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I found the exam really time pressured and the level of content really difficult but managed to answer something on each part – though scoring marks is another thing altogether.
I had to read question 1 at least twice before the panic subsided and was able to assess a few business risks.
The risks identified were mainly around the foreign exchange, expansion, brand not performing as expected
Risks of MM – IAS 21 recognition, Receivables could be overstated, Revenue recognition with the health plan, and impairment of stores purchasedI have read a lot of comments and I think I misread the deferred tax question -I didn’t think the business had changed significantly.
6 marks down the drain I guess 🙁@Fidget said:
Q1.b) Four significant risks of misstatement was easier: Revenue – healthcare plan annual revenue recognised on day one, receivables balance, provision for refitting shops, can’t remember the other now.
I included IAS for Agricultural where they state that living animals / plants should be valued at FV. Was that ok? I also added the risk that the stores could have been classified as held for sale as they intended to sell some of them, but this is wrong since the store need refurbishment and hence not available for immediate sale. Really, I was out of ideas and has to write down anything.
Hm, for provision for refitting, am not sure if that is a constructive obligation, and hence provision should not be created.Q1
– easy marks for layout, intro and conclusion– I actually managed to find lots of business risks, expanding into new industry, animal welfare standards due to keeping living animals, going concern issues due to significant advertising and huge drop in cash balance, reliance on overseas manufacturer, credit offered to customers.
– ROMM were IAS 2, IFRS 15 annual plan revenue needs to be recognised over 12 months, IAS 37 provision for refitting and potential redundancies, Payroll error maybe materially overstating expenses and IAS 38 potentially capitalising brand name.
– Couldn’t think of the impact on planning for the outsourcing of credit control, what did anyone else put?
Q2
– IAS 12 = Deferred tax asset treatment was correct as the company had now begun to post profits rather than losses, however the change in business strategy may have violated the restriction in place, so they shoudl enquire with management to see if they think it would and also reach out to the local jurisdictional body to see if it would– IAS 17 Lease = discount needs to be spread out through period of entire lease, so expense in the year of $150k was understated as it should have been $270k. Need to see the lease agreement to verify lease term, payment and discount, also review board minutes to see if lease was discussed.
Both the Deferred tax asset and lease were material.
– Part B the examination procedures on Capital Expenditure, just explaining different types of audit procedures i.e. getting a breakdown of the costs and analysing for reasonableness and assessing the architects work using ISA 620. Also this had elements of prospective financial info as it involved forecasting so mentioned PFI
Q3
– Didn’t have a clue for part A, literally just wrote money laundering in cash based businesses can affect revenue recognition. Probably got no marks on this.– Spoke about money laundering issues and that evidence would need to be obtained, if not then they need to speak with the audit committee or those charged with governance about it. If none of this was done a qualified opinion should be issued because it is not pervasive.
– IAS 37 = provision didn’t necessarily have to be recognised providing the auditors obtain sufficient and appropriate that it shouldn’t i.e. written representations legal claim against them will not succeed. Also they should review the board minutes to see if the legal issue has been discussed. A qualified opinion should be issued if the provision evidence is not obtained.
Q4
– Due to time issues could only attempt part A which was Intimidation and talking about how the guy didn’t understand what auditors do and the partner should arrange a meeting to explain what they doOverall gutted as I could have done more but ran out of time and failed in Dec 2015, hope I pass this time but due to only attempting part A on q4 and no answer for part A on Q3, fear I have failed again.
Definitely tougher than December. In Q1, one could barely think about the business risk – the question itself gave non away. I mentioned Regulatory risks, Staff Risks, Compliance Risks, Reputational Risks. The Risk of MM were a bit straightforward with FX Risk (IAS 21), FV of livestock (IAS 41), Revenue recognition (IFRS 15) and Provision for restructuring (IAS 37) mentioned.
You can’t be too sure in this kind of paper, just say a prayer and hope for the best.
Q2 was crazy while Q3 & Q5 were fair enough. I learnt from the last exam to start with the optionals first – time is a factor.
@sbeeharry said:
I included IAS for Agricultural where they state that living animals / plants should be valued at FV. Was that ok? I also added the risk that the stores could have been classified as held for sale as they intended to sell some of them, but this is wrong since the store need refurbishment and hence not available for immediate sale. Really, I was out of ideas and has to write down anything.
Hm, for provision for refitting, am not sure if that is a constructive obligation, and hence provision should not be created.I just had it down as a possible compliance risk due to keeping live animals as stock as part of the Business risks required. I passed over the idea that valuation of them might’ve been a significant risk of material misstatement because it hadn’t been judged as significant in prior years so wasn’t striking me as something that was suddenly a significant risk in the current year.
I mentioned the held for sale thing too. The trouble with that was that the stores were purchased in the current year being audited, but no plan for them for 7 months which took that into the new financial year and it was unclear how many stores would be kept, and how many sold on. So it was hard to say what to do with differentiating between those kept, and capitalised, and those those kept as held for sale. That differentiation would help with calculating how much of a provision should be created for each of the $8m refit costs.
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On Deferred tax asset, I also concluded that the Asset should be recognised. It was a change in supply not change in the way the business in carried out.
They sold(build) to themselves instead of using someone else.I didn’t think a change of supplier providing exactly the same product you’ve been dealing in is a significant change in business.
That’s how I discussed it.
@baljit1989 said:
Q3
– Didn’t have a clue for part A, literally just wrote money laundering in cash based businesses can affect revenue recognition. Probably got no marks on this.– Spoke about money laundering issues and that evidence would need to be obtained, if not then they need to speak with the audit committee or those charged with governance about it. If none of this was done a qualified opinion should be issued because it is not pervasive.
– IAS 37 = provision didn’t necessarily have to be recognised providing the auditors obtain sufficient and appropriate that it shouldn’t i.e. written representations legal claim against them will not succeed. Also they should review the board minutes to see if the legal issue has been discussed. A qualified opinion should be issued if the provision evidence is not obtained.
Q4
– Due to time issues could only attempt part A which was Intimidation and talking about how the guy didn’t understand what auditors do and the partner should arrange a meeting to explain what they doOverall gutted as I could have done more but ran out of time and failed in Dec 2015, hope I pass this time but due to only attempting part A on q4 and no answer for part A on Q3, fear I have failed again.
Money Laundering was jumping out of Q3, although I think more related to part b, than part a. Wasn’t too bad a question though.
Q4 was, or should I say, “would’ve”, been ok but for the time pressure. There was a hellova lot of ethical and professional issues that could’ve been picked up on in each of those scenarios – especially the first one. Just not enough time to adequately address them all.
Looking at these thoughts on Q1 i completely missed out IAS41 and mentioned something about risk that refurbishment costs are not capitalised in accordance with IAS16
Also re compliance risk i mentioned health and safety of employees in the event they were injured by the animals or insects
Am i way off the mark here?
I struggled to think of ROMM , just had a mind blank
Not hopeful
Also did anyone make comments in relation to ‘implied’ options in the basis for opinion as insufficient info was available for provision and cash based payment to foreign bank?
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@sami1986 said:
Looking at these thoughts on Q1 i completely missed out IAS41 and mentioned something about risk that refurbishment costs are not capitalised in accordance with IAS16Also re compliance risk i mentioned health and safety of employees in the event they were injured by the animals or insects
Am i way off the mark here?
I struggled to think of ROMM , just had a mind blank Not hopeful
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I struggled with Business risk. There were loads of financial statement (ROMM) risks but they only wanted four.
I picked those where I was very sure of the standard and where I’m sure I had the materiality calculation mark in the bag. That gives you 4 marks out of 10 marks, before you do any hard work.I therefore chose the four with values attached to them and I don’t have to write a paragraph to earn a mark.
P7 is always time pressured and that tactic was given to use by our tutor on a revision program.
Receivables
– $38 million of receivables which were about $20 million (or about there) an increase of about 85 to 90%. Could be a sign of bad debts and therefore receivables balance over stated. IAS36 impairment requires the recoverable amount to be recognised not the money owed.
I don’t remember the total assets figure and PBX but $38 million was material.Unclaimed holiday plan
The basis of calculation was too subjective and there was manual processses involved This increase errors inherent to such manual processes.
19.2 million was material and had also increased by 82% from last year which may further signify error or wrong basis used.
Therefore liabilities overstatedNew stores bought
$159 million (something like that) was material to total assets
Classification was the risk
If they are refitted and retained for business use – IAS16 PPE apply.
If sold off for a profit, then IFRS5 – Non-current assets held for sale apply (or IAS 40)
If not classifies properly, then Non-current assets are overstated.Reffittment cost.
$8 million was material to profits but it was planned to be spend next year not this year. Therefore if a provision is made now, a cost will be recognised early leading to understatement of profits by $8 million.
This does not qualify for a provision under IAS37 as their is no obligation to refitt the stores. They can avoid that cost by selling the stores off or use them the way they are.
Cutt-off was important here. Was this expense for this year or next year?- Topics: 0
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Very time pressured. I made the mistake of leaving Q1 once I had run over the allotted time, at which point I had hardly started the question.
Then I returned to it in a hurry, trying to think of business risks with what I could remember of the scenario – all I could remember was the rabbits.
I thought of one risk now – which is customers could buy the bunny rabbits thinking they might do something funny and then returning them when they are not funny. Maybe the risk would be understatement of warranty provision – however do rabbits come with a warranty?
The flip side is the risk that someone buys a rabbit that is funny and they put it on youtube and blame it on the pet shop. The risk would be to reputation and hence possible overstatement of inventory?
Staff are well trained so they should be able to advise that rabbits are not supposed to be for human entertainment – although that will be a hard sell as most people won’t understand.
Also what packaging do the pets come in? If they are too snugly packed they might not survive unless they are a spider or something.
What about the risk is that someone might buy reptile thinking it can do stuff which it can’t – like change colour.
Or they might buy one that does change colour and then return because it wasn’t following the rules.
Also the risk that some of the inventory may be consumed by some of the other inventory – you only need to type snakes into youtube to see what could go wrong here.
I think of all this stuff now – something tells me I haven’t passed.
Funniest post ive ever seen!
@stuartpearce said:
Very time pressured. I made the mistake of leaving Q1 once I had run over the allotted time, at which point I had hardly started the question.Then I returned to it in a hurry, trying to think of business risks with what I could remember of the scenario – all I could remember was the rabbits.
I thought of one risk now – which is customers could buy the bunny rabbits thinking they might do something funny and then returning them when they are not funny. Maybe the risk would be understatement of warranty provision – however do rabbits come with a warranty?
The flip side is the risk that someone buys a rabbit that is funny and they put it on youtube and blame it on the pet shop. The risk would be to reputation and hence possible overstatement of inventory?
Staff are well trained so they should be able to advise that rabbits are not supposed to be for human entertainment – although that will be a hard sell as most people won’t understand.
Also what packaging do the pets come in? If they are too snugly packed they might not survive unless they are a spider or something.
What about the risk is that someone might buy reptile thinking it can do stuff which it can’t – like change colour.
Or they might buy one that does change colour and then return because it wasn’t following the rules.
Also the risk that some of the inventory may be consumed by some of the other inventory – you only need to type snakes into youtube to see what could go wrong here.
I think of all this stuff now – something tells me I haven’t passed.
@sami1986 said:
Also did anyone make comments in relation to ‘implied’ options in the basis for opinion as insufficient info was available for provision and cash based payment to foreign bank?oh I went the whole hog on those and suggested modified opinion individually but disclaimer in aggregate if unresolved by the time the audit report had to be produced.
I found the paper to be quite tough!
Not the usual accounting standards were examined this time! I found question 5 to be very different, though we have a sum based on that in the kit. But the anewer to it was no way close to the kit
And we had to sit and think before starting any answer and this subject is no joke!@bayigga said:
On Deferred tax asset, I also concluded that the Asset should be recognised. It was a change in supply not change in the way the business in carried out.
They sold(build) to themselves instead of using someone else.I didn’t think a change of supplier providing exactly the same product you’ve been dealing in is a significant change in business.
That’s how I discussed it.
I first discussed the normal IAS12 treatment then brought in the local jurisdiction and wrote about understanding should have been obtained that such changes didn’t constitute a ‘significant change’, else risk of DTA being overstated. I didn’t conclude anything.
@demashi said:
Q2 was crazy while Q3 & Q5 were fair enough. I learnt from the last exam to start with the optionals first – time is a factor.What’s your materiality for each item in Q5?
@sbeeharry said:
For me all were not material, even when aggregated together. So I said an unmodified report should be issued. I think we has 6 marks to comment on impact of audit opinion and report. With an unmodified opinion, i really did not know what to comment in order to achieved the marks.
Any other comments regarding this?The 4 items were: impairment, borrowing costs (75K), irrecoverable receivables (65K) and FVTPL equity. Did you remember the PBT?
I can’t remember how much was the error. $400K? It sort of started with “4”. Did you divide it over the PBT? It should be above 5%.
I’m not sure what’s the % if you divide the asset value over TA, if you do this way maybe you will get an ‘immaterial’ materiality.
But since the impact of impairment would be debited to SOCI, I chose PBT, because with a lower amount compared to TA, I’ll definitely get a higher materiality figure.
And yes, I find the 6% rather unreasonable.
@Fidget said:
What did you come up with for the Capital Expenditure Review? Worth 8 marks that was, but I wasn’t really sure what it was asking me to do.I didn’t have much time for it but I wrote about checking arithmetic accuracy of the forecast, getting info / working papers on how the 1mil (sold of an old building) being derived and how sure are they it won’t turn out to be lower than 1mil, WR from management that they will be responsible for the forecast.
I think that’s all I put down, I got no time for it. :C
they were immaterial except the impairment. On an individual level no impact on the opinion but if considered in aggregate, I proposed an adverse opinion.
I put things like:
-Check expected sales proceeds to estate agents packs or surveyors reports.
– Review tender documents or quotes for the price of building the complex for completeness
– seek advise from quantity surveyor as to expected cost
– something about the cash balance.That’s all the ones I can remember, I think I put about 10 down in the end may to be on the safe side!
@stuartpearce said:
Very time pressured. I made the mistake of leaving Q1 once I had run over the allotted time, at which point I had hardly started the question.Then I returned to it in a hurry, trying to think of business risks with what I could remember of the scenario – all I could remember was the rabbits.
I thought of one risk now – which is customers could buy the bunny rabbits thinking they might do something funny and then returning them when they are not funny. Maybe the risk would be understatement of warranty provision – however do rabbits come with a warranty?
The flip side is the risk that someone buys a rabbit that is funny and they put it on youtube and blame it on the pet shop. The risk would be to reputation and hence possible overstatement of inventory?
Staff are well trained so they should be able to advise that rabbits are not supposed to be for human entertainment – although that will be a hard sell as most people won’t understand.
Also what packaging do the pets come in? If they are too snugly packed they might not survive unless they are a spider or something.
What about the risk is that someone might buy reptile thinking it can do stuff which it can’t – like change colour.
Or they might buy one that does change colour and then return because it wasn’t following the rules.
Also the risk that some of the inventory may be consumed by some of the other inventory – you only need to type snakes into youtube to see what could go wrong here.
I think of all this stuff now – something tells me I haven’t passed.
Oh my Gosh!! Stuart!!–I just thought about another risk!!–There is a risk that after reading your post, the examiner may pass everyone that took this March edition!! You are just too funny!..I havent laughed like this in such a long time!!-
aLSO THERE IS A MORE SERIOUS RISK THAT YOU MAY BE IN THE WRONG BUSINESS ACTUALLY –(You may think about moving on to comedy!)Lool at you only need to type in snakes!!
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