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EVALUATION AND REVIEW (II) MATTERS RELATING TO SPECIFIC ACCOUNTING ISSUES

- - - - Ensure that standard costing is an appropriate basis for valuing inventory
        - Establish whether prices have fluctuated. This can be done by reviewing purchase invoices, consulting a price index and enquiry of management
        
        Consider if the use of standard costing is the best accounting policy to use. This should be discussed with the directors
        
        Consider the comparability of the accounts if the accounting policy has changed
        
        Ensure that the FSs make adequate disclosure of any changes in accounting policies
      - Ensure that the calculation of the standard cost is reasonable
        
        Obtain a copy of the calculation of standard cost
        
        Check the additions and caluclations
        
        Consider whether the calculation is reasonable
        
        Verify elements of the calculation to appropriate documentation
        
        Perform analytical procedures
- - - - External
        
        Market value declines significantly
        
        Negative changes in technology, markets, economy or legal environment
        
        Increases in market interest rates that are likely to affect the discount rate using to calculate value in use
        
        Company stock price is below book value
      - Internal:
        
        Obsolescence or physical damage
        
        Significant changes with an adverse effect on use
        
        Internal evidence shows worse economic performance of the asset than was expected
    - - **Audit net realizable value >>> Same way for auditing the fair value
      - Audit value in use
        
        Obtain management's calculation
        
        Re-perform calculation to ensure that it is mathematically correct
        
        Compare the cash flow projections to recent budgets and projections approved by the board to ensure that they are realistic
        
        Calculate/obtain from analysts the long-term average growth rate for the products and ensure that the growth rates assumed in the calculation do not exceed it
        
        Refer to competitor's published information to compare how similar assets are valued by companies trading in similar conditions
        
        Compare with previous calculation to ensure that all relevant costs of maintaining the asset have been included
        
        Ensure that the cost/income from disposal of the asset has been included
        
        Review calculation to ensure cash flows from financing activities and income tax have been excluded
        
        Compare discount rate used with published market rates to ensure that it correctly reflects the return expected by the market
  - - - Confirm that the asset meets the definition of an asset held for sale: Discuss with management, assess management commitment, evaluate and assess practical steps being take to sell the asset, determine when the sales is expected to take place, determine and assess the basis on which the sale price has been set, etc.
      - Confirm that the asset has been valued as held sale in accordance with IFRS 5 and assess how fair value has been determined
      - Check that the asset has not depreciated from the date of classification
      - Confirm separate disclosure in accordance with IFRS 5
- - - - Classification of measurement is made on the basis of:
        
        The entity's business model for managing the financial assets; and
        
        The contractual cash flow characteristics of the financial asset
        
        Equity investments must be measure at fair value
        
        All derivatives are measure at fair value
      - Initial recognition is at the fair value of the consideration
        Subsequent recognition is measure at either:
        
        Amortized cost or
        
        Fair value
    - - Initial recognition is at the fair value of the consideration
        Subsequent recognition is measure at either:
        
        Amortized cost under the effective interest rate method or
        
        Fair value through profit or loss
      - A financial liability is classified at fair value through profit or loss if:
        
        It is held for trading; or
        
        Upon initial recognition it is designated at fair value through profit or loss
        
        Derivatives are always measured at fair value through profit or loss
    - - On initial recognition The entity creates a 'credit loss allowance' equal to 12 months' expected credit losses (= the probability of a default within 12 months x total lifetime losses that would result from such a default)
      - In subsequent years
        
        If the credit risk increases, the carrying amount must be lifetime expected credit loss
        
        If the credit risk decreases, the 12-month expected credit loss basis is reinstated
  - - - Audit risk will probably be increased because:
        
        Difficult to understand the nature of financial instruments
        
        Market sentiment and liquidity can change quickly
        
        Evidence supporting valuation may be difficult to obtain
        
        Large individual payments which may increase the risk of misappropriation of assets
        
        The amounts may not be proportionate to the level of risk involved
        
        Risk of fraudulent financial reporting
      - Factors affecting the RoMM:
        
        Volume of financial instruments
        
        The terms of financial instrument
        
        The nature of the financial instruments
    - - Procedures for testing completeness, accuracy and existence
        
        External confirmation
        
        Reviewing reconciliation of statements or data feeds with the entity's own records
        
        Reviewing journal entries and the controls over the recording of such entries
        
        Reading individual contracts and reviewing supporting documentation
        
        Testing controls
        
        Reviewing complaints management systems
        
        Reviewing master netting arrangements to identify unrecorded instruments
      - Procedures for testing valuation
        
        Test how management made the accounting estimate and the data used
        
        Test the operating effectiveness of the controls over how management made the accounting estimate, together with appropriate substantive procedures
        
        Develop a point estimate or a range to evaluate management's point estimate
        
        Determine whether events occurring up to the date of the auditor's report provide audit evidence regarding the accounting estimate