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

- - - - 1) Identify the contract(s) with a customer
        2) Identify the performance obligations in the contract
        3) Determine the transaction price
        4) Allocate the transaction price to the performance obligations in the contract
        5) Recognise revenue when (or as) the entity satisfies a performance obligation
    - - Sale with a right of return If there is a right of return then the goods which are expected to be returned are not recognised in revenue. This may be calculated using expected value
      - Warranties If a customer has the option to purchase a warranty separately from the product to which it relates, it constitutes a distinct service and is accounted for as a separate performance obligation
      - Principal versus agent
      - Repurchase agreements generally come in three forms:
        
        An entity has an obligation to repurchase the asset (a forward contract)
        
        An entity has the right to repurchase the asset (a call option)
        The customer does not obtain control of the asset, even if it has physical possession. The entity will account for the contract as either of the following:
        
        A lease if the repurchase price is below the original selling price
        
        A financing arrangement if the repurchase price is equal to or greater than the original selling price. In this case the entity will recognise both the asset and a corresponding liability
        
        An entity must purchase the asset if requested to do so by the customer (a put option)
        The entity must consider whether or not the customer is likely to exercise that option
      - Consignment arrangements The customer does not obtain control of the product at that point in time, so no revenue is recognised upon delivery
    - - Revenue is commonly audited using analytical procedures. However, analytical procedures may be less reliable where controls testing indicates that revenue controls are deficient.
      - ISA 240: the auditor should presume that there is a risk of fraud in relation to revenue recognition and should obtain an understanding of the controls related to these risks
      - In industries dealing primarily in long-term contracts, revenue recognition can be a material issue (building industry, engineering industry)
- - - - For classification and rights and obligations:
        
        Obtain a copy of the lease agreement
        
        Review the lease agreement to ensure that the lease has been correctly classified according to IAS 17
      - For valuation (finance lease)
        
        Obtain a copy of the client's workings in relation to finance leases
        
        Check the additions and calculations of the workings
        
        Ensure that the interest has been accounted for in accordance with IAS 17
        
        Recalculate the interest
        
        Agree the opening position
        
        Agree any new assets to lease agreements
        
        Verify lease payments in the year to the bank statements
        
        For valuation (operating lease)
        
        Agree payments to the bank statement (if material)
      - For Disclosure
        
        Ensure the finance leases have been properly disclosed in the financial statements
  - - - Accelerated capital allowance The temporary difference is the difference between the carrying value of the asset in the SOFP at the end of the reporting period and its tax depreciated value
      - Interest revenue The temporary difference is equivalent to the income accrual in the statement of financial position at the end of the reporting period, as the tax base of the interest receivable is nil
      - Development costs The temporary difference is equivalent to the amount capitalised in the SOFP at the end of the reporting period. The tax base is nil since they have already deducted from taxable profits.
      - Revaluation to fair value The temporary difference is the difference between the asset's carrying value and tax base. A deferred liability is created even if the entity does not intend to dispose of the asset.
      - Fair value adjustments on consolidation A temporary difference arises as for the revaluation above but the deferred tax effect is a consolidation adjustment in the same way as the revaluation itself
    - - Provisions The provision is recognised for accounting purposes when there is a present obligation, but may not be deductible for tax purposes until the expenditure is incurred
      - Losses Current losses that can be carried forward to be offset against future taxable profits result in a deffered tax asset
      - Fair value adjustments For example, liabilities recognised on business combinations where the expenditure is not deductible for tax purposes until a later period
      - Unrealised profits on intra-group trading The profit is not realised from the group point of view until the items transferred are sold outside the group but, where the tax base is based on the cost to the individual receiving company and no equivalent adjustment for unrealised profit is made for tax purposes, a temporary difference arises.
    - - Obtain a copy of the deferred tax workings and the CIT computation
        
        Check the arithmetical accuracy of the deferred tax working
        
        Agree the figures used to calculate timing differences to those on the tax computation and the financial statements
        
        Consider the assumptions made in the light of your knowledge of the business and any other evidence gathered during the course of the audit to ensure reasonableness
        
        Agree the opening position on the deferred tax account to the prior year financial statements
        
        Review the basis of the provision to ensure:
        
        It is in line with accounting practice under IAS 12
        
        It is suitably comparable to practice in previous years
        
        Any changes in accounting policy have been disclosed
  - - - Definition A restructuring is a programme that is planned and controlled by management and materially changes either:
        
        The scope of the business undertaken by an entity; or
        
        The manner in which that business is conducted
      - Examples
        
        The sale or termination of a line of business
        
        The closure of business locations in a country or region or the relocation of business activities from one country or region to another
        
        Changes in management structure
        
        Fundamental reorganisation that have a material effect on the nature and focus of the entity's operations
      - Conditions to recognise provision:
        
        An entity must have a detailed formal plan for the restructuring
        
        It must have raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it
    - - An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it
        
        A provision must be made for the net loss
    - - Making appropriate inquiries of management including obtaining representations
        
        Reviewing board minutes and correspondence with the entity's lawyers
        
        Examining legal expense account
        
        Using any information obtained regarding the entity's business, including information obtained from discussions with any in-house legal department
      - If the auditor assesses a RoMM regarding litigation or claims that have been identified, the auditor shall seek direct communication with entity's external legal counsel through a letter of inquiry which should specify:
        
        A list of litigation and claims
        
        Management's assessment of the outcome of the litigation or claim and its estimate of the financial implications, including costs involved
        
        A request that the external legal counsel confirm the reasonableness of management's assessments and provide the auditor with further information if the list is considered by the lawyer to be incomplete or incorrect
- - - - The future benefits cannot be estimated exactly but, whatever they are, the employer will have to pay them, and the liability should therefore be recognised now. To estimate these future obligations, it is necessary to use actuarial assumptions.
      - The obligations payable in future years should be valued, by discounting, on a present value basis
      - If actuarial assumptions change, the amount of required contributions to the fund will change, and there may be actuarial gains or losses. A contribution into a fund in any period is not necessarily the total for that period, due to actuarial gains or losses
    - - Scheme assets (including securities, debt instruments, properties)
        
        Ask directors to reconcile the scheme assets valuation at the scheme year-end date with the assets valuation at the reporting date
        
        Obtain direct confirmation from the investment custodian
        
        Consider requiring scheme auditors to perform procedures
      - Scheme liabilities
        
        Consider whether it is appropriate to rely on the actuary's work
        
        Specific matters would include:
        
        The source data used
        
        The assumptions and methods used
        
        The results of actuaries' work in the light of auditors' knowledge of the business and results of other audit procedures
      - Actuarial assumptions
        
        Obtain a general understanding of the assumptions and review the process used to develop them
        
        Compare the assumptions with those which directors have used in previous years
        
        Consider whether the assumptions appear to be reasonable and compatible with those used elsewhere in the FSs
        
        Obtain written representations confirming that the assumptions are consistent with knowledge of the business
      - Items charged to operating profit
        
        Discuss with directors and actuaries the factors affecting current service cost
  - - - Number of employees in scheme/number of instruments per employee/length of vesting period > Check to revenue scheme details set out in a contractual documentation
      - Number of employees estimated to benefit
        
        Enquire of directors
        
        Compare to staffing numbers per forecasts and prediction
      - Fair value of instruments
        
        Check to the reference source
        
        Check that model used to estimate fair value is in line with IFRS 2
      - General
        
        Obtain written representations that
        
        The assumptions used in measuring the expense are reasonable
        
        There are no share-based payment schemes in existence that have not been disclosed to the auditors