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Hello Sir, for Specimen exam applicable from Sept 2018
Q1 part (a) audit riskExaminer answer under?
“Beard Co’s investment properties”Third paragraph and last sentence:”The gain as stated in the statement of profit or loss and other comprehensive income is material at 9.3% of total comprehensive income”
1.The materiality level can be also based on TCI rather than PBT or PAT?
2.”It would be important to obtain information on the types of properties which have been invested in”. Why is it does matter? is it not the valuation is more important?
3.In the tutorial note: What transfer pricing and relevant tax implications that refers to? is it inter-company transfer of inventory and deferred tax of revaluation gain?
Thank you. 🙂
1. Materiality is a matter of judgment and can be based on anything RELEVANT. Since the gain has no effect on PBT/PAT any % based on these amounts is irrelevant – similarly it would be irrelevant to consider $m as a % of revenue (because the gain is not recognised in revenue).
2. If properties were offices it is more likely that they are owner-occupied (i.e. should not be accounted for under IAS 40). It’s not necessary to go into any detail but, for example, an investment in a “plush” apartment might be rented out to a related party. It’s not a big deal – which is why it is only a passing reference – but I rather think an auditor should know what type of properties its client is investing in.
3. No – it’s concerning the management charges (the section immediately preceding the tutorial note).
Thank you, Sir, I have more understanding right now toward the question
However, for question no.3, can you provide an example for the transfer pricing and relevant tax implications on the management charges that can be written for an answer related to audit risk for this scenario? I really can’t think about it, Thank you.
This is an audit exam so you wouldn’t expect to have any great knowledge in this area. However, you might be aware from prior studies of TX/FM that anything charged inter-company – interest on loans, management charges can be used to “move” profits between tax jurisdictions (I’m talking multi-national companies here). You have probably heard in the press (google/amazon) that this is an issue for tax authorities and now there are regimes and control mechanisms to help prevent transactions between companies which are clearly not on commercial terms.
Accounting implication is IAS 24 disclosure requirements (assumed knowledge of SBR) – non-disclosure, if material, would required “except for” qualification of the audit opinion.
Breach of tax laws would be an example of NOCLAR (could even amount to money laundering if it results in tax evasion).
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