Accounting Standards

Fair Values IFRS 13 Audit Evidence

Fair value: 'the price that would be received to sell an
asset or paid to transfer a liability in an orderly
transaction between knowledgeable market participants
at the measurement date'.
Level 1 Quoted prices (unadjusted) in active
markets for identical assets
Level 2 Quoted prices for similar assets in active
markets
Level 3 Unobservable inputs for the asset or
liability, ie using the entity's own
assumptions about market exit value.
• The objectivity and expertise and experience of those
persons determining the fair value measurements
• Enquire as to the basis of management assumptions used
(particularly where level 3 unobservable inputs are used)
• Review documentation supporting any FV
• The auditor should evaluate whether the disclosures
about fair values have been made as required by IFRS13
• The auditor should obtain written representations from
management re adequacy of valuations

Inventory IAS 2 Audit Evidence

Key risks are valuation and quantity • Vouch cost to purchase invoices
• Vouch NRV to price lists, post YE sales invoices or
Valuation marketing literature
Inventories are valued at the lower of cost and net
realisable value
• Directional testing (count-sheet to inventory & inventory to
Quantity count-sheet)
Attendance at the inventory count • Checking that the sequence of count-sheets is complete.
• Is there consideration of slow-moving items
• Enquire as to the existence of consignment stock and
gain external confirmation of such stock
Standard costing
• How often are the standard costs updated?
Issues is client used standard costing (manufacturer)
Cost p/u • Do significant variances exist?
Material Kg/pu x £ £X • What controls are there over the amendment of standard
Labour Hrs/pu x £ £X cost data? (e.g. authorisation)
Overheads/pu x OAR £X • Vouch material/labour costs per Kg/Hour
£X • Enquire as o basis of overhead calc and its completeness

Tangible Non-current Assets IAS 16 Audit Evidence

Initial measurement • Obtain Fixed Asset Register & recalculate

Should include purchase price plus acquisition,
dismantling and restoration costs if applicable
Depreciation
Should fairly represent useful economic life
Revaluation (choice)
Revalued to fair value, gain/losses to revaluation
reserve/OCI. Must apply to all assets in same class, and
calculate depreciation on new carrying value
Disposal
Difference between proceeds and carrying value
recognised in P/L. Any previous revaluation recycled
through retained earnings
• Agree opening balances to prior year
• Inspect title deeds and vehicle registration docs to
confirm ownership
• From bank letter confirm charges on property are
adequately disclosed
• Review disposals for gains/losses confirming adequacy
of depreciation policy
• Recalculate depreciation
• Compare current year depreciation policy to prior year
• For a sample of additions trace to purchase invoice
• For a sample of assets inspect to confirm existence
• Trace a sample of physical assets to the register to
confirm complete
• For a sample of disposals trace proceeds to sales
invoice and recalculate and gain or loss
Impairments IAS 36
On identification of an impairment indicator NCAs should
be reviewed
Value at lower of Carrying value vs Recoverable Amount
Where Recoverable Amount
is the higher of:- VIU FVLCTS
Any reductions should be expensed to the income
statement after clearing out any previous revaluation
gains
NCA Held for Sale IFRS 5
Non-current assets held for sale
Where a NCA meets the following criteria……
Available for immediate sale in present condition
Sale is highly probable
Management are committed
Active programme to locate a buyer
Reasonable sales price
Sales is expected within a year
…..the asset can be reclassified to current assets
The existing accounting policy should be applied to the
asset then it should be reviewed for impairment. Each
year end it should be considered if impaired further until
eventual sale (No depn from date of transfer)
Discontinued operation
A component of any entity that has either been disposed
of or is classified as held for sale by the year end and
(a) Represents a major line of business or geographical
area of operations,
(b) Is part of a single coordinated plan to dispose of a
separate major line of business or geographical area of
operations, or
(c) Is a subsidiary acquired exclusively with a view to
resale where disposal results in loss of control
……the income and expenditure of the discontinued
operation should be shown separately from those of
continuing activities either on the face of the P&L or via a
note.
Intangible Assets IAS 38
Brands, licences, patents etc
If purchased from outside the business they should be
capitalised at cost. Internally recognised brands must be
expensed
Amortisation should be over their useful life if it is finite.
Or tested annually for impairments if it is infinite.
Development expenditure must be capitalised when:
• Probable future economic benefits will flow
• Intention, resources and ability to complete/sell
• Technically feasible
• Expenditure can be measured reliably
Research and Development
• Research is always expensed.
Audit Evidence
• Obtain calculation
• Recalculate workings
• VIU – based on realistic CF projections (5 yrs max)
• VIU – uses appropriate discount rate
• VIU – includes maintenance costs
• FVLCTS – valuation reports, Audit expert ISA620
• FVLCTS – disposal costs included and reasonable
• Ensure FV calc is consistent with IFRS 13
Audit Evidence
• Inspection of asset – condition appropriate for sale
• Review marketing of asset/sale particulars
• Review board minutes showing management committed
• Review subsequent events
• Enquire to sales agent re price/likelihood
• Comparison of sale price per sale particulars to fair
value
• Obtain written representation re management intentions
• Ensure valued at lower of carrying amount and FVLCTS
• Discuss with director’s the details of any operations
disclosed as discontinued to determine whether they
meet definition of IFRS 5.
• Establish how management have identified the
amounts relating to the discontinued activities and ensure
that this has been done on a reasonable basis.
• Review board minutes for confirmation of treatment.
• Check disclosures in the accounts to those required by
IFRS 5.
Audit Evidence
• Verify costs to invoices
• Recalculate amortisation
• Enquire to management re impairment indicators
To confirm probable future economic benefits:-
• Review subsequent events
• Examine results of market research
• Inspect any pre orders
To confirm intention, resources and ability to
complete/sell
• Inspect board minutes showing commitment
• Include on written representation letter
• Review companies financial standing and funding
required to complete
Deferred Tax IAS 12
Represents tax attributable to temporary differences.
Where the tax treatment of an asset or liability is different
to the accounting standard treatment.
Eg. NCA
NBV vs TWDV = Difference x tax rate% = DT Liability c/f
Increase or decrease b/f liability through the income
statement
Deferred tax assets can only be recognised when future
profits will be generated to recover
Provisions, Contingent Liabilities and Contingent Assets IAS 37
Provisions should be recognised when:
• A present obligation as a result of a past event either
legal or constructive
• Probable that economic benefits will transfer
• Reliable estimate exists
Contingent liability exists when only possible or no
reliable estimate, therefor disclose only.
Contingent assets – disclose only when probable and
recognise a receivable when certain.
Related Party Transactions IAS 24
Parties are considered to be related if one party has the
ability to control the other party or exercise significant
influence over the other parties financial and operating
policies
Required disclosures:
• Related party relationships where control exists
• Transactions with related parties
Earnings per share IAS 33
Basic and diluted EPS should be presented for continuing
and discontinuing activities
Disclosure should be on the face of the P/L
Basic EPS calculated as PAT/Weighted ave no of shares
Diluted EPS should recognise potential future
shareholders as a result of convertible bonds and
outstanding warrants
Audit Evidence
• Obtain copy of workings
• Recalculate accuracy
• Agree figures used to financial statements carrying
values
• Agree figures used for tax base to legislation or per tax
expert
• Agree b/f position to prior year
• Agree tax rate used to enacted legislation
• Where a DT Asset has been recognised assess
company’s ability to make future profits.
Recoverability of DT Asset
• Obtain a copy of current tax computation and deferred
tax calculations and agree figures to any relevant tax
correspondence and/or underlying accounting records.
• Obtain forecasts of profitability and agree that there is
sufficient forecast taxable profit available for the losses to
be offset against
• Review current management accounts for existence of
profits
• Review correspondence (with legal advisors)
• Discuss with directors
• Review board minutes
• Review subsequent events
• Scrutinise estimate (ISA540)
• Recalculate provision movements
• Review disclosure for adequacy
Audit Evidence
• Review prior year working papers
• Review shareholder records for those who have
significant influence
• Review board minutes authorising transactions with
directors
• Review entities procedures for the identification of
related parties
• Obtain written representation re related party disclosure
• Review customer and supplier lists for connections
• Review unusual/lossmaking transactions or those with
unusual terms
Audit Evidence
• Verify to PAT to P&L
• Obtain weighted average calculation and re-calculate
• Enquire as to the existence of any outstanding warrants
or options or convertible bonds
• Review statutory records for numbers (if any) of new
shares issued in the year
• Recalculate EPS using the profit as disclosed in the
statement of profit or loss and the weighted average
number of shares.
• Read the notes to the financial statements in respect of
EPS to confirm that disclosure is complete and accurate
and complies with IAS 33
• Verify to disclosed on face of P&L
Investment Property IAS 40 Audit Evidence

Property held to earn rentals/capital appreciation Classification

• Confirm building is owned by entity and leased out
Initial measurement • Verify occupier is not connected to the company and
Initially measured at cost (including transaction costs and that rent is at an arms-length
direct costs) Verify the company does significantly occupy or provide
significant services to those who do (if so IAS16 not IAS
Subsequent measurement 40 applies)
Investment property can either
Valuation
• Remain at depreciated cost or • If cost model is adopted check compliance with IAS 16
• Be re-valued to FV (IFRS 13) each year end with any • If FV model is adopted ensure:-
gain or loss being recognised in the income statement - FV reflects market conditions (IFRS 13 compliant)
Choice must be applied consistently to all properties - Agree valuation to valuers certificate
- Recalculate gains/losses on change in FV
Disposal values less carrying amount will result in a profit - Ensure gains/losses reflected in P&L
or loss in the income statement
Disclosure
• Confirm compliance with IAS 40
• Disclosure of policy choice
• Reconciliation of changes in the year

Employee Benefits IAS 19 Audit Evidence

Defined contribution scheme Scheme Assets Scheme Liabilities

Accounted for on an accruals basis
• Review actuarial • Review working papers
Defined benefit scheme working papers & verify & consider assumptions
• More complex as company bears all the risks and FVs to available market and methods used
rewards data • Compare assumptions
• Use of actuary to make assumptions re eventual size of • Review basis of to prior year
future benefits and establish FV of closing assets and PV calculation for those with
of liabilities no market rate available
• Actuarial (re-measurement) gains and losses (reasonable assumptions)
determined and w/off through OCI
• ISA 620 Audit of Expert – Qualification, objectivity etc
Scheme Assets Scheme Liabilities • Obtain written representation re assumptions
Opening assets X Opening liabs X • Recalculate current service cost
Interest cost X Interest cost X • Review payments made into scheme
(Op asset x Int%) (Op liab x Int%) • Interest cost and return on plan assets – equivalent to
that of a yield of Blue Chip corporate bond
Cash put in X Current service cost X • Trace scheme adjustments to P&L (current service
Cash paid out (X) Cash paid out (X) cost/interest cost/return on plan assets)
• Adequate disclosure
Remeasurement Remeasurement
Gain/Loss X/(X) Gain/Loss X/(X)

Closing assets X Closing liabs X

Share-based Payments IFRS 2 Audit Evidence

Equity settled vs cash settled valued using different
FV each year end.
• Equity settled – FV at the grant date
• Cash settled – FV updated each year end
• Entity should recognise the expense spread over the
vesting period
• Number of employees should be adjusted for leavers
and estimated leavers each year (non-market condition)
• Market conditions, such as requirement for a certain
profit to be achieved are ignored as included in the FV of
an option
• Number of options each employee will receive
• Spread over correct vesting period
• Using an appropriate FV calculation (Black Scholes)
Accounting entries:-
• Inspect scheme details sent out in contractual
documentation to verify dates (start/end/vesting period)
and existence of any market or non-market based vesting
conditions
• For leavers – review payroll details
• For equity settled ensure FV is estimated at grant date
• For cash settled check that FV is recalculated at end of
reporting period
• Check that the model used to calculate FV is in line with
IFRS 2 (Black Scholes), including market based vesting
conditions
• Consider gaining expert advice
• Recalculate provision
• Obtain representation from management regarding
assumptions
• Review disclosure

Equity settled Cash settled

Dr Expense Dr Expense
Cr Other component of equity Cr Liability
Financial instruments (Classification) IAS 32
Financial Assets
A contractual right to
• Receive cash/financial asset
(eg trade receivables, bank balance)
• Exchange financial assets/liabilities
under potentially favourable
conditions
(eg derivative standing at a gain)
• Equity instrument of another entity
(eg shares in another company)
Financial Instruments IFRS 9
Classification
Amortised cost
Debt instruments.
Financial asset must pass 2 tests:-
(1) Business model test
Where company is holding the instrument to
collect the contractual cash flows (rather than
sell it)
(2) Cash flow characteristics test
The contractual terms give rise the payment of
principle and interest on specified dates
Equity instruments and derivatives
N/A
Initial measurement
At Fair Value plus transaction costs
Subsequent measurement
At amortised cost with the effective interest
being recognised in the P&L over the term of
the instrument
Financial Liabilities Equity Instruments
A contractual obligation to Any contract that evidences a
residual interest in the assets of an
• Deliver cash/financial asset entity after deducting all its liabilities
(eg trade payables)
• Ordinary share capital
• Exchange financial assets/liabilities
under potentially unfavourable
conditions
(eg derivative standing at a loss)
Preference shares
Loan characteristics Equity characteristics
• Redeemable • Dividend is at the discretion of the
• Cumulative directors
Treat as a liability Treat like ordinary shares
Dividend is a finance cost Dividend through retained earnings
Compound instruments (convertible loans)
Compound instruments have characteristics of debt and equity
Initial recognition
Use split accounting from issue date:
DR Bank Proceeds
CR Liability PV of future interest and capital payments (using %
of an equivalent non-convertible bond))
CR Equity reserve β – residual amount vs proceeds received
Subsequent measurement:
• Liability at amortised cost using % of non conv. bond as effective rate
• Equity reserve at original value
Fair Value
Fair Value through OCI Fair Value through P & L
Financial asset must pass 2 tests:- Default option. If fails to meet the
amortised cost and FVTOCI tests.
(1) Business model test
Where company is holding the Instruments can also be designated
instrument to collect the contractual initially as FVTPL if it reduces any
cash flows and selling it. accounting mismatch.
(2) Cash flow characteristics test
The contractual terms give rise the
payment of principle and interest on
specified dates
Must make an irrevocable election at Mandatory unless irrevocable election
initial recognition (Dividend income has been made
still to P&L)
At Fair Value plus transaction costs At Fair Value, transaction costs w/off to
P/L
Any gains and losses at the year end Any gains and losses at the year end
accounted through the revaluation accounted through the P/L
reserve/OCI
Audit of Financial instruments under IFRS 9

Debt instrument
• Obtain finance agreement and verify the characteristics
meet the 2 tests
• From the finance agreement verify interest rates, period,
repayments
• Inspect invoices regarding transaction costs and confirm
treatment
• Enquire as to management’s intentions and confirm on
written representation letter

Amortised cost working

• Recalculate and trace journals to the nominal ledger
• Verify payments made into the cash book/bank
• Recalculate effective interest where bond issued at a
discount or a premium is repayable
• Consider impairment indicators

Equity instruments (shares)

• Inspect irrevocable election to confirm classification
• Inspect purchase documentation to verify FV at acqn
• Verify transaction costs and consider treatment
• Verify shares held and consider if control or significant
influence exists
• Verify year end FV per reliable source
• Recalculate change in FV
• Verify treatment of gains and losses

Disclosure
• Review disclosure notes – in accordance with IFRS7?

Borrowing Costs IAS 23 Audit Evidence

Recognition • Obtain the finance agreement and verify interest rate

• Borrowing costs that are directly attributable to the • Recalculate interest capitalised
acquisition or construction of a qualifying asset should be • Verify documentation supporting the date that
capitalised with the asset. construction commenced to the date it ended (invoices)
• Physically verify constructed asset
• These costs should be capitalised from the date
construction starts to the date substantially all the
construction ends.

Business Combinations (Goodwill) IFRS 3 Audit Evidence

Recognition when a holding company achieve control of a • Confirm ownership to shareholder register or annual
subsidiary return
• Obtain legal purchase agreement and verify date of
acquisition and different consideration payable
Consideration paid
• Cash X • Verify to cash book/bank statements
• Shares at MV X • Verify to share price at date of acquisition
• Deferred consideration X • Review how discounted to PV (Appropriate COC used)
• Contingent consideration X • Verify to acquisition agreement (included based on
probability and discounted to PV)
NCI value at acquisition X • If FULL method – verify to share price at acquisition
• If PARTIAL method – recalculate NCI share of NA
acquired

FV of NA acquired (X) • Review due diligence report, consider ISA 620

___ • Ensure FV of NA acquired included contingent liabilities
Goodwill X_ as a provision and recognisable brands separate from
GW
• Consider if FV of NA changed with 12 mths – if so
update FV of NA
• Consider if impairment review took place at YE
(mandatory)
Groups

Required treatment in
Accounting standard Investment Criteria
group accounts

IFRS 10 Consolidated Subsidiary Parent has: Full consolidation

Financial Statements • Power over investee - Ability to direct activities
• Exposure to variable returns
• Ability to use power to affect their returns exists
(even if not exercised)

Eg: owning 50% +

IAS 28 Investments in Associate Parent has: Equity accounting

Associates and Joint • Significant influence over financial and operating
Ventures policies, and therefore the power to participate

Eg: owning 20% – 50%

IFRS 11 Joint Joint venture Contractual arrangement Equity accounting

Arrangements • Joint control over financial and operating policies,
distinguishes between and therefore the power to participate
Joint operations and
joint ventures

IAS 39 and IFRS 9 Investment Asset held for accretion of wealth Account for as
Financial Instruments investment
Eg: owning up to 20%

Leases IFRS 16 Audit Evidence

A Lease – is the right to control the use of an asset to obtain Classification

substantially all of the economic benefits for a period of time • Obtain the lease agreement and confirm right of use
- Identify who controls the specific asset
Recognition - Confirm/calculate PV of MLP
Dr Right of use asset - Confirm lease term vs useful life
Cr Lease liability - Verify dates, interest rates and payments

Measurement Recalculate any lease workings

• The asset should reflect the PV of MLP plus any initial • Agree to cash book amounts paid in year
deposits, direct costs and removal/dismantle costs • Recalculate finance charge against profit
• The liability should reflect the PV of MLP • Verify depreciation agrees to lower of LT vs UL
• Review/recalculate disclosure of CL vs LTL
Subsequent measurement
• The asset should be depreciated over the shorter of the
lease tern vs the useful life. Unless ownership will transfer
where the useful life will be used.
• The liability is accounted for as follows:
Op balance X
Repayment (X)
X
Interest X
Cl balance X
Split between current and non-current liabilities

Sale and finance lease back

1) Transfer is NOT a sale (fails IFRS 15 definition of a sale)
Treat as a secured loan
Dr Cash
Cr Financial Liability

2) Transfer IS a sale
Dr Cash
Dr Right of use asset (CV x PVMLP/FV) (based on proportion of the previous CV relating to the rights retaining)
Cr PPE (derecognise CV)
Cr Financial liability (PV of MLP)
Cr Profit and loss a/c
Government Grants IAS 20
Revenue grants (grants to help pay expenditure)
• The grant should be only recognised in the income
statement when the associated cost is incurred.
• Two recognition options: 1) Net funding off against
expense, 2) show total expense and funding income
separately
Audit Evidence
• Review grant documentation and conditions attached
• Agree receipt to cashbook and bank
• Verify revenue grants match qualifying expenditure
• Verify capital grants only spent on qualifying asset and
recognition agree to depreciation policy
• Review disclosure notes concerning grants – adequate?

Capital grants (grants to help purchase an asset)

• The grant should be treated as deferred income and

recognised to the income statement over the NCA
expected useful life. Therefore matched against
depreciation expense.
• Alternatively the grant could be netted against the asset
reducing the assets value

Revenue from contracts with customers IFRS 15 (replaces IAS 18 and IAS 11)

Recognition • Inspect sales agreement to see performance obligations

Revenue is recognised and measured using a 5 step model • Inspect goods delivery note/service delivery note for
date of transfer of obligation
1) Identify the contract with the customer (contract has • Subsequent events confirm cash receivable at year end
commercial substance and it’s probable the • Verify if time value of money is material and re-calculate
consideration will be collected by the entity) discounting where relevant
2) Identify the separate performance obligations
3) Determine the transaction price (FV or PV in material)
4) Allocate the transaction price to the different
performance obligations when multiple obligations exist
5) Recognise revenue as/when obligations are satisfied

Cash flow statements IAS 7

Presentation (2 Accounting policies – direct and indirect
method)
Presentation
Cash flow from operating activities
Cash flows from running a business
Cash flows from investing activities
Cash flows from buying/selling/investing in assets
Cash flows from financial activities
Cash flows to and from those who finance the company
• Endure consistent accounting policy of presentation of
cashflows from operating activities
• Recomputation and recast
• Trace all figures in the cashflow to the clients working
papers/movements in SOFP
• Agree movement in cash
Agree individual figures to the cashflow ie depreciation
Agree individual figures in the cashflow to supporting
documentation ie proceeds from disposals

Changes in accounting policies, estimates and correction of errors IAS 8

Accounting policy changes
An entity shall change an accounting policy only if
• The change is required by an IFRS or
• It results in more relevant, reliable information about
position, performance and cash flows.
If there is a change in accounting policy, the normal rule
is to apply the policy to comparatives and opening
balances as if the new accounting policy had always been
used.
• Discuss the reason for the change with management.
• Ensure that the change in policy has been correctly
accounted for as a prior year adjustment.
• Ensure that adequate disclosure has been made of the
change (in change of policy estimate or correction of
error) and the reason for the change.

Accounting estimate changes

Changes in accounting estimates are applied
prospectively with no restatement.

Prior Year Errors

If there is a material error in the previous year’s
accounts, restate comparatives and opening balances as
if error had never occurred.
Subsequent Events IAS 10

Events that come to light after the year end may have an Audit report
impact on the financial statements. YE issued F/S issued AGM
Adjusting events
Are further evidence of an event that existed at the
reporting period. Adjustments should be made to the Auditor has an No active duty BUT if something does
numbers in the accounts to reflect such events active duty to come to the auditor attention:-
Non-adjusting events consider the
Not further evidence of an event that existed at the impact of • Discuss the • Discuss with
subsequent issue with management
reporting period. If these events are material they should
events and management whether to
be disclosed in the financial statements compliance with • Revise the withdraw & adjust
It’s all about the date of the cause, not the date it came to IAS 10 audit report the F/S
management’s attention. (ie modify or • Revise the audit
• Adjusting new date) report
• Non-adjusting • If no adjustment
made - take legal
Modify if wrong advice

Foreign exchange IAS 21

Transactions Regarding transactions

• Should be initially translated at the spot rate.
• Monetary assets and liabilities should be re-translated
at the year-end closing rate with gains and losses going
to the P&L
• Non-monetary assets (ie related closing inventory)
should remain as initial recognised.
• Verify appropriateness of the exchange rates used to a
reliable source
• Verify only monetary assets/liabs have been
retranslated at year end

Consolidation of foreign subsidiary Regarding consolidation of fx Sub

To translated a foreign subsidiary from its functional
currency to its presentation currency for consolidation:
• A & L translated at the closing rate
• SC and pre-acqn RE translated at the historic rate
• I & E translated at the average rate
• Goodwill is treated as an asset of the sub and
retranslated each year end.
• Current year gains and losses on retranslation of
goodwill and the net assets of the subsidiary should be
reflected in OCI
• Verify A & L translated at the closing rate
• Verify SC and pre-acqn RE translated at the historic
rate
• Verify I & E translated at the average rate
• Verify goodwill is treated as an asset of the sub and
retranslated each year end.
• Verify gains and losses recognised in the appropriate
place. (P&L or OCI)
• Assess if the disclosure requirements of IAS 21 have
been satisfied.

Segmental Reporting IFRS 8 Audit Evidence

Requires the break-down of the aggregated F/S into
segments when:
• Segment earns revenue and incurs cost
• Results are regularly reviewed by CODM
• Discrete financial info available
Segments are reportable when their results are greater
than either 10% of total revenue/profit/assets. (To the
extent that at least 75% of revenue should be disclosed)
Significant disclosure then required re segment
assets/revenue/interest/tax etc & geographical revenue
as well as existence of any major customers (10% of
revenue)
ISA (UK and Ireland) 501 Specific considerations for
selected items governs the auditor’s approach to auditing
segment information.
Auditors are required to obtain sufficient appropriate audit
evidence regarding the presentation and disclosure of
segment information by:
(a) Obtaining an understanding of the methods used by
management in determining segment information, and:
(i) Evaluating whether such methods are likely to result
in disclosure in accordance with the applicable
financial reporting framework, and
(ii) Where appropriate, testing the application of such
methods; and

(b) Performing analytical procedures or other audit

procedures appropriate in the circumstances.