an indication as possible of the PV of the future cost. Changing the rate might be a sensible response to eco omic changes. If so, that’s fine. As it says in the answer, “the audit team must fully understand the reasons for the reduction in the provision”. One reason is a re-estimation of the discount rate. An invalid reason would be changing it arbitrarily to boost profits (an example of creative accounting/fraud).
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