- This topic has 4 replies, 2 voices, and was last updated 4 years ago by
.
- Posts
Dear tutor,
1) The ACCA answer says “Assuming that there is shared control, an audit risk arises in that ZCG may not have correctly applied equity accounting, thereby potentially over or understating ZCG’s investment and resulting in incorrect presentation in the consolidated statement of financial position and statement of profit or loss.”
In equity accounting, ZCG should pass below entry:
Dr. Investment in Joint Venture
Cr. Share of profit of Joint Venture – IncomeSo the audit risk is that the investment and income are overstated or understated, but in ACCA answer it says “incorrect presentation” and does not mention income?
2) To calculate materiality for “amortisation of license to operate in Farland”, should we use cost of license amounting $65 to total assets or calculate amortisation to extrapolated revenue?
1) I agree it could be clearer – if there was no equity accounting presumably the investment would be carried only at cost. Then:
– the investment would be under/overstated due to failure to recognise share of profit/loss;
– the consolidated SoPL would be missing the line “share of profit from equity accounted investments”2) Materiality calculation should always depend on what you are trying to say is material – if you take a cost or carrying amount of an asset as a % of total assets you are considering materiality to SoFP of entire amount. If you calculated an expense amount on an asset – that could be a % of total assets (for SoFP) or % profit (for SoPL).
The problem here is that there appears to be no profit figure – and revenue is therefore being used as a surrogate benchmark. Certainly it would not be compared to revenue (as it is unrelated to revenue) if you had had a profit figure to use.
- The topic ‘Tarantino & Co – Sep 2016 Question 1a – Audit risks’ is closed to new replies.