Application controls:

Credit risks: data analysis of whether the counter party has involved in any defaults/risk rate
assessing by using the history information.
Market risks: control over the market fluctuations such as the price changes/market demand
Settlement risk: set up the 3rd party pay which to restrict the money being paid out to the
counterparty if not settled. Encrypted payment on the transaction
Legal – ensure the payment only processed when the authorization party has signed

Q61
Group auditor’s consideration on subsidiaries’ audit team
FR issues:
Intra – group sales: eliminate on consolidation
- Cut off error: P mat not have recorded the purchase in its own book, to avoid the cut-off
error and ensure the inter-company transactions are offset
- Profit unrealized should be eliminated by using the PURP adjustment
- Tax issues: DTA against the PURP on receiving tax rate (Parent)
- Are there other intra-group sales all removed
Procedures
- Review the parent’s FS identify whether the goods in transit have been recorded to avoided
cut off error
- Receipt of goods (GRN) shortly after YE to confirm existence
- Purchase transactions – match the sales recorded (reconciliation)
- What is the margin? To get the PURP
- Recognize the inventory to ensure all of items are recognised in PURP at YE
Impairment – whether impairment has done correctly
- Discontinuing manufacturing of the old parts is an indicator of the impairment
- Are other assets also impaired as a result of the new engines used?
Procedures
- Ensure the adequate procedures to access the FV
- IAS 35: impairment is the lower on the CA and Recoverable amt (higher of the VIU and FV-
CTS) whether has confirmed the source of recoverable amt?
- Whether the judgement on the VIU is based on the future sales perspect?
- Discuss with the directors to identify whether other assets be impaired?

Group audit procedures

- Whether the subsidiary is a significant component (make up 20% of the consolidated profit :
30/116) so the group audit team must document an assessment of the significant of the
component
- Evidence to support whether the component auditors are independent (documentation to
support the independence of the component auditors)
- Need to document the assessment of competence – review qualifications, quality of the
work performed
- Communicate with the component auditor that the key risks identified and have been
addressed with evidence
- All document to be included in the audit file

Issue 2 tax issues

If a parent company determines the profit will not be distributable in the foreseeable future, no
DT arises.

However, the extracted dividend should be eliminated on consolidation as it has already

included in the parent’s finance income. The differed tax liability arises from the dividend paid
because the sub’s profits are reduced now and more tax liability in the future.

Accruals – deferred tax as to pay the tax on the dividend in the future.
Audit procedures
Verify the tax rate used is in line with the current year’s tax legislation to the HMRC (tax
authority) as the business tax can subject to change. This is to ensure the tax figure calculated is
correct.
Confirm additions all qualify for allowances
Agree the dividend to the bank.
Review UK tax relief on tax for overseas dividend – any double tax relief.
Historically carried forward temporary difference confirm its balance and have been brought
forward correctly.
Reconcile the profit before tax and the correctness of the tax computation
Enquire how the component auditors carry out the tax computation, require relevant working
document for the evidence. Management representation.
Ascertain the recoverability of the PPE which is the deferred tax liability. Verify the CA of the
PPE as to recalculate the VA from the cost – depreciation acc to the company’s depreciation
policy.

The deferred tax inherently complex, enquire the management the deferred tax working and
app tax computation

Confirm assets qualify for allowances

Q68 DAS
What to do with the 12m dataset
Step 1 – view the heatmap – explore module (visual): are there any more elevated risk
transactions? This will particularly be any one mentioned in the AI and the exam question
Also look at the stacked bar chart – setting the parameter by effective period
- Sort by the effective period and see what is going on in December
- Cut off in revenue for example – any big jump in December
- What happened in Dec?

Answer Q: The tree map has identified xx amount in xx account at xx date

- Detail of describing the transactions (ID + description + amt + date)

Materiality level – the working level materiality should be lower than 165,000.
Performance materiality is a judgement which should reflect the risk associated with audit
- 5% profit before tax and the PBT is commonly used to measure the materiality
- From DAS: 5%*3381,566
- However , the error found above in Issue 1 would not have been detected – therefore a
performance materiality for revenue should be set at a much lower level of £165,000.
- 1% revenue / 1% on the significant material item found

Audit risks
Revenue recognition
Risk
Double counting of the revenue:
Account xx - Of itself, this is a material overstatement of the sales by double counting and
possibility there are further instance of similar issues (revenue recognized on similar
transactions when invoices are raised, before control has passed, leading to overstatement)
- Look at the risk overall in income by heat map:
In December, another acc has credited to the sale.

There is also an audit risk that revenue is being recognised early if proforma invoices are
recognised before control passes - this appears to be a significant risk as a further proforma
invoice has been posted by Julie in December 2020.

Duplication of error: Error can be duplicated with other transactions where the goods were still
physically held

Control system - Suggest the weak of control and elevated control risks.

IFRS 15 requires revenue to be recognised when control passes to the customer, this is also the
nature of the commercial contracts with Panther’s customers. The proforma invoice posted in
April 2020 should be cancelled by a sales credit note or by journal.
 Derecognize the inventory to correct – to remove the inventory
Dr Closing inventory (COS)
Cr Inventory asset

For goods still not pass to the customer (i.e. in transit) – the control of the goods has not
transferred by YE, they should be recorded as apart of inventory:
Dr Inventory asset
Cr Closing inventory (expense)

Receivable: impairment review is subjective which may result in overstatement of receivable

High risk accounts – pick acc which have already been recognised
Code 4000 – cancel proforma invoice Sales have fallen by 43% - no Account xys – the month of Oct
explanation shows a large increase sale
largest revenue account; movement is Large credit note in Jan 2020 Using the tree map to identify
more than doubled from the past year (beginning of the year): other purchase invoices posted
a significant and material balance which should be investigated to to this revenue account indicates
- Compare to the past 11 months, confirm whether there had been that the above transaction has
this is a 15% - stacked bar chart an allowance for this in the been cancelled by a purchase
- Cut off error where high volume previous year financial statements. credit note.
of transactions recorded / There is a risk that the opening
recorded in wrong periods balance on receivables may be These transactions indicate that
Individual transactions: incorrect or a similar provision may there is a control risk over the
- Proforma invoice posted by Julie, be required at the year end. potential posting of purchase
date/time unusual (lack of invoices to the wrong account
supervision) elevated risk and that invoices can be omitted
- Overstating the revenue as the from the nominal ledger.
invoice recognized before control
passed
Add info Interrogate sales staff at client for
Ascertain whether control of the an explanation. Detail of the sales
inventory has passed to customer and provision posted on 1 January 2020
how the goods have been treated in and confirmation that it was
inventory count covered by an allowance for sales
Invoice + delivery notes returns in 31.12.2019.
Q51 Cash flow hedge

Impairment:
The asset should be carried at the value at the lower of CA and recoverable amt.
- RA is the higher of value in use and FV – COS

Lessee/lessor
Raven is the lessee(seller) because it originally owned the asset, it then sells the asset and lease
it back. This qualifies a sale because the rights and reward have passed to the new owner.
In Raven’s FS, it should derecognize the asset and recognize a right of use asset, Raven retains
the ownership of the asset.

FORMULATEXT(xx)

Loan – modification
A new loan is agreed between the borrower and the lender, and the FR treatment depends on
whether the original liability is derecognized and recognize a new liability, or whether the
original liability is modified.

A new liability is recognised if the new terms are substantially different from the old terms.
The term is substantially different is the PV of the cash flow under the new terms, including any
fee payable, discounted at the original effective rate, is 10% or more different from the PV of
the remaining cash flows. This is the extinguishment of the old loan. Which :
- The difference between the CA extinguished and the consideration paid should be
recognised in PnL
- The fee payable is a part of G/L
On a modification: the existing liability is not derecognized and the CA is adjusted by the fee
payable and amortised over the remaining term of the modified liability.
From the date of change, the new loan is reognised at FV and amortised at its own effective
rate, the transaction cost is to the SPL

Commentary on the performance

Financial position/performance
Revenue and GPM – business is profitable

Cash flow analysis:

Cash generating from operations. Compare to prior year, differences:
- Non cash item such as depreciation and working capital movement
- Any new purchase of the PPE? Any cash issues from the purchase?
- Shortage of cash evidenced by the overdraft
- Other ratio: cash return (cash from operations + dividend received/capital employed
Gearing low – good to make borrowings as debt capacity is high

Others: high dividend paid – question why directors want to pay themselves so much
- Repayment of the loan – questioning the directors’ confidence in the business
Hedge