AEC 64 - Auditing and Assurance: Concepts and Applications 2

List of Benefits ● Employee Handbook Completeness Actual return on Income expected from assets in (-)
(Completeness (List of benefits) plan assets the pension plan, including
and Classification ● Accountancy Policy investment income from interest,
procedures in Manual dividends, and capital gains.
accordance with
PAS 19 Employee
Benefits) Gain or loss Actuarial gain or loss refers to an
increase or a decrease in the
Review of ● AVR Completeness, projections used to value a
actuarial ● Payroll Register Valuation corporation's defined benefit
assumptions (assumptions a and c) pension plan obligations.
(Estimates)
➢ Must be reasonable
What are the ❖ Change in value of RBO
assumptions or ➢ Mag-change pag ma
analytics? change ang assumptions
No. of employees ❖ Change in value of plan assets
eligible for
retirement pay. = Net Pension Cost / Expense

Recomputation ● AVR Valuation

of Obligation ❖ Retirement Benefit Obligation (RBO)
❖ Fair Value of Plan Assets (FVPA)
Confirmation of What to confirm: Existence? ➢ Managed by a third party
plan assets 1. Balance as of year end
2. Interest income -
gina-invest ang funds Retirement Benefit Asset FVPA > RBO
sa bonds
Retirement Benefit Obligation RBO < FVPA
[Liability]
Actuarial Assumptions seen in the AVR
1. List/No. of Employees as of year end (12/31)
2. Annual Salary EXPERT
3. Average Working Life - you need: ❖ What to test by auditor?
➢ Hiring date and ➢ Competence
➢ Birthday
■ License, member of professional board
4. Discount rate - risk free rate (PHP BVAL Rate)
5. Mortality rate ➢ Capabilities
6. Future Salary Increase Rate: ■ Geographic location
➢ Auditor needs to do Subsequent Events Testing ■ Time and resources
(Ex. 2021 audit and compare to 2022) ➢ Objectivity
■ Makita ni sa engagement letter between
Notes:
actuary and client, what to check:
➔ FOUND IN PAYROLL REGISTER
● Scope of work
➔ PROVIDED BY DEPT OF FINANCE (GOVT)
● Service fee (significant or not)
Components of Pension Expense
a. Current Service Cost (+) REVISED CORPORATION CODE
b. Past Service Cost (+) - naa sa OCI, hinay-hinayan og transfer AUDIT PROCEDURES ON EQUITYxu
sa P/L (amortized)
EQUITY

COMPONENTS OF PENSION EXPENSE

AUDIT AUDIT EVIDENCE ASSERTION
PROCEDURE
Current service this is the amount that the (+)
cost employee earned for his service in
Equity Roll ● Shareholders list
the current reporting period (which
forward ● Articles of
adds up to the defined benefit
incorporation
obligation)
Confirmation to What to confirm:
Past service cost Past service cost is the change in (+)
Corporate ➢ Shares issued and PRESENTATION
the present value of defined benefit
Secretary outstanding as of year AND
obligations caused by employee
end DISCLOSURE
service in prior periods. This cost
➢ Board of Directors Kay ang
arises from changes in
and corresponding everything else na
post-employment benefits or other
shareholdings (CFO, assertion nabuhat
long-term employee benefits. The
CEO, COO) na sa previous
change in this cost may either be
➢ Board resolutions audit
positive or negative.
(including dividend
declarations)
Interest expense The increase in the overall pension (+) ➢ Minutes of the
obligation due to the passage of Meeting
time.
 AEC 64 - Auditing and Assurance: Concepts and Applications 2

Legal ➢ Types of RE (refer b. Contractual cash flow characteristics

Considerations below)

Initial Fair value plus transaction costs

measurement ➔ XCPT - FVPL: Fair value only,
COMPONENTS OF EQUITY transaction costs expensed immediately

Share Capital + Additional Paid-in Capital (icompare with Fair value = market price - transport costs
unappropriated RE)

Retained Earnings Roll forward:

RE, beg. + net income* - dividends = RE, Financial liabilities
end
a. Payables
*already included in audit of income b. Lease liabilities
statement accounts
c. Held for trading liabilities and derivative liabilities
d. Redeemable preference shares issued
TYPES OF RETAINED EARNINGS e. Security deposits and other returnable deposits
1. Appropriate retained earnings
➢ Why mag-appropriate: For future projects
➢ Example:
CHAPTER 10: Investments in Debt
■ Future business expansion - most sikat Securities
na reason ngano mag appropriate ang
From MILLAN IA1 A
entity
■ Dapat naay definite timeline
2. Unappropriated retained earnings
Financial assets at amortized cost
➔ Investment in bonds
CHAPTER 9: Investments ◆ Government (treasury bonds)
From MILLAN IA1 A ◆ Corporations (corporate/private bonds)

Financial Instruments
Bonds
➔ Long-term debt instruments
Financial assets
➔ Offered to the public
a. Cash and cash equivalents
b. Receivables Bond indenture
c. Investments in equity or debt instruments of other entities ➔ contractual arrangement between issuer and bondholders
d. Sinking fund and other long term funds ➔ Restrictive covenants to prevent issuer from taking actions
contrary to the interests of the bondholders
➔ Trustee (bank) appointed to ensure compliance

Initial When the entity becomes a party in the

recognition contractual provisions of the instrument
DISCOUNT acquisition cost < face amount
Subsequent a. Amortized EIR > NR
measurement i. Hold to collect
ii. Solely payments of principal
and interest PREMIUM acquisition cost > face amount
b. FVOCI EIR < NR
i. Hold to collect and sell
ii. SPPI Interest income PV of bonds x original EIR
iii. Irrevocable election at initial
recognition to classify an Interest receivable Outstanding face amount x NR
investment in equity
instruments
Int inc - int rec = Discount or period amortization
c. FVPL
i. If it doesn't meet amortized or
FVOCI
ii. Irrevocable designation at
initial recognition to eliminate
Acquired interest
or significantly reduce
accounting mismatch Unpaid interest has accrued
iii. Held for trading
- Record separately as
Basis:
a. Business model
i. A matter of fact
 AEC 64 - Auditing and Assurance: Concepts and Applications 2

Future cash flows x pv factor at x% = PV oci Increase (gain) No effect

decrease (loss)

Sale of bonds prior to maturity

Net disposal proceeds - CA = gain or loss

CHAPTER 14: Investments in Associates

From MILLAN IA1 B

Type of investment Nature of Applicable

relationship with reporting standard
investee

Investment Regular investor PFRS 9

measured at fair
value

Investment in Significant influence PAS 28

associate

Investment in Control PFRS 3 & PFRS 10

subsidiary

Investment in joint Join control PFRS 11 & PAS 28

venture

% of ownership interest Type of investment

<20% Financial assets at fair value

20% - 50% Investment in associate

51% - 100% Investment in subsidiary

Contractually agreed sharing of Investment in joint venture

control

OTHER EVIDENCES OF SIGNIFICANT INFLUENCE

a. Representation on the board of directors or equivalent body
of the investee
b. Participation in policy-making processes
c. Material transactions
d. Interchange of managerial personnel
e. Provision of essential technical information

Equity method

Share in Effect on investment Effect in investment

associate’s in associate income

Profit or loss Increase (profit) Increase (profit)

decrease (loss) decrease (loss)

dividends decrease No effect