ACCA P5 flashcards – set 1

The veil of incorporation can be lifted only in circumstances where incorporation is being used to give protection from improper behaviour and so the company is being used as a front or to defraud creditors.

Limited companies have a separate legal existence and that their actions and liabilities are separate from those of the shareholders and directors. A company might be sued if it causes damage or is owed, but the shareholders won’t be because the company is the guilty party. This distinction is the ‘veil of incorporation’.

• Memorandum of association
• Articles of association

• Formalities such as filing return and financial statements and perhaps needing an audit.
• Separate tax calculations
• Publicity – financial statements are open to public inspection.

• Limited liability
• Succession: because companies have a separate legal existence, they can continue in perpetuity even as shareholders change or die.
• Easy transfer of shares: ownership is represented by shares that can be bought and sold.
• Professional: limited companies might give professional impression than a sole trader.
• Raising finance: if a limited company does well it can be listed on a stock exchange.
• Taxation: advantages from time to time.

If two or more people trade together with a view to profit, then a partnership is formed.

• The employer gives the employee the old job back
• Re-engagement. The employee is given a job comparable to the old one.
• This is by far the most common remedy.

This is where the employer’s behaviour entitles the employee to presume he or she has been dismissed.

• Resignation
• Retirement
• Dismissal

Both employers and employees have responsibility.

• Placement
• Layering
• Integration

These are improper payments of cash or gifts to third parties.

Bribery: payments to induce someone to do something they shouldn’t do.

Facilitation payments: payments to induce someone to do something they should be doing anyhow.

Diversity of employment is ensuring that the composition of the workforce reflects the population as a whole.

• Direct discrimination
• Indirect discrimination
• Victimisation

Employees must exercise reasonable care and skill. The level required will depend on the experience and qualifications of the employee.

This requires the employee to serve the employer faithfully. It is implied in all employment contracts and means that an employee may not act against the interests of the employer.

An employer-employee relationship implies that there is a contract of service and the employer controls how, when and where the work is done.

A contract for services is the relationship that exists between a self-employed person and whoever is paying him or her.

The statement was made:

• Knowing it to be false
• Without belief in its truth
• Recklessly, careless as to whether it be true or false.

A misrepresentation is a false statement of fact or law which induces one party to enter into a contract. The statement must be:

• False
• Relating to fact or law.
• Induces one party to enter a contract.

• Customs
• Fact
• Law

Terms consist of conditions and/or warranties.

• Condition: vital to a contract and if breached will give the innocent party the right to repudiate (terminate) the contract and to claim damages
• Warranty: less fundamental than a term. The breach of a warranty will not cause the contract to end, but can give rise to damages.

A deed – a formal document requiring signatures and witnesses.

There is no contract as the consideration (your paint work) is past. Both sided of the exchange have to be agreed before the contract is executed.

Consideration must be sufficient but need not be adequate.

• Offer: upon receipt by the offeree
• Acceptance: upon posting
• Revocation: upon receipt by the offeree

Oral and written acceptance only.

• Acceptance
• Rejection
• Revocation
• Lapse
• Death of offeror (personal services)
• Failure of a condition attaching to the offer

An invitation to treat is where one party makes it known that they are ready to receive an offer. For example, products on supermarket shelves with prices attached do not constitute offers: these are invitations to you to make an offer to buy the goods.

Express and implied

• Offer
• Acceptance
• Consideration
• Intention to create legal relations
• Capacity

GRI is an international independent organisation that helps businesses, governments and other organisations understand and communicate the impact of business on critical sustainability issues such as climate change, human rights, corruption and many others. GRI issues reporting standards grouped like the triple bottom line approach, into environmental, social and economic standards. F

The triple bottom line is one framework for reports which include CSR impacts. It has three sections:

• Financial: traditional accounting measures, such as profit.
• Social: the effect of business practices relating to labour and the community.
• Environmental: the effect of business practices on sustainability and the beneficial or harmful effects on the environment.

(These are sometimes referred to as profit, people, planet).

CSR refers to going beyond what is required by the law. CSR involves acting as a good corporate citizen, satisfying the needs of many stakeholders, and reducing adverse effects caused by the organisation’s activities.

One definition: CSR involves acting as a good corporate citizen, satisfying the needs of many stakeholders, and reducing adverse effects caused by the organisation’s activities.

Transactions should be split up so that no one person controls all of it. This increases the chance of errors being found and also make fraud more difficult because employees would need to collude – and that increases their risk of being found out.

• The control environment
• The risk assessment process
• The information system
• The control activities
• Monitoring

• Prevention
• Detection
• Response

• Incentive/motive
• Opportunity
• Attitude/dishonesty

• Fraudulent financial reporting
• Misappropriation of assets

This is an error of commission.

This is an error of principle.

This is an error of omission.

An independent appraisal activity established within an organisation as a service to it. It is a control which functions by examining and evaluating the adequacy and effectiveness of other controls; a management tool which analyses the effectiveness of all parts of an entity’s operations and management.

None of these statements is true.

• Qualified: where the misstatement or lack of evidence is material, but can be isolated
• Adverse: where the audit report would say that because the misstatements are so severe (pervasive) the financial statements do NOT show a true and fair view.
• Disclaimer: where the auditor would say that because the lack of evidence so severe (pervasive) they can form no opinion on the financial statements.

• A statement of financial position
• A statement of profit or loss
• A statement of cash flows
• Notes to the financial statements
• A statement of movement in reserves

• Shareholders = principals
• Directors = agents

Shareholders own the company but directors manage and run it. Directors produce financial statements annually and an audit examines these to see if they give a true and fair view. This allows shareholders to better assess how their company and its directors are doing.

• An independent expert examines
• specified subject matter to
• agreed standards
• that is the responsibility of one party
• and produces a report
• for a second party.

• Supervisory board
• Management board

• Customer and shareholder focus
• Effective leadership and strategy
• Integrated governance, risk and control
• Innovation and adaptability
• Financial management
• People and talent management
• Operational excellence
• Effective and transparent communication

• Nomination committee appointment of new directors)
• Audit committee (liaison with internal and external auditors)
• Remuneration committee (directors’ remuneration)

UKCGC = not in statute. Enforced for listed companies by the stock exchange: comply or explain

SA Act = US law.

• Leadership
• Effectiveness
• Accountability
• Remuneration
• Relations with shareholders

Corporate governance frameworks should:

• Protect shareholders’ rights
• Recognise the rights of all shareholders
• Ensure disclosure and transparency
• Ensure timely and accurate information is available
• The board should determine and be accountable for the strategy of the company

Corporate governance is a system by which companies are directed and controlled.

National law.

Approach work with a questioning mind. It does not mean that you expect that every piece of information you are supplied with has been deliberately falsified. On the other hand, it does not mean that you automatically believe everything you are told. You must walk a tight-rope between belief and disbelief and be aware of human frailty and fallibility.

• Ethical principles to be followed
• These are subject to risks
• Accountants should use safeguards to avoid or to respond to risks.

• Self-interest
• Self-review
• Advocacy
• Familiarity
• Intimidation

• Integrity
• Objectivity
• Professional competence and due care
• Confidentiality
• Professional behaviour

“The provision or use of learning opportunities, both formal and informal, throughout people’s lives in order to promote continuous development and improvement of the knowledge and skills needed for employment and personal fulfilment

• Recruitment
• Training
• Ethical code
• Corporate culture

Members should not disclose confidential information unless they have a legal or professional duty or right to do so. An example of a legal duty to disclose information can arise if a member thinks that a client or the person they are working for is involved in money laundering.
There might be public interest reasons also.

Members should be influenced by the facts and the facts only. They must avoid bias, conflict of interest and undue influence.

Rules based = compliance based
Framework based = integrity or principles based

The International Ethical Standards Board for Accountants (part of IFAC) develops ethical codes and guidance.

The International Federation of Accountants. This body develops accounting and auditing standards that it hopes will be adopted across all countries.

The “public” includes all users of financial information and decisions.
“Interest” describes the responsibilities that professional accountants have to society.

Deontology refers to duty bound ethics, suggests that ethics arise from the rightness or wrongness of actions themselves, as opposed to the rightness or wrongness of the consequences of those actions. It argues that decisions should be made considering the factors of one’s duties and other’s rights.

These state that any action must be viewed in terms of the consequences that the action produces: do the consequences serve some intrinsic good? Utilitarianism proposes that one should act in such a way to produce the greatest good for the greatest number.

Absolute value theorists assume that there is only one set of moral rules that are unchanging and always true. Relative value theorists accept that there are many moral/ethical codes each of which evolves over time and each could be different from every other.