Tutor marking guidance Corporate Reporting (Sample paper) Determine adjustments for loan - 3. Going concern sign off not required on all companies - 1

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1 Question 1 MARKS WITH HEADROOM (Maximum available marks shown in brackets) a) Identifies and explains any known and potential issues which you believe may give rise to material audit adjustments or significant audit risks in the group financial statements. b) Outlines, for each issue, the additional audit procedures, if any, required to enable us to sign our audit opinion on the group financial statements c) A revised consolidated statement of financial position for the year ended 30 April 2012, which includes the overseas subsidiary, Klip Tutor marking guidance Corporate Reporting (Sample paper) Technical 7 Calculate effective interest 521,040 and deduct 200,000-1 (Max 9) Determine adjustments for loan - 3 Going concern sign off not required on all companies - 1 Klip s status as a significant component - may have changed significantly audit approach - 2 Net assets of Klip at acquisition H$775,000 (1) Goodwill H$ 220,000 (1) Exchange gain on Goodwill (1) Adjust retained earnings for loan (1.5) 13 (Max 11) (Max 9) Skills Identifying inadequate work by senior is a risk for quality - omission of Klip from consolidation, failure to determine nature of investment held by CAM, simplistic consolidation adjustments not investigated -3 Identify lack of fair value adjustment and implications for financial statements - 2 Determine that entries may be missing in respect of intercompany balances. - 1 Identify incorrect treatment of loan -1 Appreciate going concern as a potential risk. - 1 Apply concept of materiality to potential audit adjustments for obsolescence and warranty. - 2 Identify the need for tax expert to determine adjustment to the group accounts. - 1 Identify potential risk from use of overseas auditors. 1 Appreciate potential difference between Ruritanian accounting standards and IFRS and impact on group accounts. - 1 Ascertain gaps in work performed and recommend appropriate audit work for: - Investments Intercompany balances Loan 1 - Outstanding audit work Overseas subsidiary Apply technical knowledge to use appropriate exchange rates. Assimilate information to produce adjusted consolidated SOFP. Consolidated Retained earnings (1.5) NCI (1) Copyright ICAEW All rights reserved. Page 1 of 6

2 Exchange gain on retranslation of subsidiary (3) 17 (Max 16) 27 (Max 24) Total marks 44 Maximum 40 available marks Copyright ICAEW All rights reserved. Page 2 of 6

3 Question 2 MARKS WITH HEADROOM (Maximum available marks shown in brackets) a) Explain the potentially contentious financial reporting issues. Determine any adjustments you consider necessary and explain the impact of your adjustments on the financial statements, identifying any alternative accounting treatments Technical Skills Renovation of Ferris street 1 IAS 16 capitalise direct costs only not an arbitrary split write off revenue costs 2 Distinguish between accounting treatment of revenue and capital expenditure in accordance with IAS 16. Appreciate that judgement is required and the allocation is open to manipulation. Understand that project manager may not have appropriate accounting technical knowledge to determine the split of 80:20. Query why no disposal noted for Oxford project. IAS 11 4 Contract cost basis - 2 Work certified basis Identify incorrect treatment in PPE. Identify potential alternative accounting treatments and the implications for financial statements. Determine contract is still profitable and the significance of this in terms of recognition. Appreciate why judgement is required in application of IAS 11. Conclude on implications for financial statements. FX House disposal million net investment in lease - 1 Gain in IS now 15.7 million Identify interest cost not capitalised in accordance with IAS 23. Identify incorrect treatment of Copyright ICAEW All rights reserved. Page 3 of 6

4 Reverse rental income of 2m and charge interest of 975,000-2 finance lease. Estate agency buildings 2 Journal adjustment for IFRS 5 2 Apply technical knowledge of IFRS 5 to the scenario. Determine insufficient information to conclude on treatment of discontinued operations. Foreign currency receivable and forward contract 2 Journal adjustments Retranslation of receivable Taxation 3 Journal adjustments Current tax - 1 Deferred tax (Max13) b) After making adjustments for matters arising from your review of the outstanding issues, prepare a draft statement of financial position and statement of comprehensive income. 15 (Max13) Total marks 33 Maximum available marks 30 Recognise depreciation requires investigation. 2 Identify no deferred tax adjustment required Recognises that no real need for hedge accounting to apply. (Max 9) 8 Assimilate adjustments and produce financial statements. 18 (Max 17) Copyright ICAEW All rights reserved. Page 4 of 6

5 Question 3 MARKS WITH Technical HEADROOM (Maximum available marks shown in brackets) a) Explain the correct financial reporting treatment for employee incentive schemes set out in Jon s showing, where appropriate, calculations and correcting journal adjustments Staff bonus 1 Application of IAS 19 and journal adjustment. Skills 3 Link information from different parts of the scenario. -1 Financial statement analysis to determine revenue target not achieved. - 2 SAR 2 Application of IFRS 2 and journal adjustment m Recognition of share-based payment as cash settled and the impact on financial statements. - 1 Apply technical knowledge to the scenario to arrive at charge and payable. - 1 Pension 4 Determination that the cash payment is not the correct income statement charge for pension. Appreciate need for actuary in identifying the information required to recognise the net pension obligation in the financial statements. Directors Bonus b) Perform relevant analytical procedures for staff costs based on the information available, identifying any unusual patterns and trends and outlining the audit risks which arise from your work 1 Journal adjustment to remove directors bonus 4 (Max 3) 2 Relevant calculations to determine overstatement Assimilate information and adjustments to determine bonus accrual is not appropriate. (Max 8) 6 (Max 5) Assimilate information and adjustments Analyse date to identify potential overstatement. Recognise that overstatement represents significant audit risk Apply concept of materiality to determine significant of potential adjustment and need for further audit work. Appreciate that the explanations offered by the junior are Copyright ICAEW All rights reserved. Page 5 of 6

6 c) Evaluate the summary of key internal payroll controls prepared by Jon Dillan. Identify any areas where controls appear inadequate and any further risks associated with staff costs not covered by these controls. Determine the extent of reliance that can be placed on these controls in reducing the risk that the financial statements will be materially misstated. 8 (Max 6) inadequate and require further investigation. Recommend the use of experienced audit staff to investigate staff costs and pension. Identify that the pension adjustment will be a significant area of audit risk and an auditors expert will be required to review the assumptions of the actuary. Interpret and analyse data from a variety of sources to enable a critical analysis of the control information presented. Identify gaps in the control information.(e.g. employee expenses, bonus payments, share based payments, IT controls) Identify risks arising from lack of segregation of duties, relative size of departments, joiners and leavers. Apply technical advice to a given scenario and a given audience. Identify the need for documentation of controls before reliance possible. Recommend use of computer audit specialist. d) Your comments on any ethical issues or concerns you have arising from the information you have received. 6 (Max 5) 7 (Max 6) 31 (Max 25) Determine the ethical issues arising from the relationship between Tina and the financial controller and explain the audit risks. Appreciate the impact on the audit of the pressure placed upon the FD by the client. Identify the self-review threat arising from the FD s request for assistance. Relate FD s lack of expertise to potential audit risks arising from other complex areas. Total marks 37 Maximum available 30 marks Copyright ICAEW All rights reserved. Page 6 of 6