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The Institute of Chartered Accountants in England and Wales
CORPORATE REPORTING
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Corporate Reporting
The Institute of Chartered Accountant
Accountantss in England and Wales
ISBN: 978-1-78363-795-9
Previous ISBN: 978-1-78363-487-3
First edition 2014

Fifth edition 2018
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mechanicall including photocopying, recording, scanning or otherwise, without
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The content of this publication is intended to prepare students for the ICAEW
examinations,, and should not be used as professional advice.
examinations
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The publishers are grateful to the IASB for permission to reproduce extracts from
the International Financial Reporting Standards including all International
Accounting Standards, SIC and IFRIC Interpretations (the Standard
Standards).
s). The
Standards together with their accompanying documents are issued by:
The International Accounting Standards Board (IASB)

30 Cannon Street, London, EC4M 6XH, United Kingdom.
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Disclaimer: The IASB, the International Financial Reporting Standa

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iii

Contents
The following questions are exam-standard. Unless told otherwise, these questions are the style, content
and format that you can expect in your exam.
Time Page
allocation
Title Marks Mins Question Answer
Financial reporting questions

1 Kime 30 63 3 179
2 Mervyn plc 30 63 5 185
3 Billinge 30 63 7 189
4 Longwood 30 63 8 193
5 Upstart Records 30 63 11 196
6 MaxiMart plc 30 63 13 202
7 Robicorp plc 30 63 16 204
8 Flynt plc 30 63 18 209
9 Gustavo plc 30 63 20 213
10 Inca Ltd 30 63 21 218
11 Aytace plc 30 63 24 223
12 Razak plc 30 63 26 227
13 Finney plc 30 63 29 232
14 Melton plc 30 63 31 239
15 Fly-Ayres 30 63 34 243
16 Aroma 30 63 37 249
17 Kenyon 30 63 38 253
18 Snedd (July 2014) 30 63 40 256
19 BathKitz (November 2014) 26 55 42 262
Audit and integrated questions

20 Dormro 40 84 47 269
21 Johnson Telecom 40 84 50 275
22 Biltmore 40 84 54 282
23 Button Bathrooms 40 84 57 286
24 Hillhire 40 84 60 293
This website25stores
Hopper
dataWholesale
such as 40 84 63 300
26 Lyght plc 40 84 65 305
functionality,
27as well as marketing,
Maykem 40 84 67 314
28 Sunnidaze 40 84 70 319
may change 29your settings at any time
Tydaway 40 84 73 325
30 Wadi Investments 40 84 77 335
31 Jupiter 30 63 79 339
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32 Poe, Whitman and Co 30 63 82 346
33 Precision Garage Access 30 63 84 353
Marketing
34 Tawkcom 30 63 88 359
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35 Expando Ltd 30 63 91 364
364
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36 NetusUK Ltd 30 63 93 369
369
37 Verloc Group 30 63 96 372
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iv Corporate Reporting

Time Page
allocation
Title Marks Mins Question Answer
38 KK 30 63 100 380
39 UHN (July 2014) (amended) 45 95 102 387
40 ETP (July 2014) 30 63 106 393
41 Couvert (November 2014) 40 84 109 398
42 ERE (November 2014) 34 71 112 406
July 2015 exam questions

43 Congloma 40 84 117 415
44 Heston 30 63 120 422
45 Homehand 30 63 123 429
November 2015 exam questions

46 Larousse 40 84 127 439
47 Telo 30 63 130 447
48 Newpenny (amended) 40 84 133 453

49 Earthstor 40 84 137 463
50 EyeOP 30 63 140 472

51 Topclass Teach 30 63 143 479

52 Zego 40 84 147 487
53 Trinkup 32 68 151 495
54 Key4Link 28 58 153 501

55 Konext 40 84 157 509
56 Elac 30 63 160 518
57 Recruit1 30 63 163 523

58 EF 40 84 167 531
59 Wayte 32 68 170 538
cookies to 60 SettleBlue
enable essential site 28 58 173 544
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Contents v

Exam
Your exam will consist

consist of:
Three written test questions 100 marks
Pass mark 50
Time available 3.5 hours
The ACA student area of our website includes the latest information, guidance and exclusive resources
to help you progress through the ACA. Find everything you need, from exam webinars, past papers,
marks plans, errata sheets and the syllabus to advice from the examiners at icaew.com/exams.
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vi Corporate Reporting

Question Bank

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1


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2

Financial reporting questions
1 Kime
Kime plc is in the property industry, operating in both the commercial and private housing sectors.
Kime uses the cost model for measuring its property portfolio in its financial statements and has a
30 June year end.

You are Jo Ng, Kime's
Kime's recently appointed
appointed financial controller.
controller. Your role is to prepare the financial
financial
statements for the year ended 30 June 20X2 before the auditors start work next week. The finance
director has supplied you with some work papers containing a trial balance and outstanding issues
(Exhibit
Exhibit)) which have been prepared by a junior assistant. The
T he finance director gives you the following
instructions:
"The auditors are due to start their audit
au dit work on Monday and I would like to be aware of any
contentious financial reporting issues before they arrive.
Review the outstanding issues identified by the junior assistant (Exhibit) and explain the potentially
contentious financial reporting issues. Determine any adjustments you consider necessary and explain
the impact of your adjustments on the financial statements, identifying any alternative accounting
treatments. The board of directors has indicated that accounting policies should be selected which
maximise the profit in the current year. In addition, with regard to the trade receivables forward
contract, please state briefly the impact, if any, of the introduction of IFRS 9, Financial Instruments.
Using the trial balance and after making adjustments for matters arising from your review of the
outstanding issues (Exhibit 1) prepare a draft statement of financial position and statement of
comprehensive income."
Requirement
Respond to the finance director's instructions. Total: 30 marks
Exhibit: Work papers prepared by the junior assistant
Trial balance at 30 June 20X2
Debit Credit
Notes £m £m
Land 1 30.5
Buildings – cost 132.7
Buildings – accumulated depreciation 82.5
Plant and equipment – cost 120.0
Plant and
Trade equipment
receivables – accumulated depreciation
depreciation 2 174.5 22.8
22.8
Cash and cash equivalents 183.1
Ordinary share capital (£1 shares) 100.0
Share premium 84.0
Retained earnings at 1 July 20X1 102.0
functionality, as well as
Long-term marketing,
borrowings 80.0

personalization,
Deferred tax liability You
and analytics. at 1 July 20X1 3 33.0
may change yourand
Trade settings
otheratpayables
any time 54.9

Sales 549.8

Operating costs 322.4
Distribution costs 60.3
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Administrative expenses
expenses 80.7
Finance costs 4.8
Marketing 1,109.0 1,109.0
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Financial reporting questions 3

Notes and outstanding issues
(1) Freehold land and buildings – at 30 June 20X2
20X2
Land Buildings Total
£m £m £m
Cost:
At 1 July 20X1 34.0 118.4 152.4
Additions – 26.8 26.8
Disposals (3.5) (12.5) (16.0)
At 30 June 20X2
20X2 30.5 132.7 163.2
Accumulated depreciation:
depreciation:
At 1 July 20X1 – 84.8 84.8
Charge for the year – 5.9 5.9
Disposals – (8.2) (8.2)
At 30 June 20X2
20X2 – 82.5 82.5
Carrying amount:
At 30 June 20X2
20X2 30.5 50.2 80.7
At 30 June 20X1

20X1 34.0 33.6 67.6
The accounting policy states that land is not depreciated and all buildings are depreciated over
their expected useful life of 50 years with no residual value.
Additions –
Additions – total £26.8 million
The additions comprise two major commercial property projects: (These are the first construction
projects undertaken by Kime for a number of years):
 Renovation of Ferris Street property (£8.8 million)
million)
Kime commenced this renovation during the year ended 30 June 20X2. The budgeted cost of
this project is £15 million, of which £12 million (80%) has been designated as capital
expenditure by the project manager. The remaining £3 million is charged in the budget as
repairs and maintenance cost.
In the year ended 30 June 20X2, the company incurred costs of £11 million on the project.
Therefore I have capitalised 80% of the cost incurred in line with the original budget.
 Construction of a sports stadium in London (£18 million)
million)
On 1 July 20X1, Kime began constructing a sports stadium for a local authority, which was
expected to take 20 months to complete. Kime agreed a total contract price of £34 million.
Total contract costs were expected to be £16 million, however costs incurred at 30 June 20X2
are £18 million and these have been capitalised in the year ended 30 June 20X2. Reliable
estimates of costs to complete the project have been certified by the company's own surveyor
to be £4.5 million. He has also provided a value of work completed to date of £23.8 million.
In the
This website stores data yearasended 30 June 20X2, Kime raised invoices totaling £17 million to the local
such
authority
cookies to enable essential siteand recognised this amount in revenue for the year. The local authority had paid all
functionality, as well as marketing,invoices by 30 June 20X2.
outstanding
personalization,Disposals
and analytics. You
Kime settings.
or accept the default disposed of two properties during the year:
Accumulated
Cost of Cost of depreciation at
Privacy Policy Property
Property land buildings disposal date
£m £m £m
Marketing FX House 2.0 8.0 4.2
Estate agency buildings 1.5 4.5 4.0
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Total 3.5 12.5 8.2
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4 Corporate Reporting: Question Bank

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FX House
This property was leased to a third party under an agreement signed on 1 January 20X2. This is a
40-year lease and the title to both the land and buildings transfers to the lessee
l essee at zero cost at the
end of the lease term. The annual rental is £2 million payable in advance. The present value on
1 January 20X2 of the future lease payments discounted at the interest rate of 10% implicit in the
lease was £21.5 million, which clearly exceeds the carrying amount at the date of disposal and the
lease is therefore a finance lease.
I have derecognised the property and recognised a loss on disposal equal to the carrying amount
of £5.8 million in administrative expenses for the year ended 30 June 20X2. The first annual lease
payment received on 1 January 20X2 has been credited to finance costs for the year ended
30 June 20X2.
Estate agency buildings
Due to the recession Kime has reconsidered its business model and closed down its high street
estate agencies buildings from which it operated its private housing business. The estate agencies
business is now operated entirely online.
In May 20X2 a contract for the sale of these buildings, including land was agreed for a price of
£10 million, with the sale to be completed in September 20X2. A gain has been recognised in
administrative expenses in profit or loss of £8 million and a receivable of £10 million in trade
receivables.
(2) Trade receivables and forward contract
contract
Included in trade receivables is an amount due from a customer located abroad in Ruritania. The
amount (R$60.48 million) was initially recognised on 1 April 20X2 when the spot exchange rate
was £1= R$5.6.
At 30 June 20X2,
20X2, the exchange
exchange rate was £1 = R$5.0. No adjustment has been made to the trade
receivable since it was initially recognised.
Given the size of the exposure, the company entered into a forward contract, at the same time as
the receivable was initially recognised on 1 April 20X2, in order to protect cash flows from
fluctuations in the exchange rate. The
The forward contract
contract is to sell R$60.48
R$60.48 million and the
the
arrangement satisfies the necessary criteria to be accounted for as a hedge.
At 30 June 20X2,
20X2, the loss in fair value of the
the forward contract
contract was £1.5 million.
million. The company
elected to designate the spot element of the hedge as the hedging relationship. The difference
between the change in fair value of the receivable and the change in fair value of the forward
contract since inception is the interest element of the forward contract.
(3) Current and deferred taxation
taxation
I have not yet made any adjustments for deferred or current taxation, but have been told to make
the following assumptions:
 The tax rate is 24%.
 Taxable profits are calculated on the same basis as IFRS profits except for temporary
This website stores data such asarising on plant and equipment.
differences
as
functionality, as well
 Themarketing,
deferred tax temporary taxable differences have risen by £14 million over the year to
personalization, and 30 June 20X2
analytics. You after the effects of accounting for depreciation on plant and equipment only.
No taxatrelief
may change your settings is available on freehold buildings and land.
any time
2 Mervyn plc
Mervyn plc manufactures electrical components for the motor trade. Mervyn is in the process of
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finalising its financial statements for the
the year ended 30 September 20X7.
20X7. Due to cash flowflow problems
Mervyn
Marketing sold two pieces of its freehold land during the current financial year. The land was held in the
financial statements
statements at cost. The finance
finance director, reviewing
reviewing the draft financial
financial statements, has
has asked for
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your advice on these
these sales as well as on some unusual features identified.
identified.
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An extract from
from the statement
statement of changes in equity in the draft financial
financial statements shows:
Retained earnings
£'000
At 1 October 20X6
20X6 2,190
Profit for the year 1,471
Dividends paid (515)
At 30 September
September 20X7 3,146
There is a note explaining that there is no 'other comprehensive income' in the statement of profit or
loss and other comprehensive income as there are no gains and losses other than those recognised in
profit or loss for the year.
The statement of profit or loss
l oss and other comprehensive income shows an 'exceptional' gain relating to
gains on the two land bank sales:
£'000
The Ridings 100
Hanger Hill Estate 250
350
A contract for
for the sale of land at The Ridings was entered
entered into in June
June 20X7 conditional
conditional upon obtaining
obtaining
a detailed planning consent, but only outline consent had been obtained by 30 September 20X7.
Planning consent was received in October and the landl and sale was completed in November 20X7. Tax of
£27,000 has been provided on the sale.
The sale of land at Hanger Hill to the Beauford Corp on 1 October 20X6 took place under a sale and
leaseback arrangement. The terms of the lease arrangement were:
Lease term Five years
Rentals first payable on 30 September 20X7 £80,000 per annum
On 1 October 20X6 the carrying amount of the Hanger Hill land was £900,000 and its fair value was
£950,000. The first rental was paid on its due date and charged to operating expenses.
Beauford Corp is expected to take possession of this land at the conclusion of the lease.
The cumulative discount factor for a five-year annuity at 10% (the appropriate interest rate for this
transaction) is 3.791.
Operating expenses include £405,000 relating to the company's defined benefit pension scheme. This
figure represents the contributions paid into the scheme in the year. No other entries have
have been made
relating to this scheme. The figures included in the draft statement of financial position represent
opening balances as at 1 October 20X6:
£'000
Pension scheme assets 2,160
Pension scheme liabilities (2,530))
(2,530
(370)
Deferred tax asset

asset 85
85
(285)
After the year end, a report was obtained
obtained from an independent
independent actuary. This gave valuations as at
30 September 20X7 of:
£'000
Pension scheme assets 2,090
Pension scheme liabilities (2,625)
Other
or accept the information
default settings.in the report included:
Current service cost 374
Payment out of scheme relating to employees transferring out 400
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Reduction in liability relating to transfers 350
Pensions paid 220
Marketing
Interest rate on high quality corporate bonds at 1 September 20X7 10%
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All receipts and payments
payments into and out of the scheme
scheme can be assumed to have occurred on
on
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30 September 20X7.
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Mervyn's accounting policy is to recognise any gains and losses on remeasurement of the defined
benefit asset or liability (actuarial gains and losses) in accordance with IAS 19, Employee Benefits (revised
2011).
In the tax regime in which Mervyn operates, a tax deduction is allowed on payment of pension benefits.
No tax deduction is allowed for contributions made to the scheme. The rate of tax applicable to 20X6,
20X7 and announced for 20X8 is 23%.
In March 20X7, a customer of Mervyn brought legal proceedings against Mervyn for alleged injury to
employees and loss of business through a fault in one of Mervyn's products. In September 20X7, the
case came to court but Mervyn's lawyers think that it could be a very lengthy case and believe that
Mervyn will lose the case. The actual cost of damages and timing of the case are far from clear but
management have made a number of estimates. They believe that the best outcome for Mervyn will be
damages of £200,000 payable in one year's time. The worst possible outcome would be for the case to
continue for three more years in which case the estimate of damages and costs is £1,500,000 payable in
three years' time. A further estimate, between these two extremes, is that damages of £800,000 will be
payable in two years' time. Management's estimates of probabilities are best outcome 25%, worst case
outcome 15% and middle ground outcome 60%. No provision nor any disclosure has been made for
this court case in the financial statements.
Mervyn has a new arrangement with one particular customer that Mervyn will hold the goods that it
sells until such time as the customer needs them. The customer is invoiced
i nvoiced for the goods when they are
ready for delivery, but they are held until the customer needs them. The accountant of Mervyn has not
been recognising the revenue on these sales until the delivery has taken place to the customer. At
30 September 20X7, there were goods with a selling price of £138,000 and cost of £99,000 which had
not yet been delivered to the customer. These goods had been included at cost when the inventory
count took place.
The company
10,000 shares.granted share
The SARs appreciation
provide employeesrights (SARs)
at the datetothe
itsrights
employees on 1 October
are exercised 20X5
with the based
right on
to receive
cash equal to the appreciation in the company's share price since the grant date. The rights vested on
30 September 20X7 and payment was made on schedule on 1 November 20X7. The fair value of the
SARs per share at 30 September 20X6 was £6, at 30 September 20X7 was £8 and at 1 November 20X7
was £9. The company has recognised a liability for the SARs as at 30 September 20X6 based upon
IFRS 2, Share-based Payment but the liability was stated at the same amount at 30 September 20X7.
If any figures are to be discounted, a rate
ra te of 10% per annum should be used.
Requirement
Explain how each of the above transactions should be treated in the financial statements for the year
ended 30 September 20X7, briefly explaining how treatment of the sale and leaseback would change
under IFRS 16, Leases and prepare a statement of amended profit for the year ended
30 September 20X7. Total: 30 marks
3 Billinge
You are Anna Wotton,
Wotton, an ICAEW
ICAEW Chartered Accountant,
Accountant, and have
have recently been appointed as the
This website stores controller
financial data such
contro asBillinge, a manufacturer
ller at manufacturer of electrical co
components
mponents for vehicles.
vehicles. Billinge is a public
limited company with a number of subsidiaries located throughout the country and one foreign
subsidiary, marketing,
Quando.
Peter McLaughlin, Finance Director of Billinge, is in the process of finalising the financial statements for
the year ended 31 October 20X3. However, he is unsure about the impact of deferred taxation on
various transactions of the company, because the previous financial controller, Jen da Rosa, always dealt
with this side of the financial statements preparation.
Privacy Policy ( Exhibit)) prepared by Jen before she left, which contains a number of
Peter has provided you with a file (Exhibit
transactions that have deferred tax implications. He has asked you to prepare a briefing note which
Marketing
provides explanations and calculations of the deferred tax implications for each of the transactions in the
file (Exhib
(Exhibit)
it) on
on the consolidated
consolidated financial
financial stateme
statements
nts of
of Bill
Billinge
inge for the
the year
year ended
ended 31 October
October 20X3.
20X3.
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In the country in which Billinge operates, the applicable tax rate is 30%. Peter has asked you to use the
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working assumption that Billinge will continue to pay tax at the current rate of 30%.
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Requirement
Prepare the briefing note requested by Peter McLaughlin. Total: 30 marks
marks
Exhibit: Deferred tax issues identified by Jen da Rosa
(1) Fair value adjustment
adjustment
On 1 November 20X2, Billinge acquired a 100% subsidiary, Hindley for £10 million. On that date,
the fair value of Hindley's net assets was £8 million and the carrying amount was £7 million, which
is also the tax base under local tax law. The difference between the fair value and book value of net
assets relates to an item of property, plant and equipment which Hindley currently has no plans to
sell.
(2) Share options
options
On 1 November 20X1, Billinge granted 1,000 share options each to its 500 employees providing
they remained in employment until 31 October 20X4. The fair value of each option was £5 on
1 November 20X1, £6 on 31 October 20X2 and £7 on 31 October 20X3. Local tax law allows a tax
deduction at the exercise date of the intrinsic value of the options. The intrinsic value of each
option was £3 at 31 October 20X2 and £8 at 31 October 20X3. The percentage of employees
expected to leave over the vesting period was 20% as at 31 October 20X2 and has been revised
upwards to 25% as at 31 October 20X3. The deferred taxation on this transaction was correctly
accounted for in the year ended 31 October 20X2 but the finance director is unsure how to
account for the deferred taxation in the current year.
(3) Goods purchased from subsidiary
subsidiary
A wholly owned
owned subsidiary, Ince, sold goods for £5 million to Billinge on 20 September
September 20X3 at a
mark-up of 25%. At 31 October 20X3, Billinge has sold a quarter of these goods to third parties.
The financial
financial director
statemen
statementsts ofdoes
the not understand
subsidiary and how
and the this transaction
group for taxationshould
taxation be dealt with in the
purposes.
(4) Profits from foreign subsidiary
subsidiary
Quando, the 100% owned foreign subsidiary of Billinge, has undistributed post-acquisition profits
of 5 million Corona which would give rise to additional tax payable of £0.4 million if remitted to
Billinge's tax regime. As Quando is a relatively new and rapidly expanding company, Billinge
intends to leave the earnings within Quando for reinvestment.
(5) Property, plant and equipment
On 1 November 20X2, Billinge purchased an item of property, plant and equipment for
£12 million which qualified for a government capital grant of £2 million. The asset has a useful life
of five years and is depreciated on a straight line basis. Capital allowances are restricted by the
amount of the grant. Local tax law specifies a tax writing down allowance of 25% per annum.
(6) Lease
Due
now,toBillinge
the age hasofalways
its assets, Billinge its
purchased hasassets
recently begun
outright fora cash.
programme of capital
However, due to expenditure. Until
liquidity problems,
Billinge had to lease an item of machinery on 1 November 20X2. The asset has an expected
economic
This website stores life of
data such asfive years and the lease term is also for five years. Both the present value of
cookies to enable essential site payments and fair value of the asset are £6 million. The annual lease payments are
minimum lease
functionality, as £1.5
well asmillion payable in arrears on 31 October and the effective interest rate is 8% per annum.
marketing,
personalization,Under local tax You
and analytics. law the company can claim a tax deduction for the annual rental payment as the
may change your asset does not
settings qualify
at any time for capital allowances.
4 Longwood
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The Longwood Group is a listed European entity specialising in high grade alloy production for civil
aviation, military and specialist engineering applications. On 1 January 20X7, Longwood completed the
Marketing
acquisition of a private company, Portobello Alloys, to strengthen its product offering in high
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performance electro-magnetic alloys.
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8

The total price paid to acquire the entire share capital of Portobello Alloys was £57 million in cash paid
on the deal date, along with a further £10 million in deferred cash and 5 million shares in The
Longwood Group, both to be paid or issued in three years' time. The share price of The Longwood
Group was £1.88 at 1 January 20X7, but rose to £2.04 shortly after the acquisition was completed. The
best estimate of the share price on the transfer date in three years is £2.25. The appropriate discount
rate for deferred consideration is 10%.
Longwood paid its bankers and lawyers fees of £0.8 million in connection with the deal. Longwood
estimates that £0.2 million of the finance department costs relate to time spent on the acquisition by
the Finance Director and his team.
Below is the draft 'deal-date' statement of financial position of Portobello Alloys. You may assume the
carrying amounts of assets and liabilities are equal to their fair values, except as indicated in the
information that follows.
Portobello Alloys – Statement of financial position at 1 January 20X7
Carrying
amount
£m
Property, plant and equipment 18.92
Development asset 0.00
Available-for-sale investments
investments 4.37
Deferred tax asset 0.77
Non-current assets 24.06
Inventory 7.33
Accounts receivable and prepayments 4.17
Cash and equivalents 4.22
Current assets
assets 15.72
15.72
Total assets 39.78
Long-term debt 16.34

Post-retirement liability 0.37
Deferred tax liability 1.86
Non-current liabilities 18.57
Accounts payable and

and accruals 7.91
Current portion of long-term debt 3.40
Current liabilities 11.31
Share capital 2.50

Share premium 1.20
Retained earnings 6.20
Equity 9.90
and equity
Total liabilities 39.78
Both Longwood and Portobello report to 31 December each year. The Board has asked your firm to
examine the deferred tax implications of various areas relating to the acquisition.
Research andmarketing,
development
Portobello Alloys applied a policy of expensing all development expenditure as incurred. Longwood's
policy is to capitalise development cost as an intangible asset under IAS 38. The carrying amount of the
development asset in the deal-date statement of financial position was £0 million. The fair value of the
development asset was actually £5.26 million at the deal date. None of this development asset will be
amortised over the next year.
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Property, plant and equipment
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Portobello's premises are located on a prime piece of commercial real-estate. The surveyors have
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indicated that the land is worth £2.73 million in excess of its carrying amount in the financial statements
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of the company. Thelose
Longwood
location, they could some ofGroup
the keyhas no Longwood's
staff. intention of selling the
policy is toproperty as, ifatitdepreciated
carry assets changed cost,
and it does not revalue any assets on a regular basis.
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Retirement benefit obligation
Portobello operates a defined benefit plan for its key research and production employees. The plan asset
manager has made some bad equity investments over the years, and the plan is in deficit by
£1.65 million. Portobello only recognised a liability of £0.37 million in its financial statements. The local
tax authorities grant tax relief on the cash contribution into the plan.
Tax losses
Portobello made a disastrous foray into supplying specialist alloys to a now defunct electronics business,
Electrotech. It set up a special division, took on new premises and staff, and spent a lot of money on
joint development with its client. Electrotech promptly went into liquidation. Portobello incurred total
tax losses of £7.40 million over
over the two years that it was involv
involved
ed with Electrotech – it has now paid all
the redundancy costs, sold all the assets and closed the division. To date, Portobello Alloys has only
relieved £1.20 million of the losses. The revised forecast numbers for Portobello's performance post-
acquisition suggest it will be able to relieve the balance of losses in the next couple of years (see below).
Up to the date of the deal, the management forecasts used to calculate the deferred tax in the financial
statements had only anticipated relieving £2.20 million of the losses, as indicated in the schedule below.
Profit forecasts for tax loss utilisation
20X7 20X8 Total
£m £m £m
Forecast taxable profit – original 0.98 1.22 2.20
Forecast taxable profit – revised 1.90 4.74 6.64
Enacted tax rates
Deferred taxes in the deal-date statement of financial position extracted above were calculated using a
tax rate of 30%. However, the corporate tax rate for Portobello has been enacted to fall to 23% for the
period after
included 1 January
in the 20X7.
deal-date A schedule
statement of the composition
of financial of thebelow.
position is shown deferred tax assets and liabilities
Deferred tax schedule

Carrying Tax Temporary Deferred
amount base difference tax 30%
Property, plant £m £m £m £m
and equipment 18.92 13.78 (5.14) (1.54)
Available-for-sale
investments 4.37 3.30 (1.07) (0.32)
Post-retirement liability (0.37) 0.00 0.37 0.11
Unrelieved tax losses –
recognised 0.00 2.20 2.20 0.66
(1.09)
Deferred tax liability (1.86)
Deferred tax asset 0.77
(1.09)
The finance director has asked you to produce the following information:
(a) Calculate the adjustment required to the deferred
deferred tax figures in the financial
statements of
Portobello Alloys solely in respect of the change in enacted tax rates and draft the required journal.
functionality,
(b)as Calculate
well as marketing,
the adjustment required to the deferred
deferred tax asset relating to unrecognised
unrecognised tax losses in
personalization,Portobello's
and analytics. You statements resulting from the revised estimates of profitability over the next
financial
may change your settings
two years. at
Youany time provide a draft correcting journal.
should
(c) Calculate the deferred tax effect of the consolidation adjustments in respect of: of:
fair value adjustments to property, plant and equipment

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
fair value adjustments to the post-retirement liability


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(d) Calculate the goodwill
goodwill arising in the consolidated
consolidated financial statements in respect of this
this acquisition.
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(e) Explain the deferred tax treatment of goodwill under two possible deal
deal structures for the
acquisition of Portobello Alloys:
 As the acquisition actually took place, with the purchase of the shares of Portobello Alloys.
 Under an alternative structure, with the purchase of the assets and
and liabilities of
of Portobello
Alloys instead, which
which would have granted tax relief charged
charged over 15 years
years on the straight-line
straight-line
basis on purchased goodwill.
Requirement
director.
Prepare the information required by the finance director. Total: 30 marks
5 Upstart Records
Upstart Records plc (Upstart) is a listed company and the parent company for a group that operates in
the music equipment industry. You are Thomas Mensforth, an ICAEW Chartered Accountant, and you
joined Upstart six months ago.
You have received
received the following
following email from Susan Ballion, the Group
Group Finance Director
Director of Upstart:
EMAIL
To:
To: Thomas Mensforth
From:
From: Susan Ballion
Date:
Date: 17 July 20X5
Subject:
Subject: Upstart
I have been called away to an urgent meeting, so I need your assistance
assi stance to finalise some aspects of the
Upstart consolidated financial statements for the year ended 30 June 20X5. I attach details of
transactions involving Liddle Music Ltd (Liddle) that occurred during the year ended 30 June 20X5
(Exhibit 1).
1).
I also attach the draft statements of profit or loss for the Upstart Group and for Liddle for the year ended
30 June 20X5. The draft group statement of profit or loss consolidates all group companies except
(Exhibit 2).
Liddle (Exhibit 2).
Finally, there are two financial reporting issues concerning the parent company that I have not had time
(Exhibit 3).
to deal with (Exhibit 3). These will need to be resolved before the consolidated financial statements can
be prepared.
I would like you to:
(a) show and
and explain, with supporting calculations, the
the appropriate financial reporting
reporting treatment
treatment of
goodwill and non-controlling interests for Liddle in Upstart's consolidated statement of financial
position at 30 June 20X5. Use the proportion of net assets method to determine non-controlling
non-controlling
interests;
(b) explain, with calculations, the appropriate accounting treatment
treatment in respect of the issues in Exhibit 3;
(c) prepare Upstart's revised
revised consolidated statement of profit or loss for the year
year ended 30
30 June 20X5
20X5
This website stores data such
to include as This should take account of any adjustments arising from the calculations above;
Liddle.
cookies to enableandessential site
(d) explain (without
(without calculations) the impact on Upstart's consolidated
consolidated financial
financial statements if the fair
value method for measuring non-controlling interests were to be used instead of the proportion of
net assets method.
Requirement
Respond to Susan Ballion's email. Total: 30 marks
marks
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Exhibit 1: Transactions in respect of Liddle
Original investment
Upstart purchased 250,000 ordinary shares in Liddle on 1 January 20X3 for £23 each, when Liddle had
in issue 1,000,000 £1 ordinary shares and retained earnings of £6.6 million. There are no other reserves
and there has been no change to Liddle's ordinary share capital since that date. Upstart appointed two
of the six directors on the Liddle board and recognised the investment as an associate in its group
statements for the years ended
ended 30 June 20X3
20X3 and 30 June 20X4.
Shares purchased on 1 October 20X4
On 1 October 20X4, Upstart purchased a further 450,000 shares in Liddle from existing shareholders. At
this date, the fair value of Upstart's original 250,000 shares in Liddle had risen to £30 each. The
consideration was as follows:
 800,000 new ordinary £1 shares
shares in Upstart issued on 1 October
October 20X4; the market price of
of one
one
share in Upstart at this date was £11.50.
 Cash of £2 million payable on 1 October 20X4.
 Cash of £3 million payable on 1 October 20X6.
 Cash of £3 million
million payable on
on 1 October 20X7, subject toto Liddle increasing profits for the
the year
year
ending 30 June 20X7 by 35% compared with its profits for the year ended 30 June 20X4. The
board of Upstart believes there is a 50% probability of this profit increase being achieved.
Upstart paid professional fees of £250,000 in respect of this share purchase. These fees have been
debited to the cost of the investment in Liddle in Upstart's individual company statement of financial
position.
Upstart has an annual cost of capital of 9%.

On 1 October 20X4, the fair value of Liddle's assets and liabilities was equal to their carrying amount,
with the exception of buildings which had a carrying amount of £1.4 million and a fair value of
£3 million. These buildings had a remaining useful life of 20 years at 1 October 20X4. Depreciation is
included in cost of sales. Liddle has not made any adjustment for the increase in the fair value of the
buildings in its financial statements.
Shares purchased on 1 April 20X5
On 1 April 20X5, Upstart purchased 100,000 shares in Liddle from other shareholders at a price of £35
each.
Financing
On 1 October 20X4, to assist in funding the share purchases, Upstart borrowed €4 million from a
German bank when £1 = €1.30, taking advantage of a lower interest rate than offered by UK banks.
Interest on the loan, at 6% per annum, is payable annually in arrears on 30 September.
No accounting entries in relation to the loan have been made in Upstart's financial statements except to
recognise the loan at 1 October 20X4 at £3.077 million in non-current liabilities. The average exchange
rate from data
This website stores 1 October
such as20X4 to 30 June 20X5 was £1 = €1.28 and the rate on 30 June 20X5 was
cookies to £1 = €1.25.
enable essential site
Loan as marketing,
to Liddle
may change Upstart made a at
your settings loan
anytotime
Liddle of £2 million on 1 October 20X4 at an interest rate of 8% per annum.
Thedefault
or accept the loan issettings.
repayable on 1 October 20X7. Loan interest has been correctly accounted for in the
individual statements of profit or loss for both Upstart and Liddle.
Trading with Liddle
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Upstart made monthly sales of £120,000 to Liddle in the year ended 30 June 20X5. These sales were at
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a mark-up on cost of 60%. At 30 June 20X5, Liddle had £560,000 of the purchases from Upstart in
inventories.
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Exhibit 2: Draft statements of profit or loss for the Upstart Group (excluding Liddle) and for
Liddle for the year ended 30 June 20X5
Upstart
Group Liddle
£'000 £'000
Revenue 23,800 15,600
Cost of sales (7,400) (5,400)
Gross profit 16,400 10,200
Operating costs (3,500) (1,500)
Profit from operations 12,900 8,700
Investment income 890 180
Interest paid (520) (300)
Profit before tax 13,270 8,580
Taxation (2,350) (1,800)
Profit for the year 10,920 6,780
Note:
Retained earnings at 1 July 20X4 15,840 9,000
Exhibit 3: Outstanding financial reporting issues

Restructuring
Upstart has announced two major restructuring plans. The first plan is to reduce its capacity by the
closure of two of its retail outlets, which have already been identified. This will lead to the redundancy
of 20 employees, who have all individually
i ndividually been selected and communicated with. The costs of this plan
are £300,000 in redundancy costs, £200,000 in retraining costs and £50,000 in lease termination costs.
The second plan is to re-organise the finance and information technology department over a one-year
period but this will not be implemented for two years. The plan results in 20% of finance staff losing
their jobs during the restructuring. The costs of this plan are £250,000 in redundancy costs, £300,000 in
retraining costs and £200,000 in equipment lease termination costs. No entries have been made in the
statements for the above
above plans.
Share options
On 1 July 20X3, Upstart made an award of 1,000 share options to each of its seven directors. The
condition attached to the award is that the directors must remain employed by Upstart for three years.
The fair value of each option at the grant date was £50 and the fair value of each option at
30 June 20X5 was £55. At 30 June 20X4, it was estimated that three directors would leave before the
end of three years. Due to an economic downturn, the estimate of directors who were going to leave
was revised to one director at 30 June 20X5. The expense for the year as regards the share options had
not been included in profit or loss for the current year and no directors had left by 30 June 20X5.
6 MaxiMart plc
This websiteMaxiMart plc operates
stores data such as a national chain of supermarkets. You are Vimal Subramanian, the Assistant
cookies to enable essential siteand the accounting year-end is 30 September 20X1.
Financial Controller,
functionality,
It isasnow
well15
asNovember
marketing, 20X1 and the company's auditors are currently engaged in their work.
personalization, and analytics.
Jane Lewis, the FinancialYou Controller, is shortly to go into a meeting with the audit engagement partner,
may change yourMacIntyre,
Roger settings at to
any time some unresolved issues relating to employee remuneration, hedging and
discuss
or accept the
thedefault settings.
customer reward card. To save her time, she wants you to prepare a memorandum detailing the
correct financial reporting treatment. She has sent you the following email, in which she explains the
issues.
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From:
From: jlewis@maximart.com
To
To:: vsubramanian@maximart.com
Date::
Date 15 November 20X1
Subject::
Subject Financial statements of MaxiMart
I am pleased you can help me out with the information for my forthcoming meeting with Roger
MacIntyre – as you know, I have been tied up with other work, and have not had time to look into these
outstanding issues.
(Exhibit 1)
As you will see (Exhibit 1) the principal issues concern remuneration:
Historically we have had a problem with high staff turnover due to low salaries and having to work
evenings and weekends. To encourage better staff retention, we introduced a share option scheme.
Details of the scheme are given in Exhibit 1. I need you to show how the share option scheme should be
dealt with in the financial statements of MaxiMart for the year ended 30 September 20X1.
1 also has details of the company pension scheme, which was introduced a few years ago to
Exhibit 1
encourage management trainees to stay with us. Since many of our rivals no longer provide defined
benefit schemes, this gives MaxiMart an edge. It would help in the meeting if I could show Roger
MacIntyre the relevant extracts from the financial statements. You will need to show the amounts to be
recognised in the statement of profit or loss and other comprehensive income of MaxiMart for the year
ended 30 September 20X1 and in the statement of financial position at that date so far as the
information permits, in accordance with IAS 19, Employee Benefits (revised 2011). You should also
include the notes, breaking down the defined benefit pension charge to profit or loss, other
comprehensive income,
income, net pension asset/liability at the year end and changes in the present value of
pension obligation and the fair value of plan assets.
There will be a deferred tax effect arising from the pension plan, but we will deal with that on a later
occasion, as there isn't time before the meeting.
( Exhibit 2).
I also attach details of three further issues (Exhibit 2). The first relates to our Reward Card. I believe
there is an IFRIC relevant to the treatment of these schemes, but I can't remember exactly what it says.
The second issue is a futures contract. It would be good if you could explain how we should treat this
and show the double entry. Also, IFRS 9, Financial Instruments will will come into force soon, and I'd like to
know how, if at all, the treatment will change. The third issue is a proposed dividend – we need to know
if the proposed treatment is correct.
Please draft a memorandum showing the appropriate treatment of these transactions together with
explanations and any necessary workings.
Requirement
Prepare the memorandum required by Jane Lewis. Total: 30 marks
Exhibit 1: Staff remuneration
Share options
On 1 October 20X0, the board decided to award share options to all 1,000 employees provided they
remained in employment for five years. At 1 October 20X0, 20% of employees were expected to leave
This website stores
over data such
the vesting as to 30 September 20X5 and as at 30 September 20X1, this expectation had risen
period
cookies to to
enable
25%.essential site of these options at 1 October 20X0 was £2 and this had risen to £3 by
The fair value
30 September 20X1. The number of options per employee is conditional on the average profit before
any expense for shareYou
options over the five years commencing 1 October 20X0 as follows:
Average profit Number of options per employee
From £1m up to £1.2m 100
Above £1.2m
£1.2m up to £1.4m 120
Above £1.4m
£1.4m up to £1.6m 140
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Above £1.6m
£1.6m up to £1.8m 160
Above £1.8m
£1.8m 180
Marketing
Profit before share option expense for the year ended 30 September 20X1 was £0.9 million and profit
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for the following
following four years was
was forecast to rise by £0.2
£0.2 million a year. The awarding of the options was
also conditional on the share price reaching at least £8 per share by 30 September 20X5. The share
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price at 30 September 20X1 was £6.
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Pension scheme
MaxiMart set up a funded defined benefit pension plan for management-track employees three years
ago. The plan provides a pension based on 1/80th of the final salary for each year worked for the
company, subject to a minimum employment period of eight years.
The following information has been provided by the actuary for the year ended 30 September 20X1:
(a) The present value in terms
terms of future pensions from
from employee service during the year is £90,000.
This has been determined using the projected unit credit method.
(b) The present value of
of the obligation to provide benefits
benefits to current and former
former employees has
has been
calculated as £2.41 million at 30 September 20X1 and the fair value of plan assets was
£2.37 million at the same date.
(c) The interest
interest rate on
on high quality corporate bonds relevant
relevant to the year was 5%.
The following has been extracted from the financial records:
(a) The present value of of the define
defined
d benefit obligation was £2.2 million at 30 September 20X0 and the
fair value of the plan assets was £2.3 million at the same date.
(b) Pensions paid to former employees during the year amounted
amounted to £60,000.
£60,000.
(c) Contributions paid into the plan during the year as decided by the actuary were £68,000.
£68,000.
With effect from
from 1 October 20X0,
20X0, the company
company amended the the plan to increase pension entitlement
entitlement
for employees. The
The present value of the improvement
improvement in benefits was calculated by the actuary
actuary to
be approximately £100,000 at 1 October 20X0. The present value of the plan liability at
30 September 20X1 correctly reflects the impact of this increase.
(d) The company recognises
recognises gains and losses
losses on remeasurement
remeasurement of the defined
defined benefit asset or liability
(actuarial gains and losses) in accordance with IAS 19, Employee Benefits (revised 2011).
(e) Pension payments
payments and th
thee contributions
contributions into the plan were paid on 30 September 20X1.
20X1.
Exhibit 2: Other transactions
Reward card
MaxiMart offers its customers a reward card which awards customers points based on money spent.
These points may be redeemed as money off future purchases from MaxiMart or as free/discounted
goods from other retailers. Revenue from food sales for the year ended 30 September 20X1 amounted
to £100 million. At the year end, it is estimated that there are reward points worth £5 million arising
from this revenue
revenue which are eligible for redemption. Based on past experience,
experience, it is estimated th
that
at only
about two in five customers are likely to redeem their points.
Futures contract
MaxiMart entered into a futures contract during the year to hedge a forecast sale in the year ended
30
30 September
September 20X2.
20X1, The
had futures contract
the forecast sale was designated
occurred, and documented
the company as suffered
would have a cash flow hedge.
a loss of At
£1.9 million and the futures contract was standing at a gain of £2 million. No accounting entries have
This website stores
been madedata
to such
recordasthe futures contract.
Proposed
functionality, dividend
as well as marketing,
The company has a good You relationship with its shareholders and employees. It has adopted a strategy of
gradually at any
increasing itstime
dividend payments over the years. On 1 November 20X1, the board proposed a
dividend of 5p per share for the year ended 30 September 20X1. The shareholders will approve the
dividend along with the financial statements at the general meeting on 1 December 20X1 and the
dividend will be paid on 14 December 20X1. The directors feel that the dividend should be accrued in
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the financial statements for the year ended 30 September 20X1 as a 'valid expectation' has been
created.
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7 Robicorp plc
Robicorp plc is a listed company that develops robotic products for the defence industry. You are
Marina Nelitova, an ICAEW Chartered Accountant working within the finance team at Robicorp. You
receive the following email from Alex Murphy, who was appointed finance director of Robicorp in
October 20X4.
To:
To: Marina Nelitova
From:
From: Alex Murphy
Date:
Date: 3 November 20X4
Subject: Review of financial statements for year ended 30 September 20X4

Subject:
I am attending a board meeting next week, and have concerns over the way my predecessor has treated
( Exhibit 1).
some transactions in the financial statements (Exhibit 1).
I would like you to review these transactions and:
 recommend any adjustments, with accompanying journal entries, that are required to make the
accounting treatment comply with IFRS, explaining the reasons for your proposed changes; and
 revise the draft basic earnings per share figure (Exhibit 2),
2), taking into account your adjustments,
and calculate the diluted earnings per share.
Ignore any tax consequences for now.
Requirement
Reply to Alex Murphy's email. Total: 30 marks
marks
Exhibit 1: Transactions requiring further review
(a) On 1 October
October 20X3 Robicorp started
started work on the
the development
development of a new robotic
robotic device, the XL5.
Monthly development costs of £2 million were incurred from that date until 1 January 20X4, when
Robicorp made a breakthrough in relation to this project. On that date the XL5 was deemed
financially and commercially
commercially viable and thereafter
thereafter development
development costs increased to £2.5 million per
month until development work was completed on 30 June 20X4.
The XL5 went on sale on 1 August 20X4. By 30 September 20X4, Robicorp had received orders for
3,000 units priced at £25,000 per unit, of which it had manufactured and delivered 1,200 units to
customers. The terms of trade required a non-refundable payment in full on receipt of the order.
Robicorp anticipates the XL5 having a commercial life of four to five years, with total sales of
36,000 units over that period. Variable production costs are £11,000 per unit.
In the draft financial statements for the year ended 30 September 20X4, all XL5 development costs
have been capitalised. Cash received in respect of the 3,000 units ordered has been recognised as
revenue because the orders are non-cancellable.
Entries made to reflect the above are:

DEBIT Intangible assets £21m
CREDIT
This website stores Cash
data such as £21m
DEBIT Cash £75m
CREDIT Revenue £75m
may change your settings at any
DEBIT timeof sales
Cost £33m
or accept the default
CREDITsettings. Cash £13.2m
CREDIT Accrued variable production costs £19.8m
On 1 January 20X4, to help fund the XL5 development and production, Robicorp issued a
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£40 million, 3% convertible bond at par. The bond is redeemable on 1 January 20X7 at par.
MarketingInterest is paid annually in arrears on 31 December. Bondholders have the choice on
1 January 20X7 of: either converting the bonds into equity shares at the rate of 10 £1 shares for
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every £100 of bonds; or redeeming the bonds at par. Similar non-convertible
non-convertible bonds for a company
such as Robicorp pay interest at 10% per year. Robicorp anticipates that all bondholders will
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choose to convert the bonds into shares. Therefore in the draft financial statements the bonds have
been treated as equity shares.
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In the draft financial statements the following accounting entries have been made in respect of the
bond and interest:
DEBIT Cash £40m
CREDIT Share capital £4m
CREDIT Share premium £36m
DEBIT Finance costs £0.9m

CREDIT Accruals £0.9m
(b) On 1 October
October 20X3, Robicorp introduced a share option
option scheme for
for 30 senior executives.
executives. Each
executive was granted 48,000 share options on that date. Each option gives the right to acquire
one share in Robicorp, for an exercise price of £4 per share, if the executive is still in employment
with the company at 1 October 20X6, and the share price at that date is at least 30% higher than
the price at 1 October 20X3. The executives will be able to exercise these options from
1 October 20X7.
The fair value of an option was £3.50 at 1 October 20X3 and £5.30 at 30 September 20X4. By
30 September 20X4, one executive had left her job. Robicorp expects one more executive to leave
by 1 October 20X6.
The Robicorp share price at 30 September 20X4 was 32% higher than at the grant date. The
average share price of Robicorp for the year ended 30 September 20X4 was £7.60.
No accounting entries have been made in respect of the share option scheme.
(c) On 1 April
April 20X3, Robicorp
Robicorp bought 400,000 shares in Lopex
Lopex Ltd for
for £6 each. This represents 3%
3% of
the ordinary share capital of Lopex. This investment was treated by Robicorp as an available-for-sale
financial asset.
At 30 September
September 20X3, Lopex's
Lopex's shares had a fair value
value of £9.20 each and Robicorp measured
measured its
investment at £3.68 million in its financial statements at that date.
A gain of £1.28
£1.28 million was recognised
recognised in other
other comprehensive
comprehensive income with a corresponding
available-for-sale reserve being created at 30 September 20X3.
On 1 August 20X4 Saltor plc, an unrelated company, acquired all the shares in Lopex in a share-
for-share exchange.
exchange. The terms were
were 2.5 shares in Saltor for each share in Lopex. At
At 1 August 20X4,
20X4,
immediately before the takeover by Saltor, the fair value of a Lopex share was £11.20. Saltor's
shares at 1 August 20X4 were trading at £5.50 each.
No entries have been made in Robicorp's financial statements for the year to 30 September 20X4
to reflect the share-for-share exchange. Its investment continues to be recognised at £3.68 million.
Robicorp intends to sell its shareholding in Saltor and to classify the investment as at fair value
through profit or loss. At 30 September 20X4, Saltor's shares had a bid-offer spread of 480–485
pence. A sales commission of 4 pence per share would be incurred upon disposal.
(d) Robicorp granted interest-free
interest-free loans to its employees on 1 October 20X3
20X3 of £8 million.
million. The loans
will be paid back on 30 September 20X5 as a single payment by the employees. The market rate of
interest for a two-year loan on both of the above dates is 6% per annum.
The loans have been classified as 'loans and receivables' under IAS 39, Financial Instruments:
Recognition andasMeasurement. No accounting entries have been made to date in respect of these
loans.
personalization,Once the accounting
and analytics. You treatment for the loans has been determined, Robicorp wishes to continue
may change your thesettings
same treatment when IFRS 9, Financial Instruments comes into force.
at any time
Exhibit 2:settings.
Robicorp – Calculation of basic earnings per share for year ended
30 September 20X4
Profit after taxation £66.27m
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Share capital
Marketing Number of £1 ordinary shares
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At 1 October 20X3
20X3 40m
Convertible bond issue 1 January 20X4 4m
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At 30 September
September 20X4 44m
Basic earnings per share = 150.6 pence (£66.27m/44m shares).
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8 Flynt plc
You are Miles Goodwin,
Goodwin, the newly-appointed
newly-appointed financial
financial controller of Flynt
Flynt plc, a company that
manufactures electronic components
components for the computer industry.
i ndustry. You receive the following email from
Andrea Ward, the CEO of Flynt.
To:
To: Miles.Goodwin@flynt.co.uk
From: Andrea.Ward@flynt.co.uk
From:
Subject: Finalisation of consolidated
Subject: consolidated financial statements
statements for year ended
ended 31 May 20X6
20X6
Miles, I know you have just joined us, but I would be grateful if you could look at the impact of some
issues that
recently andwere
haveleftnot
unresolved by yourtopredecessor,
had the chance look at theseShane
issuesPonting IExhibit
myself. ((Exhibit 1). Iappreciate
1).
would also have been your
very busy
opinion on whether the accounting for the lease will change when IFRS 16, Leases comes into force – I
don't know anything about this but Shane mentioned it on a number of occasions.
I would like you to redraft the consolidated statement of profit or loss and other comprehensive income.
Exhibit 2).
I attach a draft for you to work from ((Exhibit 2). Please explain the reasoning for any adjustments you
make, as I would like a greater understanding of the impact of these issues on our post-tax profits. You
should also give journal entries.
I have a meeting with the board shortly, and we are concerned about earnings per share (EPS).
I would therefore be grateful if you would also calculate the basic and diluted EPS for the year ended
31 May 20X6 and the diluted EPS if applicable.
At this stage do not
not worry about any
any adjustments to the
the current or defe
deferred
rred tax charge; just assume an
effective rate of 23%.
Requirement
Draft a reply to the email from Andrea Ward. Total: 30 marks
marks
Exhibit 1: Consolidated financial statement
statementss for year ended 31 May 20X6: Unresolved issues –
arising from notes prepared by Shane Ponting
Share option scheme
On 1 September 20X5 the board approved a share option scheme for 20 senior executives. On that
date each executive was granted options over 10,000 shares at an exercise price of £39 per share, which
was the market price at 1 September 20X5. Each option gives the rights to one share. The options vest
on 1 September 20X9 subject to the following conditions:
(a) Each executive
executive remains in the employment of Flynt
Flynt until 1 September 20X9.
(b) The share price of Flynt has increased by at least 50% at 1 September 20X9.
20X9.
The fair value of an option was estimated to be £12.60 at 1 September 20X5 and £19.40 at
31 May 20X6.
This is the first time that Flynt has operated such a scheme. As there is no cash cost to the company, I
have not made any adjustments to the financial statements. The share price of Flynt at 31 May 20X6
This websitewasstores datathe
£52 and such as
average share price for the nine months to 31 May 20X6 was £48.
At as
functionality, 31well
Mayas20X6
20X 6 there were still
marketing, still 19 executives in the scheme, but I anticipate there will
will only be 16 still
employed
personalization, by 1 September
and analytics. You 20X9.
may change yourof
Lease settings
surplusatmachinery
any time
On 1 June 20X5 Flynt leased some surplus machinery to Prior plc, an unrelated company, on the
following terms:
Privacy Policy
Lease term and remaining useful life of machinery 5 years
Carrying amount and fair value of machinery at 31 May 20X5 £612,100
Marketing
Annual instalment payable in arrears £150,000
Interest rate implicit in lease
Personalization 10% per annum
Residual value guaranteed by Prior plc £61,000
Analytics
Expected
Initial residual
direct value at 31
costs incurred by May
Flynt20Y0 £70,000
£1,000
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Bank

I have treated the agreement as an operating lease and recognised lease rental income of £150,000. I
have also charged depreciation of £122,420 and written off the direct costs incurred to profit or loss.
Acquisition of Dipper plc
On 1 December 20X5 Flynt purchased 100% of the ordinary shares of Dipper plc for a consideration of
£6.4 million when Dipper had net assets with a fair value of £4.9 million including a deficit on a defined
benefit pension scheme of £0.4 million. Goodwill of £1.5 million therefore arose on acquisition. The
consideration given was 150,000
150,000 ordinary shares in Flynt. This was the first equity issue
i ssue for a number of
years. There were 1.4 million ordinary
ordinary shares in issue on 31
31 May 20X5.
Flynt operates a defined contribution scheme, and I am unfamiliar with how to deal with Dipper's
defined benefit scheme.
We obtained the following figures from Dipper's actuaries at the
the acquisition date:
Fair value of scheme assets £2.2m
Present value of pension obligations £2.6m
Estimated service cost from 1 December 20X5 to 31 May 20X6 £560,000
Interest rate on high quality corporate bonds 5% per annum
Discount rate for scheme obligations 4% per annum
The total contributions paid into the scheme by Dipper from the acquisition date to 31 May 20X6 were
£480,000, and I have charged this sum to operating costs. I have had a letter from Dipper's pension
fund advising me that they have paid out £450,000
£450,000 to pensioners
pensioners in the same period.
period. I have not
adjusted the deficit in the statement of financial position.
Dipper recognises remeasurement (actuarial) gains and losses immediately in accordance with IAS 19,
Employee Benefits (revised 2011). I intend to continue to apply IAS 19 in the group financial statements
but I do not know how to calculate the remeasurement gain or loss.
I have been advised by the scheme actuary that at 31 May 20X6 the fair value of the pension assets was
£2.08 million and the present value of pension obligations was £2.75 million at that date.
We conducted an impairment review of goodwill at the the end of our accounting
accounting period and
and estimated
that goodwill arising on the acquisition of Dipper was worth £1.1 million. I have therefore debited
£400,000 to other comprehensive income. No other adjustments were required to goodwill.
Exhibit 2: Draft consolidated statement of profit or loss and other comprehensive income for
year ended 31
31 May 20X6
20X6 20X5
£'000 £'000
Revenue 14,725 13,330
Cost of sales (7,450) (7,560)
Operating costs (3,296) (3,007)
Other operating income 150 –
Operating profit
profit 4,129 2,763
2,763
Finance costs
(452) (468)
Income tax expense (1,003) (628)
Profit after tax 2,713 1,699
Other comprehensive income
Goodwill at any time
impairment (400) –

or accept the default settings. 2,313 1,699
Total comprehensive income for the year
Note: All calculations should be to the nearest £'000.
Note: All
Privacy Policy
Marketing
Personalization
Analytics
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9 Gustavo plc
You are Anita Hadjivassili, the
the recently appoin
appointed
ted financial controller
controller at Gustavo plc, a manufacturer of
sports equipment. During the year ended 30 September 20X6, Gustavo has sold and purchased shares
respectively in two companies, Taricco Ltd and Arismendi Inc.
You have just received
received the following
following email from the CEO, Antonio
Antonio Bloom.
To:
To: Anita Hadjivassili
From: Antonio Bloom
From:
Subject: Draft Financial
Subject: Financial Statements
Statements for the Gustavo
Gustavo group
Exhibit 1).
I attach extracts from the draft financial statements for the year ended 30 September 20X6 ((Exhibit 1). I
know you are still unfamiliar with Gustavo's business, so I have also attached some file notes prepared by
(Exhibit 2).
your predecessor (Exhibit 2).
I would like you to prepare the draft consolidated statement of profit or loss and other comprehensive
income for the year ended 30 September 20X6 including other comprehensive income income,, as I need to
present it at the next board meeting. Please provide briefing notes to explain the impact of the share
transactions (Exhibit 2) on the consolidated statement of profit or loss and other comprehensive
income. Please show separately the profit attributable to the non-controlling interest.
I would also like you to advise on the impact that any future changes in exchange rates will have on the
consolidated statement of financial position.
In addition, we have a potential problem with one of our credit customers defaulting on payment
(Exhibit 3).
3). I have heard that the rules on revenue recognition are about to change to allow us to take
account of credit risk. I would like some advice on the existing rules and whether we can apply the
amended rules.
adjustments.
Ignore any further income tax or deferred tax adjustments.
Requirement
Respond to Antonio's email. Total: 30 marks
Exhibit 1: Extracts from the draft financial statements for year ended 30 September 20X6
Gustavo Taricco Arismendi
£'000 £'000 Kr'000
Revenue 35,660 28,944 48,166
Cost of sales (21,230) (22,164) (30,924)
Gross profit 14,430 6,780 17,242
Operating costs (5,130) (4,956) (9,876)
Profit from operations 9,300 1,824 7,366
Investment income 580 108 –
Finance costs (2,450) (660) (1,456)
Profit before taxation
taxation 7,430
7,430 1,272
1,272 5,910
5,910
Income tax expense (2,458 )
(2,458) (360) (2,240)
Profit for the year 4,972 912 3,670
Retained earnings
functionality,
At as well as marketing,
1 October 20X5
20X5 11,720 4,824 14,846
personalization,
Profit for the year You
and analytics. 4,972 912 3,670
Dividends at July)
paid (1 any time (3,000) (600) –

At 30 settings.
Septem
September
ber 20X6 13,692 5,136 18,516
Other financial information

Privacy Policy £'000 £'000 Kr000
Ordinary share capital (shares of £1/Kr1) 10,000 2,000 5,000
Marketing
Profits arise evenly throughout the year for all three companies.
Personalization
Analytics
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Bank

Exhibit 2: File notes for key issues in year
Taricco
Gustavo bought 1.5 million ordinary shares in Taricco Ltd on 1 January 20X2 for £15 million when
Taricco had retained earnings of £2.4 million. The proportion of net assets method was used to value
the non-controlling interest as the acquisition occurred before IFRS 3 was revised. At the acquisition date
the fair value of Taricco's net assets was equal to the carrying amount.
Prior to 1 October 20X5 there had been goodwill impairments in relation to Taricco of £2.5 million.
There have been no changes in share capital or other reserves since acquisition.
On 1 April 20X6
represented Gustavo
by two soldon
directors 800,000 shares
Taricco's boardin to
Taricco forits
oversee £19.8 million.
remaining Gustavo
interest continues
in the to be
company.
(Taricco's board consists of eight directors.) The only entry in Gustavo's financial statements regarding
the sale has been to credit a suspense account with the sale proceeds.
It was estimated at 1 April 20X6 that Gustavo's remaining shares in Taricco had a fair value of
£8.2 million.
Arismendi
On 1 January 20X6 Gustavo bought 4 million shares in Arismendi Inc, a company located overseas,
(where the local currency is the Kr) for Kr75.6 million (£12.6 million). Professional fees relating to the
acquisition were £400,000, and these have been added to the cost of the investment.
At 1 January 20X6
20X6 Arismendi owned
owned property which
which had a fair value of
of Kr14.4 million
million (£2.4 million)
million) in
excess of its carrying amount. This property had a remaining life of eight years at this date.
Gustavo would like to adopt the fair value method to measure the non-controlling interest. At
1 January 20X6 the market price of Arismendi's shares was Kr12 each.
An impairment review
review of goodwill
goodwill took place at 30 September 20X6,
20X6, and no impairment
impairment was deemed
necessary.
Exchange rates which may be relevant are:
1 January 20X6 £1:Kr6
Average Jan-Sep
Jan-Sep £1:Kr5
30 September 20X6 £1:Kr4
Exhibit 3: Impaired receivable
Gustavo has entered into a contract with Bravo Ltd, a retail chain, to provide sports equipment at a
value of £200,000. The terms are that payment is due one month after the sale of the goods. On the
basis of experience with other contractors with similar characteristics, Gustavo considers that there is a
5% risk that the customer will not pay the amount due after the goods have been delivered and the
property transferred. Gustavo subsequently felt that the financial condition of the customer has
deteriorated and that the trade receivable is further impaired by £20,000.
We would like to know
know how the above transaction
transaction would be treated
treated in subsequent financial
under IAS 18 and also whether there would be any difference in treatment under IFRS 9.
cookies to An
enable essential
annual site
discoun
discountt rate of 4% should
should be used in any calculations.
may10change Inca
yourLtd
settings at any time
Inca Ltd supplies specialist plant and machinery to the oil drilling industry. On 1 May 20X0 Inca acquired
80% of Excelsior Inc, a company based in Ruritania, where the currency is the CU.
Privacy Policy
You are Frank
Frank Painter,
Painter, a chartered accountant employed on a temporary
temporary contract following the
retirement of the Inca finance director. You have been asked to assist the managing director in finalising
Marketing
the financial statements of Excelsior and the Inca group for the year ended 30 April 20X1.
Personalization
Both Inca and Excelsior prepare their financial statements using IFRS. You receive the following email
from the managing director of Inca.
Analytics
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From:
From: Inca MD
Subject::
Subject Finalising Financial Statements
To
To:: Frank Painter
Date::
Date 25 July 20X1
Acquisition of Excelsior
Excelsior is the first subsidiary
subsidia ry that Inca has acquired, and so I would be grateful for some advice in
relation to the consolidated financial statements and also in finalising the financial statements of
Excelsior.
The cost of the investment in Excelsior was
was CU120 million,
milli on, and at 1 May 20X0 Excelsior had retained
earnings of CU64 million.
milli on. There were no fair value adjustments to the net assets of Excelsior. Inca uses
the proportion of net assets method to value non-controlling interest.
Assistance needed
I wish to show your findings to my fellow board members, as they are concerned about Excelsior's effect
on the consolidated financial statements.
statements. I have not told them that I have asked for your input as I would
like to make a favourable impression in terms of my accounting knowledg
knowledge. e.
(Exhibit 1).
I have provided you with the draft statements of financial position for both companies (Exhibit 1). I have
(Exhibit 2).
also provided some exchange rates (Exhibit 2). The accountant at Excelsior is unqualified. He has
( Exhibit 3).
identified a number of outstanding financial reporting issues (Exhibit 3).
I have heard that there is an option of valuing non-controlling interests at fair value, rather than using
the proportion of net assets method, as we do. The fair value of the non-controlling interest in Excelsior
is CU20 million. I understand that using this method would change the figures for goodwill and perhaps
the exchange difference relating to goodwill.
Please prepare a working paper for me which comprises:

 an explanation
explanation of the
the appropriate
appropriate financial reporting treatment for each of the issues identified by
the Excelsior accountant (Exhibit 3);
 the consolidated
consolidated statement of financial
financial position of Inca
Inca at 30 April 20X1, assuming there are no
adjustments to the individual company financial statements other than those you have proposed;
and
 a calculation
calculation of goodwill assuming that Inca values the non-controlling
non-controlling interest
interest in Excelsior at its
fair value of CU20
CU20 million.
Do not tell anyone else that you are
a re preparing this working paper for me. In return I will ensure that you
are given a permanent contract in the Inca group. In order to save costs I am not intending to replace
the Inca finance director as I can do this role
r ole myself with your help.
Requirements
Prepare the working paper requested by the managing director.
In addition to the working paper, explain any ethical conce

concerns
rns that you have, as Frank Painter, in relation
take.
to the managing director's email, and set out the actions you intend to take. Total: 30 marks
This website stores dataany
Note: Ignore
Note: Ignore such
UKascurrent tax implications.
Exhibit 1: Draft statements of financial position at 30 April 20X1
personalization, and analytics. You Inca Excelsior
may change Non-current
your settingsassets
at any time £m CUm
Investment in Excelsior
or accept the default settings. 24.0 –
Property, plant and equipment 32.4 64.0
Intangible assets 12.4 7.0
Total non-current assets
Privacy Policy 68.8 71.0
Current assets
Marketing
Inventories 9.8 16.6
Trade receivables
Personalization 17.4 35.2
Cash 1.6 12.8
Analytics
Total current assets 28.8 64.6
Total assets 97.6 135.6
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Bank

Inca Excelsior
Equity and liabilities
Share capital £1/CU1 4.0 10.0
Share premium account 12.0 16.0
Retained earnings 41.6 48.0
Non-current liabilities
Deferred tax 12.0 4.4
Loans 5.8 48.0
Current liabilities 22.2 9.2
Total equity and liabilities 97.6 135.6
Exhibit 2: Exchange rates

£1 = CU
1 May 20X0 5.0
Average for year
year 4.8
30 April 20X1 4.5
US$1 = CU
1 May 20X0 3.2
Average for year
year 3.0
30 April 20X1 2.8
Exhibit 3: Excelsior – Outstanding financial reporting issues
issues prepared by Excelsior accountant
Excelsior 's draft statement of profit or loss and other
Excelsior's other comprehensive inc
income
ome shows an after-tax
after-ta x loss of
CU16 million for the year ended 30 April 20X1. The current tax has been correctly calculated by our tax
advisers. However,
However, I am not familiar with deferred tax and some of the more complex financial reporting
reporting
rules and the following matters are outstanding:
(1) At 1 May 20X0
20X0 there was a deferred
deferred tax liability of CU4.4 million in the statement
statement ofof financial
position and no adjustments have been made to this figure
f igure in the draft financial statements at 30
April 20X1.
20X1. This deferred tax provision
provision was
was solely in relation to the differences
differences b
between
etween the carrying
amount of property, plant and equipment and the tax base.
The carrying amount of property, plant and equipment on 1 May 20X0 was CU60 million,
compared with its tax base of CU38 million.
milli on. At 30 April 20X1 these figures were CU64 million and
CU36 million respectively.
Companies in Ruritania pay tax at a flat rate of 20%. This rate is not expected to change in future
years.
(2) In the year ended 30
30 April 20X1 Excelsior capitalised development
development costs of CU7 million. These costs
costs
are likely to be amortised over four years from 1 May 20X2.
Under Ruritanian tax law such costs are deductible when incurred.
(3) The tax trading
trading loss carried
carried forward
forward in respect of the year ended
ended 30 April 20X1 is CU16 million.
Excelsior has reliable budgets for
for a taxable profit of CU5 million
milli on for each of the next two financial
years, but it has no accurate budgets
budgets beyond
beyond that date. Tax losses can be carried
carried forward
forward indefinitely
indefinitely
This website stores
underdata such astax law.
Ruritanian
(4)as On
functionality, well1as
May 20X0 Excelsior
marketing,Excelsior issued a 5% bond to American financial institutions.
institutions. The bond had a
personalization,nominal value of
and analytics. US$16 million and is repayable on 30 April 20X3. The bond was issued at a
You
discount of US$1
may change your settings at any time million, and is redeemable at a premium over nominal value of US$1.79 million.
Interest of US$800,000 is paid every 12 months commencing
commencing 30 April 20X1. The implicit interest
rate on the bond is approximately 10.91%.
10.91%.
Privacy Policy The loan has been translated on 1 May 20X0 and the interest paid in relation to the bond has been
charged to profit or loss. This sum was CU2.24 million (US$800,000
(US$800,000 × 2.8) but no other
Marketing
adjustments have been made.
Personalization
According to Ruritanian tax law, the only tax deduction in respect of the bond is for nominal
nominal interest
which is tax deductible when
when paid. Debits and credits relating to discounts and premiums are not
Analytics
tax deductible.
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(5) On 1 April 20X1 Excelsior
Excelsior made a loan of CU2 million to oneone of the directors
directors of the company,
company, who
also happens to be a prominent politician. I do not expect any of this sum to be recoverable, but it
would be politically embarrassing to disclose this in the financial
f inancial statements. The loan has been
included in trade receivables and no adjustments have been made. On the grounds of materiality,
the board is very keen to exclude any reference to the loan.
11 Aytace plc
Aytace plc is the parent company of
of a group that operates golf courses in Europe.
Europe. It has had
investments in a number of 100% owned subsidiaries for many years, as well as owning 40% of the
share capital in Xema Limited since 20X0.
You are Frank Brown,
Brown, a Chartered Accountant. YouYou have recently taken up temporary employment
employment with
Aytace while the
the financial controller,
controller, Meg Blake, is on
on maternity leave.
leave.
You receive the following email from
from the finance
finance director, Willem Zhang.
Zhang.
To:
To: Frank Brown
From: Willem Zhang
From:
Subject: Draft consolidated statement of profit
Subject: profit or loss and other
other comprehensive
comprehensive income for the
the year
ended 31 May 20X3
Prior to maternity leave, Meg prepared a first draft consolidated statement of profit or loss and other
comprehensive income and has noted some outstanding matters relating to transactions in the year
(Exhibit
Exhibit).
).
Please prepare a working paper which comprises:
 Advice, with explanations and relevant calculations, on the appropriate financial reporting
treatment of the outstanding matters highlighted by Meg in the Exhibit.
 A revised consolidated statement of profit or loss and other comprehensive income, showing
clearly the financial reporting adjustments you have proposed.
Ignore any tax consequences arising from the outstanding matters, as these will be finalised by our tax
advisers.
Requirement
Prepare the working paper requested by the finance director. Total: 30 marks
prepared by Meg Blake for year ended 31 May 20X3

Exhibit: Briefing notes prepared
Aytace Group – Draft consolidated statement of profit or loss and other comprehensive
comprehensive income
for the year ended 31 May 20X3
Revenue £'000
£'000
14,450 Notes
1

Operating costs as
(9,830) 1, 2
Operating profit 4,620
Income from associate 867 4
Other investment income 310
Finance costs (1,320)
Profit before tax 4,477
or accept the
Taxdefault settings. (1,220)

Privacy Policy
Notes on outstanding matters
I have not had sufficient time to look into the following matters because of my personal circumstances.
Marketing
(1) Golf tournament
tournament
Personalization
AnalyticsOn 1 December 20X2 Aytace won the tender to host an annual international golf tournament for
each of the next four years. The first golf tournament will take place in September 20X3.
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Bank

The tender process commenced on 5 August 20X2 and the tender was submitted on 8 November
20X2. Internal management time costs of £1.2 million were incurred in relation to the tender
submission. These costs were capitalised and are being amortised from 1 December 20X2 over a
four-year period. Therefore
Therefore £150,000
£150,000 (6/48 × £1.2 million) has been recognised
recognised in profit or loss as
an operating cost for the year ended 31 May 20X3.
A separate contract was subsequently signed on
on 1 February 20X3
20X3 with a satellite television
television
company for the exclusive rights to broadcast the tournament. The contract fee is £4.8 million for
the whole four years of the tournament. The broadcaster made an advance payment of
£1.0 million to Aytace on 1 May 20X3. This amount was initially credited to deferred income. I
then decided to recognise revenue on the satellite television contract evenly over a four-year period
from 1 February 20X3.
20X3. An amount
amount of £400,000
£400,000 (£4.8m × 4/48) is therefore
therefore recognised
recognised as revenue
in profit or loss for the year ended 31 May 20X3.
(2) Defined benefit pension scheme
scheme
Aytace operates a defined
defined benefit pension scheme.
scheme. Employees are not
not required to make any
any
contributions into the scheme. Aytace recognises remeasurement (actuarial) gains and losses
immediately through other comprehensive income in accordance with IAS 19, Employee Benefits
(revised 2011).
The scheme assets had a fair value of £12.2 million and £13.5 million at 31 May 20X2 and
31 May 20X3 respectively. Scheme obligations had a present value of £18 million and
£19.8 million at 31 May 20X2 and 31 May 20X3 respectively.
At 1 June 20X2
20X2 the interest rate on high quality co
corporate
rporate bonds was 6%.
6%.
In the year ended 31 May 20X3, employer contributions paid into the scheme were £0.9 million,
and pensions paid by the scheme during the year amounted to £1.1 million. These payments took
place on 31 May 20X3. The service cost for the year ended 31 May 20X3 was £1.2 million.
Aytace decided to improve the pension
pension benefit at 1 June 20X2 forfor staff who will have worked
worked at
least five years for the company at the date the benefit is claimed. The scheme actuary calculated
the additional benefit obligation in present value terms to be £400,000.
The only entry in the financial statements in respect of the year ended 31 May 20X3 was to
recognise in profit or loss the contributions paid to the scheme by Aytace, with no adjustment to
the scheme obligations in the statement of financial position.
(3) Holiday pay
pay
The salaried employees of Aytace are entitled to 25 days paid leave each year. The entitlement
accrues evenly over the year and unused leave may be carried forward for one year. The holiday
year is the same as thethe financial year. At 31 May 20X3,
20X3, Aytace has 900
900 salaried employees and
and the
average unused holiday entitlement is three days per employee. 5% of employees leave without
taking their entitlement and there is no cash payment when an employee leaves in respect of
holiday entitlement. There are 255 working
working days in the year and the total annual salary cost is
£19 million. No adjustment has been made in the financial statements for the above and there was
no opening accrual required for holiday entitlement.
cookies to (4)
enableInvestment in Xema
essential site Xema
functionality, as On
well1as marketing,
January 20X0, Aytace bought 40% of the issued ordinary share capital of Xema Ltd, a
personalization,sportswear
and analytics. You for £2.3 million. Aytace has had significant influence over Xema since this
company,
date and hasat any
usedtime
the equity method to account for the investment.
At 1 January 20X0,
20X0, Xema had an issued ordinary share capital of of 1 million £1 ordinary shares and
retained earnings of £3.4 million. There has been no change to Xema's issued share capital since
Privacy Policy 1 January 20X0. At 31 May 20X2 retained earnings were £4.8 million. Xema's statement of profit
or loss for the year ended 31 May 20X3 was as follows:
Marketing £'000
Revenue
Personalization 5,400
Operating costs (3,600))
(3,600
AnalyticsOperating profit 1,800
Other investment income 240
Finance costs (720)
Save Accept All

Tax (300)
On 1 September 20X2 Aytace bought the remaining 60% of Xema's ordinary share capital for
£12.4 million, at which date its original 40% shareholding was valued at £3.8 million. There were
no material differences between carrying amounts and fair values of the identifiable net assets of
Xema at 1 September 20X2.
I recognised the investment in Xema using the equity method and credited £867,000 to profit or
loss (profit for the year of £1.02m × 3/12 × 40% pl
plus
us £1.02m × 9/12 × 100%).
(5) Executive and employee incentive schemes

schemes
Aytace introduced two incentive
incentive schemes on 1 June 20X2. No entries have
have been made in relation
to either of these schemes in the financial statements for the year ended 31 May 20X3.
The first incentive scheme is for executives. Aytace granted 100,000 share options to each of five
directors. Each option gives the right to buy one ordinary share in Aytace for £6.40 at the vesting
date of 31 May 20X5. In order for the options to vest, Aytace's share price must rise by a minimum
of 35% from the market price on 1 June 20X2 of £6.40 per share. In addition, for a director's
options to vest, he/she must still hold office at 31 May 20X5.
Aytace's share price was only £5.80
£5.80 at 31 May 20X3,
20X3, and I am not confident that we will achieve
the required price increase of 35% by the vesting date. The fair value of a share option at
1 June 20X2 was estimated to be £2.70, but this had fallen to £1.90 by 31 May 20X3.
Most of the board has been with Aytace for a number of years, and none has left in the last twelve
months. I would anticipate only one director leaving prior to the vesting date.
The second incentive scheme is an employee scheme in the form of share appreciation rights for
senior managers. The vesting date is 31 May 20X5, and managers must be still in employment at
that date.
There are 60 managers eligible for the scheme, each of whom has appreciation rights over 4,000
shares. Under the scheme each manager will receive a cash amount equal to the fair value of the
rights over each share. I anticipate 50 of the managers being in the scheme at 31 May 20X5. The
fair value of the rights was £2.85 per share at 1 June 20X2 and £2.28
£2.28 per share at 31 May 20X3.
12 Razak plc
Razak plc is a listed
l isted parent company. During the year ended 30 September 20X2 Razak plc increased its
shareholding in its only equity investment, Assulin Ltd.
Razak publishes magazines in the UK. You are Kay Norton, a chartered accountant and a member of the
Razak financial reporting team. You report to the Razak group finance director, Andrew Nezranah, who
is also a chartered accountant.
You receive the following email:
cookies to To:
enable
To: essential site
Kay Norton
From:
From: as marketing,
Andrew Nezranah
personalization,
Date: 29 October You
Date: and analytics. 20X2
I have recently joined the board and I am preparing for our annual update presentation to our bank.
As part of this update, I have been asked
asked to present the
the bank with draft
draft consolidated financial
financial
statements for the year ended 30 September 20X2. I appreciate that there will be tax issues to finalise at
Privacy Policy
a later stage, but the bank has said that it is not interested in these at present.
For a number of years Razak plc held 15% of the ordinary share capital of Assulin, a paper pulp
Marketing
manufacturer. On 31 March 20X2 this shareholding was increased to 80%, as we wanted to secure
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continuity of supply in relation to paper pulp. Further details of this transaction can be found in Exhibit 1.
1.
Analytics
Razak plc's draft financial statements at 30 September 20X2 are summarised in Exhibit 2.
2.
( Exhibit 3).
In addition I have some concerns about Razak plc's purchase of a bond in Imposter plc (Exhibit 3).
Save Accept All
Bank

( Exhibit 4)
The directors are proposing to introduce a pension plan for next year (Exhibit 4) and are perhaps
unclear on how to account for it.
Please would you:
 provide explanations of how the increase in the
the stake
stake in Assulin will be treated in Razak's
consolidated financial statements;
 explain any adjustments needed to account for the purchase of the Imposter bond in Razak's
consolidated financial statements and evaluate any ethical issues arising from this matter;
 prepare Razak's consolidated statement of financial position at 30
30 September 20X2 after making all
relevant adjustments; and
 explain how the proposed pension plan would be accounted for in the financial statements.
Requirement
Reply to Andrew's email. Total: 30 marks
marks
Exhibit 1: Shareholding in Assulin
In 20W4 (eight years ago), Razak plc bought 75,000 shares in Assulin for £6 each. The shares were
classified as available-for-sale. At 30 September 20X1, the shares had a fair value of £16 each, and a
cumulative increase in fair value of £750,000 had been recognised in other comprehensive income and
was held in equity. In Razak plc's draft statement of financial position, the increase in the share valuation
has also been included in the investment in Assulin.
On 31 March 20X2 a further 325,000 shares in Assulin were purchased for £25 each. This sum has been
added to the investment in Assulin.
In addition to the cash consideration of £25 per share, Razak plc agreed to pay a further £6 per share on
31 March 20X4, subject to a condition that Assulin's management team, each of whom owned shares in
Assulin, remain with the company to that date. It is considered
considered to be highly
highly probable that this condition
condition
will be met. No adjustments for a contingent payment have been included in Razak's financial
statements. Razak has a cost of capital of 9%.
On 31 March 20X2, the fair value of an Assulin share was estimated to be £20. Razak has decided to use
the fair value (full goodwill) method to measure non-controlling interest.
The statements of financial position of Assulin at 30 September 20X2 and 31 March 20X2 were as
follows:
30 September 31 March
20X2 20X2
£'000 £'000
Non-current assets
Property, plant and equipment 3,460 3,210
Current assets
Inventories
Inventories 610
610 580
580
Receivables 400 280
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at bank 70 90
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site 4,540 4,160
personalization,
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analytics. You
may change £1your settings
ordinary at any
shares time 500 500
or accept the defaultearnings
Retained settings.
2,740 2,540
Loan from Razak plc 800 800
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Current liabilities
Trade payables 290 240
Marketing
Tax payable 210 80
Total equity and liabilities
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Included in Assulin's non-current assets is a property which had a carrying amount of £1.2 million at
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31 March 20X2. This property was estimated to have a fair value of £2.6 million at this date, and a
remaining useful life of five years.
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Exhibit 2: Draft statement of financial position for Razak plc at 30 September 20X2
£'000
Non-current assets
Property, plant and equipment 6,000
Investment in Assulin 9,325
Loan to Assulin 800
Other financial assets 1,308
17,433
Current assets
Inventories 1,140
Receivables 960
2,100
Total assets 19,533
Equity
£1 ordinary shares 2,800
Share premium account 7,400
Retained earnings 2,510
Available-for-sale reserve
reserve 750
13,460
Non-current liabilities 2,788
Current liabilities
Bank overdraft 1,220
Trade payables 865
Tax payable 1,200
3,285
Total equity and liabilities 19,533
Exhibit 3: Imposter bond
Razak plc purchased a 6% bond in Imposter plc on 1 October 20X1 (the issue date) at par for
£1.2 million. The interest is payable annually in arrears. The bond is redeemable on 30 September 20X4
for £1.575 million. It is currently recognised
recognised in 'oth
'other
er financial assets' in the draft statement
statement of financial
position at amortised cost, and has been classified as 'held-to-maturity'. The bond has an effective
annual rate of interest of 15%.
After paying the interest on its due date of 30 September
September 20X2, Imposter
Imposter went into administration in
early October 20X2. It is estimated that only 40% of the maturity value will be repaid on the original
repayment date of 30 September 20X4. No further interest will be paid.
20X2.
The annual market interest rate on a similar two-year, zero-coupon bond is 15% at 30 September 20X2.
The chief executive of Razak plc is also a director of Imposter and has a 5% shareholding in Imposter.
The chief executive authorised the purchase of the bond. There is no record of this matter in the board
minutes.
Exhibit 4: Proposed pension plan
The directors of Razak are considering setting up a pension plan in the next accounting period with the
following characteristics:
characteristics:
cookies to (1)
enableThe pensionsite
essential liabilities would be fully insured and indexation of future liabilities will be limited up to
to
functionality, as and
well including the funds available in a special trust account set up for the plan, which is not at the
as marketing,
disposal of Razak.
may change (2)your settings
The at any
unttime
trust account
acco will be built up by the insurance company
company from the surplus yield on investments.
investments.
or accept the
(3) default settings.plan will be an average pay plan in respect
The pension respect of which
which the entity
entity pays insurance
insurance
premiums to a third party insurance company to fund the plan.
(4) Every year 1% of the pension fund
Privacy Policy fund will be built up and employees
employees will pay a co contribution
ntribution of 4% of
their salary, with the employer paying the balance of the contribution.
Marketing
(5) If an employee leaves Razak and transfers
transfers the pension to another fund,
fund, Razak will be liable for, or is
refunded the difference between the benefits the employee is entitled to and the insurance
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premiums paid.
Analytics
In the light of the above, the directors believe that the plan will qualify as a defined contribution plan
under IAS 19, Employee Benefits rather than a defined benefit plan, and will be accounted for
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Bank

13 Finney plc
Finney plc is a UK-based company that produces engineering equipment for the mining industry. Finney
has a number of investments both in the UK and overseas, as well as an active treasury function that
trades in commodities.
You are Marina Bujnowicz,
Bujnowicz, and you recently
recently joined Finney
Finney as an ICAEW Chartered Accountant
Accountant to help
finalise the financial
financial statements for
for the year ended 30
30 September 20X2.
20X2.
You receive the following email from
from a director of Finney, Simone
Simone Hammond.
From:
From: Simone Hammond
To
To:: Marina Bujnowicz
Re
Re:: Financial Statements for year ended 30 September 20X2
Dear Marina,
Finney's treasury department has gathered together information relating to outstanding issues for
( Exhibit 1).
inclusion in the financial statements (Exhibit 1). Draft financial statements are shown in Exhibit 2.
2.
Please review this information and prepare for me a briefing note, including any relevant calculations
and journals, that sets out the financial reporting consequences for the year ended 30 September 20X2
of the issues contained in Attachment 1. 1. Discuss any further financial reporting consequences that may
arise in respect of these issues in future reporting periods including the implications of the future
implementation of IFRS 9, Financial Instruments .
2 in the light of your conclusions
Please could you also re-draft the financial statements in Attachment 2
regarding the financial reporting issues identified.
Regards
Simone
Requirement
Requirement
Draft the briefing note requested by Simone. Total: 30 marks
Exhibit 1: Outstanding issues
(a) Sale of specialist mining equipment to Muzza Ltd
Ltd
Finney sold a piece of specialist mining equipment to Muzza, on 1 October 20X1, for £5 million.
The terms of the transaction were that Muzza would pay for this equipment on 30 September 20X2
and incur an interest charge of 3% per annum until payment is made.
The market interest rate for companies with a similar risk profile to Muzza is 10% per annum.
Muzza contacted Finney in September 20X2 explaining that it is having financial difficulties, and
would not be in a position to make a payment on 30 September 20X2.
Muzza instead offered the following repayment schedule in full settlement of the equipment and
the interest obligation:
functionality, as Date
well as marketing, £'000
personalization,30 and analytics. 20X3
September You 1,500
may change your 30settings at any
September time
20X4 2,000
30 September
or accept the default settings. 20X5 2,000
Following a discussion with a credit agency, we are confident that Muzza can meet the revised
schedule of payments. We therefore believe we should accept the proposal.
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(b) Other trade receivables
(b) receivables
Marketing
The impairment of other trade receivables has been calculated using a formulaic approach which is
Personalization
based on a specific percentage of the portfolio of trade receivables. The general provision approach
has been used by the company at 30 September 20X2. At 30 September 20X2, one of the credit
Analytics
customers,
of £4 millionTechnica, has come
from Technica will to
bean arrangement
paid with Finney
on 30 September 20X3whereby
togetherthe amount
with outstanding
a penalty of
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£100,000. The total amount of trade receivables outstanding at 30 September 20X2 was £11 million
including the amount owed by Technica.
The following is the analysis of the trade receivables.
Cash to be
Balance received
£m £m
Technica 4 3.9*
Multica and other receivables 7 6.6
11 10.5
*£4.1m discounted at 5%
Finney has made an allowance of £520,000 against trade receivables which represents the
difference between the cash expected to be received and the balance outstanding plus a 2%
general allowance. Multica is one of Finney's largest customers and has a similar credit risk to the
'other receivables'. (Use a discount rate of 5% in any calculations.)
(c) Copper inventories contract
contract
At 1 July 20X2 Finney had inventories
inventories of 1,000
1,000 tonnes of copper. The average
average historic cost of
of the
copper was £9,200 per tonne.
To protect against a decline in copper prices, on 1 July 20X2 Finney entered into a futures contract,
using a recognised commodities exchange, to sell 1,000 tonnes of copper for £9,200 a tonne. (The
fair value
value of
of the futures
futures contract
contract at
at that date was
was zero.)
zero.) The
The contrac
contractt matures
matures on 31 Decemb
December er 20X2.
20X2.
Our compliance department designated the futures contract as a fair value hedge of the copper
inventory, and believes it to be highly effective in offsetting changes in the fair value of the copper.
At 30 September
September 20X2, the fair
fair value of the copper
copper inventory
inventory had fallen to £8,200
£8,200 a tonne
tonne and, at
this date, the fair

31 December 20X2value of thewas
delivery original
£950futures contract
per tonne. At 30(written on 120X2,
September July 20X2)
a newfor
futures contract
could be written for delivery of copper on 31 December 20X2 at £8,250 a tonne.
(d) UK investment
investment
On 1 October 20X0 Finney bought two million shares at £1.60 each, representing a 0.9%
shareholding, in Coppery plc. At the acquisition date there was no intention to sell the shares in
the short term.
The gain recognised in respect of the investment in Coppery in other comprehensive income for
the year ended 30 September 20X1 was £300,000.
On 1 April 20X2 Coppery was acquired by Zoomla plc, a large mining corporation. The terms of
the deal were that shareholders in Coppery would receive, for each share they owned:
(1) on 1 April
April 20X2, two
two shares in Zoomla, worth
worth £1.10 each; and
(2) on 1 April
April 20X3,
20X3, cash of £0.15.
£0.15.
Finney has a weighted average cost of capital of 10%.

At 30
This website stores Septemb
September
data er 20X2, the market price of a Zoomla
such as Zoomla share was £1.20.
£1.20.
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investment
personalization,On and1 analytics.
October 20X0,
You Finney bought ordinary shares in Bopara Inc, an unquoted American copper
may change your mining company,
settings for $15 million. The investment represented a 0.2% shareholding in Bopara and
at any time
was classified
or accept the default settings.as available-for-sale.
At 30 Sep
Septem
tember
ber 20X
20X1,
1, Fin
Finney
ney's
's sshare
harehol
holdin
ding
g in Bopara
Bopara was valued,
valued, by a market
market analyst,
analyst, at
$12.8 million. The reduction in value was due to changes in copper prices which affected share prices in
Privacy Policy the sector. This was reflected in Finney's financial statements for the year ended 30 September 20X1.
In September 20X2 there was an explosion in one of Bopara's largest mines, which caused its
Marketing
permanent closure. Finney's shareholding in Bopara decreased in value to $11.34 million at
Personalization
30 September 20X2 as a consequence.
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Bank

Relevant exchange rates were:
1 October 20X0 £1 = $1.50
30 September 20X1 £1 = $1.60
30 September 20X2 £1 = $1.62
Exhibit 2: Draft financial statements as at 30 September 20X2

Draft statement of profit or loss and other comprehensive income of Finney plc for year ended
30 September 20X2
£m
Revenue 194
194
Cost of sales (111)
Gross profit 83
Operating costs (31)
Operating profit 52
Finance income 3
Interest payable (16)
Profit before taxation 39
Taxation (8)
Profit for the year 31
Other comprehensive
comprehensive income 7
Total comprehensive income for the year 38
Draft statement of financial position as at 30 September 20X2
£m
Non-current assets
Property, plant and equipment 84
Available-for-sale financial
financial assets 36
Other financial assets 10
Inventories 66
Receivables 56
Total assets 252
Share capital: £1 shares 75

Retained earnings 97
Other components of equity 24
Non-current liabilities 27
Current liabilities
Trade payables 18
Overdraft 11
Total equity and liabilities 252
14 Melton plc
cookies to Melton plc ('Melton')
enable essential site owns a number of subsidiaries that operate high quality coffee bars.
functionality,
Youasare
wella as marketing,
recently appointed investment
appointed investment analyst for a major
major investment bank
bank that owns 6% of the
issued equity of Melton. You have been asked to analyse the profitability, cash flows and investor ratios
may change of your settings
Melton. at anytotime
You need prepare notes for a meeting with the investment team to determine whether the
investment bank should consider disposing of its investment.
One of your colleagues has left you a note of background information concerning ( Exhibit 1)
concerning Melton (Exhibit 1)
(Exhibit 2).
and some financial information (Exhibit 2).
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Your meeting notes
notes should do the following:
Marketing
(a) Evaluate the investment team
team member's comment (Exhibit
(Exhibit 1 point
point (8)), explaining the usefulness
and limitations of diluted earnings per share information to investors.
Personalization
(b) Analyse the profitability, cash flow and investor ratios of Melton plc, calculating additional
additional relevant
Analytics
ratios tofurther
require assist in your analysis. Your notes should identify and justify matters that you consider
investigation.
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(c) Explain the validity or otherwise
otherwise of your colleague's statement that Melton plc is unable to pay a
dividend because of the debit balance on consolidated retained earnings (Exhibit 1, point (7)).
(d) Discuss the reporting implications of the issue raised in the
the director's comment
comment in Exhibit 1, point (9).
(9).
Requirement
Prepare the meeting notes for the investment team. Total: 30 marks
marks
Exhibit 1: Notes on background information for Melton
(1) Melton has a reputation for
for depreciating its assets more slowly
slowly than others
others in the
the sector.
(2) The strategy of the group
group is to fund
fund new outlet capital expenditure
expenditure from existing operating cash
flows without the need to raise new debt.
(3) Like for like revenue growth in the sector is estimated at 4.1% pa.
(4) Grow 'outlet profits' (gross profits) as a percentage
percentage of outlet revenue year on year.
year.
(5) Increase promotional
promotional and advertising
advertising spend on new outlets to encourage
encourage strong initial sales.
(6) Management are accused
accused of concentrating
concentrating on new outlet openings to
to the detriment of existing
outlets.
(7) Melton is unable
unable to pay dividends as the
the company has a debit balance
balance on its consolidated retained
earnings.
(8) One member of of the investment
investment team has questioned
questioned the usefulne
usefulness
ss of diluted earnings per
per share,
which, he believes, 'adds in unnecessary complications that may never happen'.
(9) Melton acquired 8,000
8,000 out of the 10,000 shares of R.T. Café Ltd, which operates a chain of cafés
cafés
offering simple food and a good but limited range of coffees. Mr Bean, one of the directors of
Melton, has stated the following:
"While R.T. Café Ltd is profitable, long-term it is not a good fit with the image we are trying to
portray. I suggest we dispose 2,000 of our shares in this subsidiary in January 20X8. Preliminary
enquiries suggest that we could make a profit of £500,000, which would be a nice boost to
earnings per share for next year."
Exhibit 2: Financial information
Melton plc: Consolidated statement of profit or loss for the year ended 30 September
20X7 20X6
£'000 £'000
Revenue 37,780 29,170
Cost of sales (28,340) (22,080)
expenses (6,240) (4,480)
Finance costs (410) (420)
Profit before taxation 2,790 2,190
Tax
Tax (610)
(610) (460)
(460)
cookies to Earnings
enable essential
per sharesite
– basic 26.8p 21.3p
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Earnings as marketing,
share – diluted 21.2p 19.2p
may change Noyour
dividends have
settings been
at any paid or proposed in 20X6 and 20X7.
time
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Marketing
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Bank

Melton plc: Consolidated statement of cash flows for the year ended 30 September
20X7 20X6
£'000 £'000 £'000 £'000
Cash flows from operating activities
Cash generated from operations (Note) 6,450 4,950
Interest paid (410) (440)
Tax paid (320))
(320 (260)
Net cash from operating activities 5,720 4,250
Cash flows from investing activities
Purchase of non-current assets (5,970) (5,790)
Proceeds on sale of non-current assets
assets 20 30
Net cash used in investing activities (5,950) (5,760)
Cash flows from financing activities
Proceeds of share issue 240 20
Borrowings 650
650 2,000
Net cash from financing activities 890 2,020
Net increase in cash and cash equivalents 660 510

Cash and cash equivalents brought forward 2,480 1,970
Cash and cash equivalents carried forward 3,140 2,480
Note:
Note: Reconciliation
Reconciliation of profit before tax to cash generated from operations for the year ended
30 September
20X7 20X6
£'000 £'000
Finance cost
cost 410 420
Depreciation and amortisation 3,060 2,210
Loss on disposal of non-current assets 30 10
(Increase)/decrease in inventories (40) 10
(Increase) in receivables (250) (20)
Increase in trade payables 450
450 130
Cash generated from operations 6,450 4,950
Analysis of revenue, outlet profits and new outlet openings for the year ended 30 September
30 new outlets were opened during the year ended 30 September 20X7 to bring the total to 115.
20X7 20X6
£'000 £'000
Revenue per outlet
Outlets open at 30 September 20X6 354 343
Outlets opened in current financial year 258 –
Gross profit per outlet

Outlets
This website storesopen
dataat 30 September
such as 20X6 87 83
cookies to Outlets opened insite
enable essential current financial year 69 –
functionality, as well asinformation
Additional marketing,
personalization, and analytics. You 20X7 20X6
may change yourmargin
Gross settings at any time 25.0% 24.3%
Gearing settings.
(net debt/equity) 35.2% 44.4%
Current ratio 0.56:1 0.48:1
Trade payables payment period 86 days 103 days
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Return on capital employed (ROCE) 20.0% 19.1%
Cash return on capital employed (CROCE) 40.2% 36.3%
Marketing
Revenue per employee (£'000) 41.1 37.9
Earnings before interest, tax, depreciation and
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amortisation (EBITDA) (£'000) 6,260 4,820
Non-current asset turnover
Analytics 1.68 times 1.49 times
Share price (at 30 September) 302p 290p
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15 Fly-Ayres
Fly-Ayres plc (Fly-Ayres), an unlisted company, was established in 20X5 by Bill Ayres, a successful
entrepreneur, as a budget airline business. The business has grown rapidly since start up. Bill Ayres
currently owns 75% of the ordinary share capital, but in a recent press interview he announced that he
planned to seek a stock exchange listing for the company during 20X9. This would help to raise new
capital for Fly-Ayres' planned expansion of services over the next two or three years.
It is now 20 November 20X8. Fly-Ayres's finance director, Tom Briar, is an ICAEW Chartered Accountant.
He qualified many years ago and until 20X5 worked as an insurance salesman. In 20X5, Bill Ayres invited
Tom, an old school friend, to be Fly-Ayres' finance director.
The company has just appointed George, a recently-qualified ICAEW Chartered Accountant, as Tom's
assistant. George replaced Sally, also ICAEW qualified, who moved to another company. Tom has
prepared Fly-Ayres's financial statements for the year ended 31 October 20X8, in accordance with IFRS,
as set out in Exhibit 1,
1, and included some additional information in Exhibit 2, 2, including information
i nformation
from Sally on the
the share options scheme and the
the disposal of a financial asset.
financial asset.
Requirements
15.1 Draft the requested report for the non-executive director. Your report should:
(a) Address the usefulness of 'industry average' ratios.
(b) Provide additional comment oon
n whether
whether the finance
finance director, Tom Briar, is correct in his
comments about the financial reporting treatment of employee share options, and if i f not,
be.
what the correct treatment should be.
(c) Redraft the 20X8 financial
financial statements,
statements, making
making appropriate adjustments for
for the share options
options
and the disposal of the available-for-sale financial asset to comply with IFRS. You should make
adjustments, if needed, to ratios as calculated, in order to facilitate interpretation.
(26 marks)
15.2 Draft a note of any ethical implications of the scenario for both Tom Briar and his assistant George.
Your answer should refer to the back
background
ground information
information above and also to
to the ethical issue raised
( Exhibit 3)
in the last paragraph of Tom's email to George (Exhibit 3). (4 marks)
Total: 30 marks
Exhibit 1: Financial statements
Fly-Ayres: Statement of profit or loss and other comprehensive income for the year ended
31 October
20X8 20X7
£m £m
Revenue 158.4 138.3
Cost of sales (see below) (137.3) (103.8)
Gross profit 21.1 34.5
Other income 0.5
Other costs (7.6) (5.2)
Profit from operations 14.0 29.3
Finance costs (10.4) (10.0)
personalization,
Profit and analytics.
before taxationYou 3.6 19.3

Taxation (1.4) (5.2)

Profit settings.
for the year 2.2 14.1
Other comprehensive
comprehensive income 30.0 1.0
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Total comprehensive income for the year 32.2 15.1
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No dividends have been paid or proposed.
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Bank

Extract from the financial statements: Analysis of cost of sales
Cost as a Cost as a
percentage percentage
20X8 of revenue 20X7 of revenue
£m £m
Fuel 57.7 36.4% 36.4 26.3%
Airport charges 25.2 15.9% 20.2 14.6%
Crew costs 21.7 13.7% 21.2 15.3%
Depreciation and leasing costs 14.3 9.0% 10.6 7.7%
Other costs 18.4 11.6% 15.4 11.1%
137.3
137.3 103.8
103.8
Fly-Ayres: Statement of financial position as at 31 October
20X8 20X7
£m £m £m £m
ASSETS
Non-current assets
Property, plant & equipment 272.9 222.1
Financial asset 2.0 2.0
Current assets
Trade and other receivables 9.3 8.2
Cash and cash equivalents 11.2 7.4
20.5 15.6
EQUITY AND LIABILITIES
Issued capital: £1 ordinary shares 25.0 25.0
Revaluation surplus
surplus 30.0
30.0 –
Retained earnings and other reserves 54.3 52.0
Equity 109.3 77.0
Borrowings and obligations under finance leases 150.2 123.7
Maintenance provisions 5.2 4.8
Deferred tax liability 2.1 2.0
157.5 130.5
Current liabilities
Trade and other payables 18.4 17.3
Taxation 1.6 5.7
Borrowings and obligations under finance leases 8.6 9.2
28.6 32.2
Exhibit 2: Additional information

(1) In August 20X8, Bill Ayres made a £20 £20 million interest-free
interest-free loan to the
the business. It is included in
non-current borrowings and obligations under finance leases.
cookies to (2)
enableOnessential site 20X6, Fly-Ayres
1 November
November Fly-Ayres granted 200 share options to each of its 500
500 employees. Each
functionality, as option
well asgives
marketing,
the right to acquire one £1 ordinary share. Vesting is conditional upon each employee
personalization,working
and analytics.
for theYou
entity over the next three years. The fair value of each share option as at
may change your settings at 20X6
1 November any time
was £18.
On the basis of a weighted average probability, the company estimated on 1 November 20X6 that
20% of employees would leave during the three-year period and therefore forfeit their rights to
share options.
Privacy Policy
20 employees left during the year ended 31 October 20X7 and on that date, the estimate of total
Marketing employee departures over the three-year period was revised to 15% (75 employees).
Personalization
22 employees left during the year ended 31 October 20X8 and on that date, the estimate of total
employee departures over the three-year period was revised to 12% (60 employees).
Analytics
Save Accept All


Sally, George's predecessor, correctly accounted for the share option scheme in the financial
statements for the year ended 31 October 20X7, but left before making any adjustments for the
year ended 31 October 20X8.
(3) During the year ended
ended 31 October
October 20X8 Fly-Ayres
Fly-Ayres sold a financial asset which
which had a carrying
carrying value
of £2 million at 1 November 20X7 for £3 million in cash. This asset had always been classified as
available-for-sale by the company and during the period in which it was owned £500,000 of
valuation gains were recognised directly in equity, and on which deferred tax was provided at
20%. Sally correctly included the current tax payable on the sale in the income tax expense, but
she left before making any other accounting entries in
i n respect of this sale.
(4) Accounting ratios are

published financial shown
shown below.
statements of six The
listedindustry
budgetcomparatives
cairline
omparatives are averages
companiesavfor
erages
yearsbased
endedon the
between
31 December 20X7 and 31 May 20X8.
Fly-Ayres Fly-Ayres Industry
20X8 20X7
Return on shareholders' funds (ROSF) 2.0% 18.3% 13.8%
Non-current asset turnover 0.58 0.62 0.89
Gearing (net debt/equity) 135.0% 163.0% 46.4%
Passenger numbers (in thousands) 3,722 3,163 –
Revenue per passenger (£) 42.56 43.72 42.70
Operating profit margin 8.8% 21.2% 12.7%
Exhibit 3: Tom's email

Tom has sent the following email to his new assistant:
George,
The non-executive director
director needs you to draft a report giving a critical analysis of the financial
statements before the board meets next week to assess the figures. He's a marketing expert, not an
accountant, so keep it understandable.
I've collected some 'industry average' ratios, which might come in useful, although you may have to
spell out why, as the non-executive director probably won't know.
Your report should comment
comment on the the performance and financial position
position of Fly-Ayres, and you should
calculate any further ratios that may assist you in your analysis. You should also identify and justify any
additional information that you would find useful and briefly point to ways in which the analysis may be
lacking.
As you see, a couple
couple of years ago we
we brought in an employee
employee share option
option scheme for employees
employees who
stay with us for three years. Not only does this motivate staff, but last I heard there isn't a charge to
profit or loss because they're only share options. (Correct me if I'm wrong, though, as I was out of the
accountancy sector for a long time and may have missed some finer points of the more recent
standards.) Sally putI don't

scheme is relevant. a charge through
think we need lasta year,
chargebutthis
I don't
year,know
but if why, or whyplease
I'm wrong, the information
make the on the
This website stores data
appropriate such as
adjustments.
Sally has also made some notes concerning the financial asset that Fly-Ayres sold during the year. I do
not understand how this should be treated, so please make the appropriate adjustments.
Despite at any time
the downturn in profits, Bill says it is important to project an optimistic message. Even if we
don't seek settings.
a stock exchange listing next year, we need a strong statement of financial position to permit
future borrowings. If we do seek a stock exchange
exchange listing, as planned, Bill intends that all staf
staff,
f, including
recent appointees, will be rewarded with a substantial holding of shares. I hope there isn't a problem
Privacy Policy
with this – I know accountants study ethics these days, but I can't understand why rewarding people for
their hard work is unethical.
Marketing
Personalization
Analytics
Save Accept All

Bank

16 Aroma
Jo West owned a highly successful technology business which she sold five years ago for £20 million.
She then set up an investment entity that invests primarily in smaller private businesses in need of short
to medium term funding. Jo sits on the board as a non-executive director
director of a number of the entities
that her business has invested in and is often able to offer valuable business advice to these entities,
especially in the area of research and development activities. You are Lois Mortimer, a member of Jo's
investment management team.
Jo has been approached by the managing director of Aroma, a small private entity looking for
investment; she has asked you, as a member of her investment management
management team, to produce a report
analysing the financial performance of Aroma for the year ended 30 June 20X1 and its financial position
at that date. Your report should contain a recommendation as to whether she should consider this
investment further.
Jo has sent you the following email:
From:
From: jowest@westinvestments.com
To
To:: loismortimer@westinvestments.com
Date::
Date 31 August 20X1
Subject::
Subject Financial performance of Aroma
Thank you for agreeing to do this report for me. I've got hold of some extracts from Aroma's financial
(Exhibit).
statements (Exhibit).
Some background detail for you:
Aroma has been trading for more than 10 years manufacturing
manufacturing and selling its own branded perfumes,
perfumes,
lotions and candles
profits have to theover
been steady public
the in itsten
last 15 years.
retail stores and 18
However, to other
monthslarger
ago,retailing entities.
the newly Revenue
appointed salesand
director saw an opportunity to sell the products online. Using long-term funding, she set up an online
shop. The online shop has been operating successfully for the last 14 months. The sales director also
used her prior contacts to secure a lucrative deal with a boutique hotel chain for Aroma to manufacture
products for the hotel, which carry the hotel chain name and logo. The contract was set up on
1 January 20X1.
The managing director of Aroma now believes that the business could take advantage of further sales
opportunities and does not wish to lose the momentum created by the sales director. The bank that
currently provides both the long-term loan and an overdraft facility has rejected Aroma's request for
additional funds on the basis that there are insufficient assets to offer as security (the existing funding is
secured on Aroma's property, plant and equipment).
Exhibit: Financial statements extracts

Statement of profit or loss for the year ended 30 June
June
20X1 20X0
£'000 £'000
Revenue 6,000 3,700
cookies to Cost
enableof essential
sales site (4,083) (2,590)
Gross as marketing,
profit 1,917 1,110
Administrative You
expenses
expenses (870) (413)
Distribution at any time
costs (464) (356)
Finance costs
(43) (34)
Profit before tax 540 307
Income tax expense (135) (80)
Profit for the year
Privacy Policy 405 227
The revenues and profits of the three business segments for the year ended 30 June 20X1 were:
Marketing
Retail operations Online store Hotel contract
Personalization
£'000 £'000 £'000
Revenues
Analytics 4,004 1,096 900
Gross profit tax

Profit before 1,200
320 330
138 387
82
Save Accept All

The online store earned a negligible amount of revenue and profit in the year ended 30 June 20X0.
Statement of financial position as at 30 June
June
20X1 20X0
£'000 £'000
ASSETS
Non-current assets
Property, plant and equipment 380 400
Intangible assets – development costs 20 10
400 410
Current assets
Inventories
Inventories
Receivables 1,260
1,260
455 1,180
1,180
310
Cash and cash equivalents – 42
1,715 1,532
Total assets 2,115 1,942
Equity
Equity
Share capital (£1 equity shares) 550 550
Retained earnings 722 610
Total equity 1,272 1,160
Long-term borrowings 412 404
Current liabilities
Payables 363 378
Short-term borrowings (overdraft) 68 –
431 378
Total liabilities 843 782
Total equity and liabilities 2,115 1,942
Requirement
Prepare the report required by Jo West. Total: 30 marks
17 Kenyon
You work for a team of investment
investment analysts at Inver
Inver Bank.
Kenyon plc, a listed entity, operates a number of bottling plants. The entity's business consists primarily
of contract work for regular customers. Revenue from existing contracts has increased in the year and in
November 20X0 Kenyon plc secured a new contract with a high profile drinks company. Kenyon plc
paid a dividend of £100 million during the year ended 31 October 20X1.
Gary, a client, recently received the latest published financial statements of Kenyon plc and was
impressed by the level of profitability and the dividend paid. He was also impressed with the fact that
the share price had increased from £2.80 per share on 31 October 20X0 to £4.90 on 31 October 20X1.
Gary is now considering acquiring some of Kenyon plc's shares and has asked for your advice in an
email:
"I am
functionality, interested
as well in your views on whether it is worth investing in Kenyon plc. It would be useful in
as marketing,
making
personalization, andmyanalytics.
decision You
if you could produce a report which:
may change (a)your settings
analyses at financial
the any time
finan cial performance of
of Kenyon plc for the year to 31 October 20X1
20X1 and its financial
financial
position at that date and discusses whether or not it is a good investment at this time.
(b)  shows the best and worst case potential impact of the contingent liability on
on Kenyon plc's
profitability and investment potential.
Privacy Policy
 discusses any further information I may need to access regarding the contingent liability in
Marketing advance of making a final investment decision."
You have obtained
obtained the financial statements
Personalization statements of Kenyon (Exhibit 1),
Kenyon plc (Exhibit 1), together with some further
(Exhibit 2).
information (Exhibit 2).
Analytics
Requirement
Save Acceptrequired
Prepare the report All by Gary Watson. Total: 30 marks

Bank

Exhibit 1 – Financial statements
Kenyon plc
Statements of financial position as at 31 October
20X1 20X0
ASSETS £m £m
Non-current assets
Property, plant and equipment 381 346
Investment in associate (Note 1) 56 –
437 346
Current assets
Inventories 86 40
Receivables 72 48
Cash and cash equivalents 3 60
161 148
Total assets 598 494
EQUITY AND LIABILITIES £m £m

Equity
Share capital (50 pence shares) 150 150
Share premium 50 50
Retained reserves 265 223
Total equity 465 423
Pension liability (Note 2) 38 5
Current liabilities
Trade and other payables
payables 95
95 66
66
Total liabilities 133 71
Total equity and liabilities 598 494
Kenyon plc
Statements of profit or loss and other comprehensive income for the year ended 31 October
20X1 20X0
£m £m
Revenue 663 463
Cost of sales (395) (315)
Gross profit 268 148
Distribution costs (27) (20)
expenses (28) (17)
Share of profit of associate (Note 1) 7 –
Profit
Income before tax
tax
tax expense 221
221
(45) 117
117
(24)
This website stores
Profit datayear
for the such as 176 93
cookies to Other
enablecomprehensive
essential site income (not re-classified to P/L):
Remeasurement loss on pension assets and liabilities (Note 2)
functionality, as well as marketing, (48) (10)
Tax effect
personalization, and of other comprehensive
analytics. You income 14 2
Other comprehensive
may change your settings at any time income for the year, net of tax (34) (8)
Total
or accept the comprehensive
default settings. income 142 85
Exhibit 2 – Additional information

(a) Investment in associate
Privacy Policy associate
Kenyon plc acquired 40% of AB, its associate on 1 April 20X1 for £49 million.
Marketing
(b) Pension liability
liability
Personalization
The actuary has provided the valuations of pension assets and liabilities as at 31 October 20X1 in
Analyticsthe financial statements. However, as yet the actuary has not informed Kenyon plc of the
contribution level required for the year to 31 October 20X2.
Save Accept All

(c) Contingent liability
liability
The notes to the financial statements include details of a contingent liability of £10 million. On
5 October 20X1, Kenyon plc suffered a chemical leak at one of the bottling plants and there is
currently an investigation into the potential damage this caused to a nearby river and surrounding
area. The investigation is at an early stage and it is not yet clear whether Kenyon plc was negligent.
As stated in the notes to the financial
financial statements Kenyon plc's lawyers
lawyers have intimated that, in their
opinion, Kenyon plc is likely to lose the case. No obligation has been recorded because the amount
of potential damages could not be measured with sufficient reliability at the year-end. However,
the lawyers have given a range of possible estimates of between £7 million and £13 million. The
case is due to be decided by 31 October 20X2.
18 Snedd (July 2014)

Snedd Enviroclean plc is engaged in the manufacture and supply of environmentally-friendly
environmentally-friendly home
cleaning products. It was set up several years ago by its two founders and has been very successful.
Snedd is currently unlisted, but the company's founders, who are the two principal shareholders and
directors, plan to list the company on the AIM within three to four years. Snedd's accounting year end is
31 May.
Snedd has built up a substantial cash surplus and the directors decided in 20X3 to use this to achieve
growth, principally through investments in established businesses. On 1 June 20X3, Snedd made its first
acquisition, being 75% of the ordinary share capital of Bellte Ltd, a competitor company. On
1 December 20X3, Snedd made its second acquisition, being 100% of the ordinary share capital in
Terald Inc, an unlisted company in Distanlan, a foreign country.
You are Bill Smyth, the recently-appointed
recently-appointed financial controller
controller at Snedd.
You have been supplied with working
working papers, prepared by an assistant Exhibit),
assistant ((Exhibit), which contain the
draft financial statements for Snedd and Bellte for the year ended 31 May 20X4, together with Terald's
trial balance as at 31 May 20X4. The working papers also include notes on outstanding issues prepared
by the Snedd finance director before he left on a trip abroad negotiating the acquisition of another
subsidiary.
The finance director has left you the following instructions:
 Set out and explain the correct financial reporting treatment, showing appropriate adjustments for
each of the outstanding issues I have identified.
 Prepare Snedd's consolidated statement of profit or loss and other comprehensive income for the
year ended 31 May 20X4 and a consolidated
consolidated statement
statement of financial position
position at that date. Please
Please
take into account any adjustments for the outstanding issues and set out your workings showing
how you arrived at your consolidated figures so that I can understand them.
Requirement
Respond to the finance director's instructions. Total: 30 marks
marks
This website stores Working
Exhibit: data such papers
as
Draft
functionality, statements
as well of profit or loss and other comprehensive income for the year ended
as marketing,
31 May
personalization, and20X4
analytics. You
may change your settings at any time Snedd Bellte
or accept the default settings. £'000 £'000
Revenue 8,511 2,186
Cost of sales (5,598) (1,544)
Gross profit 2,913 642
Privacy Policy
Operating expenses and finance costs (1,541) (502)
Profit
Marketing before tax 1,372 140
Tax (354) (28)
Personalization
Profit for the year 1,018 112
Analytics
Other comprehensive income 600 –
Save Accept All

Total comprehensive income for the year 1,618 112
Bank

Draft statements of financial position at 31 May 20X4
Snedd Bellte
£'000 £'000
Assets
Non-current assets
Financial assets (Notes 1 and 2) 900 –
4,412 1,463
Current assets 2,365 586

Equity
Share capital 300 30
Retained earnings 4,075 1,014
Revaluation surplus 600 –
4,975 1,044
Non-current liabilities – deferred tax brought forward on

1 June 20X3 (Note 3) 92 46
Current liabilities (Note 4) 1,710 959

Notes on outstanding issues
(1) Investment in Bellte Ltd
On 1 June 20X3, Snedd acquired 75% of the ordinary share capital of Bellte for a cash payment of
£800,000. Snedd decided to value the non-controlling interest at its proportionate share of net
asset value. The fair value of the net assets acquired approximated to their carrying amount at
1 June 20X3 of £932,000, except for any adjustments arising from the following information:
 A contingent
contingent liability in respect of a product liability, which
which had not
not been
been recognised by Bellte
Bellte
(but which was referred to in a note to Bellte's financial statements for the year ended 31 May
20X3) was estimated to have a provisional fair value of £20,000 at 1 June 20X3. This liability
was subsequently settled, on 1 October 20X3, for £40,000. An expense of this amount was
recognised in operating expenses in Bellte's individual financial statements on that date.
 Bellte purchased a bespoke
bespoke soap-making machine for £100,000 on 1 June 20W8, when the
estimated useful life of the machine was 10 years, with a residual value of zero. The
provisional fair value of the machine, which is a specialised item of plant, was estimated on
1 June 20X3 to be £60,000 with a remaining useful life of five years. A specialist valuation firm
was requested to produce a fair value for the plant as at 1 June 20X3. Due to various delays,
This website stores datathe valuation
such as work was not completed until 30 June 20X4. The valuer concluded that the fair
value ofsite
cookies to enable essential the plant at 1 June 20X3 had been £65,000. Snedd's policy is to recognise plant at
depreciated
functionality, as well as marketing,cost, and to recognise all depreciation in cost of sales.
(2) Investment You
in Terald Inc
On 1 settings.
or accept the default December 20X3, Snedd acquired, for £100,000, 100% of the ordinary share capital of Terald
Inc, a company operating in the country of Distanlan. Terald's accountant has sent the following
trial balance at 31 May 20X4:
Privacy Policy D$'000 D$'000
Revenue – 150
Marketing Cost of sales 112 –
Operating expenses
Personalization 15 –
Income tax 3 –
AnalyticsShare capital – 10
Retained earnings at 1 June 20X3

20X3 – 140
140
Save Accept All

D$'000 D$'000
Non-current assets 160 –
Current liabilities – 40
Current assets 50 –
340 340
The functional currency of Terald is the Distanlan dollar (D$). The carrying amount of the net
assets of Terald at the acquisition date was D$160,000,
D$160,000, which approximated to fair value.
Terald uses Distanlan GAAP in preparing its financial statements. Distanlan GAAP is very similar to
IFRS. However, it differs in respect of the measurement of financial assets. Terald's non-current
assets at 31 May 20X4 include D$10,000, which is the cost of an investment in a derivative
financial asset acquired on
on 30 November
November 20X3. Distanlan
Distanlan GAAP requires
requires measurement of this type
of financial asset, subsequent to acquisition, at cost. The fair value of the financial asset at 31 May
20X4 was D$15,000.
Relevant exchange rates are as follows:
At 1 December
December 20X3 £1 = D$2.0
At 31 May 20X4
20X4 £1 = D$2.2
Average for period
period 1 December 20X3
20X3 to 31 May 20X4 £1 = D$2.1
D$2.1
(3) Deferred tax
No adjustments have been made for deferred tax in the draft financial statements for the year
ended 31 May 20X4. At that date, Snedd had taxable temporary differences in respect of
accelerated capital allowances of £300,000. Also, at 31 May 20X4, Bellte had taxable temporary
differences in respect of accelerated capital allowances of £180,000. During the year ended 31 May
20X4, Snedd recognised a revaluation surplus of £600,000 in respect of its head office building. As
permitted by
revaluation IFRS, Snedd's
surplus directors
in respect have decided
of this revaluation. notrevaluation
The to make ansurplus
annualwill
transfer fromwhen
be taxed the the
building is sold in the future. Snedd estimates that the appropriate tax rate for recognition of
deferred tax liabilities at 31 May 20X4 is 22%.
It may be assumed that no deferred tax adjustments are required in respect of any other items for
Snedd, Bellte or Terald.
(4) Payment of a supplier in ordinary shares
With effect from
from 1 April 20X4,
20X4, Snedd's directors decided to adopt a policy
policy of paying certain key
suppliers in Snedd's shares in order to ensure that the suppliers have a stake in the company's long-
term success.
On 1 April 20X4 Snedd issued 270 of its £1 ordinary shares to Whelkin Ltd, a supplier of soap
flakes, in full settlement
settlement of a trade pay
payable
able amount of £6,000
£6,000 which had been outstanding
outstanding since
28 February 20X4. No accounting entries have been made to recognise this transaction, and the
payable of £6,000 is still included in Snedd's trade payables in the draft financial statements at
31 May 20X4. An external consultant has estimated that, at 1 April 20X4, one ordinary share in
Snedd
This website stores had
data a fair
such asvalue of £26.50.
19 BathKitz (November 2014)
You are an ICAEW Chartered Accoun
Accountant
tant employed as an analyst at the private equity
equity firm, ADV
Investments (ADV), which ownsowns 20% of the equity shares in BathKitz plc. BathKitz is an AIM-listed
company, which sells a range of flat-pack kitchens and bathrooms to building trade customers. Your
manager, who has recently been appointed a non-executive director of BathKitz, gives you the
Privacy Policy
following briefing:
briefing:
Marketing
"I have become increasingly concerned about ADV's investment in BathKitz. In particular, BathKitz's
revenue has increased, but there has been a net cash outflow from operating activities. The financial
Personalization
controller of BathKitz provided me with some extracts from the draft financial statements for the year
Analytics (Exhibit 1).
ended 30 September 20X4 (Exhibit 1). I have performed some initial analysis on these and asked the
financial contro2).
controller
(Exhibit
today (Exhibit 2ller
). for explanations
explanations of some of the numbers. The explanations were emailed to me
Save Accept All
Bank

I have to go to a meeting now, so I would like you to review the draft financial statements extracts,
together with the explanations and prepare a briefing note for me. Specifically, in the briefing note I
would like you to:
(a) explain the appropriate financial reporting treatment
treatment for each
each of the
the matters in the email
(Exhibit 2) showing journal entry adjustments where possible. I will have the tax looked at
separately, so please ignore any current or deferred tax adjustments;
(b) prepare a revised statement of
of cash flows,
flows, after recording
recording your correcting
correcting journal entries. Include a
note reconciling the adjusted profit before tax with cash generated from operations; and
(c) explain briefly why the revised statement
statement of cash flows shows
shows a net cash outflow from operating
revenue."
activities despite an increase in revenue."
Requirement
Prepare the briefing note requested by your manager. Total: 26 marks
Exhibit 1: BathKitz draft financial statements extracts
Draft summary statement of profit or loss for the year ended 30 September 20X4
20X4 20X3
£'000 £'000
Revenue 617,000 553,000
Operating profit 41,039 52,500
Investment income 5,200 1,200
Finance costs (3,500) (1,000)
Income tax expense (10,000) (11,000)

32,739 41,700
41,700
Draft statement of financial position as at 30 September 20X4
20X4
£'000
ASSETS
Non-current assets
Investment property 12,000
Current assets
Inventories 93,062
Trade receivables 134,500
Cash and cash equivalents 18,622
246,184
Total assets 300,719
This website storesAND

EQUITY data LIABILITIES
such as
Share capital and
cookies to enable essential siteshare premium 70,000
Retained earnings
45,339
personalization, and analytics. You 115,339
Long-term
or accept the borrowings
default settings. 31,260
Trade and other payables 103,120
Current and deferred tax 23,000
Provisions 28,000
Privacy Policy
185,380
Marketing
Personalization
Analytics
Save Accept All


Draft statement of cash flows for the year ended 30 September 20X4
£'000 £'000
Profit before taxation 42,739
Adjustments for:
Depreciation 10,631
Increase in provisions 3,250
Gain on investment property (4,000)
Interest expense 3,500
56,120
Increase in inventories
Increase in trade receivables
receivables (53,978)
(53,978)
(23,090)

Increase in trade payables 27,400
Cash generated from operations 6,452
Interest paid (3,500)
Income taxes paid (12,000)
Net cash used in operating activities (9,048)

Dividends paid (5,000)
Proceeds from issuing bonds 20,000
Net cash from financing activities 15,000
Net increase in cash and cash equivalents 5,952

Cash and cash equivalents at beginning of period 12,670
Cash and cash equivalents at end of period 18,622
Exhibit 2 – Email from financial controller

To:
To: Manager, ADV
From: Financial controller, BathKitz
Date:
Subject:
Subject: Explanations – BathKitz
BathKitz finan
financial
cial statements
statements
Please find below the explanations as requested:
(1) Gain on investment property
The gain recognised of £4 million in respect of the investment property reflects a fair value increase
at 30 September 20X4 on BathKitz's property located in the TarkHill Shopping Centre. This
property is one of three similar properties at the same location. The other two properties were
owned by a company unconnected to BathKitz. This company sold one of the properties for
£9 million in April 20X4 to an investment company based in London and the other property to an
overseas investor for £12 million in May 20X4. The overseas investor was interested in making an
initial purchase in the property market in the UK and was therefore willing to pay a higher price
than local institutions would have been prepared to pay.
cookies to enable essential sitewith BathKitz's accounting policy, I have revalued BathKitz's investment property to
In accordance
functionality, as awell
fairas marketing,
value of £12 million. The change in the property's fair value has been recognised in
personalization,investment
and analytics. You together with the rental income of £1.2 million.
income
(2) Increase in revenue
BathKitz supplies flat-pack kitchens and bathrooms to building
buil ding trade customers. The BathKitz sales
managers are authorised to negotiate a discount with customers on the standard price list.
Privacy Policy
There are two explanations for the increase in revenue:
Marketing
(a) Share option incentive scheme
scheme
Personalization
Revenue increased because 100 managers have been motivated by the implementation of a
share option scheme on 1 January 20X4. At that date each manager was granted options over
Analytics
10,000 shares at an exercise price of £5.80 per share, which was the market price at
1 January 20X4. Each option gives the right to buy one share in BathKitz. The options vest on
Save Accept20X7
1 January All subject to the following conditions:
Bank

 The manager remains in the employment of BathKitz until 1 January 20X7.
 Revenue for their depot increases
increases by an average of 10% per year over the three years of
the vesting period.
The fair value of an option was estimated to be £4.60 at 1 January 20X4 and £4.80 at
30 September 20X4. The price of one BathKitz share at 30 September 20X4 was £5.90.
At 30 September
September 20X4, all 100 managers were still employed,
employed, but the directors
directors estimate that
six managers will leave the scheme before 1 January 20X7 when the options will vest.
As there is no cash cost to the company, no adjustment has been made to the financial
financial
statements for the share options, but the motivational impact has already been seen in the
increase in revenue, particularly in the last three months of the year.
(b) New 'Pick and Collect' sales
sales
Since incorporation, BathKitz has operated only by means of trade counter sales. Trade
counter customers visit a depot to order and collect their goods. The number of depots has
been constant for many years. Customers receive 60 days' credit and BathKitz recognises
revenue on collection of goods by the customer from its depots.
Following an internal review, a new online sales system was developed called 'Pick and
Collect'. The system allows trade customers to order goods online and collect directly from
the depot. To service this system, 10 new depots were opened on 1 July 20X4 in various
locations in the UK. Revenue from these sales is recognised when the order is placed online by
the customer and sales are made at a standard discount of 10% off list price and 60-day credit
terms. An analysis of revenue is as follows:
Year ended 30 September 20X4 20X3
£'000 £'000
Trade counter sales
sales 804,550
804,550 737,334
737,334
'Pick and Collect' sales 54,560 –
Total trade discounts (242,110) (184,334)
Revenue after trade discounts 617,000 553,000
The 'Pick and Collect' sales have created problems with credit co
control
ntrol as existing customers
continue to take 60 days' credit from when they collect their goods, which can be up to
two weeks after placing the order online. Receivables from 'Pick and Collect' customers were
£39 million at the year end, which included £10 million for goods sold and not collected.
(3) Decrease in operating profit margin from 9.5% (20X3) to 6.7% (20X4)
BathKitz installed automated storage and retrieval equipment in its depots. The equipment, which
is highly specific to BathKitz's business, was acquired by means of a lease with EG Capital. The
lease, which commenced
commenced on 1 July 20X4, has an implicit annual interest rate of 7%, and BathKitz is
required to make four annual payments of £4.7 million payable in arrears. The equipment could
have been purchased for a cash price of £16 million. A rental expense of £1.2 million, for the three
months to 30
equipment hasSeptember
a useful life20X4,
of sixhas been
years included
with in operating
a zero residual value.expenses and in provisions. The
cookies to (4)
enableNew depot site
essential leases
functionality, as BathKitz
well as marketing,
rents its 10 new depots from a property company called HYH on four-year operating
personalization,leases
and analytics. You
which commenced on 1 July 20X4. The total annual rentals have been agreed at £10 million.
may change your settings as
However, at an
anyincentive
time to sign the lease, HYH gave BathKitz an initial rent-free period of six
months, which means that BathKitz will pay £35 million in total. As the rent payment had not been
paid at the year-end, no charge has been made in the statement of profit or loss.
(5) Increase in long-term borrowings
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To finance expansion, on 1 October 20X3 BathKitz raised £20 million by issuing, at par, 5% three-
Marketing
year convertible bonds. The issue proceeds
proceeds of £20 million
million have been credited to long-term
long-term
borrowings. The coupon interest has been paid to the bond holders on 30 September 20X4 and
Personalization
has been recognised in finance costs for the year. The annual market rate of interest for a similar
Analyticsbond with a three-year term, but no conversion rights, is 7%.
At the choice

choice of the holders,
holders, the bonds can be either redeemed
redeemed at par on 30 September
September 20X6 oror
Save Accept
converted All
into ordinary shares in BathKitz at the rate of one ordinary share for every £10 bond
held.

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Marketing
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Bank
Audit and integrated questions
20 Dormro
You are Bernie Eters, an audit assistant manager working for FG, ICAEW Charte
Chartered
red Accountants. The
audit engagement manager in charge of the Dormro Ltd and Dormro group audit gives you the
following briefing:
"This audit is turning into a nightmare and I need your assistance today. The Dormro finance director
has just informed me that Dormro acquired an investment in Klip Inc., an overseas company resident in
Harwan, on 31 January 20X2, which is not included in the consolidation schedules. Klip is audited by a
local Harwanian auditor.
I am also unhappy about the level of detailed testing carried out by our audit senior. I have provided
you with the following relevant work papers:
Exhibit 1 Extract from Dormro audit planning memorandum.

Exhibit 2 Consolidation schedule, notes and outstanding audit procedures.
Exhibit 3 Information concerning the acquisition of Klip provided by Dormro finance director;
statement of financial position for Klip; and audit clearance from Klip auditors in
Harwan.
I have a meeting with the audit partner tomorrow and I need to inform her of any issues relating to the
group financial statements and to provide a detailed summary of the progress of our work. Please review
all the information provided and prepare a work paper which:
(a) identifies and explains
explains any known
known and potential issues which you believe may give rise to material
audit adjustments or significant audit risks in the group financial statements; and
(b) outlines, for each issue, the additional audit procedures,
procedures, if any, required to enable us to sign our
audit opinion on the group financial statements.
Also, please include in your work paper a revised consolidated statement of financial position as at
30 April 20X2, which includes the overseas
ov erseas subsidiary, Klip."
Requirement
Prepare the work paper requested by the audit engagement manager. Total: 40 marks
Exhibit 1: Extract from Dormro audit planning memorandum for year ended 30 April 20X2
Group planning materiality has been set at £250,000.

This website storeshas
Dormro data such
two as
wholly-owned UK subsidiaries; Secure Ltd and CAM Ltd.
Secure
functionality, wasasset
as well up several years ago and supplies security surveillance systems.
marketing,
personalization,
CAM is and analytics.supplier
a specialist You of security cameras and was acquired by Dormro on 31 October 20X1. CAM
may change is ayour settings
growing at anywith
business timeprofitable public sector contracts.
The UK companies have a 30 April year end and FG audits all the UK companies.
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Marketing
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Audit and integrated
integrated questions 47

Exhibit 2: Dormro: consolidation schedules for the year ended 30 April 20X2
Statement of financial position
Dormro Secure CAM Adjustments Notes Group
ASSETS £'000 £'000 £'000 £'000 £'000
Non-current assets
Property, plant and equipment 45 2,181 788 3,014
Goodwill – – – 9,490 1 6,251
(3,239) 2
Investments 10,180 – 15 (10,010) 1 185
Current assets
assets
Inventories – 3,380 2,947 6,327
Trade receivables 4,292 4,849 9,141
Intercompany receivables 2,045 – 1,474 (3,519) 3 –
Cash and cash equivalents 567 (706))
(706 382 243
Total assets 12,837 9,147 10,455 (7,278) 25,161
Equity
Share capital 200 10 510 (520) 1 200
Retained earnings at 1 May 20X1 4,523 973 1,758 (1,758) 2 5,496
Profit/(loss) for the year 54 (867) 2,962 (100) 3 568

(1,481) 2
Long-term borrowings 8,000 – – 4 8,000
Current liabilities
liabilities
Trade and
other payables 37 5,702 4,513 10,252
Intercompany payables – 3,329 90 (3,419) 3 –
Current tax payable 23 – 622 645
Total equity and liabilities 12,837 9,147 10,455 (7,278) 25,161

Statement of profit or loss
Revenue 767 23,407 28,097 (14,049) 2 37,455
(767) 3
Cost of sales – (19,703) (19,455) 9,727 2 (29,431)

767 3
Administrative expenses (740) (4,532) (4,688) (100) 3 (6,949)
2,344 2
Finance income/(cost) 50 (39))

(39 31 (15))
(15 2 27
Profit/(loss) before tax 77 (867) 3,985 (2,093) 1,102
Income tax expense as (23) – (1,023) 512 2 (534)
cookies to Profit/(loss)
for the year 54 (867) 2,962 (1,581) 568
Notesand
personalization, on adjustments
analytics. You
may change 1 your settings
This at anyeliminates
adjustment time investments in the subsidiary companies Secure and CAM. The
equivalent adjustment in the prior year was £10,000 and related to the elimination of share capital
in Secure. The increase in the current year is due to the acquisition of CAM for £10 million which I
have agreed to the bank statement. In addition, £170,000 was paid to acquire the shares in Klip
Privacy Policy and there is an investment of £15,000 held by CAM both of which are below the materiality level.
Marketing
2 This adjustment
adjustment removes from the statement of profit or loss half of CAM's results as the subsidiary
was acquired on 31 October 20X1. In addition, all pre-acquisition retained earnings have been
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eliminated and treated as part of the goodwill calculation.
Analytics
3 These adjustments eliminate intragroup balances and management charges from Dormro to its
subsidiaries. Theand
difference of £100,000 between the receivables and payables has been written off
Save to profitAccept
or loss All is concerning a dispute between Secure and CAM.

4 This loan was taken out by Dormro on 1 May 20X1. I have agreed tthe he balance to the loan
agreement, noting capital repayable over 8 years in equal annual instalments commencing
1 May 20X2 and an effective interest rate of 6.68%. An arrangement fee of £200,000 has been
expensed to profit or loss and interest is payable at 6% annually in arrears. An adjustment is
required to accrue for interest
in terest of £480,000.
Outstanding audit procedures
I have reconciled all balances from the consolidation schedules to the audit work papers for each
company, noting no exceptions. The following procedures are outstanding:
outstanding:
Secure
Review of the directors' assessment of the company's ability to continue as a going concern given the
loss for the year, the overdraft balance and the company's reliance on loans from other group
companies.
companies.
CAM
Final conclusion on the adequacy of the inventory obsolescence provision. CAM has applied the group
accounting policy in determining its provision, but this is based on historical sales. Given the technical
issues with the product range, I am concerned that the calculated provision may be understated by
around £220,000.
Audit procedures on the provision for warranty costs of £205,000
£205,000 (20X1: £275,000).
£275,000). Management
Management have
failed to supply any supporting documentation for this provision.
provision.
Secure and CAM
Receipt of bank confirmation letters and confirmation of balances due to other group companies.
Exhibit 3: Information concerning the acquisition of Klip provided by Dormro finance

director
On 31 January 20X2, Dormro paid H$918,000 (£170,000) to acquire 90% of the issued ordinary share
capital of Klip which trades in Harwan where the currency is the Harwan ($H). Klip makes security
cameras and is a supplier company to CAM. There were no adjustments to the fair value of the net
assets acquired except that inventory required a write down of H$1,000,000. None of this inv
inventory
entory
had been sold at the year end.
Dormro measures non-controlling interest using the proportion of net assets method. The rate of
exchange at 30 April 20X2 was H$4.2 = £1 and the average rate for the three months to 30 April 20X2
was H$4.8 = £1.
Klip – Statement of financial position as at 30 April 20X2
H$'000
ASSETS
Non-current assets

equipment 1,940
1,940
This website storesassets
Current data such as
cookies to Inventories
enable essential
site 2,100
Trade receivables 600
Cash and cash equivalents 40

may change yourassets
Total settings at any time 4,680

Equity
Share capital
Privacy Policy 200
Retained earnings at 1 May 20X1 1,200
Profit for the year
Marketing 500
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Long-term borrowings 1,400
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Current liabilities
Trade and other
Save Acceptpayables
payables
All 1,380
1,380

Clearance from Harwanian auditors of Klip
From: Mersander Partners, Harwan
Date: 26 July 20X2
Subject: Audit of Klip for the ye
year
ar ended 30 April 20X2
20X2
To: Finance director, Dormro, United Kingdom
We have performed an audit of the accompanying
accompanying reporting package of Klip for the year ende
ended
d
30 April 20X2 in accordance with Harwanian Standards on Auditing and using materiality specified by
you of £250,000. The reporting package has been prepared in accordance with group accounting
policies as notified by Dormro. Where no group policy has been notified, the reporting package has
been prepared using accounting policies consistent with those adopted in previous years.
The net profit for the year increased by 10% compared to the previous year. This is due to a decrease in
inventory obsolescence provisions when the group accounting policy was applied.
There is no outstanding audit work which would affect our opinion and there are no uncorrected audit
adjustments.
In our opinion, the reporting package of the entity has been prepared in all material respects in
accordance with group accounting policies and presents fairly the results of Klip for the year ended
30 April 20X2 and its financial position as at that date.
Mersander Partners
21 Johnson Telecom
Johnson Telecom plc (Johnson) is a telecommunications consultancy company delivering telecoms
support to businesses across Europe. Johnson's treasury department uses financial instruments for both
speculative and hedging purposes. The company has an accounting year end of 31 December. The
company's financial statements show the following financial instruments:
Extracts from financial statements at 31 December
Draft
20X6 20X7
Financial assets £'000 £'000
Investments in equity 485 321
Derivatives 98 102
Debt investments 143 143
726 566
Financial liabilities
Loan note 2,000 2,000
2,000 2,000
You are Poppy Posgen, a newly qualified audit senior at Beckett & Co, Chartered
Chartered Accountants, and you
This websitearestores
assigned
datatosuch
the statutory
as audit of Johnson for the year ended 31 December 20X7. You have received
cookies to the following
enable email
essential sitefrom your manager, Annette Douglas.
functionality, as :well as marketing,
Date 7 February 20X8
personalization,
From: and analytics.
AnnetteYou Douglas <a.douglas@beckett.co.uk>
may change Toyour
: settings at any
Poppy time <p.posgen@beckett.co.uk>
Posgen <p.posgen@beckett.co.uk>
Subject: settings.
20X7 Financial Statements
Attachments: Market information
information
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Poppy,
Marketing
Following our meeting yesterday, I would like you to review the way Johnson have accounted for a
number of financial instruments. As you know, the Finance Director, who has prepared the supporting
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documentation, is on sick leave at the moment and is not expected to return to work until after the
financial
Analytics statements are published. The Financial Controller
Controller has provided all the information she can
find, but lacks the background knowledge on these financial instruments.
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I have attached below the notes that the audit junior has taken in relation to the financial instruments.
Bear in mind that planning materiality for the financial statements as a whole is £80,000, and we have
set a lower performance materiality level for investments at 20% of planning materiality.
Investments in equity
The £485,000 balance at 31 December 20X6 represents two small investments in UK equity shares.
Johnson has held the investment in Cole for a number of years, and sold it on 14 August 20X7 for
£242,000. The investment in International Energy plc was acquired on 1 November 20X6. Both Cole plc
and International Energy plc are listed companies.
Valuation at Draft at
31 December 31 December
Historical cost 20X6 20X7
£'000 £'000 £'000
Cole plc (50,000 shares) 163 230 –
Routers plc (16,000 shares) – – 93
International Energy plc (30,000 shares) 270 255 228
433 485 321
The investments in both Cole plc and International Energy plc are designated as available for sale. In
previous years, any fair value gains or losses have been taken to the AFS reserve.
A new investment of 16,000
16,000 shares (out of a total of 50,000 share
shares)
s) in Routers plc was made on
8 November 20X7. In the Finance Director's absence, the Financial Controller could not find supporting
documents for the investment.
According to the Financial Times on
on that date, the bid-offer spread was £5.80–£5.83 at acquisition. The
Directors explained to me that this investment is a short-term investment and is held for trading, with
the aim of generating a profit if the price changes. As a result, it was designated as at fair value through
profit or loss.
The journal entries in respect of the disposal of Cole plc and the acquisition of the new investment in
Routers plc are shown in Attachment 2.
Derivatives
The balance comprises two derivatives:
(1) Put option
There is a put option to hedge against a fall in the share price of the 30,000 shares in International
Energy. The put was purchased on 1 January 20X7 at £2 per option and is exercisable at £9.00
until 31 December 20X8.
In the absence of the Finance Director, who prepared the documentation to support this hedge,
the documentation cannot be found. The option is accounted for using hedge accounting.
The Directors are unfamiliar with the hedge accounting rules and have asked us to outline the
hedging
This website stores data principles,
such as and explain how fair value hedge accounting changes the way the investment
cookies to enable and option are
essential siteaccounted for.
functionality, as They
well as marketing,
have also asked us to provide suitable documentation to support the fair value hedge. As the
personalization,original
and analytics. You
documentation has been lost, the Directors have suggested they may backdate the
documentation as 1 January 20X7.
(2) Interest rate swap
The interest rate swap is a five-year variable-to-fixed interest rate swap to hedge the interest rate
Privacy Policy risk of the loan note liability. The swap was entered into on 30 November 20X6. In the financial
statements for the year ended 31 December 20X6, the swap was recorded at a fair value of
Marketing
£38,000. The swap was designated as a hedge at inception and the hedging documentation was w as
reviewed by the audit team as part of last year's statutory audit.
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AnalyticsThe company applies cash flow hedge accounting to this swap. The Finance Director has prepared
a note on the accounting treatment of the interest rate swap (see Attachment 5).
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The terms of the swap:
 £2 million notional amount
 Pay 7% fixed, receive variable at LIBOR
 Semi annual payments
The fair value of the swap at 31 December 20X7, based on current LIBOR rates, is £30,000.
Debt investments
The debt investment is a four-year quoted bond in Spence and May plc acquired on 1 January 20X6 and
classified as held to maturity. Half of the holding was sold on the last day of this year for £83,000.
Terms:
 Acquired at nominal value of £140,000
 Redemption at premium of £10,000 on 31 December 20X9
 Coupon 10% pa, payable six-monthly in arrears (5% per six-month period)
 Effective interest rate is 11.79% per annum (5.73% per six-month period)
Loan note
The loan note was issued at nominal value on 31 December 20X6 and is a five-year note at LIBOR with
semi annual payments. Issue and redemption of the loan is at the nominal value of £2 million. The
variable interest rate payments are hedged by the interest rate swap referred to in the Derivatives
section above.
Actions
I need you to:
(a) evaluate the accounting treatment
treatment adopted in the draft financial statements for the above financial
instruments, showing any journal entries where relevant. Explain any audit adjustments required;
(b) draft a summary
summary of the hedge accounting rules and hedging principles as requested by the
Directors, along with a sample hedging documentation. Explain separately how we should
approach the Directors' proposal to use hedging documentation prepared by us to support the put
option;
(c) identify and explain five key
key risks that arise from the derivatives trading activities,
activities, and the internal
controls that should be in place to mitigate these risks; and
(d) identify and explain
explain any addit
additional
ional audit evidence the audit team will need
need to obtain with regards
to the financial instruments.
Requirement
Prepare a memorandum giving the information required by Annette Douglas. Total: 40 marks
Attachment 1: Market information as at 31 December 20X7
This websiteShare prices
stores data such as
cookies to enable essential site Day's close Mid market Bid Offer
functionality, as well as marketing, £ £ £ £
International
personalization, Energy You
and analytics. plc 7.70 7.62 7.60 7.64
may change Routers plc
your settings at any time 5.84 5.86 5.85 5.88
or accept the
Putdefault
optionsettings.
Fair value of option (per share)
31 December 20X6 £2
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31 December 20X7 £2.40
Attachment 2: Journal entries in respect of investments
Marketing
Cole plc
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£'000 £'000
Analytics
DEBIT Cash 242
CREDIT Investment 230
CREDIT
Save Profit or loss
Accept All 12

Being the disposal of the investment in Cole plc
Routers plc
£'000 £'000
DEBIT Investment 93.28
CREDIT Cash 93.28
Being acquisition of investment in Routers plc
Attachment 3: Bloomberg market data

LIBOR
31 December 20X6 7.0%
30 June 20X7 7.5%
31 December 20X7 7.5%
Attachment 4: Supporting workings for Spence and May bonds
The amortised cost is calculated every 6 months in line with the frequency of the coupon payments.
Opening Interest at Cash flow Closing
Period ended balance 5.73% (5% × 140,000) balance
£ £ £ £
30 June 20X6 140,000 8,022 (7,000) 141,022
31 Dec 20X6 141,022 8,081 (7,000) 142,103
30 June 20X7 142,103 8,143 (7,000) 143,246
31 Dec 20X7 143,246 8,208 (7,000) 144,454
Journal entries in respect of the bonds
£'000 £'000
DEBIT Debt investment 1.2
DEBIT Cash 7.0
CREDIT Interest income 8.2
Being re-measurement of amortised cost at 31 December 20X7
 De-recognise 50% of the amortised cost of the investment holding.
 Resulting gain of £10,773 (83,000 – (144,454/2) is recognised in profit or loss.
£'000 £'000
DEBIT Cash 83
CREDIT Debt investment 83
Being year-end disposal of 50% of holding
Attachment 5: Accounting note on the loan and interest rate swap
Loan note and interest rate swap
 The interest rate swap (IRS) provides a cash flow hedge against the interest payments on the the loan
note.
Hedge
cookies to enable accounting
essential site is permitted as:
functionality, as –well as
themarketing,
hedge is a perfect hedge as all terms match (currency, maturity, nominal amount)
personalization,–and documentation
analytics. You has been in place since inception
 The amortised
or accept the default settings. cost of the loan will remain at £2
£2 million as the loan issue and redemption
redemption are both
at par.
 The entries through the year are as follows:
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– The £150,000
£150,000 variable rate interest for 12 months to 31 Dec 20X7
20X7 is charged to profit or loss
Marketing and accrued until payment is made (£2m × 7.5%).
– The net settlement on the interest rate swap is £10,000 ((7.5% – 7%) × £2m). This is received
Personalization
from the swap bank as a cash settlement
settlement and reduces the £150
£150,000
,000 variable rate interest
Analytics expense on the loan note
no te to £140,000, being the fixed rate cost.
Save – Accept
The £8,000All
£8,000
equity).
change in the fair value of the swap is released
released from equity
equity (other components
components of
This represents the settlement of £10,000 less the unwinding of the discounting in
the future swap settlements.

£'000 £'000
DEBIT Profit or loss – Interest expense 150
CREDIT Interest accrual 150
DEBIT Interest accrual 150

CREDIT Cash 150
DEBIT Cash 10
CREDIT Profit or loss – Interest expense 10
DEBIT Equity 8
CREDIT Derivative asset 8
22 Biltmore
The Biltmore group, a property business which came into being on 1 January 20X8, owns a number of
investment properties. The parent company, Biltmore plc, and the other members of the group, had no
connection before that date.
The directors of Biltmore plc have a reputation for adopting aggressive accounting practices. At the
audit planning meeting, the need for professional scepticism was highlighted. Materiality for the
financial statements as a whole is set at 1%
1% of the group's total assets. Total group assets at the year
year end
are £2,423 million.
You are Jane Smith, a senior in James
James & Co, an accounting firm. David Williams, the audit partner, has
sent you the following email.
To: Jane Smith

From: David Williams, Audit Partner
Date: 5 February 20X9
Subject: Investment properties
properties owned by Biltmore
Biltmore group
Following our earlier discussion, I would like you to prepare a report on the investment properties
owned by the various members of the Biltmore Group at 31 December 20X8. Details of the investments
are in an Appendix. As you know, this is a complex area of the audit. The valuation of investment
properties was identified as an area where there is a particular risk of material misstatement.
All the detailed audit fieldwork has been completed, but the financial statements have yet to be finalised
and agreed by the board of directors, and the auditor's report is still under consideration.
One thing I'm particularly concerned about is the misclassification of assets. As we have seen throughout
this audit, the directors are very reluctant to make adjustments to reclassify such assets, arguing that
'you'd end up with the same total assets figure anyway'.
Your report should cover the following:
(a) The appropriate treatment of each investment property in the consolidated financial statements of
the Biltmore as as at 31 December 20X8, with justifications in each case.
Group
(b)as Awell
functionality, calculation of the adjustments that would have to be made
as marketing, made to the figures in the draft financial
personalization,statements in order
and analytics. You to show the corrected figures relating to investment properties in the
may change your consolidated financial
settings at any time statements.
or accept the
(c) default settings.
A summary and explanation of the impact on our auditor's report if the directors refuse to put
through the reclassification adjustments, setting out the reasons for your conclusion.
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Marketing
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Analytics
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Appendix: Details of Biltmore investments
The draft financial statements are as follows:
Summarised statements of comprehensive income for the year ended 31 December 20X8
Biltmore plc Subone plc Subtoo plc
£m £m £m
Revenues
Rental income 500 – 300
Gains on investment properties 100 80 50
Operating costs

Depreciation of property (2) – (1)
Administration (12) (8) (9)
Finance costs (140) (50) (25)
Net profit 446 22 315
Summarised statements of financial position as at 31 December 20X8

Biltmore plc Subone plc Subtoo plc
£m £m £m
Property, plant and equipment (excluding investment
properties) 38 – 19
Investment properties 1,000 850 510
Investments 2,000 – –
3,038 850 529
Current assets 3 2 1
3,041
3,041 852
852 530
530
Equity 1,539 351 279
Non-current liabilities 1,500 500 250

Current liabilities 2 1 1
3,041 852 530
All of the property, plant and equipment is in the form of land and buildings. All of these were
professionally revalued as at the date of Biltmore plc's investment in the group members.
Biltmore plc owns 100% of the share capital of Subone plc and 80% of Subtoo plc.
All companies show all of their investment properties at fair value, unless otherwise stated.
All properties have an estimated useful life of 20 years.
The following information relates to the properties classed as investment properties in the draft
statement of financial position of the group members:

This website stores data such as Present
cookies to enable essential site carrying
Biltmore
functionality, as well plc
as marketing, amount
personalization, and analytics. You £m
or accept the default Tower
Harmony settings.
3 – a medium-sized office block in London's Docklands
This property was purchased ini n February 20X8 for £200 million. The directors have decided
to leave this property valued at cost because they do not believe that they can measure its
Privacy Policy
fair value reliably.
Marketing
Harmony Tower 3 is flanked by two identical buildings, neither of which is owned by any
member of the Biltmore Group. The owner of neighbouring Harmony Tower 2 sold the
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property on the open market in December 20X8 for £150 million. The owner of Harmony
Analytics
Tower 1 has put the property on the market for £160 million. 200
Save Accept All


Present
carrying
Biltmore plc
amount
£m
Grove Place – an office block in Birmingham City Centre
This property had a fair value of £220 million on 1 January 20X8. During the year Biltmore
plc spent £30 million on a major programme of improvement and refurbishment and
capitalised these costs.
The latest valuation report, dated December 20X8, suggests that the property's fair value
remains at £220 million. 250
Head office – upper floors
Biltmore plc's head office is a 12-floor office block. The company occupies the bottom four
floors and has left the top eight floors vacant. The directors claim that they intend to hold
these vacant floors for their 'investment potential' and are not actively seeking a tenant or
buyer. An architect's report on the building states that it would be difficult to remodel the
building so as to let or sell the upper floors to a third party.
The upper floors are recognised in the financial statements at £100 million.
The fair value attributed to the upper floors on 1 January 20X8 was £80 million. 100
Northwest Forward – a mixed retail and office complex in Lancaster
This complex had a fair value of £240 million on 1 January 20X8.
Biltmore plc rents out 99% of the floor space in this development, but occupies a small
suite of management offices on the site. The complex cannot be sold separately. 300
Buy-to-let portfolio – Teesside
Biltmore plc owns a large number of flats and houses in the Northeast of England. These
had a fair value of £150 million as at 1 January 20X8.
There was a downturn in house market prices in that region at the end of January 20X9.
The portfolio's value was estimated at £120 million at that time. 150
Essex Mall
Subone plc's principal asset is the site of Essex Mall, which is presently under construction.
This will be a major shopping development and all of the units in the mall are under
contract to retail chains, with leases commencing from the estimated completion date of
1 September 20X9. Subone plc intends to sell the development once it is completed.
The cost of the site and building work as at 1 January 20X8 was £600 million. A further
£170 million was spent on the work done during the year ended 31 December 20X8.
cookies to The
enable essential
directors site
of Subone plc believe that the property has a fair value of £850 million in its
present
functionality, state.
as well as marketing, 850
Subone plc's head office
Subone plcsettings.
occupies a prestigious London office block which is leased from Subtoo plc on
a 20-year lease.
The property had a fair value of £120 million on 1 January 20X8. 150
Privacy Policy
Coventry building
Marketing
Subtoo plc owns a building in Coventry.
Personalization
Subtoo plc commenced development of the Coventry building in March 20X8 with a view
Analytics
to resale. At that time its fair value was £345 million. The property remains on the market
as at the present date. There have been several expressions of interest, but no formal offers. 360
Save Accept All
Requirement
Prepare the report required by the audit partner. Total: 40 marks

23 Button Bathrooms
Button Bathrooms Ltd (BB) is a retailer of bathroom fittings and accessories.
a ccessories. You are a senior in Rudd &
Radcliffe LLP, the auditors of BB.
The meeting
You have been called to a meeting with
with the engagement partner, C
Carol
arol Ying, in respect of the audit of
BB's financial statements for the year ended 30 June 20X1. Carol opened the meeting.
"I would like you to act as senior on the BB audit. In the past year there have been some significant
changesthere
believe in BB's businesscontrol
is greater modelrisk
andthan
in itsinaccounting and internal
previous years. control
In addition, the systems.
companyAsis aseeking
consequence,
an AIM I
listing in 20X2 and the board is very keen to present the company's performance as favourably as
possible.
I realise that you are new to this client, so I have provided some background notes about the company
and the changes that have occurred this year ( Exhibit 1). Especially note BB's new, and very successful,
e-commerce activity and the defined benefit
benefit pension scheme. I have also provided you with the draft
accounts (Exhibit 2).
management accounts (
I have some particular concerns about the revenue recognition procedures that BB has adopted since
installing its new information systems. An audit junior has provided
pro vided some notes from a preliminary audit
visit (Exhibit 3), but he did not have time to follow up on these matters.
I am due to meet the finance director of BB next week and I would like you to provide briefing notes for
me which:
(a) With respect to each of the m
matters
atters raised
raised by the audit junior (Exhibit 3):
(1) Explain the financial reporting issues that arise and show any adjustments that will be required
to the draft management accounts.
(2) Describe the key audit risks and the related audit procedures that we should carry out.
(b) Other than the issues raised by the audit junior, set out the audit risks
risks which arise in respect of the
new e-commerce activities of BB, including those relating to SupportTech, and explain how we
should address these in our audit procedures.
(c) Outline the audit issues we will need to
to consider regarding the outsourcing of the payables ledger
function. Details are provided below. You do not need to refer
refer to any general issues relating to
SupportTech that you have already referred to in (b).
This morning I received an email from the finance director of BB ( Exhibit 4) relating to a cyber-security
breach at SupportTech. Fortunately as the breach occurred two days ago it does not have any direct
impact on the current year's audit. However, I do need to respond to his email and therefore I would
like your briefing notes to include a summary of points that can form the basis of my response.
Please ignore any tax issues."
cookies to Requirement
Respond
personalization, andtoanalytics.
the instructions
You of Carol Ying. Total: 40 marks
Exhibit at any time
1: Background details and recent changes
History
BB was established 23 years ago as an upmarket retailer of bathroom fittings and accessories. By 20W9
Privacy Policy it was operating
(two years ago) it was operatin g from 30 showrooms. Of these, 20 large showrooms sold BB's full
product range and it offered
o ffered a service to design, supply and install bathrooms in customers' houses.
Marketing sold included baths, showers, toilets, taps, washbasins and bathroom accessories. The other 10
Products sold included
smaller showrooms sold only bathroom
Personalization ba throom accessories, a distinctive BB product range including towels,
bathrobes, lighting and decorative items.
Analytics
Save Accept All


Competition and reorganisation
By 20W9 competition from comparable retailers, combined with the recession, forced
fo rced BB to reconsider
its business model. The board believed that the company's overheads were too high. As a consequence,
between 1 July 20X0 and 31 December 20X0,
20X0, BB closed the 10 smaller showrooms and ceased selling its
bathroom accessories range from the other 20 showrooms.
New e-commerce activity
BB decided to adopt an e-commerce business model for sales of all products
produ cts in its range, including
bathroom accessories, and it commenced the development of a website on 1 July 20X0. The website was
completed and ready for use by 31 December 20X0.
20X0. It enables customers to design their own ba bathrooms
throoms
online, select the required products and pay in advance, also online. The total cost
total cost of website
development in the year ended 30 June 20X1 was £1 million.
millio n. This was capitalised and is to be written off
over five years.
After initial development, the operation of the website, including collection of payments from customers,
was outsourced to an external service provider, SupportTech plc. BB receives the cash from SupportTech
each month after deduction of a service charge fee.
The selling prices of products have been reduced by approximately 10% for online sales, compared with
the showroom prices.
Inventories of a wide range of products were previously stored in four regional warehouses. Customer
orders for less popular items, not in inventory, needed to be ordered by BB, which sometimes caused
delays of up to four weeks. From 1 January 20X1 the range and the value of inventories held were
significantly reduced.
Goods sold via the website are all ordered
o rdered from the manufacturer automatically after the information is
input by the customer. Distribution of goods to the customer is outsourced
ou tsourced by BB to a third party courier.
Costs of reorganisation,
reorganisation , including redundancies (but excluding website development ccosts),
osts), in the year
to 30 June 20X1 amounted to £1.5 million. Further costs of £1 mill
million
ion are to be paid in August 20X1 as
a result of the reorganisation.
There have been problems with the new business model including high returns of goods from customers
compared with those sold through showrooms. There have also been errors in goods delivered arising
from customers' misunderstanding of the website.
Outsourcing of payables ledger function
Last year's audit identified a number of control issues with respect to payables and in the first half of this
year staff turnover in this department was high. Following the success of the outsourcing of online sales
to SupportTech management decided to outsource the payables ledger function too. Staff were told of
the decision including details of redundancies on 1 April 20X1. SupportTech took over responsibility for
the payables ledger from 1 May 20X1. Details of the way in which the system works are as follows:

Purchase orders are raised by BB BB and a delivery
delivery note is signed on receipt
receipt of the goods.
 SupportTech is sent soft copies of the purchase orders and the signed delivery notes.
functionality,
 as SupportTech
well as marketing,
receives invoices from suppliers directly and matches them to the purchase order and
personalization,delivery
and analytics.
note. You
 The Finance Director of BB receives a schedule
schedule detailing all the payments to be made for a given
month one week before SupportTech processes the payments. This must be authorised by the
Finance Director before the payments are processed.
Privacy Policy
 A portal has been set up which allows the Finance Director to interrogate purchase ledger accounts
held by SupportTech. The system does not allow the Finance Director to update or revise the
Marketing
accounts.
Personalization
Analytics
Save Accept All


Exhibit 2: Draft management accounts: Statement of profit or loss and other comprehensive
income
Years to 30 June 20X1 20X0
£'000 £'000
Revenue
Showrooms 30,000 60,000
Online sales 33,000 –
Cost of sales (49,000) (42,000)
Less
Administration expenses
expenses (5,000)
(5,000) (5,000)
(5,000)
Distribution costs (5,000) (6,000)
Marketing costs for website (1,000) –
Website development cost – amortisation
amortisation (100) –
Reorganisation costs (1,500) –
SupportTech fees (1,800) –
Premises costs (2,500) (3,000)
Pension contributions (192) –
Profit on sale of eight small showrooms 4,000 –
Profit 908 4,000
All products sold from showrooms make a gross margin of 30% on selling price.
Exhibit 3: Notes on matters arising during interim audit – A. Junior
(1) Customers ordering online pay in full at the time of orde
ordering.
ring. BB recognises revenue when the cash
cash
is received from SupportTech. I am concerned about revenue recognition and in particular cut-off,
but I did not have a chance to look at this more closely.
(2) A New Year promotion was held for showroom sales on 1 January 20X1. Any customers placing an
order for a complete bathroom suite were given two years' interest free credit provided a 10%
deposit was paid. Delivery of the suites was guaranteed by the end of March 20X1. The promotion
was very successful and the total value of sales made to customers under this offer was £520,000. I
have confirmed that this amount has been recorded in sales and have traced a number of orders
through the sales system as part of my sales testing work. No cut-off issues were identified. I was
told by the Finance Director that BB's own incremental borrowing rate is 7% but that of its
customers is 10% but I don't understand the relevance of this information.
(3) The ten small showrooms were closed down between 1 July 20X0 and 31 December 20X0.
However, two of these (Bradford and Leeds) were still not sold by 30 JuneJu ne 20X1. These two
showrooms are disclosed in the BB statement of financial position as property, plant and equipment
at their carrying amounts of £1 million each. The Leeds site was acquired by BB fairly recently and is
stated at cost less depreciation. The Bradford site was revalued on 30 June 20X0 from its carrying
amount of £700,000 to £1 million.
millio n. The original cost of the Bradford site was £900,000.
A contract was agreed in June
June 20X1 for the sale of the Bradford showroom for £1.15 million, with
the sale
This website stores datatosuch
be completed
as in September 20X1. The Leeds showroom is being advertised, but there is
currently
cookies to enable essentialno site
buyer identified.
functionality,
(4)as Iwell
am as marketing,
unclear about what audit procedures
procedures should be carried out w
with
ith respect to the
the website
personalization,development
and analytics.costs
You and how these should be treated in the financial statements.
may change (5)your settings
Button at any time
Bathrooms started a defined benefit pension scheme on 1 July
July 20X0. I have obtained the
following information at 30 June 20X1:
£'000
Present value of obligation 249.6
Privacy Policy Fair value of plan assets 240
Current service cost for the year 211.2
Marketing
Contributions paid 192
Interest cost on obligation for the year
Personalization 38.4
Interest on plan assets for the year 19.2
Analytics
The only entry which has been made in respect of this is the recognition of the contributions paid
Save as
these AcceptinAll
an expense
payments the
to statement
the of and
cash book profit or loss
bank and other
statement. comprehensive
However, I am notincome. I havethe
sure whether agreed
other
information is relevant and whether I should have performed any other audit procedures.

Exhibit 4: Email from finance director of BB
Date: 15 July 20X1
From: Andrew Brown <a.brown@buttonbathrooms.com>
To: Carol Ying <c.ying@ruddandradcliffe.com>
Subject: Cyber-attack at SupportTech plc
I have just been informed by our account manager at SupportTech, to whom we outsource the
operation of our website and our payables ledger function, that the company experienced a significant
cyber attack two days ago which successfully breached its security systems. I have been assured that the
situation has been resolved however I am not clear what the potential consequences of this for us could
be and was hoping you could advise. Surely as it is SupportTech's system that has been attacked there
can be no direct consequences for us? If there are, what measures could we take to prevent this
situation arising with other suppliers?
24 Hillhire
You are an audit senior with Barber and Kennedy,
Kennedy, a firm of ICAEW Chartered Acc
Accountants.
ountants. Peter
Lanning, one of the firm's audit managers, has just been assigned to the audit of Hillhire plc after the
previous audit manager was signed off sick. Peter has given you some notes made by the previous
manager at the initial audit planning meeting (Exhibit 2), along with some other information, and he
has given you the following instructions:
"I would like you to assist me in the audit planning and first I would like you to prepare a memorandum
which identifies the key audit risks relating to Hillhire's financial statements some extracts from the
20X8 (Exhibit 1) for the year ended 31 March 20X8. You should also
financial statements for 20X7 and 20X8
outline the main

appropriate, stateaudit procedures
(Exhibit that wefinancial
3) the correct should carry out intreatment
reporting respect ofincluding
these matters and,
journals forwhere
any
potential adjustments that you identify at this stage.
It appears that major issues to consider include a discontinued activity, the acquisition of Loucamion SA,
the company's recent use of financial instruments for hedging purposes and the proposal to introduce a
major new system.
In addition, the company has granted share options to senior employees as an incentive. These have not
been accounted for in the current financial statements.
The financial controller has argued that the share options granted are not an expense and therefore they
have not been reflected in the financial statements. He is saying that even if they were to be accounted
for as an expense, they do not yet vest as the vesting period is three years.
You are given relevant information in Exhibit 4.
You should review all of the information to hand and identify any required adjustments
adjustments and any other
considerations associated with the audit in terms of audit risk, ethics and our own practice
management,
This website that should
stores data such as be addressed before commencing the detailed audit work."
cookies to Requirement
enable essential
site
Draft the
personalization, andmemorandum
analytics. You requested by the audit manager. Total: 40 marks
Privacy Policy
Marketing
Personalization
Analytics
Save Accept All


Exhibit 1: Extracts from draft financial statements
Statement of profit or loss and other comprehensive income for the year ended 31 March
20X8 Draft 20X7 Audited
£'000 £'000 £'000 £'000
Revenue 283,670 257,850

Cost of sales (187,220) (167,900)
Administrative expenses (excluding amortisation) (35,020) (34,610)
Amortisation (1,960))
(1,960 (970)

Total administrative expenses (36,980) (35,580)
Finance costs (17,750) (15,910)
Taxation (10,090) (9,270)
Profit for the year from continuing operations 31,630 29,190
Loss for the year from discontinued operations (4,390) –

Statement of financial position at 31 March

20X8 Draft 20X7 Audited
£'000 £'000 £'000 £'000
ASSETS
Non-current assets
Goodwill 12,000 5,000
Other intangible assets 40,680 28,740
28,740
Financial non-current assets 10,260 6,130
515,070 474,380
Current assets
Inventories 4,280 3,820
Receivables 86,430 78,160
Cash and cash equivalents 19,540 15,910
110,250 97,890
Non-current assets held for sale 40,130 –
Total assets 665,450 572,270

Equity
Share capital 10,900 10,900
Share premium 63,250 63,250
This websiteRevaluation surplus

stores data
Reserves such as 30,900
30,900
105,330 30,900
30,900
85,030

cookies to enable essential site 210,380 190,080
Long term borrowings You 382,340 313,100
Deferred at any time
tax liabilities 22,290 19,740
Current liabilities
Bank overdraft 11,160 10,270
Trade and other payables
Privacy Policy 32,810 33,950
Tax liabilities 6,470 5,130
Marketing 50,440 49,350
Personalization
Exhibit 2: Notes taken by previous audit manager at planning meeting
Analytics
Hillhire plc is a long-established company that has grown rapidly, both organically and by acquisition
Save
over the last Accept AllIt hires out commercial vehicles using a large network of depots throughout the
10 years.
United Kingdom and also in Europe through a number of wholly owned subsidiaries.

The company's management has announced that 15 of its less profitable depots are to be sold off. Each
depot is viewed as a cash generating unit in its own right. The depots that are for sale are clustered in
Scotland and the decision to sell them is part of a strategic decision to withdraw from this area. The
results of these depots have been disclosed separately as discontinued operations in the draft statement
of profit or loss and other comprehensive income. The announcement was made on 1 January 20X8 and
management's intentions were minuted in the board minutes. Marketing of the depot is not due to start
until May or June 20X8 as Hillhire is yet to find alternative storage for the vehicles currently stored in
these depots which it is intending to relocate to other parts of the business. At 1 January the carrying
value of the depots was £44.52 million. They have been classified as held for sale at a fair value less costs
to sell of £40.13 million. At 1 January the depots had a remaining useful life of 25 years. The loss on the
discontinued operations of £4.39 million is only the loss on the classification of the depots to assets held
for sale.
On 1 April 20X7 Hillhire acquired 100% of the share capital of a competitor company, Loucamion SA,
based in France. The functional currency of Loucamion is the euro. The main reason for the acquisition
was the perceived value of the customer relationships built up by Loucamion in its local market. Assets
and liabilities recognised at the date of acquisition included £4 million in respect of customer lists.
Confidentiality agreements prohibit Loucamion from selling or exchanging information about its
customers on the list. At 1 April 20X7 the useful life of the list was estimated to be 10 years and the
intangible asset has been amortised on this basis.
A loan note was issued at nominal value on 1 April 20X720X7 and is included in the statement of financial
position. It is a five year note at LIBOR plus 2%. Issue and redemption of the loan is at nominal value of
£200 million. The variable interest rate payments are hedged by an interest rate swap (see below).
The company has entered into a five year interest rate swap on 1 April 20X7 for a notional amount of
£200 million to hedge the interest rate risk of the loan note liability. A swap agreement has been signed
whereby Hillhire plc will pay a fixed rate of 8% to a counterparty on this amount and the counterparty
will pay LIBOR plus 2% to Hillhire plc. Payments are semi-annual. This swap was designated as a cash
flow hedge on 1 May 20X7 and the directors of Hillhire plc believe that it is effective as such. No
adjustment has been made for interest for the six months to 31 March 20X8, and no entries have yet
been made for the change in fair value.
LIBOR rates are as follows:
1 April 20X7 7%
30 September 20X7 7.5%
31 March 20X8 7.5%
Exhibit 3: Email from Alison Ritchie, partner responsible for Technology Risk Services in
Barber and Kennedy
Date: 10 April 20X8
From: Alison Ritchie <a.ritchie@barberkennedy.
<a.ritchie@barberkennedy.com>
com>
To: Peter Lanning <p.lanning@barberkennedy.com
<p.lanning@barberkennedy.com> >
Subject
This website stores: dataHillhire
such as
cookies to Ienable essential
understand thatsite
you are now managing the audit of Hillhire plc. You should be aware that my team
functionality,
hasasbeen
well approached
as marketing, to tender for a one-off assurance assignment for this client. This would involve a
review of risks and advice on controls in Hillhire's new online booking system, which has been piloted in
may change 20your settings
of their at any since
UK depots time 2 January 20X8, prior to a planned national launch later in the year.
At present, each depot operates its own bookings. Customers who wish to hire a vehicle must contact
the nearest depot directly and make a booking by telephone. Transactions are logged on a networked
PC system that operates independently within each branch. Every evening, this information is uploaded
Privacy Policy
to the head office's computer system. Head office then processes credit card payments due from
personal customers and invoices business customers using information supplied by the depots.
Marketing
The new system provides a centralised booking system via the company's website. Customers can make
Personalization
a booking online rather than by telephone. If the vehicle type required by the customer is unavailable at
Analytics
that depot, the system can arrange to have a vehicle transferred from another depot provided the
distance is not too great. All transactions are processed by the new system immediately, thereby
Save
accelerating Accept Allprocess.
the billing

Now that the system has been piloted, it will be extended to all depots. This will require a central
register to be compiled for all vehicles held at every branch. The standing data for business customers
will also have to be transferred to the new system.
It would be useful to discuss this at the earliest opportunity.
Exhibit 4: Details of share option scheme
On 1 April 20X7, 100 share options have been granted to each o
off the top senior 50 employees.
The options vest after three years on condition that the employees remain in the employment of
Hillhire; the directors believe that 10% of senior employees will leave during the three-year period. The
scheme is not expected to be available
av ailable to new employees.
Employing a binomial lattice model gives a fair value for the option on grant date of £10 and a value of
£8 at the year-end.
25 Hopper Wholesale
You are an audit senior in a firm of ICAEW Chartered
Chartered Accountants. You receive the following voicemail
message from one of the audit managers in your office.
"I need some help urgently with one of our clients, Hopper Wholesale Ltd. Hopper is an unquoted
company that supplies retailers with basic goods such as sugar, salt and similar items. It buys goods in
bulk and packages them in its own factory using simple packets bearing the 'Hopper Value' label. Draft
financial statements show revenue of £21.4 million, profit before tax of £2.75 million and total assets of
£65 million.
Callum
meetingthe
forsenior on the audit
the reporting is unwell
period and is likely
to 31 December to be
20X8 is off for the rest
scheduled of the
for the dayweek. The final audit
after tomorrow. I have
reviewed the audit file and have identified a number of areas where audit procedures are incomplete. I
will email you a summary of these including some background information ( Exhibit 1). I have spoken to
the junior staff on the audit and they have confirmed that these are areas where they have little
experience and require some guidance. I would like you to prepare a summary of audit procedures for
each of the outstanding matters. I would also like you to explain the key audit issues which need to be
addressed in each case – this will help the juniors to gain a better understanding of their work.
One more point. The directors of Hopper Wholesale Ltd are interested in sustainability reporting and are
proposing to include social and environmental information in their financial statements. They would like
us to clarify whether they are required to publish this information. Please outline the current situation so
that I can pass on the information to them. If they do include social and environmental information they
would like us to produce a verification report. I will email you a copy of the statements they are
planning to make (Exhibit 2). We have not been involved in this type of work before so I would like you
to outline the evidence which we should be able to obtain in order to verify these statements and any
difficulties we may experience in validating the information. You should also indicate any professional
This website stores
issues thatdata
we such
need as
to consider if we accept this work.
cookies to Thanks
enable essential site on this."
for your help
Requirement
Respond to the at anymanager's
audit time voicemail. Total: 40 marks
Exhibit 1: Hopper Wholesale Ltd – Audit – 31 December 20X8
Manager's review notes: Summary of outstanding matters
Privacy Policy
(a) Inventory
MarketingIn September 20X8 the company took delivery of 30,000 tonnes of flour from a former
f ormer competitor
who was going out of business. Normally Hopper would not carry this level of inventory of an
Personalization
individual line, representing a nine-month supply at normal rates of consumption; however, the
Analyticscompetitor was selling at a 10% discount to open market prices. Hopper paid £4.5 million for the
flour. At the time sales budgets suggested
suggested that 10,000 tonnes would be sold at a profit by
Save 31 sold Accept20X8,
December All which has proved to be the case and that the remaining 20,000 tonnes would
be steadily throughout the first half of 20X9.

The directors were concerned that the market price for flour can be volatile and so they took steps
to protect the company by entering into an agreement with a third party, Sweetcall, a food
manufacturer, under which Hopper has the right to sell 20,000 tonnes at the end of June 20X9 at
an agreed price of £140 per tonne. Hopper paid £250,000 for this option and this amount is
recognised in the statement of financial position within sundry receivables. If the price of flour falls
then the company will be able to retain their competitive advantage by selling the bulk
consignment to Sweetcall and replacing their own inventory with purchases on the open market.
The price of flour at 31 December had fallen to substantially less than £140 per tonne and
Sweetcall has offered £400,000 to Hopper to cancel the option.
Audit procedures completed
The quantity of flour inventory has been established by attendance at the inventory count.
Inventory has been valued at the lower of cost and net realisable value. Satisfactory audit
procedures have been carried out in this respect.
(b) Financial assets
The company has made a number of investments in shares in listed companies. These have been
recognised in non-current assets at £3.25 million. They have been classified as at 'fair value through
profit or loss' and are disclosed in a note to the financial statements as 'held for trading'. A gain has
been recognised in profit or loss of £515,000 in respect of these investments.
The only audit procedure performed is reperformance of the calculation of the gain recognised in
profit or loss.
(c) Receivable
The statement of financial position shows a receivable balance of £50,000. This amount is owed to
Hopper Wholesale Ltd by Bourne Ltd, a company which is controlled by Hopper's managing
director, Jack Maddison. We have been told that it is due to be repaid within the next 12 months.
No information about this transaction is provided in the notes to the financial statements.
A written representation has been obtained confirming
confirming the amount and that the company is
controlled by Jack Maddison.
(d) Share option scheme

On 1 January 20X8, Hopper Wholesale Ltd gave 100 employees 500 share options each which vest
on 31 December 20X9. The options are dependent on the employees working for the entity until
the vesting date. During 20X8, five employees left and Hopper Wholesale Ltd anticipates that in
total 10% of the current employees will leave over the two-year period, including the five
employees who left during 20X8. The fair value of the options has been estimated as follows:
1 January 20X8as £12
cookies to enable 31essential
December site
20X8 £14
functionality, as 31
wellDecember
as marketing,
20X9 £15
The share options have been recorded in the financial statements as an expense in profit or loss
and asettings.
or accept the default credit to non-current liabilities of £700,000 (100  500  14).
Agreed number of employees in the scheme to details set out in the contract.
Privacy Policy
The fair value of the share options has been confirmed with management.
Marketing
The adjustment required has been recalculated and agreed to the client's calculation.
Personalization
Exhibit 2: Social and environmental report – suggested assertions:
Analytics
(1) We do not use suppliers who use child labour.
(2) All our staff are paid at least 10% above the minimum wage. wage.
Save
(3) We have Accept
reduced Allstaff sickness to the rate of 2.4% calendar days.
(4) We have reduced the tonnage of waste sent to landfill by 10%. 10%.
(5) Through enhanced healthhealth and safety procedures, industrial accidents have been reduced by 40%.

26 Lyght plc
The accounting firm for which you work, Budd & Cherry, is a five partner firm of chartered accountants
in general practice. It has 30 staff and it generated fee income last year of £5.2 million.
Budd & Cherry has recently gained a new client, Lyght plc (Lyght), as a result of a competitive tender.
The formalities connected with appointment as auditor, including communication with the previous
auditor, have been completed. The tender was for the audit work, but there is a strong possibility that
Budd & Cherry may also be appointed to carry out the tax work and some advisory work for Lyght.
Gary Orton has been appointed as manager on the Lyght audit for the year to 30 April 20X8 and you
are the senior. Gary calls you into his office and explains the situation:
"Lyght is by far the largest company that our firm has gained as a client so it's really important that we
do a good job and impress the board – not least because, if we are given the tax and advisory work, our
expected total fees from Lyght will be around £500,000 next year. The previous three auditors have
each lasted only three years before the audit was put out to tender by the Lyght board. I want to make
sure we retain them as a long-term client. They might be looking for an AIM listing in two to three
years' time and there will be major
major additional fees for our firm if we are appointed as their reporting
accountants for that process.
At the moment we are likely
likely to make a low recovery on the audit, as we had to make a low bid to win
the work. We therefore need to carry out the audit efficiently, but also look for opportunities to sell tax
and other services to the client. If I can help gain the tax and other advisory work for a client like this, I
think I could be made a partner in Budd & Cherry and, as the senior, there could also be a big
promotion in it for you.
Harry Roberts, our ethics partner, has some concerns over the fact that this is a large client for a firm of
our size and

a memo that the
including audit
some fee isexplaining
notes so low. Heany
is therefore monitoring
ethical issues the situation.
that should be drawnPlease
to his provide me with
attention.
We are commencing the audit in a fortnight, on 25th May 20X8 20X8,, and I have already been out to the
client for a few days with a junior. I have provided some background notes (see Exhibit 1). I have also
been to see the board and some matters have arisen that I have recorded in my briefing notes (see
Exhibit 2). I would like you to explain the audit and ethical issues arising from the matters raised in the
briefing notes, including the relevant audit procedures we should carry out during the audit. Where
relevant, you should also describe the appropriate financial reporting treatment in each case. In
connection with Note 4 on the lease, please indicate if and how the position would change when
IFRS 16, Leases comes into force. Please include your comments in the memo referred to above."
Requirement
Respond to the request of Gary Orton, the audit manager. Total: 40 marks
Exhibit 1: Background notes
Lyght plc is a family-owned company which is controlled and resident in the UK. It purchases public
This website stores
sector datafrom
assets suchhospitals
as and from the armed forces within the EU, then sells them to governments
cookies to and
enable essential
private sectorsite
companies, frequently in developing countries. Sales and purchases are invoiced
either as marketing,
in sterling or in the currency of the foreign customer or supplier. The assets are those which are
no longer required by You
the public sector bodies, but they are still serviceable. Health equipment includes
expensive at anyfor
machinery time
monitoring patients, as well as more basic nursing equipment such as beds,
or accept the defaultand
blankets settings.
appliances. Lyght does not purchase weapons from the armed forces, as it has no licence
to do so, but it acquires a wide variety of small and large items including vehicles, equipment, boats,
tents and clothing.
Privacy Policy
Draft results for 20X8 show that Lyght plc generated revenue of £107 million from which a profit before
tax of £12 million was generated. The carrying amount of its net assets at 30 April 20X8 are £36 million.
Marketing
Leslie Moore is the principal shareholder of Lyght plc, with a holding of 55%. He is also Chairman of the
Personalization
board and the Chief Executive. His daughter, Emma Everton, is finance director and has a 15%
Analytics
shareholding. VenRisk, a venture capital company, has a 25% shareholding and has significant
influence, with the remaining shares being held by senior management.
Save Accept All

Exhibit 2: Manager's briefing notes
(1) Lyght has grown significantly in the last few years and is in the process of updating its IT systems
with work already completed by an external contractor on the sales and purchase ledger systems
including both hardware and software. The project is ongoing and the next stage is to install new,
more sophisticated IT systems to monitor the flows of goods across the globe and for management
accounting purposes. Lyght directors have asked our firm if we wish to tender for a small part of
this work, including advice on the internal controls to be built into the new system. The total cost
of the new system will be about £9 million, of which £5 million will be the costs of IT consultants'
time in installation, data transfer and writing new software. Work would commence in July 20X8
and would take about a year to complete.
(2) Only about £2£2 million of inventories (out of a total carrying amount of approximately
approximately £20 million)
are held in the UK at any time. Inventories are normally shipped shortly after purchase. High value
inventories usually have an identified buyer prior to purchasing them, and goods are shipped to
the buyer within two months of acquisition. Smaller, low value goods are held at depots in the
countries of the intended customers so they are available for prompt sale. Our appointment as
auditors was only formalised after the year end and as a result we were not able to attend year-end
inventory counts. I am therefore worried about how we will audit inventory. I am also worried
about how inventories are going to be valued.
(3) A large batch of used tyres was acquired
acquired by Lyght from an army transport depot for £1,000 in
August 20X7. However, they
they were sold a few weeks later for £105,000
£105,000 to a foreign company, Hott,
in which VenRisk has a 30% equity holding giving it significant influence. Leslie Moore personally
arranged the sale with the manager of the depot. An invoice has been found for £3,487 for
personal gifts and entertainment for the depot manager paid for by Lyght. It also appears from a
few enquiries I made that the depot manager
manager is a cousin of Leslie Moore.
(4) At the start of the year Lyght took out a ten-ye
ten-year
ar non-cancellable lease on some offices that were
were
part of a new city centre development. Lyght has been keen to upgrade its offices for a while in
order to impress customers, particularly representatives
r epresentatives of overseas governments. The lease
payments, payable each year in advance, are £150,000. The present value of lease payments has
been calculated at £1.1 million and has been recognised as a non-current asset and a lease liability.
The non-current asset is being depreciated on a straight-line basis over ten years.
(5) As a result of entering this lease management decided that the existing head office should be sold.
The decision was taken on 1 January 20X8 and the draft financial statements show that the
property was classified as held for sale from this date. On 1 January 20X8 the property which had
been revalued in the past had a carrying amount of £2 million prior to being transferred to assets
held for resale. Its fair value was estimated at £1.6 million and costs to sell of £20,000. The
remaining useful life of the property at the date of reclassification was 20 years. The company is
not planning to market the property until May 20X8.
(6) At 30 April 20X8 an analysis of trade receivables showed the following:
£
Boulogne SA as 1,200,000
cookies to enable essential
Cristina site 2,000,000
Other receivables 10,800,000
personalization, and analytics. You 14,000,000
The amount due from Boulogne SA is denominated in Euros. All other receivables are denominated
in pounds sterling.
The £2,000,000 due from Cristina represents an amount due from the government of Cristina
Privacy Policy which has been outstanding for some time. Considerable efforts by the sales director and his staff
have been required to recover previous amounts owed by the government of Cristina. However,
Marketingthe Cristina Government has now agreed with Lyght that the £2 million that it owes will be paid
on 1 May 20X9, together with a late payment charge, in lieu of interest, of £100,000. The effective
Personalization
interest rate at 30 April 20X8 is 8%.
Analytics
The allowance for impairment of trade receivables is to be partly calculated using a formula to give
a general allowance. The company is proposing to calculate its year end allowance for receivables
Save Accept All
as the £450,000 difference between balances owed and cash expected to be received, plus a
general allowance of 5%.

27 Maykem
You are an ICAEW Chartered Accountant,
Accountant, working as an audit senior in a firm of ICAEW Charte
Chartered
red
Accountants. You receive the following email message
message from one of the audit managers in your office:
"I know you are unassigned today and I really need your help. Max, the senior on the audit of Maykem
Ltd for the year ended 31 May 20X8, has gone off sick and I would like you to take over his
responsibilities. There are three urgent issues I would like you to address initially:
Current liabilities
An assistant
Please has the
examine completed procedures
assistant's on current
work attached liabilities
( Exhibit 1) andbut Max has
prepare a listnot
of yet reviewed
review pointsher work.
explaining,
for each of the current liabilities, any key weaknesses
weaknesses in the audit procedures com completed
pleted to date and the
additional audit procedures necessary. As part of your review, select and explain the significant financial
reporting issues which need to be addressed prior to the completion of the audit.
Pension
Maykem operates a defined benefit pension plan. The assets of the plan are held separately from those
of the company in funds under the control of trustees. At a recent meeting with the client I was told
that the senior accountant who used to deal with the pension plan left suddenly during the year. This
individual has not been replaced and the directors are proposing that the only amount that they need
to recognise in profit or loss is the cash contribution paid by the company in the year of £306,000. I
need to speak to the directors about this tomorrow. I would like you to prepare a schedule for me
setting out the correct accounting treatment and any adjustments that need to be made. It would also
be helpful if you could set out the key audit issues we need to consider. I do not require a detailed list of
audit procedures at this stage. Information relating to the plan is attached ( Exhibit 2).
Ethical issue
Sophie, the trainee on the audit team, who is originally from France, has sent me an email yesterday
saying that she has an investment which tracks the performance of Euronext (French Stock Exchange),
which includes ParisMet. I am fairly confident that this is not a problem, but I would like you to confirm
whether or not this is the case with reference to the ICAEW Code of Ethics . Your notes will then provide
evidence that we have considered the issue.
Other information
Maykem Ltd manufactures and distributes refrigeration equipment and is a wholly-owned subsidiary of
a listed French company, ParisMet. ParisMet's recent results have been disappointing and we believe
that group management is under pressure to announce increased revenues and profit for the year
ended 31 May 20X8.
Our audit approach to Maykem Ltd is wholly substantive for efficiency reasons and materiality has been
set at £250,000.
This website storesfordata

Thanks yoursuch
helpason this."
Requirement
functionality, as wellto
Respond asthe
marketing,
audit manager's email. Ignore the impact of any taxes (including indirect taxes).
personalization, and analytics. You Total: 40 marks
Exhibit
or accept the 1:settings.
default Maykem Ltd – Audit – 31 May 20X8
Work performed on current liability balances
Current liabilities are analysed as follows:
Privacy Policy
20X8 20X7
Marketing £'000 £'000
Trade payables 13,342 15,208
Personalization
Accruals 5,749 4,579
Indirect taxes 2,625 2,302
Analytics
Payroll taxes 1,214 1,304
Deferred income 15,435 18,167
Save Accept
Surplus property All
provision
provision 500
500 –
38,865 41,560

Trade payables
This balance is made up as follows:
20X8 20X7
£'000 £'000
Trade payables ledger 11,023 12,586
Goods received not invoiced 2,319 2,622
13,342 15,208
From a discussion with Maggie Phillips (financial controller), the balance has decreased compared to the
prior year as fewer goods were purchased in the last month of the year, compared with the last month
of the previous year.
Audit procedures carried out:
 Agreed trade payables balance to ledger, noting there are no reconciling items.
 Reviewed trade payables ledger for unusual items. Debit balances totalling £345,601 were noted.
An adjustment has been raised to reclassify these
these to trade receivables.
 Reconciled the five largest balances to statements received from the suppliers. The results of this
work are summarised below:
Balance Payments Invoices Balance per
Supplier per ledger in transit in transit Other statement
£'000 £'000 £'000 £'000 £'000
Note 1 Note 2
Metalbits Ltd 2,563 – 239 – 2,802
Hingeit Ltd 2,073 451 34 – 2,558
Metallo Spa
Spa 1,491
1,491 – 302
302 62
62 1,855
1,855 Note 3
3
Boxit Ltd 1,282 231 459 – 1,972
Bitso Supply
Ltd 1,184 104 510 – 1,798
8,593 786 1,544 62 10,985
Notes
1 All payments
payments in transit were agreed to the trade pay
payables
ables ledger
ledger and to the cash book before the
year end, and to bank statements
statements after the year end. They all appear as reconciling items on the
bank reconciliation.
2 All invoices in transit were agreed to supplier statements and to invoices posted to the trade
payables ledger after year end.
3 Metallo Spa invoices Maykem in euro. The supplier statement balance and invoices in transit
balance above have been translated at the year-end rate of €1.45:£1. Per discussion, the balance
This website stores datatrade
per the suchpayables
as ledger has been translated at a rate of €1.51:£1 as this is the rate in a
forward currency contract taken out to hedge purchases from Metallo. The 'other' reconciling ite item
m
shown above arises from the difference in exchange rates used.
Accruals
Accruals and the audit work performed is analysed as follows:
20X8 20X7
£'000 £'000 Note
Privacy Policy
Commission 235 150 1
Bonus 4,000 2,300 2
Marketing
General and administration 1,504 1,895 3
Personalization
Legal fees 10 – 4
Royalties payable – 234 4
Analytics
5,749 4,579
Save Accept All


Notes
1 The commission accrual represents sales commission payable for May 20X8. This amount was paid
in June 20X8 and has been agreed to the June payroll. The balance is much higher than in the prior
year because of exceptionally high sales
sales in May 20X8.
2 Staff bonuses will not be paid until September
September 20X8.
20X8. The amount
amount accrued is based on an estimate
prepared by the finance director. The accrual is much larger than in the prior year as a result of a
significant increase in the directors' bonuses which are based on company performance targets
agreed by group management.
3 An analysis
agreed of ge
general
neral documentation.
to supporting and administrative accruals was obtained
obtained and all items over £25,000
£25,000 were
4 From a discussion
discussion with Maggie Phillips, in May 20X7 Maykem received a letter
letter from Me
MegaCo
gaCo plc,
alleging that Maykem had breached one of MegaCo's patents and claiming royalties on sales of all
products in which the patented refrigeration technology was used. Although Maykem disputed
MegaCo's claim, a provision was made in the 20X7 accounts for estimated royalties payable on
sales to date. At that time the Maykem directors considered it more likely than not that some
payment would be made, given MegaCo's far superior size and resources. Maykem has now
sought independent legal advice and, in April 20X8, wrote to MegaCo plc totally refuting the
breach of patent claim. MegaCo's directors acknowledged the letter, stating that they would
respond after taking their own legal advice. To date nothing further has been heard from MegaCo.
On this basis, the provision for royalties has been released. The accrual for legal fees represents the
amount payable for legal advice taken to date.
Deferred income
Deferred income represents service revenues relating to future periods. When customers buy a
refrigeration unit from Maykem, they may choose to buy a three-year maintenance contract in addition
to the normal one-year warranty. Revenue for the maintenance contracts is deferred and released on a
straight line basis over the period to which the contracts relate.
During 20X8, Maykem has reassessed the costs it incurs in providing maintenance services. These costs
have reduced considerably as the reliability of the product has improved. As a result the margin earned
on the maintenance element is far in excess of that earned on the original product sale. An exercise has
therefore been undertaken to recalculate how the total revenue from a product and maintenance sale
should be allocated between the two elements so that the percentage margin earned on each element
is equal. This revised split of revenue has been retrospectively applied to all maintenance arrangements
still in force at 31 May 20X8, resulting in the release of nearly £4 million of deferred income.
The deferred income balance has been agreed to a detailed analysis which has been tested for accuracy
and completeness as part of our procedures on revenue. The revised calculations splitting the revenue
between the two elements have also been tested without exception.
Surplus property provision
This website stores
This data
relates such as factory premises which, until January 20X8, were occupied by Maykem's
to leasehold
cookies to domestic
enable essential site division. The trade of this division together with all related inventory was sold to
refrigeration
Coolit on 1 January 20X8. The sale excluded the leasehold premises and manufacturing plant as Coolit
did not want these.
or accept the
Fromdefault settings.with Maggie Phillips, Maykem's directors believe that it will take some time to find a
a discussion
replacement tenant for the leasehold factory premises, as they are not in good condition. The lease for
the factory expires in May 20Y8 (in 10 years' time) and the annual rental is £250,000. The provision of
Privacy Policy
£500,000 is based on the finance director's view
v iew that it will take two years to let the premises.
Included within profit or loss for the year ended 31 May 20X8 is a net gain on the sale of the domestic
Marketing
refrigeration business, which has been calculated as follows:
Personalization £'000
Proceeds from sale of trade and inventory
Analytics 1,300
Carrying amount of assets sold (200)
Provision for surplus property (500))
(500
Save Accept All
Net gain on sale of business 600

Exhibit 2: Pension plan
The terms of the pension plan have been summarised by Maykem as follows.
 Employees contribute 6% of their salaries to the plan.
 Maykem contributes, currently, the sam
same
e amount as the employees to the plan for the benefit of
the employees.
 On retirement, employees are guaranteed a pension which is based upon the
the number of years
service with the company and their final salary.
The following details relate to the plan in the year to 31 May 20X8:
£'000
Present value of obligation at 1 June 20X7 3,600
Present value of obligation at 31 May 20X8 4,320
Fair value of plan assets at 1 June 20X7 3,420
Fair value of plan assets at 31 May 20X8 4,050
Pension benefits paid 342
Total contributions paid to the scheme for year to 31 May 20X8 306
Gains and losses on remeasurement (actuarial gains and losses) are recognised in accordance with
IAS 19, Employee Benefits .
The interest rate on high quality corporate bonds at 1 June 20X7 was 5%.
Assume cash contributions are received and pension
pension payments are made at the ye
year
ar end.
28 Sunnidaze
You are Jamie Spencer, the
the senior in charge of the final audit work on Sunnidaze LLtd
td for the financial
year ended 30 June 20X6.
20X6.
Sunnidaze is based in Birmingham and sells and installs hot tubs, saunas and jacuzzis. It was
incorporated five years ago by John and Mary Cotton, both of whom invested money they had earned
in the music industry. John and Mary each own 50% of the issued share capital of Sunnidaze and are
also directors. They delegate the day to day running of the company to the only other director, Arnold
Murray, a more experienced businessman.
Until recently, Sunnidaze focussed on sales to wealthy individuals in its local area. Its range of products
and installation expertise made it very successful and the business grew rapidly. However, in the year
ended 30 June 20X5 it was less successful.
su ccessful. Revenue fell to £4 million and the company broke even.
Arnold decided to expand operations to cover the whole of England and also introduced a range of
larger products suitable for spas and hotels. These changes required investment of £2 million. John and
Mary were not willing to invest more money so Arnold arranged for Sunnidaze to borrow £2 million
This website stores
from dataonsuch
a bank as20X5.
1 July 20X5.
Under the terms of the loan, Sunnidaze was required for the first time to have an audit and, in
April 20X6, your firm was appointed as auditors for the year ended 30 June 20X6. The final audit visit
commenced in September 20X6 but progressed slowly. The financial controller, Maisie Juniper, was not
ready for your team and could not provide you with the information to complete the audit procedures.
Your team left at the end of the scheduled
scheduled audit visit with matters still outstanding.
Last week Maisie contacted you to let you know she was ready for a follow up audit visit and provided
Privacy Policy
you with summary financial information (Exhibit 1) incorporating all audit adjustments identified at
your previous visit and, in addition, two late client adjustments requested
requested by the directors. You arranged
Marketing
for a junior member of staff, Sam Burrows, to visit Sunnidaze
Sunnidaze to complete the necessary audit
procedures.
Personalization Sam has sent you an email ( Exhibit 2 ) summarising the audit procedures he has performed.
You receive a voicemail message from the Sunnidaze audit manager:
Analytics
"Hello Jamie. I know you are busy at the moment but I really need to understand the status of our audit
Save Accept All
procedures
whether weon Sunnidaze.
have Theaudit
any further directors have a meeting
adjustments and whatwith
ourthe bankon
opinion later
thethis week and
financial want towill
statements know
look like. They have asked me to meet with them tomorrow so I really need from you today:

(a) A memorandum setting out and explaining the additional audit adjustments and unresolved audit
matters identified at our follow up visit, together with a brief summary of any additional audit
procedures required. You should also prepare revised draft summary financial statements to the
extent that the available information permits.
(b) Your comments on any more general concerns you have in relation to the audit as a whole
including ethical issues for our firm and what our audit response to these concerns should be.
(c) Brief notes setting out an explanation of the form of audit opinion we should give. (I have already
given them a copy of the standard unmodified opinion so you need only consider whether we
might modify this in some way.)
(d) The company is planning further expansion in the year ending 30 June 20X7. To help to fund the
expansion Arnold Murray is proposing to enter into a sale and leaseback arrangement regarding its
warehouse. Details are as follows:
 The property
property would be sold on 1 January 20X7 for £280,000
£280,000 (the original cost was £75,000).
£75,000).
 It would then be leased back on a 20 year lease
lease at an initial rental of £32,000 per annum.
 The sale price and the rental amount both represent market value.
 The land element of the property is not material.
 Sunnidaze has an incremental borrowing rate of 1
10%
0% (annuity discount factor over 20 years =
8.5136).
Arnold would like me to explain to him the
the impact of this transaction on the financial statement
statementss
for the year ended 30 June 20X7 so please draft som
some
e notes that I can refer to outlining the effects.
I am indon't
Please a meeting
worryfor the tax
about restas
of the
the tax
day,department
so please leave the information
will address I have
any issues asked for on my desk.
here."
Requirement
Prepare the information requested by the audit manager. Total: 40 marks
Exhibit 1: Sunnidaze Ltd
Summary financial information for the year ended 30 June 20X6 prepared by Maisie Juniper
Per draft
Per trial Audit Late client financial
balance adjustments adjustments statements
£'000 £'000 £'000 £'000
Operating profit 651 (134) (50) 467
Exceptional items – (42) (42)
Interest payable (100) (100)
Profit before taxation 551 (134) (92) 325
Taxation
Taxation – (125)
(125) (125)
(125)
cookies to enableafter
Profit taxation
essential site
551 (259) (92) 200
Assetsand
personalization, analytics. You
Property, plant and equipment 357 35 392
Intangible assets 500 500
Trade receivables 1,629 (42) 1,587
Other current assets 40 40
Privacy Policy
Cash and cash equivalents 555 555
4,473 35 (42) 4,466
Marketing
Personalization
Analytics
Retained earnings 551 (259) (92) 200
Long-term borrowings 2,000 2,000
Save Accept All
Trade and other
Tax payable payables
payables 922
922
– 169
169
125 50
50 1,141
1,141
125
4,473 35 (42) 4,466

Exhibit 2: Email from Sam Burrows, audit junior
To: Jamie Spencer
From: Sam Burrows
Subject: Sunnidaze audit for the year ended 30 June 20X6
Jamie
I have now completed as many of the outstanding audit procedures as I can. I've summarised below the
procedures carried out in response to each of the points on the list of outstanding issues you gave me.
Throughout my work, I used our preliminary assessment of materiality of £30,000.

(1) Ensure that all audit adjustments identified during our previous audit visit have been posted
correctly by Maisie
Adjustments posted by Maisie all tie into our audit working papers. There is, however, one
adjustment she has not booked as Arnold told her it did not relate to the year ended 30 June 20X6.
We had proposed an adjustment to provide for a credit
credit note of £10,000 issued
issued on 15 July 20X6 to
a hotel chain as a discount for purchasing ten jacuzzis. As the tenth and final jacuzzi was only
delivered in July 20X6, Arnold believes that the discount arose in the year ending 30 June 20X7
rather than in 20X6 and does not plan to book this transaction until next year.
(2) Review any late adjustments made by the client
Maisie has made two additional adjustments. She has made an exceptional impairment of
receivables of £42,000 as a health club customer has refused to pay for two luxury hot tubs. The
hot tubs were supplied by DupaSpa (see (3) below). The tubs were delivered to the health club in
June 20X6 but Sunnidaze's engineer only started to install them at the end of October. It was
agreed during the installation process that they were unsuitable for the selected site. However,
there is disagreement over who is responsible and the customer has refused to pay and has asked
Sunnidaze to remove the hot tubs as soon as possible.
Maisie has also provided for a £50,000 one-off incentive payment to Arnold. This was agreed with
the shareholders as operating profit
prof it (before this payment) exceeded £350,000.
Maisie has informed me of one additional adjustment she plans to make. As in prior years, all
retained earnings are to be distributed to the owners as a dividend and this needs to be reflected in
the financial statements once the profit figure has been finalised.
(3) Perform work on the intangible asset
The intangible asset represents £500,000 paid to a third party supplier, DupaSpa, on 1 July 20X1
for a ten year exclusive licence to distribute DupaSpa hot tubs in its local area. I have reviewed
reviewed the
agreement and reconciled the original payment to the bank statement. When Sunnidaze started in
business, sales of approximately £600,000 related to products supplied by DupaSpa which
generated a profit margin of 47%. In recent years, other suppliers' products have become
increasingly as
popular but sales of DupaSpa products still generated revenue of £400,000 in the year
cookies to enable essential site20X6.
ended 30 June
functionality,
(4)as Update
well as marketing,
work on cash received from customers since the year end
may change your Ofsettings
total trade receivables
at any time of £1,629,000 at 30 June 20X6, £1,39
£1,391,000
1,000 has now been paid, £42,000
provided for
or accept the default settings. (see (2) – late client adjustment) and £10,000 is expected to be credited (see (1) –
discussion of audit adjustments). That leaves £186,000 unprovided and unpaid. I selected a sample
of unpaid invoices and ensured that the product they related to was delivered before 30 June 20X6.
I also enquired of Arnold and the credit controller whether there were any customer disputes or
Privacy Policy
issues and was informed that all customers were expected to pay. Delays in payment were either
Marketing due to delays in product installation or, where customers were local builders, delays in the
collection of cash from their ultimate customers.
Personalization
(5) Review of agreement for new bank loan
Analytics
I obtained and reviewed a copy of the bank loan agreement. Its key terms are as follows:
Save  Accept All

The loan capital
31 December of £2 million is repayable in five equal annual instalments commencing on
20X6.

 Interest of 5% per annum is payable annually in arrears and an arrangement fee of £40,000
was paid when the monies were advanced on 1 July 20X5.
 There is a covenant within the agreement that operating profit for a financial year will fall no
lower than £280,000. Should it do so, the bank has the power to require immediate
repayment of the loan or to call on personal guarantees provided by the directors.
 Audited financial statements for each financial year must
must be delivered to the bank no more
than 150 days after the financial year end.
(6) Review of events and results after the reporting period
The management accounts for the three months to 30 September 20X6 show revenue of
£1 million and operating profit of £50,000. These results are in line with the equivalent prior year
period, although below budget. The cash balance at 30 September 20X6 was £600,000. The
directors' latest forecast of revenue for the year ending 30 June 20X7 remains in line with their
budget of £7 million, which was a 25% increase on the previous year. They anticipate an operating
profit of £750,000 for the year ending 30 June 20X7. Maisie has told me in confidence that she
believes this budget is extremely optimistic.
My review of post year end board minutes revealed only one item of interest. John and Mary
Cotton are keen to sell their shareholding in the company and have already entered into
discussions with a number of investors. The minutes indicate that the budget is forming the basis
for negotiations on the valuation of the shares.
29 Tydaway
You are Gerry

Gerry Melville,
Melville, an audit senior in A&B Partners LLP. Today you receive a voicemail message from
your manager, Mary Cunningham:
"Hello Gerry. I'd like you to help me to plan our audit of Tydaway Ltd for the year ending 31 July 20X1. In
particular, the inventory section of our audit did not go well last year.
Tydaway is a long-standing audit client of A&B Partners and has for many years manufactured metal
filing cabinets at its factory in South London. On 30 September 20X0, Tydaway acquired a division of a
competitor's business which produces high-quality wooden office furniture. This business, now known as
Woodtydy, continues to operate from a factory in North London as a division of Tydaway. It continues to
maintain its own separate accounting records and its results have
h ave not yet been incorporated in Tydaway's
monthly management accounts.
I've left on your desk extracts from Tydaway's most recently available management
management accounts which are
which are
ended 31 May 20X1 (Exhibit 1), notes from last year's audit file on inventory valuation
for the 10 months ended
(Exhibit 2) and information on Woodtydy's inventory supplied by the Woodtydy financial controller
(Exhibit 3).
Tydaway's such
annual as
inventory count took place on 30 June 20X1 (a month before the year-end) and it was
it was
cookies to attended
enable essential
by auditsite
assistant, Dani Ford. Dani's inventory count notes are also on your desk (Exhibit 4). As
functionality, as is
Dani well
on as marketing,
study leave from next week, it's important that you raise any questions with her as soon as
personalization, and
possible. analytics. You
What I need you to do is the following:
(a) Review Dani's inventory count notes (Exhibit 4) and prepare a list of issues and queries for her to
address before she goes on study leave. Your list should include
i nclude brief explanations of the points
Privacy Policy raised so that Dani understands why any additional information is required.
(b) For each of the relevant
Marketing relevant financial statement assertions in respect of inventory:
 highlight any particular concerns or issues which you have identified from your review of
Personalization
Exhibits 1, 2 and 3; and
Analytics
 prepare a summary of the key audit procedures we will need to perform to ensure that we
have adequate audit assurance on inventory.
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Assume that audit planning materiality is £40,000 as in the prior
prior year.

We have also been asked to give our client
client some accounting advice. Tydaway is finding the mmarket
arket for
the metals required to make the filing cabinets increasingly competitive. As a result it has been looking
for new suppliers and has identified one in China. Tydaway is to be invoiced by the Chinese company
company in
US dollars (as this is the functional currency of the Chinese company). On 15 July 20X1 the company
intends to enter into a contract with the Chinese company to purchase metals with a contract price of
$500,000. This is a large order but it has been made in the light of the lead time for transporting the
raw materials. The metal will be delivered to Tydaway on 15 December 20X1 and payment will be
made on that date.
The directors are concerned about the impact of foreign exchange risk and are considering whether to
enter into a forward contract on 15 July 20X1 to purchase $500,000 on 15 December 20X1. They have
asked me to meet them next week to discuss their options. I would like you to prepare some
information that I can refer to in my meeting as follows:
(c) Set out, using journal entries, the impact of this contract on the financial statements for the years
ending 31 July 20X1 and 31 July 20X2 under each of the following scenarios:
 There is no hedging arrangement put in place.
 Tydaway enters into the forward contract, but does not satisfy the conditions for hedge
accounting.
 Tydaway enters into the forward contract, satisfies the conditions for hedge accounting and
chooses fair value hedge accounting.
 Tydaway enters into the forward contract, satisfies the conditions for hedge accounting and
chooses cash flow hedge accounting.
(d) Explain and compare the financial reporting treatment for the four scenarios above.
I do not require you to consider the tax implications of these issues and I do not require you to list
hedging accounting conditions.
I have made some additional notes and working assumptions for you to use ( Exhibit 5).
We also need to consider the implications for our forthcoming audit. If hedge accounting is used certain
documentation must be kept. Please provide a list of the documentation we would be expecting to see.
I look forward
f orward to reviewing your work later today."
Requirement
Respond to Mary Cunningham's instructions.
(Assume that today is 5 July 20X1.) Total: 40 marks
Exhibit 1: Extracts from Tydaway Ltd management accounts for the 10 months to 31 May
20X1
Statement of profit or loss and other comprehensive income
This website stores data such as 10 months to 31 May
cookies to enable essential site 20X1 20X0 Notes
functionality, as well as marketing, £'000 £'000
Revenue
personalization, andgenerated
analytics. by
YouSouth London factory
External customers
may change your settings at any time 4,282 5,912
Sales to Woodtydy
or accept the default settings. 135 – 1
4,417 5,912
South London factory costs
Raw materials at standard cost
Privacy Policy 2,431 3,197
Purchase price variances 296 (10) 2
Other purchase costs, including freight
Marketing 77 45
Movement in
Movement in inventory
inventory at
at standard
standard cost (99) 20
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Total raw material cost of goods sold 2,705 3,252
Movement in inventory provision – 5
Analytics
Labour 873 869
Overheads and
Overheads and delivery
delivery costs 345 354
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factory cost
Total factory
Total cost of goods
goods sold
sold 3,923
3,923 4,480
4,480
Margin as a percentage of total revenue 11% 24%

31 May 31 May Notes
20X1 20X0
£'000 £'000
Inventory analysis
Raw materials 340 270 3
Raw material element of work-in-progress 131 157
Raw material element of finished goods 55 – 4
526 427
Inventory provision
Inventory (20) (20)
506
506 407
407
Notes
1 Represents goods sold to Woodtydy in the period since Tydaway acquired the division on
30 September 20X0.
2 Purchase price vari
variances
ances are adverse in the period ended
ended 3131 May 20X1 as a result of an unexpected
unexpected
increase in the price of steel. In addition, normal bulk discounts were unavailable on components
bought at short notice to fulfil a major order which was shipped in May 20X1 and gave rise to a
one-off adverse price variance of £25,000.
3 Raw material inventory has increased as a result of a slow-down in customer orders. During June
20X0, certain components were purchased
purchased in bulk in anticipation of orders which have not
materialised. Of these purchases, components costing approximately £60,000 remain in inventory
at 31 May 20X1.
4 Finished goods held in inventory represent the cost of goods produced for Swishman
Swishman plc, a
customer which ordered customised products in its corporate colours for a major office
refurbishment. Swishman has recently experienced financial difficulties and has cancelled its order,
leaving Tydaway with a number of finished cabinets already painted in Swishman's specified
colours. It is possible that these cabinets can be used to fulfil other orders, but they will need to be
stripped and repainted at a total cost of around
a round £10,000. A legal claim for £30,000 has already been
made against Swishman for breach of contract. Swishman has offered £6,000 in full and final
settlement of the liability.
Exhibit 2: Notes on inventory valuation from prior year audit file for Tydaway
 Raw materials are valued at standard cost. Standard costs are reviewed
reviewed and updated on the first day
of each financial year and are then left unchanged throughout the year. Historically, our audit
testing on the valuation of a sample of items has led us to conclude that standard costs generally
represent a reasonable approximation to the actual cost of purchase.
 Standard costs include an uplift of 1.5%
1.5% of the material cost to cover
cover freight and other purchase
costs.
This website
stores data such
Inventories as
of finished goods are typically
typically very low as all goods are shipped to to the customer as soon
as they are complete.
 Work in progr
progress
ess (WIP)* is valued
valued initially at the standard cost of its raw material components. An
adjustment is made at the year end (for statutory accounts purposes only) to include in inventory
invento ry an
appropriate percentage of labour and factory overhead, calculated as follows:fo llows:
Units in WIP × 50%
× (Total factory labour + Factory overhead)
Total units produced in the year
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*WIP is on average 50% complete
Marketing
 Provision is made for any obsolete raw materials. No provision is required
required against finished goods or
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WIP as filing cabinets are typically built to order for specific
specific customers.
Analytics
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Exhibit 3: Information on Woodtydy's inventory
inventory supplied by Woodtydy financial controller
(1) At 31 May 20X1,
20X1, the Woodtydy business had total inventory as analysed below:
below:
£'000
Raw materials 230
Work in progress 120
Finished goods 159
509
Provision (58)
451
(2) Raw materials are valued at the latest invoice price.

(3) Each customer order is recorded
recorded on a separate job card. As materials are allocated to
to an order, they
are booked out of raw materials and booked on the job card at the latest invoice price. The time
spent on the job is then recorded on the card and a cost of £30 per hour is included in inventory to
reflect the cost of direct labour and factory overhead. At the period end, the job cards are sorted
into complete and incomplete items and recorded as finished goods or work in progress as
appropriate.
(4) Provision is made on a line-by-line
line-by-line basis for any items which are obsolete,
obsolete, slow-moving or can only
be sold for less than cost.
Exhibit 4: Notes on inventory count attendance prepared by Dani Ford
I attended an inventory count at Tydaway's South London factory on 30 June 20X1. As no inventory
in ventory
count is planned at 31 July, the inventory quantities from this count will be posted to the book inventory
records and updated for purchases and sales made in the last month of the financial year.
The count was well organised and all counters were briefed beforehand. Counters worked in teams of
two, with one counting and the other recording the quantity counted and comparing it to the quantity
shown on the book inventory system, as supplied on the printed
prin ted inventory list prepared beforehand.
Where the quantity
quantity counted differed by more than 10%
10% from that on the system, a second count was
performed by a team from another area of the warehouse.
I performed independent counts on a sample of 25 types of raw material, noting the following
differences:
 Quantities of smaller components were estimated by weighing a sample of ten to 20 20 items and
comparing their weight to the weight of the total inventory
in ventory of that item in order to estimate the
th e
overall quantity. When we performed our own tests, we noted differences of up to 5% in quantity
for such items. This does not appear unreasonable given the e estimation
stimation involved.
 All tins of paint and chemicals
chemicals were treated as full tins although some of them were only partly full.
From a discussion with the inventory controller this is unlikely to have resulted in any material
overstatement of inventory.
 Two differences
differences were noted in samples taken from the mezzanine area of the stores.
stores. In both cases,
the counters had recorded a count which agreed with the quantity on the system whereas our
count showed less in one case and more
mo re in the other. Our counts were agreed with the coun
counters
ters
and the inventory sheets were updated to record the correct quantities.
I performed counts on a sample of five types of work in progress. All counts were accurate.
I inspected the despatch areas, noting that there were no shipments in progress during the count. In the
goods received area, I noted a large consignment of filing cabinet drawers which had not been counted.
Privacy Policy
From a discussion with the inventory controller, these dr
drawers
awers had just been returned from a
subcontractor who finishes the premium range to a high
Marketing hi gh standard. They will be boo
booked
ked back into WIP
after the count is complete.
Personalization
Analytics
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Exhibit 5: Additional notes and assumptions
Proposed contract with China
Hedging
Tydaway is considering two alternatives:
 Do not hedge and therefore accept any consequent exchange rate risks.
 Enter into a foreign exchange forward contract on 15 July 20X1 to purchase $500,000 on
15 December 20X1.
At 15 July 20X1, the spot exchange rate is expected
expected to be £1 = $1.6108.
At 15 July 20X1, the 5-month forward rate is also expect
expected
ed to be £1 = $1
$1.6108.
.6108. The forward rate
contract will have a zero fair value at 15 July 20X1.
At 15 July 20X1, the contract with China would be a firm comcommitment
mitment and, if Tydaway decides to enter
into the forward contract at that date, it is unsure whether it would be better to treat it as a fair value
hedge or as a cash flow hedge for financial reporting purposes. However, it may be that Tydaway
cannot satisfy the hedge accounting conditions, although it is hoped it will be able to do so.
Working assumptions
For illustrative purposes I would like you to adopt the following working assumptions as one possible
scenario of future exchange rate movements:
At 31 July 20X1
Spot £1 = $1.5108
Fair value of forward contract £20,544 positive (ie, in favour of Tydaway)
At 15 December 20X1
20X1
Spot £1 = $1.4108
Fair value of forward contract £43,994 positive (ie, in favour of Tydaway)
30 Wadi Investments
The Wadi Investments Group invests in capital markets and real estate primarily in the Indian
subcontinent and Asia. Your firm is responsible for the audit of Wadi Investments and the consolidated
financial statements. The audit has already commenced
commenced but you have been ask asked
ed to join the team as the
manager is concerned that there is not the appropriate level of expertise in the current team. You have
been sent the following email from your manager.
To: APerdan@ABCAccountants
From: TFlode@ABCAccountants
Date: 30 July 20X9
cookies to Subject : Audit of site
enable essential the financial statements for the year ended 30 June 20X9
Amar,
may change your
I am settings
very at any
glad that youtime
are joining the audit as things have not been going well. I have had a fairly
inexperienced team and I am concerned about some of the work which has been prepared to date. We
are responsible for both the parent company audit and the audit of the group. Work has already started
on the audit of the parent company. I have briefly reviewed most of the working papers produced to
Privacy Policy
date but have not been able to look at them in detail. My review has raised a number of concerns which
I would like you to address in a report which I can use to evaluate how to approach the remaining audit
Marketing
work. I have listed my concerns below and have attached a number of other relevant documents
including relevant exchange rates ( Attachment 2). I have confirmed the exchange rates myself so you
Personalization
should use these in any calculations.
Analytics
Save Accept All


Audit of the parent: Wadi Investments
Acquisition of Strobosch
We have been told that Wadi purchased an 80% subsidiary on 1 January 20 20X9.
X9. It is an investment
company based in Ruritania and its functional currency is the Ruritanian rand (RR). Some work has been
done on the investment in the parent's statement of financial position but from my review of the audit
assistant's working paper (Attachment 1) a number of significant issues have not been addressed.
Please identify these including any audit adjustments that may be required. You should also review the
work performed by the junior and list any additional procedures which are needed.
Investment property
The group carries all land and buildings, including investment property, at fair value. On
15 March 20X9 the head office building in London was vacated and is to be leased out for the next five
years to a company outside the Wadi Group. The building originally cost £90 million bac backk on 3 April
20X6 and as at the next valuation on 30 June 20X7 it was valued at £112 million. Its fair value at 15
March 20X9 was £124 million and at 30 June 20X9 is £128 million. The depreciation policy for
buildings is straight line over
50 years, measured to the nearest month. Our audit work to date shows that the asset has been
included in property, plant and equipment in the year end statement of financial position but any
further work on this issue is outstanding. Please can you set
set out how to account for the change in the
use of this asset and outline the audit adjustments required. You should also list the audit procedures
which should be performed.
Audit of Wadi Investments Group
This is still at the planning stage and there are a number of issues which I would like your help with.
(a) The Strobosch audit is being conducted by a local firm, Kale & Co. I am familiar with the firm and
its practices and am confident that they will do a professional job. However, I need to
communicate with them and will have to draft a letter of instruction. Please draw up a checklist of
the points which I need to include so that I can ensure that all necessary matters are covered.
(b) At a recent
recent meeting with the finance director of Wadi, he mentioned that the investment in
Strobosch was financed by a number of Ruritanian Rand loans in order to hedge the foreign
currency exposure and that hedging provisions are to be adopted. Total exchange losses on the
loans for the six months to 30 June 20X9 are £36 million. He also mentioned a loan made to
Strobosch on 1 January 20X9 to assist with expansion plans. Further details regarding the net
investment in Strobosch and the loan to Strobosch are attached ( Attachment 3). Please identify
the audit and financial reporting issues that we will need to consider.
Requirement
Respond to the manager's instructions. Total: 40 marks
This website stores data 1:

Attachment such
Auditas assistant's working paper for the acquisition of Strobosch
cookies to Client:
enable essential site Investments
Wadi
functionality, as end:
Year well as marketing,
30 June 20X9
Prepared by: Sam Brown You
Investment
or accept the in Strobosch
default settings.
£m
Cash paid on 1 January 20X9 675
8% debentures 360
Privacy Policy
Costs 18
1,053
Marketing
Analysis of costs
Personalization £m
Costs of internal merger and acquisitions team at Wadi Investments
Analytics 2
Issue costs of debentures 6
Legal costs (RR23m × 0.45) 10
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18
18

Note: I have been told that the IRR on the debentures is 4.42% per six-month period but I am not sure
what the relevance of this is. Interest on the debentures is paid every six months.
Work performed
(1) Agreed cash paid to bank statement.
(2) Agreed £360
£360 million debentures
debentures to matching
matching liability in the statement of financial position.
(3) Obtained a schedule
schedule of the breakdown of costs.
(4) Cast total and agreed spot rate.
Attachment 2: Exchange rates
The following exchange rates should be used for the preparation of the 20X9 financial statements.
Date RR:£
1 January 20X9 1:0.45
30 June 20X9 1:0.47
Average for six months to 30 June X9
X9 1:0.46
RR = Ruritanian rand
Attachment 3: Hedge of net investment
Extract from the financial statements of Strobosch as at 30 June 20X9
Draft
RRm
Property, plant & equipment 389
Investment property 1,453
Financial assets 659
Current assets 124
Total assets
assets 2,625
2,625
Share capital 300
2,020
Non-current liabilities 518
Current liabilities 87
Total liabilities and equity 2,625
 Retained earnings at acquisition were RR1,440 million and the fair value of net assets at acquisition
was RR1,865 million.
 The long-term liabilities of Strobosch
Strobosch include RR444 million in respect of a five-year interest free
loan of £200 million made by Wadi on 1 January 20X9.
31 Jupiter
This websiteIt isstores data such
15 January 20X9.asYou are the audit senior on the external audit of Jupiter Ltd. The company's year
cookies to end
enable essential
is 31 Decembersite20X8. The audit manager Jane Clarke has asked you to take responsibility for
f or the
audit procedures on development costs. You have a schedule of development costs produced by the
personalization,
client and analytics.
(Exhibit You
1), a summary of the board minutes produced by Jane on a preliminary visit to the client
(Exhibit 2) and some notes of a meeting between the Finance Director of Jupiter Ltd and Jane Clarke
or accept the default3).settings.
(Exhibit
You receive the following voicemail message from Jane
Jane Clarke.
Privacy Policy
"As you know I would like you to take responsibility for the audit procedures on development costs. My
review of the board minutes and my recent conversation with the finance director of Jupiter Ltd have
Marketing
given me some cause for concern in this area so we need to get this right. I would like you to prepare a
memorandum which sets out the audit issues and the audit procedures required to address these. You
Personalization
should also refer to any financial reporting issues which arise. Please quantify, as far as you can based on
Analytics
the information currently available, any adjustments required. I would also like you to consider any
potential professional and ethical implications for our firm based on the discoveries I have made –
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including matters we should consider in respect of the internal audit function.
James Brown the audit junior has been doing some work on the audit of trade payables. He has
obtained some information from the client (Exhibit 4) but is unsure how to progress. I would be

grateful if you could review the information he has obtained and make some notes for James explaining
the main audit issues and an outline of the audit procedures required to address these.
See you later!"
Requirement
Prepare the summary and notes requested by Jane Clarke in her voicemail message. Total: 30 marks
Exhibit 1: Development costs recognised in the year ended 31 December 20X8
£'000
Cost
01.01.X8 10,000
Additions 2,000
At 31.12.X8 12,000
Amortisation
01.01.X8 500
For the period 500
At 31.12.X8 1,000
31.12.X7 9,500
31.12.X8 11,000
Exhibit 2: Jupiter Ltd: Summary of minutes of board meetings

Jupiter manufactures a device which converts vegetable oil into diesel, thereby creating an inexpensive
and sustainable fuel that can be used in conventional diesel-engine cars. This device was developed over
several years. Significant development costs were incurred in the process and these were capitalised. The
device went into full production at the beginning of 20X7.
A total of £4 million was capitalised on the development
development of this device. The development costs are
amortised on a straight line basis over the device's estimated useful life of eight years. There is a balance
of £3 million remaining after £1 million was amortised over the last two years. It was expected that the
conversion device would be replaced by more advanced technology at the end of the eight year period.
Jupiter is in the process of developing a car engine that will run on vegetable oil. This project is the
result of an unexpected breakthrough in a research project that had not been expected to yield useful
results. A major car manufacturer has looked at a prototype engine and has agreed in principle to offer
this engine as an option on its range of compact cars. Jupiter has not applied for a patent for the
vegetable oil engine technology.
Development costs on this engine were capitalised at £6 million o onn 31 December 20X7. A further
£2 million has been capitalised during
durin g the year ended 31 December 20X8. None of these costs have
been amortised because development work on the car engine is not yet completed. The car engine is
currently expected to go into full production in the first quarter of 20Y0.
In December 20X8, the internal audit department completed a review on the likely impact of the launch
of the new engine on the sales of Jupiter's core product, the conversion device. The internal auditors
produced the following cash flow forecast relating to the conversion device business over the next
six years. The pre-tax discount rate specific to the conversion device is estimated at 15%, after taking
into account the effects of general price inflation.
or accept the
Yeardefault settings. 1 2 3 4 5 6
£'000 £'000 £'000 £'000 £'000 £'000
Future cash flows 770 700 520 350 330 300
Privacy Policy
Two weeks ago, Jupiter's management became aware of the fact that the company's largest competitor
is working on a car engine that will run on vegetable oil and will enter production in the third quarter of
Marketing
20X9. The competitor has a contract to supply this engine to a major car manufacturer and is in the
Personalization
process of completing non-disclosure agreements with several other manufacturers. Once this formality
has been completed the competitor will offer to license their technology to all major car companies. No
Analytics
formal announcement of this technology will be made until February 20X9 at the earliest.
earliest.
Jupiter is extremely concerned because the ability to run cars on vegetable oil may cut short the life
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expectancy of the vegetable oil to diesel conversion device. They are also concerned that their proposed
car engine might not come into commercial production unless it is significantly better than their
competitor's forthcoming model. No details on the competitor's engine are as yet available. Jupiter only

knows about it because they used a firm of commercial investigators to find out what progress the rest
of the industry was making on alternative fuel sources. As part of this investigation, a senior design
engineer from the competitor was interviewed for a job that did not actually exist. He was encouraged
to talk about projects that he had been involved in during his time with the competitor. He gave
sufficient information about the new engine for Jupiter's directors to be extremely concerned. The
engineer then became suspicious of the investigator who was conducting the interview and refused to
disclose any further information about the new engine.
The Board has instructed the internal audit department to conduct a detailed risk assessment of this
discovery.
Exhibit 3: Jupiter Ltd: Notes of meeting with Finance Director

The Finance Director stated that Jupiter fully intended to continue to amortise the development costs of
the diesel converter over the remainder of its eight-year estimated useful life and to continue to
capitalise development costs. She said that the internal audit department was working on ways to
complete the preparation of the financial statements as early as possible in January 20X9 and she asked
that the audit work be timetabled so that the audit report could be signed by 31 January at the very
latest. That way, any subsequent announcement by the competitor would not constitute an event after
the reporting period under IAS 10. She said that the matters discussed in the board minutes were to be
treated as confidential. Indeed, the company had effectively obtained this information through
fraudulent misrepresentation and so it would not be appropriate to use it in the preparation of the
annual report.
Jupiter has borrowed heavily in order to fund these two development projects. The bank loan covenant
specifies a maximum gearing ratio. I have done a quick calculation of the effect of an immediate write-
off of the development costs and the company would be in default of this borrowing condition.
Exhibit 4: Jupiter Ltd: Summary of trade payables

Analysis of trade payables
31.12.X8 31.12.X7
£'000 £'000
Myton Engineering Ltd 2,400 2,400
Overseas suppliers 1,750 900
Other suppliers 995 1,107
GRNI (goods received but not invoiced) 720 288
5,865 4,695
Notes
1 Myton Engineering Ltd is the sole supplier of a kkey
ey component which goes into the fuel conversion
device. In previous years the company has refused to respond to requests to confirm any year end
balance and does not issue statements. In addition this year Myton has introduced a reservation of
title clause on all invoices to Jupiter Ltd.
2 During the year the clerk responsible for managing
managing overseas suppliers resigned
resigned as she had found a
cookies to enable jobessential
closer tosite
home. The company has been unable to find a permanent replacement for her. The
functionality, as overseas
well as marketing,
suppliers balance at 31 December 20X8 includes £75,000 in respect of goods which are
personalization,still
andinanalytics. You
transit but which have been recognised in inventory.
3 default
or accept the 'Othersettings.
suppliers' relates to around 150–200 small suppliers which produce a range of components.
This balance is net of £125,000 of debit balances.
4 The company experienced a ccomputer
omputer problem in the last week
week of the reporting period
period which
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Marketing
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32 Poe, Whitman and Co
You are an audit senior with Poe, Whitman and Co, Co, a firm of chartered accountants. Upon returning tto
o
the office this week from vacation, you find the following email in your in-box from Margaret Fleming,
one of your firm's audit managers.
Date: 2 April 20X7
From: Margaret Fleming <m.fleming@poe.whitman.com>
To: Audit Senior <a.senior@poe.whitman.com>
Subject: Commedia Ltd
Attachments: Commedia background notes; email from Bob Kerouac
Kerouac
I hope you had a good holiday. As you may know I have recently been given managerial responsibility
for the firm's new audit client Commedia
Commedia Ltd, and I understand that you will be the senior on the
group's audit for the year ended 28 February 20X7. We have only recently been appointed
appo inted auditor
following the unexpected resignation of the previous auditor just two weeks
weeks ago.
Please could you consider the practical and ethical issues specifically in connection with our late
appointment and the steps we should take to ensure that these issues do not affect the performance of
our duties as the group's auditor.
Please also summarise for me the relevant audit procedures and our reporting responsibilities which arise
from the Commedia engagement
engagement being a new audit for Poe, Whitman and Co.
I have also attached to this email some notes on the Commedia group ( Attachment 1).
In addition to providing some background information on the group, the notes also include information
on some specific events that occurred within the group during the year. I would like you to identify the
audit risks relating to these events and draft the audit procedures required to mitigate them.
Finally, I attach an email I received last week from Bob Kerouac (Attachment 2), requesting advice on
some financial reporting matters. Please draft a response in note form for me to use at the meeting I
have arranged with Bob for next week.
Margaret
Requirement
Respond to the email from your audit manager. Total: 30 marks
Attachment 1: Commedia group background notes
Commedia Ltd (Commedia)
Commedia is an independent television production company with annual revenues last year of
approximately £60 million. The company's creative team develops ideas for television programmes,
which are then 'pitched' to one or more of the television broadcasting companies within the UK. If the
pitch is successful, the programme is commissioned by the broadcaster and then made by Commedia to
an agreed budget.
During theasyear,
marketing,
a number of Commedia's customers changed the terms of some of their commissions
personalization,
from a 'funded' to a You
and analytics. 'licensed' basis.
Funded commissions
The broadcaster is responsible for funding the entire production budget (which includes an agreed
management fee for Commedia) in monthly instalments as the production progresses. Upon delivery of
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the programme to the broadcaster, all future rights to exploit the programme are signed over to the
broadcaster.
Marketing
Licensed commissions
Personalization
Under these arrangements, Commedia is paid an agreed amount, in full, upon delivery of the
Analytics
programme. The broadcaster acquires the rights to broadcast the programme an agreed number of
times, with Commedia retaining all residual rights to future exploitation of the programme. The price
Save Accept All for a licensed commission is 25% to 30% lower than that for the equivalent
paid by the broadcaster
funded commission. Where the cost of making
making the programme excee
exceeds
ds the value of the licensed
commission payment, the difference is carried forward as an intangible asset by Commedia to write off
against future revenues arising from the residual rights held.

At the start of this accounting period, 1 March 20X6, Commedia had two wholly-owned subsidiaries,
Scherzo Ltd and Riso Ltd. The subsidiaries were set up by Commedia Ltd many years ago. All three
companies have the same 28 February year end and they are all audited by your firm.
Scherzo Ltd (Scherzo)
Scherzo is a concert and events promotion company. The company stages major popular and classical
music concerts throughout the year, which are held principally in open-air venues.
Disposal of shareholding
On 30 April 20X6, Commedia disposed of 70% of its shareholding in Scherzo to that company's
management team for a possible total sum of £20 million. £15 million of this total was paid in cash on
completion of the sale, with the remainder to be paid 15 months later, contingent on the profit of the
company for the year ended 28 February 20X7. Scherzo has also appointed your audit firm as its
auditor. Extracts from the terms of the sale of shares in Scherzo are set out below.
Extracts from contract for sale of shares in Scherzo Ltd
(a) The completion date for the disposal of the shares was 30 April 20X6.
(b) Total possible consideration for the shares is £20m,
£20m, split as follows:
 £15 million payable on completion.
 £5 million payable on 31 July 20X7 if the pre-tax profit of the company
company for the year ended
28 February 20X7 is at least £5 million.
 If the pre-tax profit for the year ended 28 February 20X7 is below
below £3 million, no further
consideration is payable.
 For pre-tax profit between £3 million and £5 million, the further consideration payable is
calculated as follows:
Further consideration = £5m  (pre-tax profit less £3m)/£2m
(c) Pre-tax profit for the purpose of this contract is defined as 'Profit before tax per the company's
audited financial statements excluding the following items:
 Total directors' emoluments in excess of £350,000.
 Exceptional items (ie, items of income
income and expense
expense of such materiality that IAS 1 requires their
nature and amount to be disclosed separately).
'Rock in the Park' concert
Scherzo was responsible again this year for 'Rock in the Park', a major outdoor series of popular music
concerts spanning three days in July 20X6. On the evening of the third day, part of the stage collapsed
causing injury to some members of the stage crew and audience. The incident also led to the
This websitecancellation
stores dataofsuch
the rest
as of the concert, including the performance scheduled for the event's most well
cookies to known
enable performer. Scherzo had sub-contracted the erection and maintenance of the stage to another
essential site
company, Highstand
functionality, as well as marketing,Limited.
The directors You have included a provision in the year-end financial statements of £2 million.
of Scherzo
may change your
This settings
is to at any
allow for time of refunding all monies received from the sale of tickets to the concerts, and
the cost
to recognise the cost of personal injury claims received by the company as at the year end.
Riso Ltd (Riso)
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Riso's sole activity is the operation of a large television studio which it hires out to customers for the
production of television programmes. The television studio is based in a former glass bottle factory and
Marketing
is occupied by Riso under a ten-year lease, originally taken out on 1 March 20X3. The studio is hired out
to Commedia (on an arm's length basis) approximately 30% of the time for the filming of its own
Personalization
commissions. For the remaining 70% of the time the studio was, until recently, hired out to two
Analytics
different broadcast companies, each for the production of their own competing daytime television
drama serial.
Save Accept
During the year All28 February 20X7, one of these broadcasters announced that, due to poor
ended
viewing figures, it would no longer be making a drama serial. Riso has spent the last three months
looking for an alternative customer, but has so far been unsuccessful. The directors of Riso are aware
that there is currently surplus capacity in UK-based studio facilities, due to a reduction in UK-produced


programmes. This reduction has been brought about by an increase in programmes imported from
overseas and reduced TV advertising budgets.
The directors of Riso have produced a forecast of future pre-tax cash-flows for the company as follows:
Year ending 28 February £'000 inflow/(outflow)
inflow/(outflow)
20X8 (100)
20X9 (50)
20Y0 900
20Y1 1,375
20Y2 1,495
20Y3
20Y3 1,695
1,695
Riso made an initial £8 million investment in the television production equipment required for its studio
on 1 March 20X3. No further capital expenditure is likely to be required for the foreseeable future. The
company expects the equipment to have an expected useful life of ten years at which point its disposal
value is estimated to be £2 million. Riso depreciates the equipment on a straight-line basis. The carrying
amount of the company's other assets and liabilities at 28 February 20X7, was £250,000.
Attachment 2: Copy of email from Bob Kerouac
Date: 26 March 20X7
From: Bob Kerouac <bkerouac@commediagroup.com>
To: Margaret Fleming <m.fleming@poe.whitman.com>
Subject: Year end financial statements
Margaret,
It was good to meet you recently. Further to our scheduled meeting in two weeks' time, there are some
matters in connection
that when we meet youwith
canthe current
provide meyear
withfinancial statements
advice on that I want
their appropriate to discuss
treatment in with you. I hope
the financial
statements for the year ended 28 February 20X7. The matters are as follows:
(1) Disposal of our majority holding of shares in Sche
Scherzo:
rzo: as you know, we sold the majority
majority of our
shares held in this company during the year. I would be grateful if you could provide me with
some advice on how to account for this disposal in Commedia's own financial statements for the
year; and also how the remaining investment in Scherzo
Scherzo is now to be treated in the group's
consolidated financial statements.
(2) Treatment of the television production
production equipment in Riso: as you are aware, we have recently
recently lost a
major contract in this company due to cancellation by our customer of their daytime TV drama
serial. This has given rise to a loss in the company this year, and will mean future losses if an
alternative customer cannot be found. I am unsure how, if at all, this affects the value and
presentation of the equipment in the financial statements of Riso. I am particularly concerned as we
recently had the equipment externally valued at a figure of £4 million. Please could you clarify this
issue for me, indicating what adjustments, if any, are required to ensure proper presentation in the
financial statements for the year. I am unsure whether this is of use to you, but the pre-t
pre-tax
ax annual
rate of returnsite
that the market would expect from this type of investment is 10%.
may33change Precision
your settingsGarage Access
at any time
Precision Garage Access plc (PGA) is a listed company which manufactures and installs garage doors for
private residences. You are a senior working for PGA's auditors and are currently supervising the
Privacy Policy
planning and interim audit work for the year ending 30 September 20X6. You are also carrying out a
review of the interim financial statements for the nine months to 30 June 20X6.
Marketing
As part of the planning process, an audit junior, Claire Chalker,
Chalker, has completed some initial analytical
Personalization
procedures on the management accounts for the nine months ended 30 June 20X6. She has provided
some background information (Exhibit 1) and set out some basic financial data and notes ( Exhibit 2).
Analytics
She does not however have the experience to analyse this data in order to identify audit risks.
Save Accept All


The engagement manager, Gary Megg, reviewed Claire's work and sent you the following email:
To: A. Senior
From: Gary Megg, Engagement Manager
Date: 26 July 20X6
Subject: PGA audit
I have been through the notes prepared by Claire. I think she has highlighted some interesting points,
but she has not really analysed the data in any depth or identified key audit issues. There appear to be
some financial reporting issues arising from her work which may require adjustment to the management
accounts.
Prior to our audit planning meeting next week I would like you to do the following:
(a) Carry out revised analytical procedures using Claire's data
data and other information provided. This
work should:
 identify any unusual patterns and trends in the data which may require further investigation.
Show supporting calculations (where appropriate assume 360 days in a year for the purpose
of computing any ratios); and
 outline the audit risks that arise from the patterns and trends identified in the analytical
procedures and set out the audit procedures you would carry out.
(b) Set out the financial reporting issues that arise from the above audit work with respect to the
interim financial statements for the nine
nin e months ended 30 June 20X6 and are expected to arise for
the year ending 30 September 20X6. I do not require any detailed disclosure requirements. I do
not require you to consider tax, or deferred tax, implications at this stage.
There is one further matter which I would like you to look at. I have just received an email from David
May, the finance director of PGA. The board has acknowledged that the company is experiencing
difficulties retaining key staff. This is particularly the case with senior and middle management. Whilst a
bonus scheme has been introduced this year in place of a pay rise (see Claire's notes below) the
directors realise that they need to encourage individuals to commit to the company longer-term. David
has come up with a proposal for a share based bonus scheme but is concerned about its effects on
future profits. I have attached his email which provides details
details of the scheme and the information he
requires (Exhibit 3). I would like you to produce the information he has requested so that I can forward
it on to him. Please use his working assumptions. I think that his predicted share price increases may be
optimistic in the current climate but I can discuss this with him at a later date.
Many thanks,
Gary
Requirement
Respond to the engagement manager's instructions. Total: 30 marks
cookies to Exhibit 1: Background
enable essential site information prepared by Claire Chalker
functionality,
PGAas makes
well asand
marketing,
installs two types of garage doors:
 Manually
may change your settingsoperated
ope rated
at any wooden doors – the 'Monty'. The list price of the Monty was increased
time increased by
by 5%
5%
on 1 October
or accept the default settings. 20X5 to £840 each, including installation.
 An electrically operated sesett of metal doors with a motor – the 'Gold'. The list price of the Gold was
increased by 5% on 1 October 20X5 to £2,520 each, including installation.
Privacy Policy
Nearly all doors are made to order.
Marketing
Each of the two types of door is made on a separate production line at PGA's factory in the south of
England. Production equipment is specialised and highly specific to each of the separate production
Personalization
processes.
Analytics
PGA makes about 70% of its sales of both products in Germany and France where it has a network of
sales offices. All selling prices are set at 1 October each year. Prices for overseas markets are fixed in euro
Save
at this time, Accept All
at the equivalent of pound sterling prices.

The company has had a difficult trading year so far, due to the general economic downturn. The trading
performance in the year ending 30 September 20X6 is thus expected to be weaker than in the previous
year.
In previous years, approximately equal quantities of Gold and Monty doors have been sold. However,
sales of the Gold have suffered particularly badly this year, as customers appear unwilling to spend large
sums on their garage doors in the recession. Sales of Gold doors are not expected to increase in the
foreseeable future.
Customers are either individual householders or small building companies. Discounts may be given to
building companies for large orders but PGA sales staff have stated that door prices to individual
customers are never discounted.
Exhibit 2: Financial data and notes prepared by Claire Chalker
Management accounts – Statements of profit or loss and other comprehensive income
Draft 9 months to 9 months to Year ended
Notes 30 June 20X6 30 June 20X5 30 Sept 20X5
£'000 £'000 £'000
Revenue: 1
Monty 7,500 9,600 10,400
Gold 14,000 28,800 31,200
Cost of sales: 2
Monty (6,700) (7,800) (9,200)
Gold (15,500) (23,400) (27,600)
Gross profit/(loss) (700) 7,200 4,800
Fixed administrative and
distribution costs (1,200) (1,200) (1,600)
Exceptional item
item
Staff bonus scheme 3 (450)
(450) – –
Profit/(loss) before tax (2,350) 6,000 3,200
Income tax expense – (1,680) (900)
Profit/(loss) for the period (2,350) 4,320 2,300
Management accounts – Extracts from statements of financial position

At 30 June At 30 June At 30 Sept
Notes 20X6 20X5 20X5
Current assets £'000 £'000 £'000
Inventories 4 3,500 3,500 1,
1,200
200
Trade receivables 4 2,400 4,300 1,000
Notes
1 Revenue
cookies to enable Inventory records
essential site show the number of doors sold as:
functionality, as well as marketing, 9 months to 30 9 months to 30 Year ended
personalization, and analytics. You June 20X6 June 20X5 30 Sept 20X5
Monty 9,000 12,000 13,000
Gold 6,000 12,000 13,000
Sales volumes in the final quarter of the year ending 30 September 20X6 are expected to be the
same as the final quarter of the year ended 30 September 20X5 for both the Monty and the Gold.
Privacy Policy
Revenue from garage doors is recognised when they are delivered to a customer's house. Revenue
Marketing from installation is recognised when the contract is completed
completed to the customer's satisfaction.
2 Cost of sales
Personalization
The production process for the Gold is technologically advanced, so annual budgeted fixed
Analytics
production costs of £12 million are expected. For the Monty, annual budgeted fixed production
costs are £4 million. These fixed costs have not changed for some years and are incurred evenly
Save over theAccept All an equal amount being recognised in each quarter. The variable cost per unit
year, with
for each product is budgeted at 50%
50% of selling price.

3 Staff bonus
As a result of the recession, there was a zero
zero general pay increase for employee
employees.
s. However, a bonus
scheme was introduced under which a payment to employees of £600,000 will be made for the
full year if revenue for the year ending 30 September 20X
20X66 exceeds £26 million.
4 Inventories and receivables
Inventories consist mainly of partly-made doors. There is little finished inventory as doors are
normally made to order.
Sales are normally on 30 day credit terms.
Exhibit 3: Extract of email from David May: share based bonus scheme
To tie in middle and senior managers to the company, a bonus would be given to existing managers
after three years of continued employment from 1 October 20X6, on which date the scheme would
commence. If these employees leave before 30 September 20X9 they will receive no bonus. Also,
however, I want to link the bonus to company performance – which I think is best achieved by basing it
on share price.
The proposal is to either: (A) issue 600 shares; or (B) pay a bonus equivalent to the value of 600 shares
at the date of redemption for each existing manager. The amount would only be given in either case
after three years' service. Those managers joining after 1 October in any year would not qualify for the
scheme in that year.
The problem is that these managers would probably stay for three years to receive the bonus and then
leave. My idea is – and this is the clever part – to have the same bonus scheme every year so, whenever
managers leave, they would be giving up a large sum in bonuses that have not vested.
Using Proposal A as an example, if we start the scheme on 1 October 20X6, each eligible manager will
receive 600 PGA ordinary shares on 30 September 20X9. There would then be another scheme on
1 October 20X7 for 600 shares which would
wo uld vest on 30 September 20Y0 (ie, three years llater),
ater), and the
same again in each future year. The same rolling system would apply if we decide to go with Proposal B
instead.
My working assumptions are as follows:
 The PGA
PGA share price will be £8 on 1 October 20X6 and increase by 25%
25% in the first year and then
20% per annum thereafter (our future order book looks strong and I believe that there are signs
that we are coming out of the recession).
 There are 80 eligible managers now. It is assumed that ten managers (all of whom are currently
currently in
employment) will leave during each year and ten managers will join.
 The fair value of the
the share based cash settled instrument is equal to the share price.
This websiteInformation
stores datarequired
such as
cookies to Ienable
would essential site
like the following information:
(1) Using
personalization, my working
and analytics. Youassumptions, pre
prepare
pare a com
computation
putation of the effect on profit of this scheme
scheme for
may change your each of theatyears
settings any ending
time 30 September 20X7, 20X8 and 20X9 under the following alternative
assumptions:
 Proposal A – the
the bonus
bonus is given in the form of 600
600 PGA shares per manager each year.
Privacy Policy  Proposal B – the bonus is paid in cash as an amount

amount equivalent to 600 PGA shares per
manager each year.
Marketing
(2) An explanation of why the impact
impact on profit may vary:
Personalization
 from year to year for each proposal
Analytics between the two proposals
Save Accept All


34 Tawkcom
You are the senior responsible for the audit fieldwork at Tawkcom
Tawkcom Ltd, the UK trading subsidiary of
Colltawk plc, a major international telecommunications group, listed on the London Stock Exchange.
Tawkcom provides data and communication services to commercial and public organisations. These
services utilise Tawkcom's UK-wide fibre optic network, a valuable and unique asset built up over many
years.
You are currently completing the final audit of Tawkcom for the year ended 30 September
September 20X9. The
audit has not gone smoothly and reporting to the group audit team is overdue. The most significant
incomplete area of audit procedures is the work on property, plant and equipment (PPE), which has
been allocated to a junior member of your team, Jo Carter. You are due to meet the audit manager, Jan
Pickering, this evening to discuss progress on this work.
Jan has just left you this voicemail:
"The Colltawk group financial statements are due to be signed off early next week and I'm very worried
about the work we have left to do on Tawkcom. PPE is a key audit area for this business and Jo is likely
to require detailed guidance if she is to complete the procedures satisfactorily. I know you've been very
busy but I need you to look today at what she's done so far ( Exhibit 1), both to identify any unresolved
audit or financial reporting issues and to determine what audit procedures we have left to do.
I've sent you some extracts from the group audit instructions ( Exhibit 2) so you can take these into
account in determining the required audit procedures.
Please come to the meeting this evening prepared for a detailed discussion. You will need to prepare the
following documents for the meeting:
(a) Notes explaining

explaining any financial reporting and audit issues you have identified from your review of
Jo's work to date (Exhibit 1).
(b) A list of the additional ste
steps
ps we will need to pe
perform
rform to complete
complete our audit procedures on PPE,
both for group reporting and to support our opinion on the statutory financial statements of
Tawkcom.
(c) A summary identifying where the group audit team may provide useful evidence
evidence in com
completing
pleting the
audit of PPE.
I am also aware that there have been some changes to the auditing standards relating to auditor's
reports and in particular the introduction of a new standard on Key Audit Matters. I haven't had time yet
to look at the new standard in detail so I would be grateful if you could put together a few notes on this
and its relevance if any to Tawkcom and the group."
Requirement
Prepare the documents Jan has asked you to bring to this evening's meeting. Total: 30 marks
cookies to Exhibit 1: PPE work
enable essential site papers prepared by Jo Carter
Summary of marketing,
balances
may change The group
your reporting
settings at anypack
timefor
f or Tawkcom at 30 September 20X9 includes the following schedule. All
balances
or accept the defaultand movements have been agreed to the register of PPE and to the schedules used for detailed
settings.
testing.
Freehold Fixtures
land and Leasehold Network and Investment
Privacy Policy
buildings improvements assets equipment property Total
£'000 £'000 £'000 £'000 £'000 £'000
Marketing
Cost/valuation
Personalization
Brought forward at
1 October 20X8 32,000 4,160 162,831 19,255 0 218,246
Analytics
Additions 0 3,409 34,391 2,406 0 40,206
Disposals (6,550) (102) 0 (508) 0 (7,160)
Save Transfer fromAccept
assets All
held for sale 0 0 0 0 3,936
3,936 3,936
3,936
Carried forward at
30 September 20X9 25,450 7,467 197,222 21,153 3,936 255,228


Freehold Fixtures
land and Leasehold Network and Investment
buildings improvements assets equipment property Total
£'000 £'000 £'000 £'000 £'000 £'000
Accumulated
depreciation
Brought forward at
1 October 20X8 476 882 38,697 14,577 0 54,632
Charge for the year 0 298 2,875 4,051 0 7,224
Disposals (95)
(95) (98) 0 (129) 0 (322)
Carried forward20X9
30 September at 381 1,082 41,572 18,499 0 61,534
Carrying amount at
30 September 20X9 25,069 6,385 155,650 2,654 3,936 193,694
Summary of procedures performed

Opening balances
Opening balances have been agreed to prior year signed financial statements with the exception of the
opening cost for Network assets. This is greater than the balance shown in the prior year financial
statements by £1.3 million due to an audit adjustment to remove from non-current asset additions the
cost of certain repairs to and maintenance on the fibre optic network. This was recognised in the
financial statements but not reflected in the register of PPE or in the group reporting pack,
pack, as it was not
considered material for group purposes.
Additions
A sample of additions was selected for each category
category of PPE using group materiality of £4 million to
determine the sample size. Each item in the sample was physically inspected where possible, verified as
a capital item and, where appropriate, agreed to a third party invoice. Further information is provided
below:
Leasehold improvements
Tawkcom has one leasehold property, its head office building. This building is leased under a 20-year
operating lease, expiring in 20Z5. During the year ended 30 September 20X9, Tawkcom completed a
major refurbishment programme to update and improve all office accommodation.
Network assets
Additions comprise new fibre optic cable laid to extend
extend network coverage or to connect a particular
customer to the network. Tawkcom's own staff perform much of the work and additions could not
therefore be agreed to third party invoices. Instead they were agreed to project sheets detailing the
material,
This website labour
stores data andas
such overhead costs incurred on each stretch of cable.
cookies to Additions
enable essential site than in the prior year as group management
are higher management instructed the local finance director to
functionality, as wellthe
increase as day
marketing,
rates used for staff time so they were consistent with the rates used to compute charges
to external You
customers. A rough calculation indicates that the increase in rates has increased additions to
network assets by around £5 million.
Physical inspection of the network assets was not possible as the fibre optic cabling is laid underground.
Disposals
Privacy Policy
There were only three significant disposals in the year ended 30 September 20X9.
Marketing
(1) In June 20X9,
20X9, Tawkcom disposed of office equipment with a cost of £33
£332,000
2,000 to AR Hughes Ltd.
The accounting
Personalization assistant informed me that this company is owned by friends of Max Dudley,
Tawkcom's finance director. The group finance director approved the disposal. The accumulated
Analyticsdepreciation of £62,000 was correctly removed from the register of PPE. There were no proceeds
and a loss of £270,000 was included within the statement of profit or loss and other
Save Accept All
comprehensive income.

(2) In September 20X9, the company's freehold property in Scotland, Glasgow House, was sold to LJ
Finance plc, a finance company owned by the bank for the Colltawk group. The group finance
team arranged this transaction and local management has limited information. Tawkcom is still
occupying the building as it has been leased back from LJ Finance under a 20-year lease, which can
be extended to 50 years at Colltawk's option. An external valuer revalued Glasgow House at
30 September 20X7, along with the company's other freehold properties. Its value of £5.8 million
was agreed to the prior year audit work papers. The valuation and associated accumulated
depreciation were correctly removed from the register of PPE, cash proceeds of £7 million were
vouched to the bank account on 30 September 20X9 and the gain of £1,295,00
£1,295,000
0 was agreed to
the statement of profit or loss and other comprehensive income.
(3) Tawkcom disposed of land for £1.5 million
million recognising a profit on disposal in profit or loss of
£750,000. The contract was entered into on 31 July 20X9 conditional upon detailed planning
approval being granted. By 30 September 20X9 outline planning consent only had been granted.
Full planning consent was received on 20 October and the sale was completed on 30 October 20X9.
Sale proceeds were agreed to the cash book and bank statement. The cost of land was correctly
removed from the register of PPE and the profit on disposal correctly calculated.
Transfer from assets held for sale
In the financial statements for
fo r the year ended 30 September 20X8, a freehold property, surpl
surplus
us to
Tawkcom's requirements, was transferred out of PPE and shown separately as a non-current asset held
for sale. Our prior year audit files concluded that this treatment
treatment was correct on the basis that tthe
he
property was being actively marketed and a sale at its carrying amount of £3.9 million was considered
imminent.
This sale was not concluded and management has now decided to retain the property for the time
being until the property market has improved. To generate some return from the property,
management intends to divide the property into small office units which it will rent out as office space
under short-term rental agreements. In order to make this more attractive to prospective tenants,
Tawkcom will provide services such as telecommunications, reception, secretarial support and meeting
rooms. As the property is now being held for its investment potential, it has been transferred back into
PPE and designated as an investment property.
Depreciation charge for the year
The Tawkcom financial statements for the year ended 30 September 20X8 disclose the following
depreciation policy:
Depreciation is charged so as to write off the cost or valuation of assets over the following periods:
Freehold buildings 50 years
Leasehold improvements 20 years (the minimum term of the lease)
Network assets 20 years
Fixtures and equipment
This website stores data such as 3–10 years
cookies to For
enable
eachessential
categorysite
of asset, an expectation for the depreciation charge for the year ended was formed
using the above rates and taking into account the timing of additions and disposals.
may change The following
your settingspoints
at anywere
timenoted:
or accept the
(1) default settings. has been charged
No depreciation charged on freehold
freehold buildings as these properties are carried at
valuations which the finance director believes reflect their market value at the reporting date and
the buildings are maintained to a high standard.
Privacy Policy
(2) The depreciation charge for network assets is considerably
considerably lower than expected. This is as a result
Marketingof a group wide review of useful lives conducted by head office. This review concluded that the life
of network assets is greater than 20 years and a revised useful life of 22 years has been applied to
Personalization
all such assets. Calculations of the revised carrying amounts for a sample of assets were reviewed
Analyticsand verified as accurately reflecting for each asset the unexpired portion of a 22-year life.
Save Accept All


Exhibit 2: Extracts from the Group audit instructions for the Colltawk plc group for the year
ended 30 September 20X9
Risk of fraud and misstatement
The following key risks have been identified and should be considered by all subsidiary audit teams:
(1) The group has banking covenants on long-term bank loans requiring it to maintain a certain ratio
of non-current assets to net borrowings (defined as bank borrowings and lease creditors less cash).
As a result, management may have an incentive to overstate non-current assets or to understate
understate
net borrowings.
(2) Subsidiary management participates in the group's bonus scheme.
scheme. The level of bonus to be paid
depends on the performance both of the individual subsidiary and of the group as a whole.
Management may therefore have an incentive to overstate profit either at a subsidiary or group
level.
Materiality and reporting of misstatements
Pre-tax materiality for the Colltawk group audit is £4 million. All individual misstatements over £200,000
should be reported to the group audit team.
35 Expando Ltd
You are a supervisor in the audit department of Jones & Co. You are currently in charge of the audit of
Expando Ltd (Expando), a private limited company which imports and retails consumer electronic
equipment. Expando's year-end is 30 June 20X7. Today you arear e in the office when
wh en you receive the
following email from the audit senior who is working for you on the audit of Expando:
Expando:
To: Audit Supervisor

From: Audit Senior
As you are aware we are nearing the completion
completion of the audit of Expando Ltd, however, there are a
number of outstanding issues which need to be addressed. I have summarised these in an attachment
(Attachment 1). Unfortunately I am not sure how these should be dealt with in the financial statements
so I have not been able to revise the draft financial statements provided by the client ( Attachments 2
and 3). The audit partner has specifically requested a set of revised financial statements as he wants to
take them to the meeting with Expando's finance director tomorrow. I am also unclear whether these
issues have any implications for our remaining audit procedures. I was hoping that you may be able to
help me as follows:
(a) Explain the financial reporting treatment of the outstanding issues.
(b) Complete the draft statement of profit or loss and other comprehensive income, statement of
changes in equity and statement of financial position where indicated and make any appropriate
adjustments and corrections.
cookies to (c)
enableListessential site audit procedures which I need to do.
any additional
A couple of final points. I have found a list of procedures performed by the auditors of Titch (see point 5
below). I am not quite sure what to do with these. Shouldn't we do the audit of Titch?
or accept the
Thedefault settings.
client has a member of the accounts department who is due to go on maternity leave in three
months time. I have been asked if we can provide temporary help to cover for their absence. Can we do
this?
Privacy Policy
Requirement
Marketing
Respond to the audit senior's email. Assume that the tax figures will be audited by your firm's tax audit
Personalization
specialists, so you can ignore tax (including deferred tax) for now. Total: 30 marks
Analytics
Attachment 1
Notes of outstanding issues
Save Accept All
(1) With the exception
exception of the property referred to in Note
Note 4, below, all of Expando's trading premises
are held on short leases, and are not shown on the statement of financial position. The land
recorded on the statement of financial position refers to the storage facility in Northern England.


This is not depreciated. During the year it was revalued upwards, by £1 million, to £5 million. The
valuation was commissioned in the early summer of 20X6, to support the company's fundraising.
(2) New finance was taken
taken out on 1 July 20X6, in the form of an issue of a £2 million debenture loan.
Issue costs were £150,000. The coupon rate on the debenture is 3%. Its terms provide that it was
issued at par but that it will be redeemed at a premium. The overall effective interest rate for
Expando is 7%.
(3) On 1 September 20X6,
20X6, Expando acquired the business of Minnisculio, a small competitor,
competitor, for
£250,000. The acquisition was structured as a purchase of trade and assets, with £20,000 allocated
to inventories and the balance to goodwill. Expando has not conducted an impairment review in
respect of goodwill as there is no indication of circumstances which would give rise to an
impairment.
(4) Prior to the acquisition by Ex
Expando
pando of its trade and assets, Minnisculio had negotiated the
acquisition of new freehold premises, to be acquired on 1 October 20X6 for a consideration of
£125,000. The asset was estimated to have a useful life of 20 years and a policy of straight-line
depreciation was to be adopted. These premises were, however, surplus to requirements after
Minnisculio's business had been acquired by Expando. On 31 March 20X7 the management took
the decision to sell the premises at which date the fair value less costs to sell amounted to
£115,000.
(5) On 1 October 20X6, Expando acquired 25% of Titch Ltd, for a consideration of £400,000.
£400,000. Titch is
co-owned by three other UK companies, each of which holds 25% of its shares. Unfortunately, due
to unforeseen events which are not expected to be repeated, Titch made a trading loss for its year
ended 30 September 20X7 of £350,000. The results of Titch have not been reflected in Expando's
draft financial statements with the exception of the tax effect which has been dealt with by the tax
department.
(6) The tax impact
impact of the above is be
being
ing dealt with by the tax department.
Attachment 2
Summary draft statement of profit or loss and other comprehensive income and statement of
changes in equity
Year ended 30 June 30 June
20X7 20X6
(draft) (audited)
£'000 £'000
Revenue 4,430 3,660
Less operating expenses (3,620) (2,990)
Operating profit 810 670
Interest payable – Note 2 above (260) (200)
Profit before tax 550 470
Taxation (91) ( 141)
cookies to Profit
enableforessential
the year site
459 329
Other comprehensive income:
Gain on
personalization, andproperty revaluation
analytics. You 1,000 –
may change your settings at any time for the year
Total comprehensive income 1,459 329
Retained Revaluation
Statement of changes in equity 30 June 20X7 (extract) earnings surplus
Privacy Policy £'000 £'000
Balance at 1 July 20X6 713 –
Marketing 459 1,000
Balance at 30 June 20X7 1,172 1,000
Personalization
Analytics
Save Accept All


Attachment 3
Summary draft statement of financial position
Period end date 30 June 30 June
20X7 20X6
(draft) (audited)
£'000 £'000
Non-current assets
Land 5,000 4,000
Premises – Note 4 above 125 –
Plant and machinery 2 2
Investments – Notes 3, 5 above 650 –
Current assets 2,155 520
Current liabilities
Taxation (91) (141)
Other (300) (149)
6% bank loan (3,333) (3,333)
3% debenture – Note 2 above (1,850) –
Deferred tax To be completed –
Net assets To be completed 899
Share capital 86 86
Share premium 100 100
Revaluation surplus – Note 1 above 1,000 –
Retained earnings 1,172 713
Equity 2,358 899
36 NetusUK Ltd
You are a senior on a large team which is planning for the audit of NetusUK Ltd, a media company,
company, for
the year ending 30 June 20X9. NetusUK is a wholly owned subsidiary of an Australian parent company,
Netus Oceania (also audited by your firm), and contributes a very substantial proportion of the revenue
and profit reported by the Netus Oceania Group. Your team is required to report to your firm's
Australian office in Perth on the results of NetusUK and also to report
report on NetusUK's statutory UK
accounts. Netus Oceania is planning to raise additional capital from shareholders and the deadlines for
group reporting are very tight. Your firm is required to provide the final report to the Perth office by
16 September 20X9.
You receive an email from the manager
manager with overall responsibility for the NetusUK audit, Louise
Manning:
cookies to To:
enable
essential site
A. Senior
From: L. Manning
Subject:
personalization, and NetusUK
analytics.audit
You planning
may change Date:
your settings
3 July at
20X9
any time
or accept the default to
Welcome settings.
the Netus team.
team. As you know, we have a large te
team
am assigned as this is a very significant
client. I'm asking each team member to take responsibility for a particular section of our work and to
prepare a detailed audit plan, setting out the procedures to be performed at our final audit visit in
Privacy Policy
August. Materiality for planning purposes has been set at £1.5 million.
Marketing
You will be responsible for staff costs and the assets and liabilities related to staff costs in the statement
of financial position. NetusUK has around 5,000 permanent employees, 1,000 of whom are
Personalization
remunerated on an hourly basis. A time sheet system records time for hourly paid staff and overtime for
those salaried staff who are entitled to overtime payments. The company runs a single computerised
Analytics
payroll system covering both hourly paid and salaried staff and all staff are paid monthly. Each staff
member is allocated to one of the company's 80 departments, which range in size from three to
Save Accept All
400 employees.

Results of our review of controls at the interim audit showed that controls were poor so a substantive
approach is to be adopted. Management's attitude regarding controls has been a concern in the past
however they are aware of the issues and have told us that they are in the process of resolving them.
Attached to this email is an extract from NetusUK's June 20X9 draft accounts (Exhibit 1) showing the
20X9
items for which I wish you to take responsibility.
I need you to send me the following planning documentation so that I can complete the overall
planning file for this audit and submit it for manager review. Apart from item (3), your responses should
concentrate solely on the audit of staff costs and related assets and liabilities in the statement of financial
position. You do not need to consider any corporation tax or deferred tax balances.
Planning documentation required
(a) (1) Briefing notes for Harry Thomas the Finance Director (see Exhibit 2) so he understands what
entries he needs to make to account correctly for pension costs and where he can obtain any
additional information necessary.
(2) A schedule summarising
summarising the audit procedures you
you believe we should complete at our final visit
in August. For the substantive procedures, please be specific about the procedures you plan to
perform on each relevant balance.
(b) Your comments on any other matters, including ethical issues, you think we should take into
account in planning our audit procedures more generally or any concerns you have as a result of
the information you have been given.
I look forward to receiving your audit planning.
In addition to this I would like your assistance with a special project. Our firm is looking into the
possibility of using data analytics in future as a means of making our audit process more efficient. At the
interim audit our IT specialists were given permission by NetusUK to use our newly devised data
analytics tool as part of a pilot scheme. A journals dashboard was produced as a result ( Exhibit 3).
I have not been part of the working party involved in the data analytics project and am unclear as to
what this is all about and its relevance to our audit work. Please produce some notes for me explaining
what data analytics is. Then I would like you to look at the information produced and set out how this
could assist in our risk assessment process. You should also indicate any further analysis which we could
perform using the data analytics tool.
Louise
Requirement
Respond to Louise Manning's email. Total: 30 marks
Exhibit 1: Extract from NetusUK's draft accounts for the year ended 30 June 20X9
Summary of staff costs reflected in the statement of profit or loss and other comprehensive
This website storesfor
income data
thesuch
yearasto 30 June 20X9
cookies to enable essential site Total Total
functionality, as well as marketing, Cost of Distribution Administrative year to year to
personalization, and analytics. You sales costs expenses 30 June 20X9 30 June 20X8
may change your settings at any time £'000 £'000 £'000 £'000 £'000

Payroll settings. 78,301 40,815 33,974 153,090 141,496
Pension cost 10,487 5,466 4,550 20,503 12,634
Temporary staff 5,690 0 2,451 8,141 1,065
Privacy Policy
Employee expenses 341 287 2,074 2,702 2,396
Total staff costs 94,819 46,568 43,049 184,436 157,591
Marketing
Personalization
Analytics
Save Accept All


Summary of staff cost related balances in the statement of financial position at 30 June 20X9
30 June 20X9 30 June 20X8
£'000 £'000
Current liabilities
Employment taxes 6,903 6,287
Employer's pension contributions payable 2,397 1,484
Accruals
Temporary staff 204 119
Commission payable on June sales 454 429
Note: For the purposes of the draft accounts pension costs comprise only employer contributions
payable to NetusUK's defined benefit pension scheme. The rate of employer contribution increased from
10% of pensionable salary to 15% of pensionable salary with effect from 1 July 20X8 following an
actuarial valuation which showed a significant deficit.
Exhibit 2: Briefing notes
To: L. Manning
From: H.Thomas@Netus.com
Subject: Audit planning
Date: 1 July 20X9
Hi Louise
You already have our draft accounts for the period ended
ended 30 June 20X9 which have been prepared on
the same basis as last year's group reporting. As you know, the group head office has never required us
to include adjustments for the pension scheme deficit. I've just received instructions from head office
which state that, for this year's group reporting, they want full compliance with IFRS and will not be
making central adjustments for our pension scheme. I'm going to need your help in calculating the
necessary entries as I have no real experience of accounting for pension schemes and you've always
helped me with the entries for our statutory accounts.
As you know, we have one UK defined benefit
benefit pension scheme open to all employee
employees.
s. Head office has
told me that I should recognise the actuarial gains and losses immediately.
I look forward to receiving your advice on these matters and to discussing your detailed audit plan.
Regards
Harry
Exhibit 3: Journals dashboard
COMPANY: NETUSUK 01.07.X8 – 30.06.X9
Journals
Dashboard
functionality, as well as marketing, Automated vs Manual
may change 440your settings at any time Value
Total no ofsettings.
or accept the default journals
25%
£3,874,000
Privacy Policy
Total value of journals
Marketing
75%
Personalization
£8,805
Analytics
Average value of journals

Save Accept All

10 Volume
Number of users
40%
60%
Automated
Manual

Top 10 users Volume
V alue
Creator ID Department V alue Volume
£000 38
900 36
Andrews Finance 850 34
800 32
30
Conway Finance 750
700 28
650 26
24
Dalton Finance 600
550 22
(financial 500 20
450 18
controller) 400 16
350 14
Edwards Finance 300 12
250 10
200 8
Farley Finance 150 6
100 4
Lyndon Sales 50 2
s y s

dd n s
Ridley Finance e w
r e w a o n w a r
t e y
l e d o ld e y
e h
g m a n g
d n l
a r n d
n o o
A n C o D E d F a L y i
R i
S h
T W
Singh Finance
Average £17k £12k £53k £8k £13k £5k £15k £18k £18k £2k

Thomas Finance
Wong Sales
This37
websiteVerloc Group
stores data such as
You
functionality, asare a as
well newly-promoted
marketing, audit manager at Marlow & Co, a firm of ICAEW Chartere
Chartered
d Accountants. You
arrive and
personalization, at the office onYou
analytics. a Monday morning and find the following email from Leonard Kurtz, the audit
engagement partner
may change your settings at any timefor Verloc Group.
Date: 4settings.
October 20X9
From: Leonard Kurtz <lkurtz@marlow.co.uk>
To: Ruth Smith<rsmith@marlow.co.uk>
Privacy Policy
Subject: Verloc Group audit
Ruth,
Marketing
I know that you have not been involved in the Verloc Group audit before, but as you probably know,
Personalization
the audit manager on this account has just resigned and I need you to step in. I'm looking for someone
who can pick things up quickly and run with it, and you look like the right person for the job.
Analytics
I attach the following information, which I have just received from Verloc Group's Finance Director:
Save
 Accept
Individual All
statements of profit or loss and other comprehensive income for the companies in the
group (Attachment 1).
 Notes on the main transactions during the year ended 30 September 20X9 (Attachment 2).

 Draft consolidated statements of profit or loss and other comprehensive income with supporting
workings (Attachment 3).
The Finance Director has not yet sent me the statements of changes to equity and statements of
financial position but he promises to have them ready for us at the audit planning meeting this
afternoon.
I have also forwarded to you some handover notes prepared by your predecessor ( Attachment 4),
which may help us in planning the audit this year.
Ahead of the audit planning meeting, please review the information provided and:
(a) explain any financial

should take reporting
in response to eachand auditing
issue, issues
including that arise,
matters to beand describe
discussed thethe
with actions thatDirector;
Finance we
and
(b) draft the revised
revised consolidated state
statement
ment of profit or loss and other comprehensive income that you
would expect to see after adjusting for the financial reporting issues.
Come and see me at 1pm so we can go through the main points before we head off to the meeting
with Verloc Group.
Thanks,
Leonard Kurtz
Requirement
Respond to the audit partner's email. Assume that the tax figures will be audited by your firm's tax audit
specialists, so you can ignore tax for now. Total: 30 marks
Attachment 1: Statements of profit or loss and other comprehensiv
comprehensive
e income for three
entities for the year ended 30 September 20X9
Verloc Winnie Stevie
£'000 £'000 £'000
Revenue 6,720 6,240 5,280
Cost of sales (3,600) (3,360) (2,880)
Gross profit 3,120 2,880 2,400
Administrative expenses (760) (740) (650)
Distribution costs (800) (700) (550)
Investment income 80 – –
Finance costs (360))
(360 (240) (216)
Profit before tax 1,280 1,200 984
Income tax expense (400) (360) (300)
Profit for the year 880 840 684
Other comprehensive income (not reclassified to P/L):
Remeasurement gains on defined benefit pension plan 110 – 40
This websiteTaxstores
effectdata suchcomprehensive
of other as income (30) – (15)
cookies to Other
enablecomprehensive
essential site income for the year, net of tax 80 – 25
960 840 709
may change Attachment
your settings2:atNotes on the main transactions during the year ended 30 September 20X9
any time
or accept the
(a) default
Verlocsettings.
acquired 160,000
160,000 of the 200,000 £1 issued ordinary shares of Winnie on 1 May 20X9 for
£2,800,000.. The reserves of Winnie at 1 May 20X9 were £2,050,000. A year end impairment
£2,800,000
review indicated that goodwill on acquisition of Winnie was impaired by 10%. The group policy is
Privacy Policy to charge impairment losses to administrative expenses. The group policy is to value the non-
controlling interest at the proportionate share of the fair value of the net assets at the date of
Marketing acquisition.
Personalization
The fair value of the net assets acquired was the same as the book value with the exception of an
investment property, which had been valued at the time of acquisition to be £960,000 above its
Analytics
book value. The property has an estimated total useful life of 50 years, and has been depreciated
on the cost model. At the date of acquisition Winnie had owned this property for 10 years.
Save Accept All
The
basisgroup policy
from the is to
date charge depreciation
of acquisition onofbuildings
to the date disposal.to administrative expenses on a monthly

(b) Verloc disposed of 40,000
40,000 £1 ordinary shares of Stevie on 1 July 20X9
20X9 for £960,000.
£960,000. Verloc had
acquired 75,000 of the 100,000 £1 issued ordinary shares of Stevie for £980,000 on
1 November 20X6, when the balance on reserves was £1,020,000.
£1,020,000. The fair value of the
shareholding retained at 1 July 20X9 was £792,000. There was no evidence of goodwill having
been impaired since the date of acquisition. The reserves of Stevie at 1 October 20X8 were
£1,300,000.
(c) Winnie paid a dividend of £1
£100,000
00,000 on 1 September
September 20X9
20X9 and Verloc
Verloc has recorded
recorded its share in
investment income.
(d) Verloc holds several
several available for sale investments, including some unquoted shares, and accounts
for these in accordance with IAS 39, Financial Instruments: Recognition and Measurement . Gains on
subsequent measurement of £46,000 occurred in the year. The financial controller, however, is
unsure how this should be presented within the statement of profit or loss and other
comprehensive income and so has yet to include it. He is also aware that the presentation may
change when IFRS 9, Financial Instruments comes into force.
(e) Verloc also disposed of an available for sale investment
investment during the year to 30 September
September 20X9 for
£630,000, when the carrying value of the investment
inv estment was £580,000. The gain on disposal of
£50,000 is included in administrative expenses in Verloc's individual financial statements. Previously
recognised gains associated with this investment of £40,000 have been recycled from other
comprehensive income to profit or loss (administrative expenses) in the draft consolidated financial
statements, although it had not been adjusted for in the individual statements of profit or loss and
other comprehensive income above.
Attachment 3: Draft consolidated statements of profit or loss and other comprehensive
income with supported workings
Verloc Group
Consolidated statement of profit or loss and other comprehensive income
income
for the year ended 30 September 20X9
£'000 £'000
Revenue (6,720 + (6,240  5/12) + 5,280) 14,600
Cost of sales (3,600 + (3,360  5/12) + 2,880) (7,880)
Gross profit 6,720
Administrative expenses (760 + (740  5/12) + 650 + 119 (W2) – 40 recycled (1,797)
AFS gains (W7))
Distribution costs (800 + (700  5/12) + 550) (1,642)
Finance costs (360 + (240  5/12) + 216) (676)
Income tax expense (400 + (360  5/12) + 300) (850)
cookies to Other
enablecomprehensive
essential site income:
income:
Items that will not be reclassified to profit or loss
Remeasurement
personalization, gains
and analytics. You on defined benefit pension plan (110 + 40) 150
Tax effect of other comprehensive
may change your settings at any time income (30 + 15) (45)
Items that may be reclassified subsequently to profit or loss
Recycling of previously recognised gains on AFS investment (W7) (40))
(40
Other comprehensive income for the year, net of tax 65
Privacy Policy
Total comprehensive income for the year 1,820
Marketing
Profit for the year attributable to:
Personalization
Owners of the parent 1,242
Non-controlling interest (W1) 513
Analytics 1,755
Save Accept All

Total comprehensive income for the year attributable to:
Owners of the parent
parent
Non-controlling (W1)
interest 1,291
1,291
529

1,820

WORKINGS
(1) Non-controlli
(1) Non-controlling
ng interests
PFY TCI
£'000 £'000
Winnie
As stated in Attachment 1 (840
(840  5/12) 350
Additional depreciation on fair value adjustment (10)
340

NCI share (NCI in TCI is the same as Winnie has no OCI) = 20%
68 = 68
Stevie
As stated in Attachment 1 684
684 709
 65%
65%  65%
= 445 = 461
Total NCI 513 529
(2) Goodwill (Winnie) (to calculate impairment loss for year)

(2)
£'000 £'000
Consideration transferred 2,800
NCI at proportionate share of fair value (20%  3,210) 642
Less net assets at acquisition:
Share capital 200
Reserves 2,050
Goodwill (2,250)
1,192
Impairment (10%) 119
(3) Goodwill (Stevie)

(3)
£'000 £'000
Consideration transferred 980
NCI at proportionate share of fair value (25%  1,120) 280
Less net assets acquired:
Share capital 100
Reserves 1,020
(1,120)
140
140
(4) Adjustment to equity on part disposal of Stevie

This website stores data such as £'000
Fair value of consideration received 960
Increase in NCI in net assets at disposal (483 (W5)  35%/75%) (225))
(225
Adjustment to parent's equity 735
or accept the
(5) default settings. ng interests (SOFP)
Non-controlling
Non-controlli
£'000
NCI at acquisition (W3) 280
Privacy Policy NCI share of post acquisition reserves to disposal
203
Marketing (25%  [(1,300 + 709  9/12) – 1,020])
NCI at part disposal 483
Personalization
Movement in NCI (483 x 35%/75%)) (225)
258
Analytics
(6) Intragroup dividend
Save Accept All
Intragroup dividend income from Winnie = £100,000  80% group share = £80,000
→ Eliminate from 'investment income' bringing balance to zero.

(7) Available for sale investment
On disposal (30 September 20X9), previous revaluation gains of £40,000 were reclassified from
other comprehensive income to profit or loss ('administrative expenses').
Attachment 4: Handover notes – Verloc Group
Verloc is a family-owned retail business which had grown organically. In recent
recent years, it has sought to
expand in the domestic market by acquiring other synergistic businesses: Stevie in 20X6 and Winnie in
20X9.
We are auditors for Verloc, and have been auditing the individual financial statements of Stevie as well,
well,
although I am unsure whether this arrangement will continue.
The Verloc Group audit has always been extremely time-pressured. In the three years when I have
worked on this audit, the Board has insisted each time that the audit must be completed by
1 November. This deadline is completely artificial of course, but that's what the Group policy is.
Fortunately, this audit is very straightforward compared to most of the firm's other audit engagements
and presents low audit risk. Therefore, audit procedures can be simplified as much as possible. For
example, related party transactions and share capital are of low risk, so audit procedures can be
minimised on these two accounts.
Also, the timescale is such that there is insufficient time to apply the firm's statistic
statistical
al sampling methods
in selecting trade receivables balances for testing. It is more efficient to pick the sample based on the
audit team members' own judgement.
Materiality for the financial statements as a whole was £200,000, based on £12.8 million of revenue,
£2.1 million of profit before tax and £11.1 million of gross assets. I expect similar materiality levels can
be used on the 20X9 audit.
Last year, I gave two audit juniors the tasks of auditing trade payables and going concern. They
reviewed each other's work. This worked very well all round: reducing my review time and providing
good training for the audit juniors.
On a separate matter, I spoke with the Finance Director at a networking function two months ago, and
he mentioned that the Board is preparing for a listing on the London Stock Exchange in a bid to raise
long-term finance. I don't know where they are now on their listing plans.
38 KK
Kemsler Kessinger Ltd (KK) is a manufacturer of industrial cutting equipment.
You are a senior who has recently been assigned to the audit of KK. You work for Wight and JonesJones LLP
(WJ), a firm of ICAEW Chartered Accountants. WJ has recently been appointed as auditor for the KK
This website stores datafinancial
consolidated such asstatements for the year ended 30 June 20X4. WJ is also the auditor of all KK group
cookies to companies
and associates. The engagement partner, Emma Happ, invited you to a meeting with her to
functionality, as some
plan well as marketing,
aspects of the KK audit.
Emma opened the meeting:
or accept the
"KKdefault settings.
is a new client of WJ and we are still trying to understand fully its management processes and
corporate governance. My particular concern is that the interim audit discovered transactions with
directors and other related parties during the year which I suspect may not be at arm's length.
Privacy Policy
We need to make sure that the financial reporting treatment is appropriate in the KK consolidated
financial statements for the year ended 30 June 20X4 and that all necessary disclosures are made in each
Marketing
of the individual company financial statements.
Personalization
I have met with the KK chief executive, Mike Coppel. As a result of this discussion, I have prepared some
background information (Exhibit 1). In addition, the audit senior on the KK interim audit, Russell Reed
Analytics
(who no longer works for WJ), raised some matters of concern ( Exhibit 2).
One further issue
Save is that
Accept All Mike is unhappy with the due diligence work which was performed by the
accountants Trebant & Edsel LLP (TE) for KK's purchase of the shares in Crag Ltd (Exhibit 1). Mike is
considering asking WJ to review their work so the KK board can decide whether to undertake litigation
against TE. However, Mike emphasised that, while he is happy with the work of WJ so far, he would like
against TE. However, Mike emphasised that, while he is happy with the work of WJ so far, he would like

the audit for the year ended 30 June 20X4 to be completed to his satisfaction before he would consider
awarding this new review work to WJ, or indeed reappointing WJ for the audit engagement next year.
Please prepare notes for me as follows.
(a) For each of the issues in Exhibit 2:
 describe the appropriate financial reporting treatment in the KK consolidated financial
statements for the year ended 30 June 20X4. Explain and justify whether or not disclosure of
any related party transactions needs to be made in the individual financial statements of the
companies concerned for the year ended 30 June 20X4, setting out any required disclosures;
and
 explain the key audit issues and the audit procedures to be performed.
(b) Identify and explain
explain the key audit issues which arise from the acquisition by KK of shares and
options in Crag.
(c) Explain the ethical implications for WJ of Mike's
Mike's suggestion tthat
hat WJ carry out review work in respect
of the due diligence assignment performed by TE.
Please ignore tax and deferred tax for now."
Requirement
Respond to the instructions of Emma Happ, the engagement partner. Total: 30 marks
Exhibit 1: Background information
KK manufactures industrial cutting equipment at its factory in the UK. In the year ended 30 June 20X4,
the KK group had revenue of £126 million, made a profit before tax of £13 million and had net assets of
£88 million at that date.
Share ownership and the board
The ordinary share ownership and directors of KK at 30 June 20X4 were as follows:
Director role Shareholding in KK
Mike Coppel Chief executive 15%

Holly Reaney Finance director 5%
Janet Coppel Production director 10%
Dans Venture Capital Co (DVC) – 40%
Harry Harker Non-executive director –
(appointed by DVC)
This website stores
Yissan plcdata such as – 30%
Monica Orchard Non-executive director –
(appointed by Yissan plc)
may change Noyour settings
directors at any
joined timethe KK board during the year ended 30 June 20X4. Mike and Janet Coppel are
or left
married tosettings.
each other.
Group structure, other investments and transactions
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Most of the component parts used by KK in its manufacturing process are imported. One supplier,
Yissan, supplies 32% of KK's components.
components. Yissan acquired its 30% shareholding in KK in 20X1
20X1 and
Marketing
actively exercises its votes. Yissan has the right to appoint a director to the board.
Personalization
KK owns 40% of the ordinary shares in Seal Ltd and exercises significant influence.
Analytics
KK owns 35% of the ordinary shares in Moose Ltd and appoints two of its five board members. The
remaining 65% shareholding is owned by Finkle Inc, a US registered company. KK owns 30% of the
Save Accept
ordinary shares All Inc. The remaining 70% of the shares are held by a single unrelated individual.
in Finkle
On 1 August 20X3, KK acquired 45% of the ordinary shares in Crag Ltd, a competitor company. The
remaining 55% of the ordinary shares continue to be held by Woodland plc. Crag had previously been a
wholly-owned subsidiary of Woodland which is an unrelated company. Under the terms of the share


purchase, KK has an option, exercisable up to three years from the date of the share purchase, which
allows it to buy an additional 15% holding of Crag ordinary shares from Woodland at an exercise price
per share which is 10% higher than the actual price per share paid to purchase the 45% shareholding.
KK has been exercising its votes as a shareholder of Crag. Since 1 August 20X3, the fair value per
ordinary share of Crag is estimated to have risen by 13%. Crag's marketing director, who was appointed
by KK, has implemented a new successful marketing strategy which has been a key factor in increasing
the fair value per share.
The ordinary shares of all companies are voting shares. All companies have a 30 June accounting year
end.
Exhibit 2: Interim audit notes – prepared by Russell Reed
(1) Seal sold £12 million of goods to Crag, spread evenly over tthe
he year ended 30 June 20X4.
20X4. I am not
clear how this should be treated and whether there should be separate disclosure of these
transactions and, if so, what needs to be disclosed.
(2) On 6 June 20X4, Seal sold goods to Moose at a price of £2 million. At 30 June 20X4, none of these
goods remained in inventories held by Moose. There were no other transactions between Seal and
Moose during the year ended 30 June 20X4.
(3) On 15 December
December 20X3, Mike Coppel purchased a cutting machine from KK for £300,000.
£300,000. At the
date of sale, the carrying amount of the machine was £240,000 and its fair value was estimated to
be £380,000.
(4) On 2 October
October 20X3, KK
KK repaid a £9 million interest-free loan from Yissan. The loan was originally
raised on 12 March 20X1.
(5) On 20 January 20X4, Crag sold goods which had cost
cost £1 million, to KK for £1.5 million. One
quarter of these goods remain unsold by KK at the end of the year. There were no other
transactions between Crag and KK during the year ended 30 June 20X4.
39 UHN
You work for Hartner as an audit senior. Hartner is a firm of ICAEW
ICAEW Chartered Accountants. You have
recently been asked to act as an audit senior on the audit of UHN plc, an AIM-listed company.
UHN manufactures electronic navigation systems for the aircraft industry. It has survived the recession
and order levels have started to recover. In addition, low interest rates and the ability to keep costs
controlled have improved the company's financial performance in recent years.
The audit engagement partner, Petra Chainey, gives you the following briefing:
"We have been very short-staffed on the UHN audit and Greg Jones, the audit senior, has been acting as
This websitethestores
audit data
manager
suchonas this assignment. Greg has just gone on study leave and I would like you to take
cookies to on
enable essential
his role for thesite
remainder of the audit. Before he left, Greg prepared a handover note ( Exhibit 1)
which includes information on UHN's covenants and its draft summary financial statements for the year
endedand
personalization, 31 March 20X4.
analytics. YouThe handover note also includes Greg's summary of the key fin financial
ancial reporting
issues. These issues are
may change your settings at any time either unresolved or, in Greg's opinion, issues where the directors have exercised
judgement
or accept the in the application of accounting policies and estimates in the preparation of the financial
default settings.
statements for UHN. The planning materiality is £100,000. The audit closure meeting is scheduled for
this Friday.
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I have also forwarded you an email from the UHN finance director, Melvyn Hansi, requesting Hartner to
accept a one-off assignment (Exhibit 2). I need to respond quickly to this email as the matter is urgent. I
Marketing
am concerned that if we do not do as UHN requests, they may engage with another assurance firm, not
Personalization
just for this one-off engagement, but also for future audits.
We may not have the expertise in-house to complete this one-off assignment as the nature of UHN's
Analytics
industry is specialised, but I am sure we can put together a convincing report.
Save Accept
I would like you All
to prepare a working paper in which you:
(a) Set out and explain the implications of the financial reporting issues in Greg's handover note
(Exhibit 1). For each issue, recommend the appropriate financial reporting treatment, showing any
adjustments that you would need to make to the draft summary financial statements.

(b) Using your recommendations
recommendations above, evaluate and explain
explain the overall impact of your adjustments
on the gearing ratio and the interest cover ratio at 31 March 20X4 in accordance with the bank's
loan covenants.
(c) Explain the key audit risks that we need to address before signing our audit report on the financial
statements. I do not need the detailed audit procedures; just concentrate on the key risks.
(d) Explain the responsibility and accountability
accountability of the UHN board for cyber security and make
appropriate recommendations.
I will ask the tax department to review any further deferred tax and current tax adjustments.
I would also like you to prepare a file note explaining the ethical implications for our firm if we decide to
accept the one-off assignment (Exhibit 2)."
Requirement
Prepare the working paper and the file note requested by the audit engagement partner.
Total: 45 marks
Exhibit 1: Handover note prepared by Greg Jones
Loan covenants
UHN is financed by equity and debt. In 20X0, UHN was rescued from insolvency by its bank, which
provided a £20 million loan, repayable in 20X8. The loan contract with the bank stipulates two
covenants which are based on the year-end audited financial statements. Failure to meet either
covenant could result in the loan facility being withdrawn.
The covenants are as follows:
(1) The gearing ratio is to be less than 130%. The ratio is defined as:
Non - current liabilities (excluding provisions and deferred tax liability)
 100%
Equity (Share capital and reserves)
(2) The interest cover is to be greater than 3. The ratio is defined as:
Profit before finance costs (including exceptional items)
Finance costs
Covenants are determined at each 31 March year end.
As part of the loan agreement, audited financial statements
statements must be presented to
to the bank within four
months of the accounting year-end.
UHN – Draft summary financial statements for the year ended 31 March 20X4
This websiteStatement
stores dataof such
profitasor loss for the year ended 31 March 20X4
cookies to enable essential site £'000
£'000
Revenue 56,900
Operating costs You (49,893)
Exceptional itemat(Issue
any time
1) 3,040
Operating profit 10,047
Finance costs (2,200)
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Statement of financial position at 31 March 20X4
Marketing £'000
ASSETS
Personalization
Non-current assets
Property, plant and equipment (Issue 2) 20,040
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Current assets
Save Accept
Inventories (Issue 3) All 21,960
Trade receivables
receivables
Cash and
cash equivalents 15,982
15,982
128
38,070
Total assets 58,110


£'000
Equity
Share capital – ordinary £1 shares 1,000
Share premium 15,000
Retained earnings – deficit (500)
Total equity 15,500
Loans 20,000
Long-term provision (Issue 4) 8,520
8,520
Deferred tax liability 1,000
Total non-current liabilities 29,520
Current liabilities
Trade and other payables (Issue 3) 12,350
Short-term provision (Issue 4) 740
Total current liabilities 13,090
Financial reporting issues identified by Greg Jones

Issue 1 – Sale and leaseback of factory
On 31 March 20X4, UHN entered into a sale and leaseback agreement for its freehold factory in
Swindon. The factory was originally acquired by UHN on 31 March 20W4, at which point it had a useful
life of 30 years and a zero residual value. The sale proceeds from the sale and leaseback agreement were
£6 million, which is equal to the fair value of the freehold factory. The property was leased back on a
20-year lease from 31 March 20X4 at an annual rental of £611,120 to be paid annually in arrears. The
directors told me that, as the rentals are at market value, they have treated the lease as an operating
lease. The first lease rental will be payable on 31 March 20X5 and will be charged to the statement of
profit or loss in the year ending 31 March 20X5. The profit on the disposal of the factory and land has
been included as an exceptional item as follows:
Factory
£'000
Disposal proceeds 6,000
Less carrying amount at 31 March 20X4 (2,960))
(2,960
Profit recognised as an 'exceptional item' 3,040
Although we have vouched this transaction to the lease agreement

agreement and other documents (and there is
plenty of evidence on the audit file relating to this transaction), as it is such a material amount I thought
This website storesdraw
I would dataitsuch as attention.
to your
I have calculated the interest rate implicit in the lease to be 8% per annum.
I understand that theYou
treatment of sale and leaseback is to change, following the introduction of
may change your
IFRS 16,settings
Leases. at any time
Could you provide a brief explanation of the new treatment?
Issue 2 – Service centre in Russia
On 1 April 20X3, UHN set up a service centre in Russia at a cost of RUB266 million. The service centre is
Privacy Policy
situated at Moscow airport and operates as a repair depot for flights in and out of Moscow airport. The
service centre had an estimated useful life of six years at 1 April 20X3, with a zero residual value.
Marketing
In March 20X4, new regulations were introduced in Russia which prevented extended stays at Moscow
Personalization
airport for a number of major airlines. Therefore, significantly fewer aircraft could be serviced at UHN's
Moscow service centre. The UHN finance director recognised this regulatory change as an impairment
Analytics
indicator and carried out an impairment test exercise at 31 March 20X4 on the service centre.
Save Accept
As a consequence of All
this exercise, the service centre was determ
determined
ined to have a value in use of
RUB180 million and a fair value less cost to sell of RUB204 million at 31 March 20X4.
The finance director therefore calculated an impairment charge of RUB18 million. He translated this at
RUB48 = £1 to give an impairment charge of £375,000 in operating costs.

I haven't studied this area of financial reporting at college yet, so I thought I should bring it to your
attention. I have checked the exchange rates which are as follows:
At 1 April 20X3 RUB53 = £1
At 31 March 20X4 RUB48 = £1
Issue 3 – Hedge against increase in price of titanium
UHN uses titanium in its production process and holds titanium inventory of around 680,000 kilograms
to ensure a constant supply for production. UHN's selling price of its products is linked to the price of
titanium. On 1 January 20X4, UHN had 680,000 kilograms of titanium at a total cost of £8.2 million in
inventory. At that date, UHN signed a futures contract to deliver 680,000 kilograms of titanium at
£14 per kilogram on 30 September 20X4 to hedge against a possible price fluctuation of titanium. At
31 March 20X4, the market price of titanium was
w as £15 per kilogram and the futures
fu tures price for delivery on
30 September 20X4 was £16.60 per kilogram.
The arrangement was clearly designated as hedge accounting for financial reporting purposes in the
documentation prepared on 1 January 20X4. However, no adjustment has been made in the financial
statements to 31 March 20X4 to use hedge accounting or to adjust the fair value of the inventory. I was
informed that, as UHN had met the interest cover requirement for its bank covenant for the year ended
31 March 20X4, the directors want to hold back profit in order to recognise it in the year ending
31 March 20X5. The loss on the futures contract of £1.768 million is included in operating costs and in
trade and other payables.
Issue 4 – Provision for claim for damages
In 20X0, a cargo plane, fitted with a navigation system installed by UHN, crashed in the Saharan desert.
There was no loss of life, but the owner of the plane blames the crash on a failure of the UHN navigation
system. It is alleged that UHN's computer system had been hacked and the information used to attempt
to hi-jack the plane. UHN has strenuously denied this and contested the legal case. However, as the
UHN directors believed that it was probable that there would be a settlement, but were uncertain as to
the amount, a provision was made on 31 March 20X2 for the most likely outcome of £10 million to be
settled in approximately 3 years. The provision was discounted at 8% per annum.
In March 20X4, to avoid further bad publicity, UHN settled out of court with the owner of the plane and
agreed to pay £9.1 million. The payment terms have been agreed as 25% payable in April 20X4 and
75% payable in April 20X5. No adjustments have been made to the financial statements as a result of
the settlement because the directors believe that the existing provision should cover the payments they
will be required to make.
Exhibit 2: Email from finance director of UHN
To: Petra.Chainey
From: M.Hansi
Date:
This website stores data21 20X4
Julyas
such
cookies to enable essential site assignment
Subject: One-off
functionality,
TheasUHN
well board
as marketing,
is in disagreement about UHN's approach to cyber security.
may change The operations
your settings director believes that a cyber incident would be so rare that despite the fact that the
at any time
effects
or accept the would
default be potentially significant it is not worth spending large amounts on attempting to
settings.
mitigate risks. He pointed out that the responsibility for cyber security lies with the IT senior manager
who is not a board director but is responsible for the IT and security budget.
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The finance director believes that the amount UHN pays for cyber insurance premiums could be
reduced if it could demonstrate good cyber security practices. Other directors complain that there is a
Marketing
lack of information regarding security breaches. The HR director complained that she first heard about
the hacking allegations and the attempted hi-jacking of the cargo plane in the press.
Personalization
I would like Hartner to report to the board of directors about whether our spending on cyber security
Analytics
matters is providing value for money.
Save Accept to
I would like Hartner Allaccept this one-off assignment. I expect that Hartner will be able to charge a low
fee for this work as I am sure you will be able to use some of this report as part of your audit work.

40 ETP
You are Steph Carter, an audit senior
senior with J&K LLP, a firm of ICAEW Chart
Chartered
ered Accountants which audits
Erskin Technology plc (ETP).
You receive the following briefing from Lauren Haynes, the audit manager responsible for the ETP audit:
Welcome to the ETP audit team.
team. This week you are scheduled to plan the ETP audit for the year ending
30 September 20X4. It's important we get the planning completed so we can focus on updating our
controls work on revenue at our interim audit visit next month.
I'm aware that you have not worked on ETP before, so I have provided some background information
from last year's audit file (Exhibit 1). I've also sent you a working paper setting out the results of
preliminary analytical procedures performed last week by our audit assistant, Joshi Khan ( Exhibit 2).
Planning materiality has been set at £850,000.
email from the ETP finance director, Mari Johnson (Exhibit 3). She has asked us
Yesterday I received an email
for some advice and I'll need your help with my
my response.
You and I are scheduled to meet up later today. I would like you to do the following in preparation for
that meeting.
(a) In respect of the audit for the year ending 30 September 20X4:
(1) Prepare review notes
notes on Joshi's work (Exhibit
(Exhibit 2 ), which explain the weaknesses and limitations
2),
in the procedures he has performed. Perform additional analysis where you think this is
required. Set out clearly the additional audit procedures you would like him to perform and
the queries you would like him to resolve when he returns to the client later this week to
complete the preliminary analytical procedures.

(2) Identify and explain
explain the financial reporting issues and related audit risks you have identified
from the information provided, and outline, for each, the implications
implications for our audit approach.
Detailed audit procedures are not required at this stage.
(b) Draft a response to Mari's email
email (Exhibit 3) that explains how a review of the interim financial
statements for the period to 31 March 20X5 would differ from a statutory audit and set out the
benefits of such a review for ETP.
Requirement
Respond to Lauren Haynes' requests. Total: 30 marks
Exhibit 1: Background information on ETP from J&K's audit working papers for the year
ended 30 September 20X3
ETP is a listed company which supplies data storage devices and secure archiving systems.
ETP has three main revenue streams:
Hardware
Hardware revenues areYougenerated by sales of data storage devices which are manufactured for ETP by a
may change your
third settings
party at any time
manufacturer in Asia. These devices are sold under the 'Stor-It' brand name which was
purchased by ETP for £5 million on 1 October 20X1, at which date the brand had a remaining expected
useful life of 10 years. At the same date, ETP invested £1.6 million in patents for a new range of 'Stor-It'
devices. These costs were capitalised as non-current assets. The new 'Stor-It' devices went on sale on
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1 April 20X3 and were expected to have a market life of around four years from that date. Revenue from
sales of hardware is recognised when the hardware is delivered.
Marketing
Systems
Personalization
Systems revenue is generated from the sale of complete archiving and data storage systems comprising
Analytics
hardware, software and related services. System projects typically take 6 to 12 months to deliver and
revenue is recognised on confirmation by the customer that the project is complete.
SaveServices Accept All
Service revenue is generated by sales of training and consultancy. This is a very competitive market
segment. It has been historically important for ETP and remains a core part of the company's business
segment. It has been historically important for ETP and remains a core part of the company s business
plan. Service revenue is recognised as the service is performed.

Exhibit 2: ETP audit for the year ending 30 September 20X4 – Preliminary analytical
procedures working paper prepared by Joshi Khan
This working paper considers the following key performance indicators identified by ETP:
 Revenue growth
 Gross margin
 Receivables – days sales outstanding (DSO)
This working paper compares actual performance reported in the company's interim financial
statements for the six month period to 31 March 20X4, with:
 the budget; and
 the average performance of a comparator group of companies identified during the audit for the
the
year ended 30 September
September 20X3 as being
being most closely aligned to ETP in terms of activity.
Comparisons are also made if applicable to performance in a prior period. Where actual results appear
out of line with budget or the comparative data, explanations have been sought from Julie Barwell,
Financial Controller, and notes from these discussions are documented below.
(1) Revenue growth
Total revenue for the 6 months ended 31 March 20X4 was as follows:
£m
Hardware 25.4
Systems 100.3
Services 17.9
Total 143.6
Revenue growth for the six months ended 31 March 20X4

Hardware Systems Services
% % %
ETP
Actual growth for six months to 31 March 20X4
20X4 (15.0) 25.0 12.0
Budgeted growth for six months to 31 March 20X4 5.0 10.0 1.0
Comparator group of companies

Average growth for six months to 31 March 20X4
20X4 5.0 6.0 (2.5)
Note 1 2 3
Notes
1 Hardware sales of Stor-It
Stor-It devices were disappointing in the first half of the financial year
following the introduction of cheaper and more advanced products by ETP's competitors.
From discussions with Julie, sales have continued to decline in the third quarter and storage
space for hardware inventory is becoming a problem.
2 Systems sales were very strong in the first half of the financial year.
year. ETP
ETP reviewed
reviewed its re
revenue
venue
recognition policy for systems sales in October 20X3 and is now invoicing and recognising
revenue and associated costs as each project progresses. This resulted in the recognition of
additional revenue totalling £30 million on part-completed projects in the six months ended
31 March 20X4. The recognition of revenue on part-completed projects was not foreseen at
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the time the budget was prepared and hence actual performance was significantly better than
Marketing budget.
3 Services revenues for training and consultancy
Personalization consultancy were strong in the first half of the year despite
an overall decline in this sector of the market. Julie attributes this strong performance to the
Analytics introduction of an 'all in' advice package. Customers pay an up-front annual fee and are then
able to access telephone and online advice as and when they need it. They are also entitled to
Save Accept of
discounts Allup to 20% for the company's training programmes. This new service has proved
very popular and revenues of £5 million were received in the six months ended 31 March 20X4.
The up-front fees are recognised as revenue on receipt as they are not refundable.

(2) Gross margin
Hardware Systems Services
% % %
ETP
Actual margin for six months to 31 March 20X4
20X4 31.4 46.0 63.9
Budgeted margin for six months to 31 March 20X4 35.0 45.0 50.0
Actual margin for six months to 30 September
September 20X3 35.0 44.8 50.1

Average margin for 6 months to 31 March 20X4
20X4 42.0 44.7 50.3
Notes
Notes 4 5
Notes
4 systems sales for the six months to 31 March 20X4 is higher than budgeted
Gross margin on systems
as the new projects that started during the period have generated margins higher than those
experienced on the older projects which have now been completed. These higher margins
were, however, offset by a loss recognised on a new project for a government department. At
31 March 20X4, this project was approximately 40% complete and revenue of £3.6 million
was recognised in the six months to 31 March 20X4. Costs incurred on this project in the
period amounted to £4.6 million giving rise to a £1 million loss.
5 The gross margin
margin on services revenues is higher
higher than expected due tto
o the recognition of
£800,000 of training revenue relating to training courses held in September 20X3, but only
invoiced in October 20X3. Related costs were recorded in September 20X3.
(3) Receivables – Days sales outstanding (DSO)
ETP Days
Actual DSO as at 31 March 20X4
20X4 78.4
Budgeted DSO as at 31 March 20X4 66.0
Actual DSO as at 30 September
September 20X3 66.2
Average DSO for comparator group as at 31 March 20X4 65.0
Note
Note 6
Note
6 Overall DSO increased to above the industry average and prior year, as customers were
generally slow to pay invoices for stage payments on systems sales. In addition, a number of
distributors for the 'Stor-It' hardware devices struggled to make timely payments as their sales
of the product fell and inventory levels increased.
Exhibit 3: Email from ETP finance director, Mari Johnson
This websiteTostores
: dataLaurenHaynes@JK.com
such as
From: MariJohnson@ETP.com
Date: 21 July 20X4
Subject: analytics.
InterimYou
audit
Hi Lauren
I was surprised when I joined ETP that we did not ask J&K to complete review procedures on our interim
results. I'd like ETP to do this in future, but I am having some difficulty persuading the board that we
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should incur the additional cost. Please therefore provide me with a brief summary of the key benefits
that an interim review and report by J&K would provide.
Marketing
ETP's budget for the year ending 30 September 20X5 forecasts revenue for the year to be £350 million.
Personalization
The revenue growth is mostly attributable to a major systems sales contract with an overseas company
which will commence in April 20X5. ETP will prepare interim results to 31 March 20X5 and I think it
Analytics
would be relevant information for our shareholders to recognise revenue evenly over the year and
therefore reflect half of this new contract revenue in the interim financial statements for the six months
Save to 31 MarchAccept
20X5. AAllreview and a report by J&K would add credibility to the interim financial
statements for our shareholders.

41 Couvert
You are Anton Lee, a recently-qualified ICAEW
ICAEW Chartered Accountant working for Pryce Gibbs LLP (PG),
a firm of ICAEW Chartered Accountants. You are currently assigned as audit senior to the audit of
Couvert plc for the year ended 31 August 20X4. Couvert is a listed company.
Couvert sells high-quality carpets. It has struggled during the recession as demand for its products has
fallen. However, the company's directors are now confident that it will benefit from the expe
expected
cted
recovery in the carpet industry.
Couvert has several subsidiaries, most of them carpet retailers. In 20X3, Couvert's directors decided to
implement a strategy of vertical integration in order to protect the company's sources of supply. On
1 September 20X3, as part of this strategy, Couvert acquired 55% of the ordinary share capital of Ectal,
a carpet manufacturer based in Celonia. Background information on the investment in Ectal is provided
(Exhibit 1). On 1 March 20X4, Couvert also acquired 100% of the shares of Bexway Ltd, a UK carpet
manufacturer.
Mary, the audit manager assigned to the Couvert audit for the year ended 31 August 20X4, left PG last
week to start a new job in Australia. The audit partner, Lucille Jones, has sent you the following email:
To: Anton Lee, audit senior

From: Lucille Jones, audit partner
Subject: Couvert audit
I have assigned a new audit manager to the Couvert audit, but he is currently concluding another
engagement, and will not be able to join you until next week. In the meantime, there are several urgent
tasks outstanding on the Couvert audit. Our deadline for completion of the audit work is
12 November 20X4. Couvert is due to release its preliminary results to the stock market one week later.
I am concerned that Couvert has only today received year-end financial information from its subsidiary
Ectal (Exhibit 2) for consolidation into the Couvert group financial statements. I am also perturbed by
the apparent lack of involvement by Couvert's management in Ectal's affairs. Ectal has not prepared
regular management accounting reports during the year.
Another concern is the conduct of the audit of Ectal by by the local Celonian auditor, Stepalia LLP;
LLP; they
have not communicated the results of their audit to us. We originally assessed audit risk for Ectal as
moderate, but given the lack of information received we may need to look at this assessment again.
Ectal is material to Couvert's consolidated financial statements.
Also, I've just received a request for advice regarding
regarding two financial reporting issues from Couvert's
finance director. His email is attached (Exhibit 3).
I would like you to prepare a working paper in which you do the following:
This website(a)stores dataand
Analyse such as
explain, using analytical procedures, the financial performance and position of Ectal
Ectal for
the year ended 31 August 20X4 (Exhibit 2). Include enquiries that will n need
eed to be made of Ectal's
functionality, as management
well as marketing,
and its auditor Stepalia arising from these analytical procedures.
(b) Identify You your concerns
and explain
explain concerns about the corporate governance arrangements at Ectal and the
impact at anyon
of these time
the financial reporting of the investment in Ectal in Couvert's consolidated
financial statements for the year ended 31 August 20X4.
(c) Explain, in respect of the audit of Ectal b
byy Step
Stepalia:
alia:
Privacy Policy  the actions to be taken by PG; and
 the potential implications for the group auditor's report.
Marketing
(d) Explain the appropriate financial reporting treatment for the two issues identified by Couvert's
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finance director (Exhibit 3).
Analytics
Requirement
Respond to the
Save auditAll
Accept partner's email. Total: 40 marks

Exhibit 1 – Background information on Couvert's investment in Ectal
Ectal was incorporated 20 ago in Celonia, a country well known in the carpet industry for the high
quality of its wool products and its skilled labour force. The currency of Celonia is the Celonian dollar
(C$).
Ectal was founded by Ygor Vitanie, who held a majority shareholding until, on 1 September 20X3,
Couvert purchased 55% of Ectal's ordinary share capital from him, at a substantial premium. The
remaining 45% of the shares are now held as follows:
Ygor Vitanie 35%
Other members of the Vitanie family 10%

Corporate governance arrangements
Ygor is Ectal's managing director, and his daughter, Ruth, is the manufacturing director. There are three
other directors nominated by Couvert. These are Couvert's marketing director, finance director and
operations director. Ygor has the casting vote in cases where voting is tied. Since 1 September 20X3,
Couvert's operations director has attended four of Ectal's monthly board meetings, Couvert's finance
director has attended one board meeting in November 20X3 and Couvert's marketing director has been
unable to attend any of
o f the meetings because of other commitments.
External audit arrangements
PG does not have a correspondent or branch office in Celonia. The audit of Ectal continues to be
conducted by a local Celonian audit firm, Stepalia, which was first appointed to the Ectal audit several
years ago. PG issued group audit instructions to Stepalia
Stepalia several months ago, but has received very
very little
information from Stepalia. Component materiality for the Ectal audit was set at the planning stage at
C$20 million.
Due diligence
Due diligence in respect of Couvert's acquisition of Ectal was carried out jointly by PG and Stepalia. The
principal member of PG's staff involved in the due diligence exercise was Mary, the PG audit manager
who has just left the firm.
Exhibit 2: Year-end financial information received from Ectal
The Ectal financial statements have been prepared in compliance with IFRS.
Ectal: Statement of profit or loss for the year ended 31 August 20X4
20X4 20X3
Actual 20X4 Budget Actual
C$m C$m C$m
Revenue 305.4 358.6 350.4

Other income 4.8 – –
This website stores data such as 310.2 358.6 350.4
functionality, as wellinas
Change marketing,
finished goods and WIP 5.9 (8.3) (18.6)
Raw materials You
and consumables used (192.8) (205.7) (194.1)
may change Employee expenses
your settings at any
time (26.3) (25.8) (21.0)
Depreciation expense
or accept the default settings. (52.4) (60.8) (59.4)
Impairment of property, plant and equipment (60.0) – –
Other expenses (29.7) (21.0) (21.2)
Finance costs
Privacy Policy (5.1))
(5.1 (5.0) (5.0)
(Loss)/profit before tax (50.2) 32.0 31.1
Tax
Marketing – (10.0) (9.3)
(Loss)/profit after tax (50.2) 22.0 21.8
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Analytics
Save Accept All


Ectal: Statement of financial position at 31 August 20X4
20X4 20X3
Actual 20X4 Budget Actual
C$m C$m C$m
Property, plant and equipment 551.3 622.5 603.7
Inventories 98.0 90.0 92.1

Trade receivables 50.7 55.0 57.0
Cash 1.5 15.0 10.1
assets
Current 150.2 160.0 159.2
Total assets 701.5 782.5 762.9
Ordinary share capital 5.0 5.0 5.0

Retained earnings 529.0 621.5 599.2
Loan from director 50.0 50.0 50.0

Provisions 16.0 – –
Non-current liabilities 66.0 50.0 50.0
Trade and other payables 98.7 96.0 99.4

Short-term borrowings 2.8 – –
Current tax payable – 10.0 9.3
Current liabilities 101.5 106.0 108.7
Total equity and liabilities 701.5 782.5 762.9
Exhibit 3: Email to Lucille Jones from Couvert's finance director

Lucille
I would appreciate your advice on the following two financial reporting issues that affect Couvert's
consolidated financial statements for the year ended 31 August 20X4.
Issue 1 – Accounting for retirement benefits
As you know, the Group's pension plan is a defined contribution
contribution plan, which is open to employees in
most, but not all, of our subsidiaries. However, as part of our vertical expansion strategy we purchased
100% of the shares of Bexway Ltd halfway through the financial year, on 1 March 20X4. Bexway has a
defined benefit scheme for senior staff. Bexway's accountant retired shortly after the takeover and there
is now no-one at the company who understands the accounting for a defined benefit scheme. The only
accounting entry that has been made since recognising the net pension liability on acquisition is in
respect of employer contributions paid. This amount has been debited to staff costs.
This website stores

I have thedata such as
following information about the pension plan between 1 March 20X4 and 31 August 20X4:
functionality, as wellservice
as marketing, £'000
Current cost for six months (estimated by actuary) 604
personalization, and of
Fair value analytics. Youat 1 March 20X4
plan assets 8,062
Present value ofat anyliabilities
plan time at 1 March 20X4 8,667
Contributions paid into plan by Bexway on 31 August 20X4 842
Retirement benefits paid out by plan 662
Fair value of plan assets at 31 August 20X4 (estimated by actuary) 8,630
Privacy Policy
Present value of plan liabilities at 31 August 20X4 (estimated by actuary), not including 8,557
amendment to plan (see below)
Marketing
On 14 April 20X4, Bexway's directors decided to amend the pension plan by increasing the benefits
Personalization
payable to members with effect from 1 September 20X4. From this date benefits will increase, as will
the contributions payable by Bexway. I am informed by the actuary that the present value of plan
Analytics
liabilities should be increased by £500,000 at 31 August 20X4 in this respect.
The applicable
Save six-month
Accept All discount rate is 3%.
I am unfamiliar with current practice in respect of accounting for defined benefit plans.
Please advise me of the correct accounting treatment for the plan for the six months ended
31 August 20X4 and provide me with the appropriate journal entries for Bexway.


Issue 2 – Financial asset
On 1 April 20X4 Couvert's board bought a put option contract over 500,000 shares in an Australian
wool-producing company, The Brattle Company. The exercise price ofo f the option is £6.00 per share and
it will expire on 31 March 20X5. The bank has supplied me with the following information about the
put option:
1 April 20X4 31 August 20X4
Market price of one share in Brattle £6.00 £5.90
Value of put option contract £63,000 £95,000
I recorded the initial investment of £63,000 as an available-for-sale financial asset, but I have made no
other accounting entries in respect of this asset and I am not sure whether any adjustment is necessary.
Please explain the appropriate financial reporting treatment for this item, and set out the appropriate
journal entries.
I look forward to your response to my queries.
42 ERE
ERE Ltd designs (ERE), manufactures and installs medical equipment for healthcare providers. ERE is
currently unlisted but its shareholders are considering an AIM listing within the next three years. The
chief executive, Frank Mann, owns 30% of the shares in ERE and the remaining 70% are owned by
private equity investors. ERE has a 31 July accounting year end.
You are Tom Tolly, an audit senior with Ham and Heven
Heven LLP (HH), a firm of ICAEW CChartered
hartered
Accountants. HH has audited ERE for a number of years. You have just returned to work after study leave
and you have received the following email from your audit manager setting out your assignment for
today.
To: Tom Tolly

From: Audit manager
Subject: ERE – audit of payables and deferred tax for the year ended 31 July 20X4
ERE's financial controller, Josi Young, is a former employee of HH. She left HH in August 20X4 before
completing her training contract and shortly afterwards secured a job with ERE. Josi had been a member
of the ERE audit team for a number of years before leaving HH.
I assigned Chris King, a junior audit assistant, to the payables and deferred tax sections of the ERE audit
as I felt confident that Josi would be able to provide him with some assistance. However, I now have
some concerns with the work that he has produced. I have attached a working paper that I asked Chris
to prepare summarising the audit procedures he has performed on payables and deferred tax (Exhibit).
This website storeslike
I would data
you such as
to review this working paper and prepare a report for me in which you:
(a)as explain
functionality, the key weaknesses
well as marketing, weaknesses in the audit procedures performed by Chris. Identify the audit risks
risks
personalization,arising in respect
and analytics. Youof ERE's payables and deferred tax and the audit procedures that should be
may change your completed
settings atinany
order to address each risk;
time
or accept the
(b) default settings.
identify and explain the financial reporting issues and recommend appropriate adjustments. With
regard to the lease of the factory, briefly explain what, if anything, will change when
IFRS 16, Leases comes into force;
Privacy Policy
(c) summarise on a schedule of uncorrected misstatements the adjustments that you have
Marketingrecommended. Explain the further action that we should take in respect of the uncorrected
misstatements; and
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(d) identify and explain
explain any ethical
ethical issues for HH, and recommend any actions for HH arising from
Analyticsthese issues.
Requirement
Save Accept All
Prepare the report requested by your audit manager. Total: 34 marks

Exhibit: Working paper: prepared by Chris King
ERE: Audit procedures for payables and deferred tax for the year ended 31 July 20X4
The planning materiality is £120,000.
Payables and deferred tax per the statement of financial position are as follows:
Reference to
audit procedures 20X4 20X3
£'000 £'000
Trade payables (1) 13,709 14,628
Other payables
Deferred tax (2)
(3) 2,620
440 550
950
(1) Audit procedures for trade payables
Trade payables comprise:
20X4 20X3
£'000 £'000
Trade payables ledger balances 11,820 12,036
Add: Debit balances 345 52
Add: Goods received not invoiced 1,544 2,540
Total trade payables 13,709 14,628
Trade payables ledger balances

I reviewed a sample of ten supplier statement reconciliations selected for me by Josi, who has
performed reconciliations for all the major suppliers.
I re-performed the reconciliations for the three largest suppliers, which represented 89.8% of the
total trade payables balances at 31 July 20X4, as follows:
Mesmet plc KH GmbH Medex
£'000 £'000 £'000
Balance per ledger 2,563 1,739 1,962
Payments in transit 950 – 250
Invoices in transit 525 – 540
Mesmet invoices 'on hold' 1,230 – –
Disputed Medex invoices – – 850
Balance per supplier statement 5,268 see below 3,602
% of trade payable ledger balances 44.6 14.7 30.5

I agreed payments in transit to the cash book and to the bank reconciliation. All payments were
presented within 30 days of the year end.
All invoices in transit were agreed to invoices posted in August 20X4.
cookies to enable Mesmet invoices
essential site 'on hold'
functionality, as Iwell as marketing,
queried the invoices 'on hold' on Mesmet's supplier statement. Josi was unsure about these
personalization,invoices,
and analytics.
but saidYou
that they have now 'disappeared' from Mesmet's most recent supplier statement.
ERE's at any
finance timehas told her not to contact Mesmet to query these invoices as he deals
director
personally with the Mesmet finance department.
KH
Privacy Policy KH is a new supplier and invoices ERE in euro. The supplier statement shows a balance of €2 million
at 31 July 20X4. On 1 October 20X3, ERE purchased a large consignment of monitors from KH for
€4 million and recorded this transaction at the exchange rate on that date. ERE paid €2 million to
Marketing
KH on 1 April 20X4 and made a final payment of €2 million on 1 November 20X4 at the exchange
Personalization
rate on that date of €1.28:£1. The year-end ledger balance has been adjusted for an exchange
Analyticsgain. I have checked the calculation of the exchange gain using the following exchange rates:
€/£ €'000 £'000
1 October 20X3 1.15 4,000 3,478
Save Accept All
1 April 20X4 1.20 (2,000) (1,667)
Exchangebalance
Year-end gain
gain (72))
(72
1,739

The €/£ exchange rate at 31 July 20X4 was €1.27:£1.


Disputed Medex invoices
I queried the £850,000 of disputed Medex invoices with Josi and have noted below her
explanation:
Medex supplies components to ERE. ERE used these components to manufacture its oxygen units,
which are installed for hospital customers in operating theatres. On 10 August 20X4, legal
proceedings were commenced against ERE by a hospital which claims that failure of the oxygen
units installed by ERE during the year ended 31 July 20X4 caused delays to the performance of
operations. The hospital is claiming £1.2 million compensation for loss of income.
On 14that
likely, September 20X4,
the claim ERE appointed
will succeed. legalthe
However, advisers who suggested
legal advisers estimatethat it ifis the
that, possible,
case isbut not it
settled,
would be in July 20X6. Also, they have advised that legal costs will be £100,000, which will also be
settled at that date. Josi has included an accrual for the legal fees as part of 'other payables' (see
below). The ERE board does not want to disclose any information regarding the legal case as the
directors believe that it will cause reputational damage for ERE.
ERE believes that the Medex components were faulty.
f aulty. Therefore Josi has requested credit notes
n otes
from Medex in respect of invoices for these components and has credited purchases with
£850,000 and debited the Medex payable ledger account.
Debit balances
This is an adjustment to reclassify debit balances as receivables. I have checked that the debit entry
of this adjustment is included in receivables.
Goods received not invoiced
I reviewed the list of goods received not invoiced and noted several items dating from January
20X4. Josi informed

the amount involvedme that£115,000,
is only she is still chasing invoices
and therefore from
less the
than suppliers for
materiality, these
I have notgoods butout
carried as
any further audit procedures.
(2) Audit procedures for other payables
Other payables comprises:
20X4 20X3
£'000 £'000
Legal fees (see above) 100 –
Provision for restructuring:
Redundancy payments 270
One-off payments to employees for relocation costs 50
Costs of removing plant and machinery 400
720 –
Lease cost of factory 1,100 –

Payroll such
and as current taxes
other 200 200

Other
well asaccruals
functionality, as Total accruals
marketing, 500
500 350
350
2,620 550
may change your Provision
settings for restructuring
at any time
On 1 settings.
October 20X4, ERE closed down a manufacturing division which operated from a factory in
the North of England. I have agreed the provision for restructuring to the budget and also to the
board minutes which stated that negotiations with employee representatives and the factory
Privacy Policy landlord were completed on 30 July 20X4 and a formal announcement was made to all employees
on 31 July 20X4.
Marketing
Lease cost of factory
Personalization
ERE signed a 10-year lease for the factory on 1 August 20X0 at an annual rental of £240,000,
Analyticspayable annually in arrears. It was noted in the board minutes that, following the closure of the
division on 1 October 20X4, ERE has the choice of subleasing the factory to another company for
Save the remaining
Acceptsix
Allyears at an annual rental of £60,000 payable annually in arrears; or paying
£1.1 million as compensation to the factory landlord to terminate the lease. The directors asked Josi
to obtain more information and to prepare calculations using an annual discount rate which
reflects the time value of money of 5%. Until this information is made available, a provision of
£1.1 million has been made in the draft financial statements.

(3) Audit procedures for deferred tax
Josi has provided the following deferred tax computation and notes:
Deferred tax computation
£'000
Taxable temporary difference:
Carrying amount of plant and equipment at 31 July 20X4 12,800
Tax base of plant and equipment at 31 July 20X4 (8,600)
Taxable temporary difference on plant and equipment 4,200
Deferred tax liability on taxable temporary difference at 20% 840

Deferred tax asset in respect of carried forward trading losses (400)
Deferred tax balance 440
Notes
1 Accounting profits equal taxable profits except in respect of depreciation.
2 ERE made a tax loss of £2 million
million in the year ended 31
31 July 20X4. Under current
current tax legislation
this loss can be carried forward indefinitely. ERE has prepared a budget for 20X5 and 20X6
which shows taxable profits of £500,000 and £750,000. No projections are available after this
date due to the uncertainty of tax law.
3 ERE revalued its head office building on 31
31 July 20X4. The revalued carrying amount at
31 July 20X4 was £5 million and its tax base was £4 million. Gains on property are charged to
tax at 20% on disposal. However, ERE has no intention of selling its head office therefore no
deferred tax liability has been recognised.
4 I have agreed the carrying amount of plant and machinery to the financial statements and the
tax base to the company tax return.

Privacy Policy
Marketing
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Privacy Policy
Marketing
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Real exam (July 2015)
43 Congloma
Congloma plc is a UK listed company and it is the parent of a group of manufacturing companies
located across the UK. Your firm, A&M LLP, a firm of ICAEW Chartered Accountants, has audited
Congloma and its subsidiaries for three years.
You are assigned to the group
group audit team for Congloma
Congloma for the year ending 31 August 20X4. Your
manager, Harri Merr has asked for your help to finalise audit planning. Other audit teams from your firm
are responsible for the individual audits of Congloma's subsidiaries.
You meet with Harri, who
who gives you the following
following instructions:
"I've provided some background information ( Exhibit 1). The Congloma finance director, Jazz Goring,
has asked A&M to assist her in determining how a number of significant transactions should be treated
in the Congloma consolidated financial statements for the year ending 31 August 20X4. She also wants
to understand the overall impact of these transactions on the consolidated profit before taxation.
I've forwarded her email to you ( Exhibit 2), together with an attachment comprising briefing notes
from the Congloma corporate
corporate finance team which provides some further details ooff the transactions
(Exhibit 3). These briefing notes were presented at the Congloma board meeting in May 20X4 before
the significant transactions were completed. Jazz has assured me that none of the details changed when
the deals were finalised, so we can use this information for audit planning purposes.
I would like you to:
(a) draft a response to Jazz's email
email (Exhibit 2) and its attachment (Exhibit 3). In your response you
should:
(1) set out and explain, for each of the transactions she identifies, the correct financial reporting
treatment in Congloma's consolidated financial statements for the year ending
31 August 20X4. Recommend and include appropriate adjustments and calculations; and
(2) calculate the consolidated
consolidated profit before taxation for the year ending 31 August 20X4, taking
into account the adjustments you have identified; and
(b) set out, in a working paper, the additional audit procedures
procedures that we will need to perform as a result
of the transactions Jazz has identified. Include an explanation of the impact that the transactions
will have
This website stores data on
suchtheasscope of our audit procedures and the identification of components that we
consider
cookies to enable to be
essential sitesignificant.
functionality, as The
welladditional
as marketing,
audit procedures that you identify should include those we will perform both at the
personalization,significant
and analytics. You
component subsidiaries and head office. These procedures should only be those of
relevance to our opinion on the Congloma consolidated financial statements for the year ending
31 August 20X4. At this stage, I am not interested in the procedures we will need to perform in
order to sign an audit opinion on each individual group company."
Requirement
Privacy Policy
Respond to Harri's instructions. Total: 40 marks
Marketing
Personalization
Analytics
Save Accept All

July 2015 questions 117
Exhibit 1: Background information provided by the audit manager, Harri Merr

Our experience of the Congloma audit is that the group is generally well managed and maintains
reliable accounting records. We have noted, however, that the finance team's experience of more
complex transactions is limited and they do not always make the correct accounting entries or
appreciate fully the financial reporting implications of such transactions.
The scope of the work to be performed by the group audit team in respect of the group financial
statements is as follows:
 Audit procedures on the group financial statements and consolidation
 Direction and re
review
view of the audit procedures
procedures performed by other teams from our firm at all
significant components
 Review procedures on the results of components which are not significant
Based on the group's latest financial projections, I have determined planning materiality for the group
audit at £350,000.
Exhibit 2: Email from Congloma Finance Director, Jazz Goring
To: Harri Merr
From: Jazz Goring
Date: 17 July 20X4
Subject: Significant transactions
After a period of over a year with no acquisitions or disposals,
disposals, June 20X4 was
was a busy month for our
corporate finance team. In addition to the information
inf ormation provided below, you will find further details in
the attached
board briefing
meeting in Maynotes
20X4from the Congloma
(Exhibit 3). corporate finance team which were presented at our
The board is pressing me for a forecast of the consolidated profit before tax for the year ending
31 August 20X4. Therefore it would be helpful to have your advice on the financial reporting treatment
of the transactions set out below. Before accounting for the effect of any adjustments arising from these
transactions, our latest forecasts show a consolidated profit before tax of £7 million for the year ending
31 August 20X4.
Further investment in Oldone Ltd
In 20W4, ten years ago, Congloma subscribed £9.6 million for an 80% shareholding in Oldone on the
incorporation of the company. At that date, Anthony Myers, the Oldone chief executive subscribed for
the remaining 20% of Oldone shares.
On 1 June 20X4, Anthony retired and sold his shares in Oldone to Congloma for £4 million. Oldone is
expected to make a profit before taxation of £500,000 in the year ending 31 August A ugust 20X4. As for all our
group companies, Oldone's profits are not seasonal, but accrue evenly throughout the year.
functionality,
Theasidentifiable
well as marketing,
net assets of Oldone at 31 May 20X4 were £14 million and, in our interim financial
statements You we recognised a non-controlling interest of £2.8 million, using the proportion
at that date,
may change of your settings
net assets at anyalways
method time adopted by Congloma. I will instruct an expert valuer to determine the fair
value settings.assets so that I can calculate the goodwill to be included in the consolidated financial
of Oldone's
statements for the year ending 31 August 20X4. However, I need your advice on how to eliminate the
non-controlling interest balance of £2.8 million from the consolidated statement of financial position at
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31 August 20X4.
Issue of convertible bonds
Marketing
On 1 June 20X4, Congloma raised £10 million through an issue of convertible bonds to third party
Personalization
investors. Further details are included in the attached briefing notes (Exhibit 3). For the time being, I
Analytics
have recognised the £10 million as a liability.
liabili ty.
Investment in Neida Ltd
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On 1 June 20X4, Congloma acquired 45% of Neida's issued ordinary share capital and voting rights for
£3 million. Neida's remaining ordinary shares and voting rights are currently held equally by the two
individuals who founded the company. Congloma has an option to acquire a further 20% of Neida s
ordinary share capital in the future.

Neida is engaged in developing practical applications for Lastlo, an innovative new material. We expect
that the use of Lastlo will improve the durability and performance of a number of Congloma's products.
I believe that Congloma's holding of 45% of Neida's ordinary share capital and voting rights gives it
significant influence and so propose to account for Congloma's investment in Neida as an associate. As
you will see from the attached briefing notes (Exhibit 3), Neida has very fe
few
w assets or liabilities, so the
key impact on the group financial statements will be the recognition of the investment of £3 million.
Disposal of 75% interest in Tabtop
On 30 June 20X4, 75% of the ordinary shares and
an d voting rights in Tabtop Ltd, which was wholly owned
by Congloma, were sold to a third party for £6 million. The carrying amount of the net assets (excluding
goodwill) of Tabtop on 30 June 20X4 was £5.6 million and the carrying amount of goodwill relating to
Tabtop in Congloma's consolidated statement of financial position at that date was £1.5 million.
Therefore I have calculated, and propose to include, a group profit on the sale of £0.3 million
(£0.3 million = £6.0 million – (75% of £5.6 million) – £1.5 million).
Further details of this transaction are included in the attached briefing note (Exhibit 3).
I propose to equity account for our non-controlling
n on-controlling interest following the share sale. The disposal should
save you some time on the audit compared to last year, as now you will not need to perform group
audit procedures on Tabtop.
Impairment of investment in Shinwork Ltd
Congloma has an 80% holding of the ordinary share capital of Shinwork Ltd.
Demand for Shinwork's products has fallen and cash flow projections show that its business will have a
value in use of £9.2 million at 31 August 20X4. We will therefore need to record an impairment in our
group financial statements for the year ending 31 August 20X4.
I am not quite sure how to calculate this impairment charge from the information I have and would
welcome your advice. It would be helpful if you could highlight any other financial reporting points that
I should consider.
At 31 August 20X4, key financial data for Shinwork is projected to be as follows:
£m
Carrying amount of net separable assets 8.0
Carrying amount of goodwill relating to Shinwork in Congloma consolidated
statement of financial position 4.0
Non-controlling interest (determined using the proportion of net assets method) 1.06
Exhibit 3: Briefing notes from the Congloma corporate finance team, presented to the
Congloma board meeting on 21 May 20X4
Issue of convertible bond
Proposed marketing,
terms for the convertible bond issue have now been agreed. On 1 June 20X4, Congloma will
personalization, andmillion
raise £10 analytics. You 100,000 5% convertible bonds, each with a par value of £100. Each bond
by issuing
may change canyour settings at on
be converted anyortime
before its maturity date of 31 May 20X7 into 10 shares in Congloma plc.
Interest willsettings.
be payable annually in arrears.
By issuing a convertible bond, we not only obtain longer-term finance for the group, but also secure a
lower interest rate. The annual interest rate for similar debt without the conversion rights would be 8%.
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Investment in Neida
Marketing
We propose to proceed
proceed with the acquisition of 45%
45% of the issued share capital of
of Neida for £3 million
Personalization
on 1 June 20X4. We will also have a call option to acquire, from the two founding shareholders, a
further 20% of Neida's ordinary
ordinary share capital and voting rights for £1.5
£1.5 million. Neida ex
expects
pects to
Analytics
exercise this option before 1 June 20X9.
The draft shareholder
Save agreement states that the board of Neida will comprise the two founding
Accept All
shareholders and two individuals nominated by Congloma. Most decisions will be made by a majority of
the directors, but

the agreement decisions
of both about
of the major research anddirectors.
Congloma-nominated development projects cannot be made without
Neida is expected to make a loss of £300,000 in the year ending 31 August 20X4 and the projected
carrying amounts of its net assets at the date of acquisition (1 June 20X4) are as follows.
£'000
Property, plant and equipment 150
Net current assets 50
Net assets 200
Given the nature of these assets and liabilities, their fair values are equal to their carrying amounts.
Disposal of 75% interest in Tabtop
Tabtop has been making losses for a number of years and is also incurring net cash outflows to an
extent that the Congloma group no longer wishes to fund. Its projected loss for the year ending
31 August 20X4 is £3 million. We have received an offer of £6 million for 75% of the Tabtop ordinary
shares which we believe we should accept. In addition, Congloma will retain a holding of 25% Tabtop's
ordinary share capital, which experts tell us would have a fair value of £1 million. Congloma would
continue to exercise some influence on the business through a seat on the board.
44 Heston
Heston plc is a listed company which manufactures engines. It has four autonomous divisions, which
operate from separate factories. Heston has no subsidiaries.
You recently joined Heston
Heston as deputy to the finance dire
director,
ctor, Edmund Rice. Edmund se
sent
nt you the
following email.
To: Deputy finance director

From: Edmund Rice, finance director
Date: 20 July 20X5
Subject: Finalisation of the annual report – year ended 30 June
June 20X5
The past few years have been difficult
diff icult for Heston, but a new chief executive, Franz Zinkler, was
appointed in 20X4 and he is beginning to change things. Despite this, the year ended 30 June 20X5
was again a challenging year. I have provided you with a document giving some background
information about Heston and its recent history ( Exhibit 1).
We need to publish our financial statements
statements shortly. Draft financial statement inform
information
ation has been
prepared (Exhibit 2), but there are a number of issues which will require adjustment (Exhibit 3).
I need to provide an explanation of Heston's financial performance for the year ended 30 June 20X5 and
its position at that date. This is for the finance director's section of the management commentary in the
annual
This website report.
stores I alsoas
data such need to make a presentation to financial analysts about Heston's financial
performance and
cookies to enable essential siteposition following publication of the annual report. This will include some tough
questions marketing,
about the financial statements and the company's underlying performance.
I need your assistance You
with the following:
(1) default
or accept the I would like you to:
settings.
 set out and explain the financial reporting adjustments required in respect of the issues in
Exhibit 3, stating with a brief explanation whether the treatment of the cash flow hedge will
Privacy Policy change when IFRS 9, Financial Instruments comes into force; and
Marketing
 prepare an adjusted statement of profit or
or loss for tthe
he year
year ended 30 June 20X5 and an
adjusted statement of financial position at that date in a form suitable for publication
Personalization
(including comparative figures for the year ended 30 June 20X4, in the form that they would
Analytics appear in the financial statements for year ended 30 June 20X5). Do not worry about the tax
or deferred tax effects of your adjustments at this stage.
Save
(2) To helpAccept All
me to prepare my section of the management commentary
commentary and to help me answer
answer
questions, please analyse Heston's performance and position for the year ended 30 June 20X5.
Include calculations and use the adjusted financial statements. Outline any further information
needed, so I can ask somebody to investigate.

Requirement
Respond to the instructions of the finance director. Total: 30 marks
Exhibit 1: Company background – prepared by the finance director
Heston produces engines. Heston has four divisions which are not separate subsidiaries and are part of
the Heston plc legal entity; they are autonomous and operationally independent of each other. Each of
its four separate divisions produces a different type of engine for: cars, motor bikes, boats and lawn
mowers.
Trading
Division,has been there
because difficult
wasfora all the divisions
major in recent
new entrant years,
in to this
into but particularly
industry in August for theThe
A ugust 20X4. Lawn Mower
chief executive,
Franz, therefore decided that Heston should sell off the Lawn Mower Division (Exhibit 3).
For the other three divisions, the key risk was a potential fall in future sales volumes. Such a fall would
affect Heston significantly because about 70% of cost of sales comprises fixed manufacturing costs,
which need to be incurred irrespective of sales volumes. To counter the risk of falling volumes, Franz
decided to reduce all selling prices in
i n these three divisions by 10% from 1 July 20X4.
Financial analysts have responded favourably to these decisions, but have been enquiring about their
impact on profit.
Exhibit 2: Draft financial information for the year ended 30 June 20X5 – prepared by the
finance director
Draft financial information for the statement of financial position at 30 June
20X5 20X4
£'000 £'000
ASSETS
Development costs 10,380 10,380
Trade and other receivables 36,100 30,400
(Overdraft) / Cash (8,400))
(8,400 5,600
184,040 189,980
Retained earnings 85,220 68,520
Long-term borrowings 22,000 39,000
Trade and other payables 31,600 39,400
Current tax payable 4,420 6,060
Provision for redundancy costs 3,800 –
This website stores data such as 184,040 189,980
Draft as marketing,
financial information for the statement of profit or loss for the year ended 30 June
personalization, and analytics. You 20X5 20X4
may change your settings at any time £'000 £'000
Revenue
Cost of sales (306,180) (318,500)
Distribution costs and administrative expenses (107,200) (101,400)
Finance costs (1,500) (1,500)
Privacy Policy (4,420)
(4,420 ) (6,060)
Income tax expense
Marketing
Exhibit 3: Issues requiring adjustment in the financial statements – prepared by the finance
Personalization
director
Analytics
(1) Disposal of the Lawn Mower Division
Save ImpactAccept
on results
All
On 1 January 20X5, Franz decided to dispose of the Lawn Mower Division, which had recently
started making losses. The Heston board formally approved the decision on 1 March 20X5 and the
division's assets were advertised for sale at their fair value from 1 April 20X5.
Heston intends to sell only the division's non-current assets (including its brand name, GrassGrind).
It is expected that these assets will be sold to a range of different buyers.
The land and buildings are expected to be sold at their fair value of £13 million and plant at its fair
value of £7 million. Selling costs are expected to be 4% of the fair value ffor
or these assets.
The Lawn Mower Division brand name, GrassGrind, including the legal right to trade under that
name, is expected to realise only £800,000. The brand was internally generated by Heston and so
is not recognised in the financial
fin ancial statements.
Draft financial information for the year ended 30 June 20X5 (Exhibit 2) includes the following
f ollowing
amounts in respect of the Lawn Mower Division:
20X5 20X4
£'000 £'000
Revenue 92,000 119,300
Cost of sales (72,084) (77,400)
Distribution costs and administrative expenses (Note) (33,800) (34,700)
(13,884) 7,200
Income tax credit/(charge) 2,600 (1,400)
(Loss)/profit after tax (11,284) 5,800
Note: Staff working in the Lawn Mower Division will be made redundant when the division is sold
and a provision for redundancy costs of £3.8 million has been recognised in distribution costs and
an d
administrative expenses for the year ended 30 June 20X5.
Impact on property, plant and equipment
Heston uses the cost model for property, plant and equipment.
An analysis of the property, plant and equipment
equipment figure in the draft financial statements is as
follows:
Plant and
Land Buildings equipment Total
£'000 £'000 £'000 £'000
Lawn Mower Division:
Cost at 30 June 20X4 and 30 June 20X5 5,600 6,000 12,000 23,600
Accumulated depreciation at 1 July 20X4 – (960) (3,400) (4,360)
Depreciation charge for the year ended
30 June 20X5 – (120) (860) (980)
Carrying amount at 30 June 20X5 5,600 4,920 7,740 18,260
Continuing activities:
cookies to enable (ie,essential
the othersite
three divisions)
functionality, as Carrying
well as marketing,
amount at 30 June 20X5
20X5 32,200
32,200 34,700
34,700 28,500
28,500 95,400
95,400
Total carrying amount at 30 June 20X5 37,800 39,620 36,240 113,660
or accept the default settings. are being depreciated over a 50-year life to a zero residual value. The plant and
The buildings
equipment is being depreciated on a 10% reducing balance basis. The company's policy is to
recognise all depreciation charges in cost of sales.
sal es.
Privacy Policy
There were no acquisitions or disposals of property, plant and equipment during the year ended
Marketing June 20X5.
30
(2) Cash flow hedge
Personalization
AnalyticsOn 1 May 20X5, Heston entered into a contract to purchase 6,000 tonnes of steel. The contract is
for delivery in September
September 20X5 at a price of
of £165 per tonne. Heston uses steel to mmake
ake most of its
engines and makes regular purchases of steel.
Save Accept All
At 30 June 20X5,
20X5, an equivalent new contract,
contract, for delivery of 6,
6,000
000 tonnes of steel in
September 20X5, could be entered into at £158 per tonne.

Heston does not intend to take physical delivery of the 6,000 tonnes of steel, but intends to settle
the contract net in cash, then purchase the actual required quantity of steel as regular production
needs arise.
The contract is designated as a cash flow hedge of the highly probable forecast purchase of steel.
All necessary documentation was prepared to qualify the co contract
ntract as a cash flow hedge. N
No
o
accounting entries have been made in the draft
draf t financial statements.
45 Homehand
You are Jan Jenkins, an audit senior
senior with Brine & Weel ((BW)
BW) LLP, a firm of ICAEW
ICAEW Chartered Accountants
which is engaged as auditor to Homehand Ltd. Homehand manufactures and sells production
machinery to the food processing industry.
You are working on
on the final stages of the audit of Hom
Homehand
ehand for the year ended 331
1 March 20X5. Your
Your
predecessor, Min Wall, is on study leave.
l eave. You receive the following email from the manager responsible
for the Homehand audit, Leigh
Leigh Moore:
To: Jan Jenkins

From: Leigh Moore
Date: 20 July 20X5
Subject: Finalisation of Homehand audit for
for the year ended 31 March 20X5
I attach to this email a schedule of uncorrected misstatements prepared by Min Wall (Exhibit 1)
together with Min's audit procedures on current and deferred tax (Exhibit 2), which are incomplete.
As the misstatements

finance identified
director told me that he by Minnot
does (Exhibit 1)adjust
wish to do no
notfor
t appear
these,toorbe material,
make the Homehand
any further adjustments we
may identify. However, I have told him that we will need to consider audit adjustments when we have
completed all our procedures. In particular, we will need to take into account, not only the overall level
of any uncorrected misstatements, but also their effect on individual line items within the financial
f inancial
statements.
I would like you to review the schedules prepared by Min (Exhibits 1 and 2) and prepare a file note for
me in which you:
(a) explain the financial reporting issues you have identified and recommend
recommend appropriate
adjustments;
(b) prepare a revised schedule of all uncorrected
uncorrected misstatements,
misstatements, including your
your adjustments from (a)
above. Identify and explain the misstatements, if any, that we require Homehand to correct;
This website(c)stores
set out
datathe audit
such as procedures we need to perform to complete
complete our audit of the current tax and
cookies to enable deferred taxsite
essential balances; and
functionality,
(d)as identify
well as marketing,
and explain the ethical issues for our firm and any actions you believe
believe we should
should take.
Requirement
Respond to Leigh Moore's instructions. Total: 30 marks
Exhibit 1: Schedule of uncorrected misstatements for the year ended 31 March 20X5 –
Privacy Policy
prepared by Min Wall
Marketing
Planning materiality for Homehand is £120,000. Misstatements below £6,000 are regarded as clearly
trivial and are not reported to those charged with governance.
Personalization
Last year (ie, the year ended 31 March 20X4) there was only one uncorrected misstatement, an over-
Analytics
provision of warranty costs of £60,000.
The schedule below does not include any adjustments arising
arisin g from my audit procedures on current and
Save Accept All
deferred tax (Exhibit 2) as these procedures are incomplete.
Description of misstatement Statement of financial

Statement of profit or loss position
Debit Credit Debit Credit
£'000 £'000 £'000 £'000
(1) Over-provision of warranty costs due to – 75 75 –
error in formula used to derive general
provision for warranty.
(2) Estimated over-valuation of inventory 115 – – 115
based on a sample testing of inventory
costs.
(3) Understatement of cost of sales
sales due to 34 – – 34
lease of production machinery (see Note
below).
Note: Lease of production machinery
On 1 April 20X4, Homehand recognised as revenue £44,000 received from a customer, HodFoods Ltd,
in respect of a lease of production machinery.
The sales director explained to me that instead of selling the machinery outright for £123,000,
Homehand instead leased it to HodFoods over its three-year life. The lease requires three payments of
£44,000, paid annually in advance. The annual market rate of interest would have been 8%.
HodFoods made the first lease payment of £44,000 on 1 April 20X4. However, the machinery is still
included in Homehand's inventory at its production cost of £102,000. Therefore I believe that there is an
overstatement of Homehand's inventory and an understatement of cost of sales of £34,000 (being
£102,000 divided by three years). BW's tax department has informed me that the tax treatment and
accounting treatment of leases are the same.
Exhibit 2: Audit procedures on current and deferred tax – prepared by Min Wall
Current tax liability
I have reconciled the current tax liability in the statement of financial position at 31 March 20X5 to the
prior year balance as follows:
£'000
Current tax liability at 1 April 20X4 465
Current tax expense for year ended 31 March 20X5 (Note 1) 436
Taxation paid in respect of the year ended 31 March 20X4 (Note 2) (512)
Current tax liability at 31 March 20X5 389
Note: Current tax expense for year ended 31 March 20X5

The current tax expense of £436,000 is the amount expected to be paid by Homehand to the tax
authorities
This website stores data for such
the year
as ended 31 March 20X5. This has been calculated by Karen Barnes, a trainee
cookies to ICAEW
enable Chartered Accountant who works in the Homehand finance department. I have performed audit
essential site
functionality, as well ason
procedures marketing,
the tax computation prepared by Karen as detailed below:
personalization, and analytics. You £'000 Audit procedures
Profit for the year ended 31 March 20X5 2,050 Agreed to the draft financial statements.
statements.
or accept the
Add default
back:settings.
Expenses not deductible for tax purposes:
Depreciation of non-current assets for 1,185 Agreed depreciation charges to audit
Privacy Policy
accounting purposes and disallowed for tax working papers. There were no disposals
of non-current assets in the year.
Marketing
Warranty cost 350 Agreed to analysis of warranty costs
costs - see
below.
Personalization
Other non-deductible expenses 45 Not material so no detailed procedures
Analytics performed.
Deduct:
Capital allowances for tax purposes (1,450) Confirmed with BW tax department that
Save Accept All the capital allowances are calculated
correctly according to tax law.
Taxable profit for the year ended 31 March 2,180
2,180
20X5
Tax at 20% 436 Recalculated tax due

Explanation of warranty costs
BW's tax department informed me that the tax rules in respect of warranty costs are as follows:
 Increase/decrease in the warranty provision is disallowed for tax purposes.
 Warranty costs paid are allowed as tax deductions.
I agreed Karen's tax adjustment for the warranty cost above to an analysis of the warranty provision as
follows:
£'000
Warranty costs
Warranty provision
paidatin1the
April 20 X4
20X4
year 400
400
(150)
Charge for warranty costs per the statement of profit or loss 350
Warranty provision at 31 March
March 20X5 600
Note: Taxation
Note: Taxation paid in respect of the year ended 31 March 20X4
Karen Barnes informs me that the tax payment of £512,000 was higher than the £465,000 liability
recognised in the financial statements for the year ended 31 March 20X4 because of an arithmetical
error found by the tax authority on the company tax return which Karen had filed on 1 November 20X4.
Karen revised and re-filed the company tax return and Homehand paid the revised amount of tax of
£512,000 on 1 January 20X5.
When revising the company tax
tax return for the year ended 31 March 20X4 Kare
Karen
n noted a further error.
Legal expenses of £105,000 were treated as tax-deductible when they should have been added back as
non-deductible expenses. As the amount is not material, Karen does not propose to notify the tax
authority of this error.
Deferred tax balance

Karen has provided the following analysis of the deferred tax balance at 31 March 20X5:
Taxable temporary difference £'000
Carrying amount of plant and equipment at 31 March 20X5 6,400
Tax base of plant and equipment at 31 March 20X5 (5,300)
Deductible temporary difference 1,100
Warranty provision at 31 March

March 20X5 (600)
500
Deferred tax balance (20%) 100
The deferred tax liability at 31 March 20X4 was £87,000. Therefore, as the difference is not material,
Karen proposed that it is not worth adjusting the deferred tax liability at 31 March 20X5. I have
therefore not carried out any further audit procedures.
cookies to Ienable
have identified
essentialthe
sitefollowing further issue which may require adjustment to the current and deferred
functionality,
taxasliabilities:
well as marketing,
personalization,
Shareand analytics.
option scheme You
An default
or accept the expensesettings.
of £450,000
£450,000 is included in the statement
statement of profit or loss fo
forr the year ended 31 March
March 20X5
in respect of share options granted on 1 April 20X4. The share option expense is based on 1,000
options vesting for each of 450 employees on 31 March 20X7. Each option has an exercise price of £4
and had a fair value of £3 at 1 April 20X4.
Privacy Policy
The BW tax department informed me that Homehand will receive a tax deduction only when the
Marketing
options are exercised and that this will be calculated on the basis of the options' intrinsic value at that
date. (The intrinsic value is the difference between the share price and the exercise price on the exercise
Personalization
date.) The price of one Homehand share at 31 March 20X5 was £8.50.
Analytics
Save Accept All


Privacy Policy
Marketing
Personalization
Analytics
Save Accept All

Real exam (November 2015)
46 Larousse
You are Alex Chen, an ICAEW Chartered Accountant. You have just started work as financial controller at
Larousse plc, an unlisted company, which is the parent company of the Larousse Group. The Larousse
Group is a successful business, supplying fashion clothing to supermarkets and department stores both
in the UK and internationally.
Larousse plc designs clothes, but does not manufacture them. However, about 18 months ago the
board decided on a new business policy of vertical integration with its key suppliers. On
1 October 20X4, Larousse plc acquired 100% of the ordinary share capital of two separate companies,
HXP Ltd and Softex Ltd. HXP and Softex are manufacturers of clothing and both companies supply to
Larousse plc.
Currently, Larousse's finance director, Dennis Speed, who is an ICAEW Chartered Accountant, is out of
the country negotiating new contracts with some of the company's significant customers. The
accounting assistant, Marie Ellis, has just started a two-week period of study leave.
Larousse's managing director, Hal Benny, sends you the following email:
To: Alex Chen

From: Hal Benny
Subject: Draft consolidated financial statements
statements for the year ended 30 September
September 20X5
Welcome to Larousse. It is unfortunate that both Dennis
Dennis and Marie are away as there is a lot of urgent
accounting work to complete.
Consolidated financial statements
Marie started to draft consolidated
conso lidated financial statements for the year ended 30 September 20X5, but she
did not have time to complete the task before going on study leave. Her draft consolidation schedule
(Exhibit 1) is unfinished and she has prepared some notes that will help you to complete it (Exhibit 2).
I need you to check Marie's work carefully as she has told me that she is not very knowledgeable about
advanced aspects of financial statement preparation.
Performance analysis
Following such as of HXP and Softex on 1 October 20X4, I would like to understand the
the acquisition
cookies to difference
in the post-acquisition performance of the two subsidiaries, particularly as there is significant
intra-group trading between them (Exhibit 2, Note 3).
may change Corporate responsibility
your settings at any timedisclosure and assurance
or accept the
Thedefault
board settings.
would like to discuss some proposals for corporate responsibility disclosure and assurance for
the Larousse Group. I have prepared a brief summary of these proposals and related performance
targets (Exhibit 3). Also, it has been suggested to me by one of my fellow directors that our auditors
Privacy Policy
could be asked to provide an additional assurance report which could be published in our annual report.
Marketing
Instructions
Personalization
In summary, I would like you to:
(a) prepare the consolidated statement of profit or loss for the Larousse group for the year ended
Analytics
30 September 20X5 and the consolidated statement of financial position at that date, correcting
any errors. Provide explanations and journal entries for any adjustments you make. You may
Save Accept All
assume for now that tax and deferred tax will remain unchanged as a result of your adjustments;
(b) prepare notes for the board analysing and comparing

comparing the performance and profitability of the two
subsidiaries for the year ended 30 September 20X5; and
November 2015 questions 127
(c) respond to the proposals from the board about corporate responsibility by:
 explaining the responsibilities of the Larousse Group's external auditors in respect of the
proposed corporate responsibility disclosures (Exhibit 3); and
 determining the scope of an additional assurance report by the external auditors and
describing the type of work that might be involved in providing verification of progress on the
four key targets (Exhibit 3).
Requirements
46.1 Respond to the instructions in Hal Benny's

Benny's email.
46.2 Identify any potential ethical issues arising for you and for Dennis Speed from the circumstances
set out in the file note in Exhibit 4. Describe the actions that you should take.
Work to the nearest £100,000.
£100,000. Total: 40 marks
Exhibit 1: Larousse Group – draft consolidation schedule for the year ended 30 September
20X5 – prepared by Marie Ellis

Larousse plc HXP Softex Adjustments Notes Group
£m £m £m £m £m
Revenue 56.5 12.0 16.0 84.5
Cost of sales (33.3) (7.5) (12.5) (53.3)
Administrative expenses (8.3) (1.5) (1.5) (1.0) 4 (12.3)
Selling and distribution costs (4.7) (0.7) (1.4) (6.8)
Finance costs
costs (1.6)
(1.6) – – (1.6)
(1.6)
Profit before tax 8.6 2.3 0.6 (1.0) 10.5
Income tax expense (1.7) (0.5) (0.2) (2.4)
Profit for the year 6.9 1.8 0.4 (1.0) 8.1

Non-current assets
PPE 38.0 10.8 16.0 64.8
Goodwill – HXP – – – 2.6 1
5.6
Goodwill – Softex – – – 3.0 2
Investment in HXP 12.0 – – (12.0) 1 –

Investment in Softex 22.0 – – (22.0) 2 –
This website storesassets

Current data such
as
cookies to Inventories
enable essential
site 9.2 1.9 1.7 12.8
Trade as marketing,
receivables
receivables 10.8
10.8 2.0
2.0 2.1
2.1 14.9
14.9
personalization, and cash
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equivalents – 0.6 2.0 2.6
Total
or accept the assets
default settings.
92.0 15.3 21.8 (28.4) 100.7
Share capital 10.0 4.0 5.0 (4.0) 1
10.0
(5.0) 2
Privacy Policy
Share options – – – 1.0 4 1.0
Retained earnings at
Marketing
1 October 20X4 35.8 7.4 14.0 (7.4) 1
Personalization 35.8
(14.0) 2
Profit for the year 6.9 1.8 0.4 (1.0) 4 8.1
Analytics
Non-current liabilities 28.4 – – 2.0 1 30.4
Save Accept
Current liabilities All
Trade and other payables 8.2 1.6 2.2 12.0
Current tax payable

payable 1.7
1.7 0.5
0.5 0.2
0.2 2.4
2.4
Short-term borrowings 1.0 – – 1.0
Total equity and liabilities 92.0 15.3 21.8 (28.4) 100.7

Exhibit 2: Notes for completion of draft consolidated financial statements for the year ended
30 September 20X5 – prepared by Marie Ellis
Notes
1 Acquisition of HXP
On 1 October 20X4, Larousse plc acquired 100% of the ordinary share capital of HXP for
£12 million in cash. The fair values of the recognised net assets at the date of acquisition were
equivalent to their carrying amounts. Additional deferred consideration of £6 million will be
payable in cash on 30 September 20X7. Dennis told me to use an annual discount rate of 5%.
However, I was not sure what to do with this information, so have ignored it. I have added one-
third of the deferred consideration into the goodwill calculation, as follows:
£m
Consideration in cash 12.0
Deferred consideration 2.0
14.0
Less: share capital and retained earnings at date of acquisition (11.4)
Goodwill on consolidation 2.6
2 Acquisition of Softex
On 1 October 20X4, Larousse plc acquired 100% of the ordinary share capital o off Softex for
£22 million in cash. The fair values of the recognised net assets at the date of acquisition were
equivalent to their carrying amounts. Dennis left a note on the file saying that Softex also had an
unrecognised internally-generated research asset valued at £2 million at the date of acquisition.
This asset relates to the development of a waterproof fabric coating developed by Softex's
manufacturing team. As it is an intangible asset, I felt that it was prudent to ignore this in my
goodwill calculation, shown below:
£m
Consideration in cash 22.0
Less: share capital and retained earnings at date of acquisition (19.0))
(19.0
Goodwill on consolidation 3.0
3 Intra-group trading
I know that some adjustments will be required for intra-group trading, but I have not had time to
do them. I have set out information about intra-group trading in the following table:
HXP Softex
Percentage of revenue from sales to Larousse plc 50% 50%

cookies to enable Percentage
essential of revenue from sales outside the group
site 50% 50%
functionality, as Gross
well as marketing,
profit margin on intra-group sales 40% 20%
may change your Percentage
settings atofany
intra-group
time purchases for the year remaining in
Larousse
or accept the default plc's inventories at 30 September 20X5
settings. 20% 25%
Intra-group receivable from Larousse plc at 30 September 20X5 £1.2 million £1.4 million
Privacy Policy Following a review of inventories at 30 September 20X5, the board decided that the inventories in
Softex were impaired and should be written down by £1.2 million. I have therefore adjusted
MarketingSoftex's cost of sales and inventories by £1.2 million, producing revised figures of £12.5 million for
cost of sales and £1.7 million for inventories.
Personalization
4 Share options
Analytics
On 1 October 20X4, Larousse plc introduced a share option scheme for senior staff. Each share
Save option entitles
AccepttheAll holder to subscribe for one Larousse plc share. On 1 October 20X4, 1,000 share
options were granted to each of 50 employees and directors. The share options will vest on
30 September 20X8 to those employees who are still in i n employment with Larousse plc at that
date. In the year ended 30 September 20X5, four of the 50 employees left the company and it is
expected that a further two employees will leave in each of the remaining years until the shares
vest. The fair value of each option was £20.00 at 1 October 20X4, and £21.74 at 30 September
20X5.
I have calculated the cost of the share option scheme in the financial statements for the year ended
30 September 20X5 as follows:
1,000  (50 – 4)  £21.74 = £1m (to nearest £100,000)
This expense is included in administrative expenses and is credited to equity.
Exhibit 3: Proposals for corporate responsibility
responsibility disclosure and assurance – prepared by Hal
Benny
In recent years, the fashion industry has been subject to criticism. This criticism results from the fashion
industry's perceived indifference to issues such as the well-being of staff in developing countries, the use
of child labour and the environmental impact of its activities in cotton production and dyeing. Now that
the Larousse Group has direct interests in production and supply through our new shareholdings in HXP
and Softex, it is timely to reconsider its corporate responsibility policies and disclosures.
Both HXP and Softex produce a significant proportion of their fashion range in countries with low
economic standards of living. We know that staff in their factories are paid very low wages and that
working conditions are challenging. I have provisionally set four key performance targets for
achievement by HXP and Softex:
(1) A clean water
water initiative is to be undertaken
undertaken to mitigate
mitigate the environmental effects of fabric dyeing
dyeing
and cotton production. Scientists will monitor water quality regularly.
(2) An effective health and safety programme is to be launched
launched in the factories.
(3) The use of child labour (children under 16

16 years of age) is to be eliminated
eliminated within three years.
(4) Training and development
development programmes are to be carried out to improve the skills of all factory
workers.
Progress towards achievement of these targets will be disclosed as part of integrated reporting to
stakeholders in a corporate responsibility section of the Larousse Group's annual report for the year
ending 30 September 20X6.
Exhibit 4: Ethics file note prepared by Alex Chen
On my first day at Larousse, I was sitting in the staff coffee bar where I overheard a conversation
between two of the office administrators. They were gossiping about Dennis Speed, the Larousse
finance director.
According to their conversation, Dennis Speed maymay have been involved in unethical activities in respect
respect
of Larousse plc's takeover of HXP. Dennis is married to Lola Gonzalez, a director of HXP. Prior to the
takeover, Lola owned 30% of the shares in HXP. It was suggested that Larousse overpaid substantially
for HXP, and that Dennis facilitated the overpayment
overpayment in order to benefit his wife. He did tthis,
his, allegedly,
by colluding with his wife to falsify records submitted to the accountants who undertook due diligence
in respect of the takeover. Dennis is apparently not well liked; the administrative staff regard him as
intimidating and it seems they would be pleased if he lost his job.
47 Telo
Privacy Policy
You are Sophie Blake, an ICAEW
ICAEW Chartered Accountant. You have been been appointed as the financial
Marketing
accountant of Telo plc, an unlisted company engaged in running marketing campaigns for its clients.
Personalization
Telo was established five years ago and its ordinary share capital is held equally by its three founder
shareholders. All three remain directors, and are actively involved in running the business. The directors'
Analytics
intention is to achieve an AIM listing within the next three years.
Your predecessor was John Birch, a part-qualified accountant who left Telo last month. Before he left,
Save Accept All
John prepared a draft trial balance as at 31 August 20X5, the company's year end, together with some
notes (Exhibit).
Telo s auditors are TCC Associates who were appointed three years ago. TCC completed a brief interim
audit in May 20X5, and is due to start work on the final audit next week.

Telo's operations director has given you the following instructions:
"Sophie, I have discussed with TCC the information that they will require next week. I would like
you to review John's draft trial balance and related notes (Exhibit) and prepare a working paper in
which you:
(a) explain the appropriate financial reporting treatment of the four matters highlighted in John's
notes, setting out any necessary adjustments; and
(b) prepare, including your adjustments, a draft statement of profit or loss and other
comprehensive income for the year ended 31 August 20X5, and a statement of fi financial
nancial
position at that date.
The current tax charge in the trial balance of £350,000 was estimated by John, and you can
assume for the purpose of preparing the draft financial statements that it is correct. Adjustments in
respect of deferred tax may, however, be required."
Requirement
Respond to the instructions of the operations director.
Work to the nearest £1,000.
£1,000. Total: 30 marks
Exhibit – Draft trial balance at 31 August 20X5 prepared by John Birch
−
Notes Debit Credit

£'000 £'000
Operating costs 1 11,353 –
Inventories and work-in-progress at 1 September 20X4 1 4,355 –
Sales 2 – 15,680
Selling costs 1,162 –
Administrative expenses 2,340 –
Other income: property letting – 70
Current tax charge 350 –
Ordinary share capital – 60
Trade receivables 2 3,281 –
Trade payables – 3,965
Current tax payable – 350
Cash 82 –
Retained earnings at 1 September 20X4 – 5,051
Revaluation surplus at 1 September 20X4 3 – 971
Property at 53 Prospect Street 3 3,335 –
Computer and office equipment – at cost 242 –
Computer and office equipment – depreciation at
Augustdata
20X5such
as – 110
Deferred tax at 1 September 20X4 4 – 243
personalization, and analytics. You 26,500 26,500
Notes
1 Cost of sales is calculated by adjusting operating costs for ope
opening
ning and closing inventories and
work-in-progress. Inventories and work-in-progress are estimated at each year end in respect of all
Privacy Policy of Telo's current marketing campaigns. Unfortunately, I have recently found that an addition error
was made in the calculation of inventories and work-in-progress at 31 August 20X4 and brought
Marketing forward on 1 September 20X4.
20X4. Inventories and work-in-progress at that date should act
actually
ually have
been recognised at £3,742,00
£3,742,000.
0.
Personalization
On 31 August 20X5, inventories and work-in-progress are valued at £4,437,000.
Analytics
2 In September
September 20X4, Telo won the contract to provide marketing services to a client, Sourise, which
Save is basedAccept
in Nemisland.
All The contract specified that services should be invoiced twice a year, and
that invoices should be denominated in Nemisland dollars (N$). Telo sent an invoice for
N$220,000 on 31 December 20X4, 20X4, and another invoice
invoi ce for N$180,000 on 30 June 20X5. Sourise
experienced financial difficulties during the year, but following refinancing was able to pay Telo
N$250,000 on 31 August 20X5. I recorded the invoices using the relevant exchange rates on the
invoice dates, as follows:
Date Rate Invoice amount

(to nearest £'000)
31 December 20X4 £1 = N$1.06 £208,000
30 June 20X5 £1 = N$1.16 £155,000
On 31 August 20X5, I translated the cash receipt of N$250,000 at the exchange rate at that date
of £1 = N$1.12. I set the cash receipt first against the 31 December 20X4 invoice, which settled it
in full, then set the balance against the 30 June 20X5 invoice. Following further correspondence
with Sourise, Telo's directors have decided to make a specific allowance of 50% against the
outstanding receivable at 31 August 20X5. I have not had time to make this adjustment.
3 The property at 53 Prospect Street
Street was bought by Telo
Telo on 1 September
September 20X2 for £2 million (land
£300,000 and buildings £1.7 million). The directors decided to measure the property under the
revaluation model, and to apply an annual depreciation rate to the buildings of 1%, assuming no
residual value.
The first revaluation of
o f the 53 Prospect Street property took place on 31 August 20X4. A chartered
surveyor valued the property at £3,180,00
£3,180,0000 (of which land
l and comprised £600,000). No change was
made to the expected useful life of the property at that date.
It was clear by late 20X4 that the property was too small for Telo's rapidly-increasing scale of
operations, and the business moved to offices at 15 Selwyn Road on 1 January 20X5. The
15 Selwyn Road offices are occupied under a short-term operating lease.
The Telo directors decided to retain ownership of 53 Prospect Street, and to let it out as an
investment property. A five-year lease was agreed with an unrelated party, which moved into the
property on 1 January 20X5.
The carrying amount of 53 Prospect Street in the trial balance is £3,335,000 and comprises:
£'000
Property at valuation at 31 August 20X4 3,180
Installation of air conditioning system (March 20X5) 100
Professional fees in respect of leasing 53 Prospect Street 25
Costs of relocation to 15 Selwyn Road 30
3,335
As commercial property prices in the area

area are rising rapidly, the same charte
chartered
red surveyor who
conducted the valuation at 31 August 20X4 was asked to revalue the property again at
1 January 20X5 and at 31 August 20X5. She produced the following valuations:
Date Land Buildings
£'000 £'000
1 January 20X5 620 2,600
31 August 20X5 650 2,850
On 1 January 20X5, the Telo directors decided to measure 53 Prospect Street using the fair value
personalization,model.
and analytics. You
4 The deferred
deferred tax balance of £243,000 brought forward at 1 September 20X4 arose in respect of
or accept the default settings.at 53 Prospect Street. It was calculated at a tax rate of 20% which continues to be the
the property
applicable rate at 31 August 20X5. Gains on o n property, plant and equipment are taxed when the
asset is sold. However, the tax rules for calculating gains on investment properties follow the
Privacy Policy
accounting rules: gains are taxed when they are recognised in the statement of profit or loss. No
other temporary differences arose, including on computer and office equipment, either at
Marketing
31 August 20X4 or 31 August 20X5.
Personalization
Analytics
Save Accept All


48 Newpenny (amended)
You are Cary Lewis, an ICAEW Chartered Accountant working for a firm of accountants and auditors,
Linton LLP. You are the senior assigned to the audit of Newpenny plc, a UK company which
manufactures and distributes a range of vacuum cleaners. You are currently planning the Newpenny
audit for the year ending 31 December 20X5.
Your audit manager calls you into his office and briefs you:
"I have received an email (Exhibit 1) from Rosa Evans, the Newpenny finance director. She needs our
advice on some financial reporting matters and has also provided information about the purchasing
procedures Newpenny now has in place (Exhibit 2). She would like us to take these updated procedures
into account when planning our audit approach, so that we can place more reliance on internal controls
in our audit of trade payables and accruals.
Our audit of Newpenny's trade payables and accruals for the year ended 31 December 20X4 relied
wholly on substantive audit procedures. The results of these audit procedures are summarised in a
memorandum (Exhibit 3).
I need you to prepare the following:
(a) An email replying to Rosa Evans in which you provide, with explanations, the financial reporting
advice she has requested (Exhibit 1)
(b) A memorandum to me in which you re respond
spond to Rosa's suggestion that we should place more
reliance on internal controls in our audit of Newpenny's trade payables and accruals for the year
ending 31 December 20X5. I have set out in a note (Exhibit 4) how you should structure this
memorandum and the information you should include. (Ignore the results of the data analytics
noted below.)
(c) I have some concerns about N Newpenny's
ewpenny's purchase order and re receipt
ceipt of materials
materials systems. I have
therefore taken the opportunity to analyse the purchase data using Linton's new data analytics
system, DAACA. I have provided a 'dashboard' showing the results of this analysis ( Exhibit 5).
Using this data, set out and explain any further concerns (in addition to those identified in (b)
above) regarding Newpenny's internal control system for purchase orders."
Requirement
Prepare the documents requested by your audit manager. Total: 40 marks
Exhibit 1: Email from Rosa Evans
Advice needed on financial reporting matters
(1) Jones Engineering Ltd (JE) supplies Newpenny with vacuum cleaner cleaner motors. Historically
Historically we have
agreed with JE annually in advance the price per motor and JE has invoiced Newpenny at the
agreed price on delivery. In the year ended 31 December 20X4, Newpenny purchased 75,000
JE motors and the budget, prepared at 1 January 20X5, for the year ending 31 December 20X5
showed that Newpenny would require 100,000 JE motors. The price agreed on 1 January 20X5
was £20 per motor.
When our new purchasing manager joined NewpennyNewpenny in May 20X5, he renegotiated
renegotiated the contract
with JE, resulting in a revised contract for the year ending 31 July 20X6. The renegotiated contract
Privacy Policy has the following terms:
 The price
price per JE
JE motor
motor is reduced to £19
£19 for all motors de
delivered
livered to Newpenny
Newpenny on or after
Marketing
1 August 20X5 and this is invoiced by JE to Newpenny on delivery.
Personalization
 If the total number
number of motors ordered in the year ending 31 July 20X6 is less
less than 100,000
Analytics then Newpenny will pay an additional £1 for each motor purchased in the year ending
31 July 20X6 (resulting in a price per motor of £20).
Save  Accept
If the total All
number
number of motors ordered in the year ending 31 July 20X6 exceeds 110,000, then
JE will give Newpenny a refund which will reduce to £18.50 the price per motor supplied in
the year ending 31 July 20X6.
At the moment, we are recording
recording the liability to pay JE as invoices are received.
received. Please explain to
me any further accounting entries or disclosures I should make in Newpenny's financial statements
for the year ending 31 December
December 20X5.
(2) In the last month, Newpenny had an issue with a few of its Model2000
Model2000 industrial vacuum cleaners.
Customers complained that the vacuum cleaners overheat and one customer alleged that their
vacuum cleaner was the cause of a serious fire. Under its one-year warranty, Newpenny provides
free replacement cleaners to those
those who complain within the warranty period. To date, eight
vacuum cleaners at a total cost of £1,200 have been replaced and Newpenny made an offer of
£5,000 in compensation to the customer who reported a fire. Newpenny sells aroaround
und 10,000
Model2000 vacuum cleaners each year.
The costs to date have been covered by the warranty provision made each year on the basis of past
claims. Please advise me of the approach I should take when assessing the need for any additional
provision in the financial statements for the year ending 31 December 20X5.
Your audit approach
I understand that in last year's audit of trade payables and accruals you relied wholly on evidence
obtained from substantive testing and did not test the operating effectiveness of our controls. We have
introduced updated purchasing internal control procedures and I would like you to rely as much as
possible on the controls we now have in place. Please give this some consideration as you perform your
detailed audit planning.
I attach a copy of our updated purchasing internal control procedures (Exhibit 2) to assist you.
Rosa
Exhibit 2: Newpenny's updated purchasing internal control procedures – prepared by
Newpenny purchasing manager in July 20X5
Background
Newpenny's purchases can be categorised as follows:

follo ws:
(a) Materials (including components) used in the manufacture of vacuum cleaners
cleaners
(b) Services such as utilities and agency staff.
Purchase orders
Purchase orders for materials are prepared by the manufacturing department and sent to the relevant
supplier. The orders are authorised by a manufacturing manager in accordance with the authorisation
limits set by the finance department and are entered in the purchasing IT system by an assistant in the
purchasing department. Manufacturing managers each have a limit of £5,000 for a single order and
have a maximum total order value of £100,000 per month. Authorisation by a senior manufacturing
manager is required for orders above these limits.
Purchase orders for services are prepared and authorised by the relevant departments.
Receipt of materials
This website stores
When data such
materials are as
received at the
the factory, staff in the goods received departm
department
ent match the quantity
cookies to and
type of materials received to a purchase order on the system. If matched, the delivery is accepted
and the purchasing IT system is updated. This entry automatically generates a 'goods received not
personalization, and(GRNI)
invoiced' analytics. You at standard cost and the printing of a 'received' sticker which is attached to the
accrual
goods. at any
The store's time checks for the presence of this sticker before moving the goods into the
manager
store area. settings.
Goods are moved out of the store area when requested for use in production. The goods are then
deducted from stores records (inventory) and transferred to production costs.
Privacy Policy
Standard costs for each material or component are set at 1 January each year.
Marketing
The goods received department staff are instructed that if there is no matching purchase order on the
Personalization
system, materials should not be accepted.
Receipt and posting of invoice
Analytics
Invoices are received by various departments and forwarded to the finance department. If the invoice is
for materials,Accept
Save it is matched
All to the goods received
received entry (thus removing the GRNI accrual) and posted to
the purchase ledger.
If the invoice is for services for which there is an authorised purchase order, it is posted to the purchase
ledger immediately without further authorisation. If there is no authorised purchase order, the invoice is
sent to the relevant department for approval and only posted to the purchase ledger once that approval
has been obtained.

Month end accruals process
At the end of each month, an assistant in the finance department reviews open purchase orders (ie,
those orders which have not been matched to goods received or invoice) on the system and determines
whether the ordered materials or services were supplied before the month end. Accruals are made for all
items supplied before the month end. The accruals listing is reviewed by the financial controller, who
requests supporting information for a sample of items selected at random.
Where a supplier provides a monthly statement,
statement, this is reconciled to the balance on the purchase ledger
and GRNI accrual for that supplier by a member of staff in the finance department.
Cash payments
Every two weeks, all items due for payment are selected from the purchase ledger and added to the
automated payment run. The payment run is reviewed and authorised by the financial controller and
one of the other bank signatories before being notified to the bank. The payment is posted to both the
cash book and the purchase ledger. Bank and purchase ledger control account reconciliations are
performed at each month end by the financial controller.
Exhibit 3: Memorandum on trade payables and accruals from the audit working papers for
the year ended 31 December 20X4
We performed the planned audit procedures
procedures on trade payables and accruals. The following findings
were noted:
 Our audit procedures on post year-end invoices identified omitted accruals of £103,000
£103,000 relating to
invoices for agency staff work performed before the year end, but invoiced a month later.
 A review of the GRNI accrual listing revealed old items amounting to £50,000. Newpenny staff
were unable to explain why invoices had not been received and matched to these receipts of
materials.
Exhibit 4: Audit manager's note memorandum on Newpenny's controls over purchasing
−
Your memorandum should first explain any general

general points about Newpenny's control environment for
payables and accruals.
You should then consider the audit assertions relevant to payables
payables and accruals balances, setting out the
following for each assertion:
 An explanation of the assertion as it relates to trade payables and accruals
 The key control activities you have identified from the information provided
 Your initial assessment as to whether the controls you have identified individually or in combination
This website stores
withdata
othersuch as are capable of ensuring that the audit assertion is met
controls
 An explanation of any potential internal control deficiencies identifying:
personalization,–and any
analytics. Youhave identified in the control activities;
gaps you
– matters on which you require additional information; and
– areas where
where you
you are concerned that the controls maymay not be designed effectively to meet the
relevant assertion.
Privacy Policy
Exhibit 5: Dashboard of results from the application of DAACA data analytics
Marketing
Newpenny management has made available to Linton all its data files with respect to its purchases,
stores and payables system. Linton's Data Analytics and Controls Assessment system (DAACA) has been
Personalization
applied to this data.
Analytics
The DAACA system tested 100% of items for all types of product ordered and received, in the year
ended 31 December 20X4. It analysed data and identified outliers in respect of each of the following:
Save Accept All
Test 1: Size and timing of individual orders and monthly totals for each manufacturing manager.
Test 2: Matching of all orders with goods received notes (GRNs).
Based on the above analytics, the following results have been obtained in the form of the standard
output of the DAACA system, which is the data dashboard.
Test 1: DAACA system - data dashboard
Test Outcome
Number of manufacturing managers 30

Average value per individual order £2,343
Average value of monthly total orders per £45,864
manager
Frequency of managers exceeding 16

£90,000 in any one month
Frequency of managers exceeding zero
£100,000 in any one month (requiring
approval from senior manager)
Outliers
One manufacturing manager, John Fuller, was identified as an outlier showing the following data:
Test Outcome
Frequency of
Average value per individual order £3,246 value of individual
Average value of monthly totals of orders £64,379 orders for John Fuller for
the year
% of individual orders exceeding £4,000 35%
% of individual orders in last three days of 27% 35%
the month 30%

25%
Frequency of John exceeding £90,000 of 7 20%
15%
orders in a month
100%
5%
0%

cookies to Test
enable2: essential site - data dashboard
DAACA system
personalization,
Test and analytics. You Outcome
may change your settings at any time Top 4 suppliers
Number
or accept the defaultofsettings.
orders matched with GRN 13,546 Average no of days
Number of unmatched orders 1,175 delivery terms exceeded
Privacy Policy
Number of unmatched orders over 22
2 months old Wilson
Marketing
Number of unmatched GRNs 17
Personalization Man Inc
Analytics
UUP Ltd
Save Accept All

Jones plc
-5 0 5 10

49 Earthstor
Earthstor plc is listed on the AIM of the London Stock Exchange. It is a retailer of clothing and footwear
and sells products to customers in the UK.
You are a newly-qualified ICAEW Chartered Accountant working for the auditors of Earthstor. Your firm
is currently undertaking the audit of Earthstor for the year ended 30 June 20X6 and you have replaced
Greg Troy, the audit senior who has recently been reassigned to another client. You report to Tom
Chang, the audit manager.
Tom Chang gives you the following briefing:
"I have provided you with a draft statement of financial position at 30 June 20X6, prepared by
Earthstor's finance department (Exhibit 1).
Greg reviewed the minutes of the directors' quarterly board meetings and prepared a file note in respect
of some financial transactions undertaken by Earthstor during the year ended 30 June 20X6 (Exhibit 2).
Greg has set out Earthstor's draft financial reporting treatment and some additional information for
these transactions, but Greg had concerns about whether the financial reporting treatment is correct
(Exhibit 3).
Planning materiality is £2.4 million, which represents 5% of profit before tax. We agreed with the audit
committee that we will report to them each misstatement above £120,000 identified during our audit.
Please prepare a working paper in which you:
(a) explain the financial reporting implications of each of the transactions noted by Greg from the
board minutes (Exhibits 2 and 3). Recommend appropriate accounting adjustments. Please ignore
any tax or deferred tax implications of these adjustments;
(b) identify the key audit risks arising from each of the transactions (Exhibits 2 and 3) and recommend
the audit procedures that we will need to complete in order to address each risk;
(c) prepare a revised
revised draft statement
statement of financial position at 30 June 20X6 (Exhibit 1). This should
include any adjustments identified in (a) above; and
This website(d)stores
explain
dataany corporate
such as governance issues for Earthstor that you ide
identify
ntify from Greg's
Greg's file note
cookies to enable (Exhibit 2). Also,
essential site identify any ethical issues for our audit firm and recommend the actions that our
firm should take."
Requirement
Prepare
or accept the thesettings.
default working paper requested by Tom Chang. Total: 40 marks
Privacy Policy
Marketing
Personalization
Analytics
Save Accept All

Exhibit 1: Earthstor Draft statement of financial position at 30 June 20X6 – prepared by

−
Earthstor finance department

ASSETS £'000
Non-current assets
Intangible assets – website development costs 31,300
Financial asset – investment in TraynerCo 8,000
Current assets
Inventories 144,380
Trade and other receivables 22,420
Cash and cash equivalents 71,139
Total assets 333,548

Equity
Ordinary share capital (£1 shares) 10,000
Translation reserve (TraynerCo) (1,500))
(1,500
171,862
Non-current liabilities 12,175
Current liabilities 149,511
Exhibit 2: File note – Transactions noted from review of the minutes of the directors'
quarterly board meetings – prepared by Greg Troy
I have summarised the key points from the minutes of the board meetings which relate to complex
financial transactions during the year. I have also set out in a separate
separate file note (Exhibit 3) Earthstor's
draft financial reporting treatment for the year ended 30 June 20X6, for each transaction. I am not sure
that the draft financial reporting treatment is always correct.
Meeting on 10 September 20X5
TraynerCo is an unquoted Malaysian company which supplies Earthstor with footwear, a core product
for Earthstor. An interruption in supply from TraynerCo would affect Earthstor's ability to trade
successfully in the footwear market.
TraynerCo suffered a serious cash flow problem in June 20X5 and Earthstor's CEO, Dominic Roberts,
This website storesthat,
reports dataonsuch as 20X5, he instructed the finance director to provide emergency finance to
1 July
cookies to TraynerCo.
enable essential
This issite
an interest-free loan of MYR20 million, repayable at par on 30 June 20X7. (MYR is the
currency
personalization, ofanalytics.
Malaysia.) Loans of equivalent risk in the marketplace have an annual effective interest rate
of 6%.and
In order You
to secure footwear supplies, the directors retrospectively approve the loan.
or accept the defaultproposes
Dominic settings.a long-term investment in TraynerCo. Henry Min, an entrepreneur, owns 100% of
the share capital in TraynerCo. Dominic states that Henry Min has agreed to sell 10% of his
shareholding in TraynerCo to Earthstor for MYR45 million. The date of the transaction will be
1 October 20X5.
Privacy Policy
Although the board approves the purchase of the 10% shareholding in TraynerCo, there is a dissenting
Marketing
vote from the finance director, who believes that the price to be paid for the shares is above the market
Personalization
price. The finance director states that he will provide further evidence of the market price valuation.
Meeting on 10 January 20X6
Analytics
The board records the resignation of the finance director on 1 January 20X6. In his resignation letter to
Save Accept
the board, the Alldirector states that he can no longer work with Dominic, who is dominating the
finance
board and allowing a close friendship with Henry Min to compromise his judgement.
The HR director presents a short report on the process for recruiting a new finance director. Dominic
joins the meeting via teleconference from Singapore. Dominic tells the board that, in the interim period,
the finance department will have to cope until a replacement finance director is appointed.

Dominic is negotiating the purchase of an office building in Singapore for Earthstor, which will be
rented out entirely to third parties. He asks the board to approve this transaction in advance. Although
details of the purchase are not available, Dominic considers that it is a good investment opportunity for
Earthstor.
After the Singapore office building has been purchased by Earthstor, TraynerCo will relocate its
administration function on 1 August 20X6 to Singapore for tax reasons and has agreed to occupy one
floor of this Singapore office building. Dominic states that no rent will be charged
charged to TraynerCo as he
recently agreed a very low price for Earthstor's purchases of footwear from TraynerCo.
Meeting on 10 March 20X6

Dominic decided to cancel this board meeting.
Meeting on 30 June 20X6
Dominic reports that the purchase of the Singapore office building has been successful and presents
details of the deal. Earthstor paid SG$10 million on 1 February 20X6 when the exchange rate was £1 =
SG$2.1. (SG$ is the currency in Singapore.) Dominic states that this is a good price as a similar property
was sold for SG$11 million in June 20X6.
Dominic announces the launch on 1 May 20X6 of the new Earthstor website which fully integrates with
Earthstor's inventory and order processing systems. The website now enables goods to be despatched to
the customer within four hours of the order being placed. The website will provide future benefits to the
business for seven years.
Exhibit 3: Draft financial reporting treatment for the year ended 30 June 20X6
Set out below are Earthstor's draft financial reporting treatment and some additional information for the
financial transactions during the year noted from my review
review of the minutes of the directors' quarterly
board meetings (Exhibit 2).
MYR20 million interest-free loan to TraynerCo
This loan is recognised in trade and other receivables, translated at the exchange rate on 1 July 20X5 of
£1 = MYR5. No other entries have been made in respect of this loan. The average exchange rate for the
year ended 30 June 20X6 was £1 = M MYR5.5
YR5.5 and the exchange rate
rate at 30 June 20X
20X6
6 was £1 = MYR6.
Investment in 10% of TraynerCo's shares
The investment in TraynerCo is recognised as a financial asset at its cost on 1 October 20X5 of
£9.5 million (MYR45 million at £1 = MYR5, plus legal fees of £0.5 million). It is translated at the year-
end exchange rate at 30 June 20X6 of £1 = MYR6. A loss o off £1.5 million is presented through other
comprehensive income in a translation reserve in the statement of financial position.
In July 20X6, Henry Min sold a further 10% holding of his shares in TraynerCo to a Malaysian entity for
This website storesmillion.
MYR36 data such
Thisasvaluation reflects a fall in the value of TraynerCo's shares since 1 October 20X5
cookies to caused
enable byessential site
poor trading results since 1 October 20X5.
Purchase
personalization, and of Singapore
analytics. You office building
may change Theyour settingsoffice
Singapore at anybuilding
time is held at cost in property, plant and equipment. It is translated at the
or accept the
datedefault settings. No depreciation has been charged and the accounting policy for investment
of acquisition.
properties states that they should be recognised at fair value. The exchange rate at 30 June 20X6 was
£1 = SG$2.7.
Privacy Policy
New Earthstor website
Marketing
The following website development costs have been included in non-current assets:
Personalization £'000
Planning costs 3,000
Analytics
Professional fees for photography and other graphic design 1,300
Fee paid to Tanay (Note) 5,000
Save Accept
Internal software All
development costs 22,000
22,000
31,300
Note: £5 brand'.
Earthstor million was paid to Tanay, an internationally-famous singer, who is the 'name behind the
The above costs have not been amortised in the financial statements.
50 EyeOP
You are Greta Hao, an ICAEW Chartered Accountant working in the finance departmdepartment
ent at HiDef plc, an
AIM-listed company which manufactures medical equipment. HiDef has several wholly-owned
subsidiaries and prepares consolidated financial
fi nancial statements. Its year end is 30 November.
On 1 December 20X4, HiDef bought 50,000 of the 1 million issued ordinary shares in EyeOP Ltd, for
£700,000. EyeOP makes medical imaging cameras. HiDef classified its investment in 50,000 EyeOP
shares as an available-for-sale financial asset. On 30 November 20X5, the fair value of the 50,000 shares
was £2.5 million

statement of otherand the increase inincome
comprehensive fair value
for of
the£1.8
yearmillion
endedwas recognised20X5.
30 November in HiDef's consolidated
HiDef intends to buy a further 650,000 of EyeOP's ordinary shares on 1 August 20X6 for £85 million.
The fair value of EyeOP's net assets at 1 August 20X6 is expected to be £63 million. EyeOP has a
31 December year end.
The fair value of HiDef's original shareholding of 50,000 shares is expected to be £6.2 million on
1 August 20X6. HiDef intends to use the proportion of net assets method to value non-controlling
interests.
You receive the following briefing from the HiDef CEO:
CEO:
"A finance assistant has provided some financial information, which comprises:
 a draft
draft forecast statement of profit or loss and other ccomprehensive
omprehensive income for EyeOP
EyeOP for the year
ending 31 December 20X6; and
 some notes on outstanding financial reporting issues and assumptions for 20X7 (Exhibit 1).
The HiDef directors want to understand the impact of buying a further 650,000 shares in EyeOP on the
group's ability to achieve the key group performance targets. I have provided you with the forecast
consolidated statement of profit or loss and other comprehensive income for the HiDef group
(excluding the impact of the proposed purchase of 650,000 EyeOP shares) for the year ending
30 November 20X6, together with other information and key group performance targets (Exhibit 2)."
The CEO's instructions
"I would like you to prepare a report for me in which you:
(a) calculate the goodwill relating to the proposed p purchase
urchase of 650,000
650,000 ordinary shares in EyeOP
EyeOP on
1 August 20X6, which would be included in HiDef's consolidated statement of financial position as
at the year ending 30 November 20X6. For this purpose, use the expected fair value of EyeOP's net
assets at 1 August 20X6 of £63 million;
This website(b)stores datathe
explain such as of each
impact each of the outstanding financial reporting issues (Exhibit 1)
1) on EyeOP's
EyeOP's
forecast financial statements for the year ending 3131 December 20X6.
20X6. Recommend appropriate
personalization,adjustments
and analytics. using
Youjournal entries;
may change (c)your
prepare a revised
settings forecast consolidated statement
at any time statement of profit or loss and other comprehensive income
income
for HiDef
or accept the default for the year ending 30 November
settings. November 20X6. Assume that HiDef buys 650,000 shares in
EyeOP on 1 August 20X6 and include any adjustments you recommend in respect of the
outstanding financial reporting issues (Exhibit 1); and
Privacy Policy
(d) analyse the impact of the purchase of 650,000
650,000 shares in EyeOP on HiDef's
HiDef's key performance targets
(Exhibit 2) for the year ending 30 November 20X6 and, where possible, for the year ending
Marketing
30 November 20X7.
Personalization
Please ignore any tax or deferred tax consequences."
Analytics
Requirement
Respond to the CEO's instructions.
Save Accept All
Total: 30 marks

Exhibit 1: Financial information provided by the EyeOP finance assistant
EyeOP Draft forecast statement of profit or loss and other comprehensive income for the year
─
ending 31 December 20X6

£m
Revenue (Note 2) 178.9
Cost of sales (Note 2) (92.6)
Gross profit 86.3
Administrative expenses (Note 1) (36.3)
(14.0)
Non-recurring item – development costs (Note 2)
Profit from operations 36.0
Finance costs (12.2)
Profit before tax 23.8
Income tax (4.8)
Profit for the year 19.0
Other comprehensive income for the year –
Total comprehensive income for the year 19.0
19.0
Depreciation of £4.1 million and operating lease rentals of £5.5 million are included in cost of sales.
Outstanding financial reporting issues
Notes
1 Pension schemes
EyeOP contributes to two pension schemes on behalf of its employees: Scheme A and Scheme B.
The total contribution paid to the company's pension schemes of £9.2 million is recognised in
administrative expenses. The breakdown of the contribution and details of the schemes are as
follows:
Scheme Details
A EyeOP will make a contribution of £6.4
£6.4 million to scheme A in the yyear
ear ending
31 December 20X6.
This scheme is for directors and employees who have worked for more than five years for
the company. EyeOP has a contractual obligation to ensure that its contributions are
sufficient to provide a pension to the scheme members at retirement. The pension is
based on an average of the member's final three years' salary. Scheme A is separately
constituted from Scheme B (see below). Scheme A is now closed to new members.
B EyeOP will make a contribution of £2.8 million to Scheme B in the year ending
This website stores data such31 asDecember 20X6.
cookies to enable essential siteThis scheme is for employees who are not eligible for Scheme A.
personalization, and analytics.Contributions
Yoube used tocreate,
can
for an employee, a right to a portion of the scheme assets, which
buy an annuity on retirement. Contributions are fixed at 7% of the annual
salary for the employer and 3% for the employee.
The following information relates to Scheme A as reported in the financial statements for the year
ended 31 December 20X5:
Privacy Policy £m
Pension scheme assets 22.0
Marketing
Present value of the obligation (60.0))
(60.0
Post-employment net benefit obligation (38.0)
Personalization
The scheme actuary provided the following information:
Analytics
 During the year ending 31 December 20X6, 15 senior employees will be made redundant and
Save as Accept All
a consequence, EyeOP will commit to pay additional pensions to these employees under
the terms of their redundancy. This contributes an additional £4.2 million to the present value
of the pension obligation.
 The valuation of the pension scheme assets and the present value of the pension obligation at
31 December 20X6 are now expected to be £32.6 million and £74.5 million respectively.
 Other information estimated for the year ending 31 December 20X6:

Yield on high-quality corporate bonds 5% pa
£m
Current service cost 5.9
Benefits paid to former employees 2.1
Actual return on scheme assets 6.3
Except for the recognition of the pension contributions of £9.2 million in administrative expenses,
no adjustments
31 December have been made to the draft forecast statement of profit or loss for the year ending
20X6.
2 Medical imaging camera – Medsee
On 1 October 20X4, EyeOP started to develop a new medical imaging camera, the Medsee.
Monthly development costs of £4 million were incurred from that date until 1 January 20X6, when
EyeOP made a technical breakthrough in relation to this project. On 1 January 20X6, the Medsee
was deemed financially and commercially viable and thereafter development costs decreased to
£3.5 million per month until development work
wo rk was completed on 30 April 20X6.
Marketing and production of the Medsee began on 1 May 20X6. EyeOP expects to receive o orders
rders
for 600 cameras priced at £60,000 each in the
the year ending 31 December
December 20X6. The terms
terms of trade
require a non-refundable payment of 25% of the selling price on receipt of the order. The order is
non-cancellable. There will be 50 cameras manufactured and delivered to customers in the year
ended 31 December 20X6 who will pay EyeOP the remaining 75% of the selling price in in
January 20X7.
EyeOP anticipates the Medsee having a commercial life of four years, with total sales of 3,500
cameras over that period. It is anticipated that 875 cameras will be delivered in the year ending
31 December 20X7.
Variable production costs are £22,000
£22,000 per camera.
In the forecast statement of profit or loss for the year ending 31 December 20X6, EyeOP intends to
expense all Medsee development costs. Because the orders are non-cancellable,
no n-cancellable, EyeOP intends to
recognise revenue in respect of the 600 cameras which customers will order by 31 December 20X6.
Entries made in the forecast financial statements for the year ending 31 December 20X6 to reflect
the above are:
£m £m
DEBIT Cash 9.0
DEBIT Receivables
This website stores data such as 27.0
CREDIT
cookies to enable Revenue
essential site 36.0
personalization,DEBIT
and analytics.Cost
You of sales 13.2
CREDIT Inventories 13.2
DEBIT Non-recurring item – development costs 14.0
CREDIT Cash 14.0
Privacy Policy Assumptions for year ending 31 December 20X7

It is expected that the variable production cost per Medsee camera, and its selling price, will
Marketing
remain unchanged in the year ending 31 December 20X7. Other revenue and costs are also
Personalization
expected to remain constant.
Analytics
Save Accept All


Exhibit 2: HiDef consolidated forecast statement of profit or loss and other comprehensive
income for the year ending 30 November 20X6 (excluding the impact of the proposed
purchase of 650,000 EyeOP shares)
20X6
£m
Revenue 383.0
Cost of sales (264.2)
Gross profit 118.8
Administrative expenses (102.0)
Profit from operations 16.8
Finance costs (5.5)
Income tax (2.3)
Other comprehensive income for the year –
Other information
Depreciation of £28.1 million and operating lease rentals of £35.5 million are included in cost of sales.
HiDef's consolidated revenue and costs are expected to remain constant for the foreseeable future.
Revenue for the year ended 30 November 20X5 was £400 million.
Key group performance targets for HiDef
Revenue growth Increase of 7% each year
Gross profit percentage Greater than 35%
EBITDAR / Interest Greater than 12
51 Topclass Teach
You are Mo Ranza, an ICAEW Chartered
Chartered Accountant who recently joined Jones, Smith & Wilson LLP
(JSW) as an audit senior. You receive the following briefing from Sue Jessop, the JSW engagement
partner:
"Welcome to JSW. I need your help on the audit of Topclass Teach plc (TT) for the year ending
31 August 20X6. TT provides education and training, and it operates from an extensive campus. TT has
been an audit client of JSW for a number of years.
Our interim audit visit at TT starts next week and I am concerned that we have not yet planned our
audit approach on property, plant and equipment (PPE). The TT financial controller has sent me the PPE
This website stores
note fromdata
the such as
management accounts for the nine months ended 31 May 20X6. This gives you an idea
cookies to of
the significance of the PPE balances ( Exhibit 1). Planning materiality for the TT audit is £2 million and
we willand
personalization, report each proposed
analytics.pro
Youposed misstatement over £40,000 to the audit committee.
The only documentation
may change your settings at any time regarding PPE on our audit file is a planning memorandum prepared in
June
or accept the (Exhibit 2) by an audit assistant, Naomi Wills. This was not reviewed by the audit senior or
20X6 settings.
default
manager and, while it includes some useful information, it does not specifically identify or comment on
the audit risks.
Privacy Policy
I've received an email from the TT finance director, Karel Kovic, which requests advice on the financial
reporting implications of a proposed agreement and updates us on some recent developments at TT
Marketing
(Exhibit 3)."
Personalization
Partner's instructions
Analytics
"What I need you to do is to use the information I have provided to do the following:
(a) Draft a response to Karel's request for advice on the financial reporting implications of the
Save Accept All
proposed agreement with Beddezy on the TT financial statements for the year ending
31 August 20X6 (Exhibit 3). You can ignore any tax or deferred tax consequences.
(b) Identify and explain
explain the inherent,
inherent, control and detection audit risks associated with the audit of PPE
in TT's financial statements for the year ending 31 August 20X6.
(c) Prepare an outline audit approach for TT's PPE

PPE balance at 31 August 20X6 which explains those
aspects of our audit of PPE where:
(1) we are able
able to test and place reliance
reliance on the operating effectiveness of controls;
(2) we will need expert input;
(3) audit software can be used to achieve a more efficient audit;
(4) substantive analytical procedures will provide us with adequate audit assurance; and
(5) tests of details should be performed
performed during our interim audit visit.
We can discuss detailed audit procedures once we have agreed on the audit approach."
Requirement
Respond to the instructions of Sue Jessop, the JSW engagement partner. Total: 30 marks
Exhibit 1: PPE note from TT management accounts for the 9 months ended 31 May 20X6 –
prepared by TT financial controller
Freehold land Assets under Fixtures, fittings
and buildings construction and equipment Total
£m £m £m £m
Cost or valuation
At 1 September 20X5
20X5 129.5 2.8 29.5 161.8
Additions – 21.8 4.1 25.9
Assets coming into use 13.5 (13.5) – –
Disposals – – (1.5))
(1.5 (1.5)
At 31 May 20X6 143.0 11.1 32.1 186.2
Depreciation
Depreciation
At 1 September 20X5
20X5 6.1 – 15.4 21.5
Charge for the period 2.4 – 2.8 5.2
Disposals – – (0.9) (0.9)
At 31 May 20X6 8.5 – 17.3 25.8
Carrying amount
At 1 September 20X5
20X5 123.4 2.8 14.1 140.3
At 31 May 20X6 134.5 11.1 14.8 160.4
The forecast for the three months ending 31 August 20X6 includes movements in PPE as follows:
Freehold land Assets under Fixtures, fittings
and buildings construction and equipment Total
This website stores data such as £m £m £m £m
cookies to Cost
enableoressential
valuationsite
At as
functionality, 31well
Mayas20X6
marketing, 134.5 11.1 14.8 160.4
Additions – 8.0 0.5 8.5
may change Depreciation charge
your settings at anyfortime
the
period
or accept the default settings. (0.8) – (1.0) (1.8)
Revaluation gain 40.0 – – 40.0
At 31 August 20X6 173.7 19.1 14.3 207.1
Privacy Policy
The revaluation gain shown above is an estimate as the valuation will not be completed until early
September 20X6.
Marketing
Personalization
Analytics
Save Accept All


Exhibit 2: Interim audit memorandum on PPE – prepared by Naomi Wills in June 20X6
This memorandum summarises relevant information from our prior-year audit file and discussions with
TT management to date to assist us in determining the risks associated with our audit of the PPE balance
at 31 August 20X6. Points noted are as follows:
 TT's freehold land and buildings comprise teaching facilities, including lecture theatres, classrooms
and specialised laboratories. TT also has surplus land on its campus.
 No audit adjustments
adjustments were raised in relation
relation to PPE balances during our audit of TT for the year
ended 31 August 20X5.
 Prior-year audit work concluded that controls over the TT purchasing function (including the
purchase and classification of PPE) were appropriately designed and operating effectively.
 The TT register
register of PPE is maintaine
maintained
d on a system
system which is separate from the main accounting
ledger. This system was developed by the TT finance department and uses spreadsheets run on a
laptop to calculate month-end journals and prepare year-end reports.
 Freehold land and buildings are recognised at fair value in the financial statements. The most
recent valuation was performed by a professional valuer on 31 August 20X3. TT is planning to use
its own estate's department to determine the value of freehold land and buildings at
31 August 20X6. A significant increase in value is expected as property values in the area have
increased by an average of 25%.
 During August 20X6, the TT finance department plans to conduct a physical verification exercise
focussing on small equipment and IT assets, as these are considered the categories of PPE most
most
susceptible to theft or other loss.
 TT has a number of major capital projects in progress during the financial yyear
ear ending
31 August 20X6. The construction of a new business school was completed in May 20X6 at a total
cost of £13.5 million. Assets under construction include the refurbishment of two science
laboratories and the replacement of the IT system for recording attendance and marks.
Exhibit 3: Email from Karel Kovic to Sue Jessop – Request for advice and update
I need your advice on the financial reporting implications of a proposed agreement with Beddezy plc, a
UK company which runs an international chain of hotels. Under this agreement, which we plan to
finalise before 31 August 20X6,
20X6, Beddezy will build both a hotel and a management training centre
using surplus land on our campus. An outline of the key terms of the proposed agreement is as follows:
 TT will sell land with a carrying amount of £3 million to Beddezy for £5 million.
This website stores

 Beddezy
data will
suchbuild
as two separate
separate buildings on that land: a hotel and a management
management training centre.
centre.
cookies to enableEach building
essential will occupy half of the land bought by Beddezy.
site

for
Theitsanalytics.
hotel
visitors, You
will be
butoperated
it has noby Beddezy. TTtoexpects
commitment to use
do so. The approximately
prices half will
of hotel rooms of the
be hotel capacity
determined by
Beddezy based on market conditions and are expected to vary over time. TT has no rights to
acquire the hotel, or the land occupied by the hotel, at any stage in the future.
 The management training centre will comprise lecture theatres and teaching facilities, with a wide
Privacy Policy variety of uses. It will be built by Beddezy and is expected to cost £4 million to build, excluding the
cost of the land. It will be completed by 31 August 20X7. For 15 years from that date, TT will have
Marketing
exclusive use of the management training centre to run training courses and conferences.
Personalization
In return, TT will pay to Beddezy (on 1 September each year) £300,000 to cover both the rental of
the management training centre and the supply of Beddezy staff to clean and maintain the
Analyticsbuilding, provide security and run the main reception. These staff will work under the direction of a
building manager employed by TT. If TT employed the staff it would cost approximately £100,000
Save Accept
per annum. All end of the 15-year period, TT will have the right to purchase from Beddezy the
At the
management training centre and the plot of land it occupies at a price equal to the market value at
that date.
Update on other matters

Here is an update on some other matters before you begin your interim audit visit.
Harry George, our PPE accountant, is on long-term sick leave so his role is being covered by one of the
surveyors within the estates department. Key aspects of Harry's role include maintaining our PPE register
and reviewing all accounting for major building projects.
Work on the two science laboratories refurbishment is progressing. Work on Laboratory 1 was
completed on 1 July 20X6 and the laboratory is now back in use.
Work on Laboratory 2 is also well advanced, but progress

progress has slowed as new regulatory requirements for
some of our advanced engineering courses mean that TT needs to make changes to the plans. The
changes we need to make include additional building work to demolish and reposition a number of
dividing walls, which is expected to add approximately £100,000 to the total cost.

Privacy Policy
Marketing
Personalization
Analytics
Save Accept All

52 Zego
You are Andy Parker, an audit senior
senior working for Terry & Jonas LLP (TJ), a firm of ICAEW Chartered
Accountants. You have just been
been assigned to the audit of Zego Ltd, a 100% subsidiary o off Lomax plc, a
listed company. Lomax and its subsidiaries operate in the aerospace sector. You have received the
following email from Grace
Grace Wu, the audit manager witwith
h overall responsibility for the LLomax
omax Group
audit.
To: Andy Parker

From: Grace Wu
Subject: Zego audit for the year ended 31 October 20X6
As you are new to this audit, I have provided some
some background information about Zego and the Lomax
Group (Exhibit 1). The final audit starts next week.
Zego's finance director, Carla Burton, went on maternity leave in September 20X6. Before she left, Carla
prepared a schedule of information relating to Zego's non-current assets (Exhibit 2).
Our contact in Zego's finance department is now Julia Brookes, a part-qualified accountant who was
appointed as the financial controller earlier this year. Julia has prepared draft financial statements for the
October 20X6 (Exhibit 3).
year ended 31 October
Two days ago, I met with Grahame Boyle, the Lomax Group finance director, and I attach notes relating
to Zego from that meeting ( Exhibit 4).
Yesterday I had a meeting with Zego's chief executiv
executive,
e, Jurgen Miles, where we
we discussed some
important issues arising from the draft financial statements and the current risks and difficulties that
Zego is facing. I attach notes of that meeting (Exhibit 5).
Prepare the following documents.
(a) Notes explaining and, where possible, calculating adjustments that are required to Zego's draft
financial statements for the year ended
ended 31 October 2
20X6
0X6 (Exhibit 3).
Do not prepare revised financial statements, but you should clearly identify areas where more
information as
is required to make appropriate adjustments.
(b)as Awell
functionality, working paper setting out the results of preliminary
as marketing, preliminary analytical procedures.
procedures. Include relevant
personalization,calculations
and analytics.
andYouexplain any issues arising for the audit from the analytical procedures. Your
calculations should
may change your settings at any time take into account any adjustments that you have proposed to the financial
statements.
(c) A memorandum explaining the key audit risks for Zego.
Zego. Set out the implications of these risks for
the financial statements for the year ended 31 October 20X6 of:
Privacy Policy
 Zego
Marketing Lomax plc

 The Lomax Group

Personalization
Requirement
Analytics
Prepare the documents requested by Grace Wu, the audit manager. Total: 40 marks
Save Accept All
Exhibit 1: Background information about Zego and the Lomax Group – prepared by Grace
Wu, audit manager
The Lomax Group supplies communication products to the aerospace industry. The Lomax Group's
strategy in recent years has involved the development of new markets and products, partly through its
own research and development activities and partly through acquisitions of related businesses.
Zego Ltd specialises in fibre-optic aerospace products. During 20X3 and 20X4 Zego's research and
development team developed a product called Ph244. By 31 October 20X5, orders were received for
this product and the criteria had been fulfilled for recognition of a significant amount of development
expenditure as an intangible asset.

During November and December 20X5, Ph244 achieved expected sales targets. However, in
January 20X6, Zego's largest competitor announced the launch of a rival product which has proved
superior to Ph244. Zego's sales of Ph244 since January 20X6 have fallen.
Planning materiality for Zego has been estimated at £250,000 and for the Lomax Group at £5 million.
We consider all adjustments under £10,000
£10,000 to be clearly trivial.
The Lomax Group has committed to make a preliminary announcement of its earnings on
5 January 20X7.
Exhibit 2: Schedule of information relating to Zego's non-current assets – prepared in
September 20X6 by Carla Burton, Zego's finance director
Analysis of forecast non-current assets between Ph244 related assets and other assets for the year
ending 31 October 20X6
Property, plant and equipment (PPE)
20X6 20X6 20X5 20X5
Forecast Forecast
Ph244 Other PPE Ph244 Other PPE
£m £m £m £m
Balance at 1 November 5.8 10.0 0.3 8.9
Additions 1.8 2.2 6.0 1.5
Depreciation (0.5) (0.7) (0.5) (0.4)
Balance at 31 October 7.1 11.5 5.8 10.0
Intangible asset: research and development (R&D)

20X6 20X6 20X5 20X5
Forecast Forecast Other
Ph244 R&D Ph244 Other R&D
£m £m £m £m
This website storesatdata
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1 November 7.2 8.2 – 7.9
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Amortisation (1.2) (1.8) – (2.0)
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Balanceand
atanalytics. You
31 October 6.0 8.0 7.2 8.2
In the
or accept the above
default analysis R&D comprises capitalised development costs.
settings.
Recoverable amounts
(1) I believe it is unlikely that impairm
impairment
ent losses will arise in respect of 'Other PPE' or 'Other R&D'.
Privacy Policy
(2) Included in the £7.1
£7.1 million forecast
forecast for Ph244 PPE at 31 October 20X6 20X6 is £6.2 million for a
Marketingspecially-constructed building for the production of Ph244. It is likely that this building could be
sold for £8 million if it were adapted for more general use. Adaptation costs are currently estimated
Personalization
at £1.5 million. This building could continue to be used in Zego's business if future research and
Analyticsdevelopment projects are undertaken.
(3) A market is likely to continue
continue to exist for Ph244, although at a much
much reduced level
level of activity.
Save Accept
Estimated All inflows are:
net cash
Year ending 31 October
October 20X7 £1.4 million
We would need to discount
discount these at around 8% pe
perr annum. No significant cash flows are expected
to arise after 31 October 20X9.

Exhibit 3: Zego Ltd – Draft financial statements for the year ended 31 October 20X6 –
prepared by Julia Brookes, Zego's financial controller
Zego Ltd: Statement of profit or loss for the year ended 31 October 20X6
20X6 20X5
£m £m
Revenue 24.8 31.4
Cost of sales (15.2) (18.8)
Operating
Operating expenses
expenses
profit (7.2)
(7.2)
2.4 (8.8)
(8.8)
3.8
Profit before tax 0.6 2.4
Income tax – (0.6)
Profit for the year 0.6 1.8
Zego Ltd: Statement of financial position at 31 October 20X6
20X6 20X5
£m £m
ASSETS
Non-current assets
Property, plant and equipment 18.6 15.8
Intangible asset: R&D 14.0 15.4
32.6 31.2
Current assets
Trade receivables
receivables 4.6
4.6 5.8
5.8
Cash and cash equivalents – 3.6
16.6 17.2
Ordinary share capital 4.0 4.0
Retained earnings 17.0 16.4
21.0 20.4
Long-term liabilities: borrowings 20.6 22.4
Deferred tax 0.6 0.6
21.2 23.0
Current liabilities
Trade payables 3.8 4.4
Tax payable – 0.6
Overdraft 3.2 –
personalization, and analytics. You 7.0
7.0 5.0
5.0
Zego
or accept the Ltd: settings.
default Statement of cash flows for the year ended 31 October 20X6
20X6 20X6 20X5 20X5
£m £m £m £m
Privacy Policy
Profit before tax 0.6 2.4
Marketing
Adjustments for:
Depreciation 1.2 0.9
Personalization
Amortisation 3.0 2.0
Finance costs
Analytics 1.8 1.4
6.6 6.7
Change in inventories (4.2) 0.4
Save Accept
Change in trade All
receivables 1.2 (0.7)

Change in trade payables (0.6))
(0.6 0.9
Cash generated from operations 3.0 7.3
Interest paid (1.8) (1.4)
Tax paid (0.6) (0.7)
Net cash from operating activities 0.6 5.2
20X6 20X6 20X5 20X5

£m £m £m £m
Cash flows from investing activities
Purchase of property, plant and equipment (4.0) (7.5)
Investment in development assets (1.6) (9.5)
Net cash used in investing activities (5.6) (17.0)
Loan (repayment)/financing (1.8) 13.0
Net change in cash and cash equivalents (6.8) 1.2
Opening cash and cash equivalents 3.6 2.4
Closing cash and cash equivalents (3.2) 3.6
Exhibit 4: Notes of a meeting with Grahame Boyle, the Lomax Group Finance Director –
prepared by Grace Wu, audit manager
(1) Lomax paid £18
£18 million for 100% of the shares in Zego onon 1 August 20X3,
20X3, resulting in
£3.75 million of goodwill on consolidation. Zego's performance until the year ended 31 October
20X5 was slightly worse than expected. In particular, the investment in Ph244 was a big
disappointment.
(2) Lomax made loans of around £10 million to to Zego and Lomax's main board directors have
have stated
that no more cash will be forthcoming to support Zego. From now on, Zego's directors must raise
all of its finance
finan ce from sources external to the Lomax Group.
(3) Lomax has no plans to sell its investment in Zego
Zego in the near future, but it is likely to take more
steps to exercise control.
Exhibit 5: Notes of a meeting with Jurgen Miles, Zego's Chief Executive – prepared by Grace
Wu, audit manager
(1) The development of Ph244 has been expensive and a disappointment. At 31 OctoberOctober 20X6, Zego
had a balance of capitalised development costs of £6 million in respect of the Ph244 product
technology (Exhibit 2). How much of this investment can be recovered is now uncertain.
Zego recently received an offer of £2.4 million for the Ph244 product technology from a non-UK
competitor. This offer includes the rights to use this intangible development asset and related plant
and equipment, but not the existing inventories
in ventories or the specially-constructed production building
for Ph244.
The Zego board is considering the offer. It is likely that Zego would incur
i ncur around £200,000 in legal
and related fees if it accepts the offer.
cookies to (2)
enable essential
Zego needs site
to renegotiate its bbank
ank finance. Of the
the long-term borrowings
borrowings of £20.6
£20.6 million in the
functionality, as statement
well as marketing,
of financial position at 31 October 20X6, £11 million is owed to the company's bank.
personalization,Theandremainder
analytics. is
You
owed to Lomax plc. Zego met a required repayment of £1 million to the bank on
1 June at any
20X6. time repayment of £1 million is due on 1 December 20X6.
A further
The bank holds fixed and floating charges over Zego's assets, and agreed covenants requiring an
interest cover ratio of at least 1.2 and the gearing ratio to be no higher than 130% (calculated as
net debt/equity). Although these covenants were not breached at 31 October 20X6, based on the
Privacy Policy
draft financial statements, the bank has called for a meeting which will take place next week.
MarketingIt seems likely that further conditions will be imposed by the bank in order to continue the existing
level of financing. Jurgen thinks that additional financial support will be provided by Lomax, and is
Personalization
hopeful that finance will be provided for a new project which will require development investment
Analyticsof around £7 million. Jurgen knows that Lomax has stated that there will no more finance
finan ce available
for Zego. However,
However, he is confident that finance will,
will, ultimately, be provided b
byy Lomax if it
Save becomes really
Accept All necessary.
(3) Of the inventories
inventories of £12 million at 31 October 20X6,
20X6, £3.6 million relates to Ph244 products.
Production of Ph244 ceased in June 20X6. Sales of £1.4 million of Ph244 at a gross profit margin of
40% are expected in the year ending 31 October 20X7.

53 Trinkup
Trinkup plc operates a chain of coffee shops which sell coffee, tea and cakes. Its accounting year end is
30 September.
On 1 October 20X5, Trinkup acquired 80% of the ordinary share capital of The Zland Coffee Company
(ZCC), a coffee producer and distributor. Trinkup has no other subsidiaries.
You have recently started a new job as the financial accountant
accountant at Trinkup. The financial controller gives
gives
you the following briefing:
"I need your help in preparing the consolidated financial statements for the Trinkup
Tr inkup group now that we
have acquired ZCC.
ZCC operates in Zland, a country where the currency is the krone (K). Trinkup paid K350 million for its
investment in ZCC. As ZCC is not a listed company, Trinkup intends to use the proportion of net asset
method to value the non-controlling interest.
ZCC prepares its financial statements using Zland GAAP. Although there are similarities between Zland
GAAP and IFRS, there are differences
diff erences in pension accounting and deferred tax iiss not recognised under
Zland GAAP. I have provided you with a working paper which contains the draft finan financial
cial statements for
Trinkup and ZCC for the year ended 30 September 20X6, and notes on the outstanding financial
reporting issues (Exhibit).
I would like you to do the following.
(a) Set out and explain the appropriate adjustments for the outstanding financial reporting issues
(Exhibit) for the year ended 30 September 20X6 for:
(1) the individual company financial statements of Trinkup and ZCC; and
(2) the consolidated financial statements.
You should assume that the current tax charges are correct, but you should include any deferre
deferred
d
tax adjustments.
(b) Prepare Trinkup's consolidated statement
statement of comprehensive income for the year ended
30 September 20X6. Please use the adjusted individual company financial statements.
(c) Calculate Trinkup's consolidated goodwill and consolidated foreign exchange reserve at
30 September 20X6. Show your workings."
Requirement
Respond to the financial controller's instructions. Total: 32 marks
cookies to Exhibit: Working
enable essential paper prepared by the financial controller
site
Draft as marketing,
statements of comprehensive income for the year ended 30 September 20X6
may change your settings at any time Notes Trinkup ZCC
or accept the default settings. £m Km
Revenue 1 189.2 494.6
Cost of sales 1 (124.0))
(124.0 (354.2)
Gross profit
Privacy Policy 65.2 140.4
Other operating income 2 15.7 –
Operating expenses
Marketing 2 (35.0) (188.8)
Profit/(loss) before tax 45.9 (48.4)
Personalization
Tax 3 (9.0))
(9.0 –
Profit/(loss) for the year 36.9 (48.4)
Analytics
Other comprehensive loss 4 – (56.6)
Total comprehensive income/(loss) for the year 36.9 (105.0))
(105.0
Save Accept All
Draft statements of financial position at 30 September 20X6

Notes Trinkup ZCC
£m Km
Non-current assets
Property, plant and equipment 6 127.3 244.5
Financial asset – investment in ZCC 64.8 –
Amount owed by ZCC ZCC 5 36.4 –
Net current assets 1 30.8 101.0

259.3 345.5

Equity
Share capital 150.0 50.0
Retained earnings at 1 October 20X5 52.8 240.5
Pension reserve 4 – (56.6)
239.7 185.5
Deferred tax 19.6 –
Long-term loan owed to Trinkup 5 – 160.0
259.3 345.5
Notes: Outstanding
Notes: Outstanding financial reporting issues
1 In the year ended
ended 30 September 20X6, Trinkup bought coffee from ZCC
ZCC for K294 million. Trinkup
paid
30 for the coffee
September 20X6,onTrinkup's
delivery and there are
inventory no trading
includes amounts
£18 million owingbought
of coffee to ZCCfrom
at theZCC.
yearZCC
end. At
charges a mark-up of 30% on cost of goods sold.
2 Trinkup's 'other operating income' comprises a management
management charge to ZCC of K75.3 million for
management support given to ZCC. This charge was paid by ZCC on 30 September 20X6 and is
included in ZCC's operating expenses. In future years there will be no management charge as it is
expected that ZCC will not require Trinkup's management support.
3 ZCC has a K100 million tax trading loloss
ss arising in the year ended
ended 30 September 20X6. Zland tax
law allows tax trading losses to be carried forward only against future taxable trading profits. ZCC
expects to make a taxable trading profit next year.
ZCC's accountant has suggested that the Zland tax authorities could investigate the K75.3 million
management charge made by Trinkup to ZCC and challenge the recovery of ZCC's tax loss. The
This website stores datafor
tax rate such as and ZCC is 20%.
Trinkup
4 as In
functionality, October
Octo
well as ber 20X5,
20X5, ZCC set up a defined contribution pension scheme
marketing, scheme for its directors and has
personalization,accrued
and analytics. You
a contribution of K56.6 million for the year ended 30 September 20X6. This contribution
may change your settings at anypension
was paid to the time fund on 15 October 20X6. Under Zland GAAP, pension contributions are
recognised
or accept the default directly in reserves through other comprehensive income. Tax relief for pension
settings.
contributions is claimed in the accounting year in which the cash is paid to the pension company.
5 On 1 April 20X6,
20X6, Trinkup
Trinkup made an additional investment in ZCC when it provided a loan of
Privacy Policy K160 million to ZCC with interest payable at 5.25% annually in arrears. Trinkup does not require
repayment of this loan in the near future. No adjustments have been made for this loan other than
Marketing
to include it in Trinkup's non-current assets at the rate of exchange at 1 April 20X6. ZCC has
Personalization
recognised the loan in non-current liabilities. No entries have been made in either company in
respect of the interest on the loan. Interest is taxed on an accruals basis.
Analytics
6 At 1 October 20X5, there were
were no differences between the fair value of
of ZCC's net assets and the
carrying amounts, except for the valuation of land owned by ZCC. PPE included land, at cost, of
Save Accept All
K156 million which had a fair value at 1 October 20X5 of K232 million. The directors do not intend
to sell the land. Zland GAAP does not allow revaluations.
The following tax rules apply to PPE in Zland:
 No tax is charged on disposals of PPE.
 Depreciation is an allowable expense for tax purposes.

Other information
£1/K exchange rates were as follows:
1 October 20X5 £1 = K5.4
1 April 20X6 £1 = K4.4
30 September 20X6 £1 = K4.2
Average for the year to 30 September 20X6
20X6 £1 = K4.8
54 Key4Link
You are an audit manager, working
working for ICAEW Chartered AcAccountants,
countants, HJM LLP. You have
have just been
assigned to finalise the audit procedures for Key4Link Ltd for the year ended 30 September 20X6.
Key4Link installs media systems.
You receive the following
following briefing note from the engagement
engagement partner:
Carey Knight, the senior manager working on the Key4Link audit, has had a cycling accident and will be
off work for two weeks. Our audit procedures on Key4Link need to be finalised this week as I have a
meeting with the finance director, Max Evans. I therefore need to understand the current position
regarding our audit work. I have provided you with background information on Key4Link (Exhibit 1).
Most of our audit procedures are complete and have been reviewed by Carey. Carey's file note
(Exhibit 2), prepared a week ago, lists a number of matters which were at that time unresolved.
Updated information
I asked Kevin Jones, the audit assistant, to find out more information about the unresolved matters in
Carey's file note (Exhibit 2). I have now received a memorandum ( Exhibit 3) from Kevin.
I have also received an email from Max, the Key4Link finance director (Exhibit 4) responding to some of
the unresolved matters in Carey's file note and asking for advice. I have not had time to review Max's
email in detail, but I did note that he is keen for HJM to bid for Key4Link's tax work.
Instructions
I would like you to review all of the documentation provided and complete the following tasks:
(a) For each of the matters
matters identified in Carey's file note (Exhibit 2),
2), taking into account the
procedures already undertaken by Kevin (Exhibit 3) and the observations in Max's email (Exhibit 4),
identify and explain:
(1) any additional
additional financial reporting adjustments required, including journals,
This website stores
(2) data
any such as issues and the additional audit procedures required in order to complete
auditing complete our
audit and reach a reasoned conclusion on the unresolved matters. Identify any further
information required from Key4Link.
may change your You do notatneed
settings to consider any current tax o
any time orr deferred tax adjustments.
or accept the
(b) default
Explainsettings.
any ethical issues for HJM arising from Max's rerequest
quest for HJM to
to bid for Key4Link's
Key4Link's tax
advisory work (Exhibit 4). Set out any actions that HJM should take.
Requirement
Privacy Policy
Respond to the engagement partner's instructions. Total: 28 marks
Marketing
Exhibit 1: Background information on Key4Link – provided by the engagement partner
Personalization
At 30 September 20X6,
20X6, the three directors
directors of Key4Link had the following shareholdings:
Analytics
Name Position % shareholding in Number of £1
Save Accept All Key4Link ordinary shares held
Jan Furby CEO 50% 50,000

Max Evans Finance director 25% 25,000
Carol Furby (wife of Jan) Marketing director 25% 25,000
Key4Link's draft financial statements for the year ended 30 September 20X6 recognise revenue of £25
million and a profit before taxation of £3.2 million.
Planning materiality for the financial statements as a whole has been set at £150,000. Performance
materiality is £100,000. Each potential audit adjustment of £5,000 or over should be recorded for
further consideration.
From the audit procedures completed and reviewed to date, we have identified only one uncorrected
misstatement – an understatement of accruals by £50,000 due to an error in the calculation of the sales
commission payable for the quarter ended 30 September 20X6.
Key4Link uses the revaluation model for freehold land and buildings and the cost model for all other
non-current assets.
Exhibit 2: File note – prepared by Carey Knight, HJM senior manager
Set out below is the status of the Key4Link audit as at 28 October 20X6. Our audit procedures are
almost complete, but I have identified the following unresolved matters:
(1) The audit procedures on trade payables are largely complete
complete but the supplier statements for tw
two
o
key suppliers still need to be obtained and reconciled.
(2) Our audit procedures
procedures on the valuation of the company's
company's freehold premises are substantially
complete, but we are awaiting a final signed copy of the report from the external valuer, Mason
Froome. Our audit procedures to date have been based on a draft report which we understand is
unlikely to change. We concluded that specialist input from an auditor's expert was not required as
a third party valuer with appropriate qualifications had performed the valuation.
(3) Max called me yesterday to say that he has adjusted the financial statements to include a provision
provision
of £175,000 for restructuring costs. I have asked him to provide Kevin, the audit assistant, with
more details.
(4) A Key4Link staff
staff member mentioned
mentioned to me that some of of the senior staff are expecting to exercise
share options as soon as the financial statements for the year ended 30 September 20X6 are signed
off. This worried me as no accounting entries or disclosures have been made in respect of any share
option scheme. Therefore, I have asked Max to provide me with information about the share
options.
(5) I have reviewed
reviewed the Key4Link
Key4Link draft annual report and I believe that
that the related party disclosures
may be incomplete. The only related party transaction identified is the remuneration paid to
Key4Link's directors, which we have already audited. However, I know that the Key4Link CEO, Jan
Furby, has other business interests and I am therefore concerned that there may be other
transactions
This website stores data suchto as
disclose.
cookies to Exhibit
enable essential
3: Update sitememorandum – prepared by Kevin Jones, HJM audit assistant
personalization,
This and analytics.records
memorandum You the audit procedures I performed during my visit to Key4Link on
4 November 20X6.
or accept the defaultstatements
Supplier settings.
I obtained supplier statements for the remaining two key suppliers, Barnes Communications (Barnes)
and Farnell Engineering (Farnell). I have summarised below how the statements reconcile to the
Privacy Policy
purchase ledger balance for each supplier at 30 September 20X6.
Marketing Balance per Included in Balance per
Supplier
Personalization Note purchase ledger accruals Difference supplier statement
£ £ £ £
Analytics
Barnes 1 231,650 21,560 57,230 310,440
310, 440
Farnell 2 148,000 – 160,000 308,000
Save Accept All

Notes
1 The difference of £57,230 relates to a missed accrual for inventory delivered on 28 September 20X6
direct to a customer's premises rather than to Key4Link. As the amount is not material, no
adjustment has been proposed.
2 Farnell's statement is dated
dated 5 October 20X6. It includes an invoice
invoice for £160,000 dated
1 October 20X6 for engineering services. I discussed this invoice with Max Evans who referred me
to Jan Furby (CEO), as Farnell is owned by Jan and his brother. Jan told me that Farnell had
performed these engineering services in September 20X6. As this amount relates to services
performed before the year end and is material, I have proposed an audit adjustment to increase
trade payables and cost of sales.
Restructuring costs
I obtained from Max details of the provision for restructuring costs. The board has decided to outsource
its delivery function, which will result in redundancy payments to its drivers and the disposal of its fleet
of trucks. The provision comprises:
£
Carrying amount of trucks at 30 September 20X6 100,000
Anticipated redundancy costs 75,000
175,000
I agreed the carrying amount of the trucks to the non-current asset register at 30 September 20X6,
which was tested by our audit procedures on non-current assets. I obtained calculations for the
anticipated redundancy costs; agreed the basis of the calculations to documented advice obtained from
Key4Link's employment lawyer; and agreed all details for each affected employee to the relevant
employment records. I also ensured that all the drivers were included in the calculation.
Exhibit 4: Email from Max Evans, Key4Link finance director
To: Engagement partner
From: Max Evans
Subject: Audit of Key4Link for the year ended 30 September 20X6
Valuation of freehold premises
Carey asked me to contact our valuer, Mason Froome, for a final copy of his valuation report. I now
have a copy of this.
Jan told me that he had a conversation with Mason at the golf club last week and Mason has now
This websiterevised some
stores dataof the as
such assumptions in his draft report. The final valuation is now £1.2 million, £200,000
cookies to higher
enable than in thesite
essential draft version of the report which you have audited. We will need to adjust the
functionality, as well as marketing,for this.
personalization,
Shareand analytics.
option schemeYou
Carey
or accept the also settings.
default asked me about the company's share option scheme. On 1 December 20X2, five key
members of staff, including me, were each granted options over 500 £1 ordinary shares. Each option
grants the right to acquire one share at an exercise price of £5 per share. These options vest on
30 November 20X6, provided that the company makes a profit before tax of £2.6 million or more for
Privacy Policy
the year ended 30 September 20X6. As you know, this profit level is expected to be achieved and all five
Marketing
of us are planning to exercise our options. I should have mentioned this scheme to you before but
forgot to do so, as there have been no cash entries to account for. WWhen
hen the options were grante
granted
dI
Personalization
calculated that each option had a fair value of £45.
Analytics
Key4Link's tax work
There is also one other matter I would like to discuss at our meeting. Our current tax advisors,
Save Accept All
Blethinsock Priory, have told me that they intend to resubmit the company tax return for last year as
they have identified an error, leading to an underpayment of Key4Link's tax. This seems ridiculous to me
– I cannot see why we need to draw attention to this error and I am not happy at the prospect of
paying more tax. I am considering changing advisors and would like HJM to bid for f or this work. We are
likely to need tax advice in the next few years, so there would be lots of work for HJM.

Privacy Policy
Marketing
Personalization
Analytics
Save Accept All

55 Konext
Scenario
You work for Noland, a firm of ICAEW
ICAEW Chartered Accountants. Your firm is tthe
he auditor of Konext plc and
its subsidiaries. Konext is AIM-listed and is in the business communications sector. It sells mobile devices
to businesses and provides related software and repair services.
Noland has been asked to provide an assurance report on Konext's interim financial
finan cial statements for the
six months ended 30 June 20X4. You have been assigned to act as audit senior.
The recently-appointed Konext financial controller, Menzie Mees, has provided the following:
 Extracts from the draft consolidated interim financial statements for the six months ended
30 June 20X4 (Exhibit 1)
• An extract from the proposed management commentary drafted by the finance director, Jacky
Jones, who is an ICAEW Chartered Accountant (Exhibit 2)
• A summary of financial reporting issues on which Menzie needs advice (Exhibit 3)
The engagement partner gives you the following briefing:
"I had a meeting with Jacky last week and she mentioned that there had been an information security
secur ity
issue. She has made some disclosure about this in her proposed
propo sed management commentary (Exhibit 2). I
have asked her to send more details to you ( Exhibit 4)."
"I would like you to:
(a) explain the appropriate financial reporting
reporting treatment of the issues in the summary
summary provided by
Menzie (Exhibit 3). Recommend appropriate adjustments, including journals, to the draft
consolidated interim financial statements for the six months ended 30 June 20X4;
(b) prepare a revised
revised consolidated statement
statement of profit or loss for the six months ended 30 30 June 20X4.
Set out analytical procedures on the revenue and gross profit prof it in the revised statement of profit or
loss. Identify potential risks of material misstatement arising from these analytical procedures; and
(c)as set
functionality, wellout
as briefly the key audit procedures required
marketing, required to address each of the risks of misstatement
misstatement
relating to revenue that you have identified. For these risks, set out separately the audit procedures
for:
• settings.
the interim financial statements; and
• the financial statements for the year ending 31 December 20X4.
(d) In respect of the details you receive from Jacky about the information security
Privacy Policy security issue (Exhibit 4):
• evaluate the adequacy of the management commentary disclosure in relation to the
Marketing information security issue (Exhibit 2); and
Personalization
• explain any ethical issues for Noland and set out the actions Noland should take."
Analytics
Requirement
Respond to the engagement partner's instructions. Total: 40 marks
Save Accept All
Exhibit 1: Extracts from the draft consolidated interim financial statements for Konext for the
six months ended 30 June 20X4 prepared by Menzie Mees, financial controller
Consolidated statement of profit or loss for the six months ended 30 June 20X4
Six months ended Year ended
30 June 31 December
Notes 20X4 20X3 20X3
£000 £000 £000
Revenue
Customised mobile devices
Software services devices 1
1 30,300
30,300
18,010 20,700
20,700
10,800 51,700
51,700
25,900

48,310 31,500 77,600
Other mobile devices 2 15,700 6,100 20,500
Mobile device repairs 3 2,100 5,200 7,800
Total revenue 66,110 42,800 105,900
Gross profit 39,541 21,625 54,025
Distribution costs (3,823) (3,122) (8,547)
Administrative expenses (6,563))
(6,563 (6,054) (13,755)
Operating profit 29,155 12,449 31,723
Finance costs (1,280) (1,550) (4,125)
Profit before tax 27,875 10,899 27,598
Taxation (2,000) (2,180) (5,520)
Profit for the period 25,875 8,719 22,078
Notes: Operating segments
The type of mobile device Konext sells are tablet computers. The following are the operating segments
used by the board to make strategic decisions:
1 Konext develops a software service specific for each client which enables the clients' employees to
access the clients' business processes. In each case, the software service contract includes data
security and storage services.
Konext buys mobile devices to which it uploads software specific to the client business. It then sells
the customised mobile devices to the client together with a software service contract.
2 Konext also sells other mobile devices to customers without customised software services.
3 Mobile device repairs for Konext clients and othe
otherr customers
customers are undertaken by a division of
Konext called 'Refone' (Exhibit 3).
This websiteExhibit
stores2:data
Draft management
such as commen
commentarytary for the six months ended 30 June 20X4 prepared by
cookies to Jacky
enableJones, finance
essential site director
functionality, as well performance
Financial as marketing,
may change The Konext
your group
settings hadtime
at any a good financial performance across all operating segments in the first half of
20X4.
Total revenue increased by 54.5% to £66.11 million in comparison with the equivalent six-month
period ended 30 June 20X3. Konext's sales of all mobile devices are seasonal,
seasonal , with 40% of mobile
Privacy Policy
devices delivered in the first six months of 20X4.
Marketing
The directors forecast that total revenue for the year ending 31 December 20X4 will grow by 20% in
comparison with the year ended 31 December 20X3.
Personalization
The directors estimate that the number of devices to be delivered in the year ending 31 December 20X4
Analytics
will be as follows:
20X4 20X3
Save Accept All
Number of devices Number of devices
Customised mobile devices 650,000 636,000
Other mobile devices 392,000 205,000
The combined gross profit margin on sales of customised mobile devices and sof
software
tware services has
increased from the 60% margin achieved in 20X3. The gross profit margins on sales of other mobile
devices and mobile device repairs have remained at 25% and 30% respectively.

Future prospects − New product, the Denwa+
Konext has signed a contract with JUI, a Japanese manufacturer
manuf acturer of mobile devices. JUI will sell a new
device called the Denwa+ to Konext. This device will beb e sold exclusively by Konext to its customers
together with specific software and services where relevant. From August 20X4, sales of the Denwa+ will
gradually replace sales by Konext of its current
curren t mobile device.
All the Denwa+ devices will be sold with a guarantee of a replacement device
device if the original is damaged.
This guarantee will apply regardless of the reason for the damage.
An advertising
of the campaign
sales starting for the
in August launch of the new Denwa+ device began in May 20X4 in anticipation
20X4.
Information security issue
An information security issue in a Konext subsidiary is under investigation. There is no evidence that
client accounts have been compromised.
Exhibit 3: Summary of financial reporting issues – prepared by Menzie Mees
I have set out below some financial reporting issues. I am not sure that the transactions are correctly
treated in the draft consolidated interim financial statements.
Revenue
In June 20X4, Konext received deposits totalling £2 million
millio n from clients for the new Denwa+ device. The
clients will make final payments totalling £13 million on delivery of the devices on 1 August 20X4. These
clients will also receive a software service contract for two years and a free guarantee for replacement
should the device be damaged or faulty. Revenue in relation to these sales has been recognised in full
and presented in the interim financial statements as follows:
£'000
Customised mobile devices 10,000
Software services 5,000
15,000
An estimate of the cost of sales for these devices

devices has been recognised in the interim financial statements,
assuming a gross profit margin of 60%.
Jacky, the finance director, said that we should recognise the Denwa+ sales in full because
b ecause the contracts
were signed before 30 June 20X4 and are legally binding. Jacky added that, because the devices will be
delivered before 31 December 20X4, it does not make much difference
diff erence whether we recognise the
revenue in the first or second half of the year.
This website stores dataofsuch
Impairment Refoneas
In as
functionality, January 20X2,
well as Konext bought the trade and net assets of Refone, a mobile device repair business.
marketing,
Refone's cash
generating flow
unit. is30
independent
June 20X4, of
theother group cash flows and it is regarded asne
a separate
were: cash
may change your settings atAtany time carrying amounts of the net assets of Refone
Refo
or accept the default settings. £'000
Brand name 4,175
Privacy Policy
Goodwill 1,975
Inventory 225
Marketing
Receivables 1,950
15,875
Personalization
Payables and other liabilities (3,425)
Net assets
Analytics 12,450
Recently Konext received an offer of £8 million after selling costs for the Refone trade and net assets.
Save
Jacky told meAccept All is currently no plan to sell the business as the budget shows that it can
that there
generate pre-tax cash flows of £1,200,000
£1,200,000 per annum for the five years to 30 June 20X9. With a pre-tax
annual discount rate of 5%, Jacky believes this business can be a success. However, I wonder if there
should be an adjustment to reflect the fall in value of the assets.
Deferred advertising costs

In March 20X4, Nika, an advertising company, was engaged to market the new mobile device,
Denwa+. On 30 June 20X4, Konext recorded invoices totalling £1 million from Nika for fo r marketing
services delivered by that date by debiting the statement of profit or loss and crediting the Nika payable
account. Konext has agreed to issue 100,000 of its £1 ordinary shares to Nika, in full settlement of the
£1 million owed to Nika. The date of the share issue is expected to be 1 September 20X4.
However, Jacky has accounted for the £1 million as a prepayment in the interim financial statements
sta tements for
the six months ended 30 June 20X4 by debiting prepayments and crediting the statement of profit or
loss. She explained to me that the final cost for
f or the marketing services will depend on the share price on
1 September 20X4 and it should, in any case, be matched against the deliveries of the Denwa+, which
start in August 20X4. I am concerned that this treatment is not correct.
Defined benefit scheme
Konext operates a defined benefit pension scheme for its senior executives and a defined contribution
scheme for other employees. Konext's employer contributions to the schemes for the six months to
30 June 20X4 have been charged to the interim statement of profit or loss as follows:
fo llows:
£'000
Defined benefit scheme 900
Defined contribution scheme 3,600
4,500
The service cost for the defined
def ined benefit scheme for the year ending 31 December 20X4 is expected to
be £2.8 million. The six-month interest rate to 30 June 20X4 on a selection of corporate
co rporate bonds is
3.25%. The net benefit pension obligation of £2.3 million reported at 31 December 20X3 comprised
assets at fair value of £12.2 million and the present value of the obligations of £14.5 million. To date
the scheme has not paid out pensions or other benefits to beneficiaries of the scheme.
Jacky did not want to incur the cost of asking the scheme actuary to provide measurements of the
scheme's assets and liabilities at 30 June 20X4 as there have been no significant
signif icant changes since the
actuarial valuation at 31 December 20X 20X3.
3. For simplicity, Jacky told me to charge the employer
contributions to the interim statement of profit or loss and leave the net pension obligation unchanged.
issue – prepared by Jacky Jones,
Exhibit 4: Confidential details about information security issue
finance director
Last week the Konext IT department emailed me with details of a cyber attack
a ttack on a Konext data server
in Poland. The data server held clients' business details and bank
ban k accounts. It is possible that data ffrom
rom
500 client accounts could have been accessed during the attack.
This website stores
There data
is no such asso far that client accounts were accessed, so we have not informed the clients.
evidence
cookies to However,
enable essential
there issite
some risk that clients could suffer a financial
f inancial loss.
I have included
financial a statement
statements. this disclosing the security issue in mywant
wmanagement
ant to say toocommentary in about
the interim
may change your settings at anyAstime is still being investigated, I don't much publicly it at
thedefault
or accept the moment. Further details will be announced in the year-end consolidated financial statements.
settings.
56 Elac
Privacy Policy
Scenario
Marketing
Elac plc is listed on the London Stock Exchange and supplies metal-framed windows for use in industrial
Personalization
buildings. Elac has investments in several wholly-owned subsidiaries.
Analytics
You are Elac's financial accountant and you
you report to El
Elac's
ac's finance director. You have just returned to
work after a holiday. Your assistant, Daniel, an unqualified accountant, has prepared the first draft of the
Save
consolidatedAccept
financialAll
statements for the year ended 31 May 20X7 using briefing papers prepared by
Elac's finance director. These briefing papers include details
detai ls of the following significant matters:
• The increase in Elac's investment in Fenner Ltd and transactions with Fenner Ltd (Exhibit 1)
• Trading outside the UK (Exhibit 2)
The first draft of Elac's consolidated statement of profit or lo
loss
ss for the year ended 31 May 20X7 and its
consolidated statement of financial position at that date ( Exhibit 3) exclude the results and balances of

Fenner Ltd. Fenner has prepared draft financial
f inancial statements for the year end
ended
ed 30 June 20X7. These are
shown in a separate column in Exhibit 3.
Exhibit 3 also includes Daniel's notes showing the adjustments that he has made to Elac's draft
d raft
consolidated financial statements. The notes explain areas where he is uncertain about the appropriate
financial reporting treatment.
Elac's finance director has asked you to draft a working paper in which you:
(a) explain the financial reporting adjustments re
required
quired in respect of the matters described in the
briefing any
Identify papers (Exhibits
further 1 and 2)
information and in Daniel's
required.Dan iel's the
Ignore notes
eff(Exhibit
effects 3). Include adjustments
ects of accounting relevant journal entries.
on taxation;
and
(b) prepare Elac's revised consolidated statement
statement of profit or loss for the year ended 31 May 20X7 and
consolidated statement of financial position at that date. These should include the adjustments
identified in (a) above.
Requirement
Prepare the working paper requested by Elac's finance director.
Work to the nearest £0.1 million.
million. Total: 30 marks
Exhibit 1: Elac's investment in Fenner Ltd – briefing paper prepared by Elac's finance director
Fenner, an important supplier to Elac, manufactures toughened glass. In 20X4, Elac bought 5% of the
ordinary share capital of Fenner for £50 million. This investment is recognised at cost (which
approximates to its fair value) in Elac's draft consolidated statement of financial position at 31 May 20X7
(Exhibit 3).
On 1 February 20X7, Elac bought an additional 20% of the ordinary share capital of Fenner for
£350 million in cash from one of Fenner's principal shareholders. This payment was debited to a
suspense account. The additional investment entitles Elac to appoint a director to Fenner's board. The
remaining 75% of Fenner's shares are held equally by three institutional investors, each of which is
entitled to appoint a director to the Fenner board.
Fenner has made losses during its financial years ended 30 June 20X6 and 30 June 20X7 but it has
continued to pay dividends throughout this period. Fenner paid a dividend of 20p per share on
1 October 20X6 and a dividend of 40p per share on 30 Apri
Aprill 20X7.
Trading with Fenner
Fenner sells goods to Elac at cost plus a mark-up of 20%. During Elac's financial year ended
cookies to 31
enable
Mayessential site supplied goods to Elac at a price of £145.2 million. Trade takes place evenly
20X7, Fenner
functionality, as well asthe
throughout marketing,
year. At 31 May 20X7, Elac's inventories included goods supplied by Fenner at a price of
£35.0 million and Elac's trade payables included an amount of £37.6 million due to Fenner.
Exhibit 2: Trading outside the UK – briefing paper prepared
prepared by Elac's finance director
Until recently, all Elac's sales were to the UK construction industry. During the financial
f inancial year ended
31 May 20X7, the group started trading with construction companies in Otherland.
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Otherland contract
Marketing
The currency of Otherland is the Otherland dollar (O$).
Personalization
In September 20X6,
20X6, an agent for several construction companies in Otherland agreed a one- year
contract with Elac to supply a single type of office
off ice window at a price of O$5,000 per window. The
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contract started on 1 January 20X7 and Elac expects to make a gross profit margin of approximately
30%, which is a much larger margin than UK sales.
Save Accept All
The contract includes a commitment by Elac to pay the agent a commission of 5% of sales value in O$,
provided that total sales for the calendar year 20X7 exceed 16,000 windows. If total sales for 20X7 are
below 16,000 windows the rate of commission is reduced to 3%. The commission is payable annually
annual ly in
arrears.
Average monthly sales for the five-month period from 1 January 20X720X7 to 31 May 20X7 were 1,6001,600
windows and this level of sales
sa les is expected to continue for the rest of the 20X
20X77 calendar year.
Exchange rates:
Spot rate at 1 January 20X7 £1 = O$2.2
Spot rate at 31 May 20X7 £1 = O$2.4
Forward rate (at 1 June 20X7) for 31 December 20X7 £1 = O$2.8
Exhibit 3 – Draft financial statements
Draft statements of profit or loss for the year
Elac: consolidated
(excluding Fenner) to Fenner to
31 May 20X7 30 June 20X7
Notes £m £m
Revenue 1,855.4 382.4
Cost of sales 1 (1,482.9) (272.0)
Operating expenses (270.8) (91.2)
Investment income 2 3.6 –
Profit/(loss) before tax 95.9 (58.5)
Income tax (19.1) 12.0
Draft statements of financial position

Elac: consolidated
(excluding Fenner) to Fenner to
31 May 20X7 30 June 20X7
Notes £m £m
Non-current assets
Tangible assets 1,799.7 1,180.0
Investments 456.0 –
Suspense account 350.0 –
Current assets
Trade receivables 1 238.9 88.8
Cash 16.4 –
This websiteTotal assets
stores such as
data 3,104.8 1,312.0
cookies to Equity
functionality, as well share
Ordinary as marketing,
capital (£1 shares) 150.0 10.0
may change Reserves
Reserves
your settings at any time 2,255.4
2,255.4 208.4
208.4
Long-term liabilities 388.3 1,003.2
Current liabilities
Trade payables and accruals 305.6 65.6
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Provisions and borrowings 1 5.5 24.8
Total equity and liabilities 3,104.8 1,312.0
Marketing
Notes to
Notes to Elac's draft consolidated financial statements for the year ended 31 May 20X7 –
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prepared by Daniel
Analytics
1 Cost of sales includes a provision relating to the
the Otherland
Otherland contract.
contract. I have classified
classified this as an
onerous contract because of the exchange losses I expect to occur between 31 May and
Save Accept20X7.
31 December All I have calculated expected sales over this period as O$56 million (7 months ×
1,600 × O$5,000). Using the 1 January 20X7 exchange rate, £ equivalent salessa les would have been
£25.5 million, but at the 31 December 20X7 forward rate, the £ equivalent sales will be only
£20 million. I have recognised a provision of
o f £5.5 million under current liabilities.
Elac's trade receivables at 31 May 20X7 include £4.8 million due from Otherland customers. This is
the equivalent of O$10.1 million translated at O$2.1 = £1, which was the average exchange rate
during the period 1 January 20X7 to 31 May 20X7.

I have not recognised any accrual for agent's commission as this is a contingent liability depending
on performance, and should therefore
therefo re be disclosed only as a note to the ffinancial
inancial statements.
2 Investment income includes the dividends received
received from Fenner
Fenner on 1 October 20X6 (£100,000)
and on 30 April 20X7 (£1 million). I have made no adjustments in respect of trading with Fenner.
57 Recruit1
Scenario
You are an audit manager
manager working for Hind LLP, a firm of ICAEW Chartered Accountants w with
ith offices in
several countries. You have been assigned to the group audit of Recruit1 plc for the year ended
30 April 20X7. Recruit1 is the parent of an international group of companies engaged in executive
recruitment and training. You receive a briefing from the engagement partner on the Recruit1 group
audit:
"Our scoping and materiality planning summary (Exhibit 1) provides an overview of the audit
procedures planned at each entity within the Recruit1 group.
Our audit is nearly complete but I need your help with outstanding
o utstanding matters relating to Recruit1's
subsidiaries in the countries Arca and Elysia. These subsidiaries are
a re R1-Arca Inc and R1-Elysia Ltd. The
local currency in Arca is the Arcan dollar
do llar (A$) and in Elysia is the Elysian do
dollar
llar (E$).
Last week I received a reporting memorandum from the Hind audit team in Arca ( Exhibit 2) which I
need you to review. I was relieved to receive their report as the team has not replied to any of our other
requests for information.
During audit planning, R1-Elysia was assessed as an immaterial subsidiary. However, our review
procedures, completed last week, identified that the company bought a property during the year,
resulting in material property and loan balances at 30 April 20X7. I asked the audit senior to find
f ind out
more about this property transaction and she has provided additional information (Exhibit 3).
(a) I would like you to review the reporting memorandum from the Hind audit team in Arca
(Exhibit 2) and for each account identified:
• describe any weaknesses in the audit procedures;
• explain any potential financial reporting and audit issues; and
• set out further audit procedures
procedures that either
either the UK group audit team or the
the H
Hind
ind team
team in Arca
should perform, and identify any additional information needed for these procedures.
functionality,
(b)as In
well as marketing,
respect of R1-Elysia's property transaction and loan, re
review
view the further information provided
may change your (Exhibit 3) at
settings and:
any time
• explain the financial reporting implications for the consolidated financial statements of
Recruit1 for the year ended 30 April 20X7. Recommend appropriate accounting adjustments;
and
Privacy Policy • set out any additional audit procedures that should be performed."
Requirement
Marketing
Respond to the partner's instructions. Total: 30 marks
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Exhibit 1: Scoping and materiality planning summary for the Recruit1 group audit for the
Analytics
year ending 30 April 20X7 (Prepared byby Hind UK group
group audit team in January 20X7)
Recruit1 has Accept
Save trading All
subsidiaries, located in many countries around the world. All subsidiaries are wholly
owned by Recruit1. All subsidiaries report under IFRS.
The Hind UK audit team is responsible for the audit of the parent company, Recruit1 plc, the Recruit1
UK subsidiaries and the audit of the consolidated financial statements. The audits of Recruit1 plc's non-
UK subsidiaries are performed by Hind audit teams in the countries where the subsidiaries are located.
Group planning materiality has been determined at £1.2 million. Scoping and component materiality
are shown below:
Entity Level of component materiality Audit procedures to be

performed by Hind
Recruit1 plc – the parent £850,000 UK audit team

company
UK subsidiaries Materiality will be determined UK audit team
separately for each.
R1-Arca This entity is not required to issue Hind audit team in Arca to
audited financial statements and so perform audit procedures
Results are expected to be
work will be performed using
material to the Recruit1 group.
component materiality of £300,000
(A$600,000 as at 31 December 20X6).
Other non-UK subsidiaries £500,000 UK audit team to perform
(including R1-Elysia) review procedures for
unexpected fluctuations or
Results are not expected to be
material balances
material to the Recruit1 group.
Exhibit 2: Reporting memorandum

memorandum received
received from the Hind audit team
team in Arca on 14 July
20X7
The table below sets out the audit procedures we have performed on the financial statements of
R1-Arca for the year ended 30 April 20X7 and highlights matters arising. All accounts have been agreed
to the consolidation schedules provided to Recruit1. These are reported in A$. At 30 April 20X7, the
exchange rate was £1 = A$1.8.
Account A$'000 Notes on audit procedures and matters arising
Revenue 11,172 Selected a sample of items recorded within revenue and agreed
them to invoices and either to the receivables ledger as at 30 April
20X7 or to a cash receipt. No exceptions were noted.
Staff costs (4,924) Agreed the total staff costs to payroll schedules provided by the
service company which processes the payroll for R1-Arca.
Other operating (2,652) Agreed a sample of items to supporting documentation, ensuring
expenses that each item is a valid business expense, recorded in the correct
period and correctly classified within operating expenses. No
This website stores data such as exceptions were noted.
Interest
functionality, income
as well as marketing, 350 No audit procedures carried out as below materiality of A$600,000.
may change Profit
yourbefore
settings at any time3,946
taxation
Taxation Agreed to draft tax computation prepared by R1-Arca's tax advisors.
Checked that current tax payable is correctly calculated as taxable
Privacy Policy (1,715) profit of A$4.9 million at the Arcan corporate tax rate of 35%.
Profit for the year
Marketing 2,231
Personalization Reconciled to prior-year financial statements. Retained earnings as
1 May 20X6 reported to Recruit1 as at 30 April 20X6 were A$6,488,000.
Analytics
The difference of A$2,250,000 is due to the reversal of revenue
which was incorrectly included in the reporting pack for the year
Save Accept All ended 30 April 20X6 as it relates to recruitment services provided in
May and June 20X6.
This error was discovered during the preparation of the financial
This error was discovered during the preparation of the financial
4,238
4,238 statements for the year ended 30 April
Apri l 20X7.

Account A$'000 Notes on audit procedures and matters arising
at 30 April 20X7
Property, plant and 1,065 In accordance with group policy, property, plant and equipment is
equipment measured at cost and depreciated over its useful life.
Movements in this account during the year ended 30 April 20X7
relate to immaterial additions and depreciation.
As all movements are below component materiality
materiality of A$600,000,
no further audit procedures have been performed.
Trade receivables 2,987 This balance was agreed to a detailed list of receivables which was
reviewed for any related party or unusual balances. No such items
were noted.
A sample of balances with a total of A$453,000
A$453,000 was selected to b
be
e
tested for agreement to cash received after the year end.
Of the sample, A$198,000 has been received to date.
As the unpaid element is below component materiality
materiality of
A$600,000, no further audit procedures have been performed.
Other receivables 592 No audit procedures carried out as below component materiality of
and prepayments A$600,000.
Cash and short- Agreed to bank statements or investment

investment confirmations.
term investments 4,143
Total assets 8,787
Trade payables and 2,218 The only material balance within this account is A$1,715,000
accruals relating to tax payable – this is discussed above.
Share capital 100 No audit procedures carried out as below component materiality of
A$600,000.
30 April 20X7 6,469
Total equity and 8,787
This website stores
liabilitiesdata such as
functionality, as well3:as
Exhibit marketing,
Further information on property transaction and loan in R1-Elysia – prepared by
may change audit
yoursenior
settings at any time
I discussed the increase in property and loan balances in R1-Elysia with the group finance director as I
was concerned that the carrying amounts are incorrect.
On 30 September 20X6, R1-Elysia bought a property for E$6 million with a bank loan of E$6 million
Privacy Policy
taken out on the same date. The loan is repayable in full after five years and interest is payable annually
in arrears at a fixed rate of 6% per annum. In Elysia, a tax deduction for interest is available only when
Marketing
the interest is paid.
Personalization
After buying the property, R1-Elysia converted it into a training facility. The conversion took six months
and was completed on 1 April 20X7 when the property was ready for use.
Analytics
From 1 April 20X7, R1-Elysia has used the property to run training courses for its clients. Also, training
Save Accept
rooms are rented All parties on a daily or weekly basis. The rental income includes the use of all
to third
facilities, together with some administrative support. Catering
Catering is provided as an optional service. As the
property generates rental and other income, it has been classified as an investment property in the
consolidation reporting pack submitted by R1-Elysia. The property is expected to have a useful life of
25 years.
The carrying amounts of the property and the loan in the consolidation reporting pack at 30 April 20X7
are as follows:
Property Loan
E$'000 E$'000
Initial purchase transaction on 30 September 20X6 6,000 6,000
Conversion and start-up costs incurred (funded from cash)
External contractor costs 4,200
Allocated salary costs of R1-Elysia employees 850
Marketing costs 900
Security, insurance and other running costs incurred 750
750
while the building was empty
Interest for 7 months to 30 April 20X7 210
Fair value gain on property due to increase in Elysian 500
property prices in the 7 months to 30 April 20X7
Carrying amounts in the consolidation reporting pack at 13,200 6,210
30 April 20X7
Under Elysian tax rules, capital allowances of 50% of the cost of buying business property, including all
conversion and marketing costs, are given in the year of purchase. Therefore capital allowances of
E$6.35 million, based on a total cost before fair value changes of E$12.7 million, have been taken
correctly into account in calculating the Elysian current tax charge. No tax deduction is given for
depreciation.
No other accounting entries have been made in respect of the current or deferred tax on the property
or the loan. The tax base does not change if the property is subsequently revalued for accounting
purposes. The Elysian corporate tax rate is 35%.
Spot exchange rates are as follows:
30 September 20X6 £1 = E$4.0
30 April 20X7 £1 = E$3.6
Average for seven months from 1 October
October 20X6 to 30 April 2
20X7
0X7 £1 = E$3.8

Privacy Policy
Marketing
Personalization
Analytics
Save Accept All

58 EF
You are an audit senior working
working for a firm of ICAEW Chartered Accountants, MKM LLP. You have been
been
assigned to the audit of EF Ltd, a UK company which sells home ffurnishings.
urnishings.
In July 20X7, your team completed audit planning and interim audit procedures on EF for its year ending
31 December 20X7. You prepared a file note ( Exhibit 1) outlining the key elements of your planned
audit approach.
The MKM audit manager for the EF audit engagement gives you the following briefing:
"On 31 August 20X7, EF was acquired by a listed multinational company, MegaB plc. I have received an
email from the EF chief financial officer (CFO) (Exhibit 2) which provides information that may affect
our audit plan. MegaB has told the CFO to make some adjustments to EF's financial statements for four
matters. These matters are included in an attachment to the email.
MegaB is a client of MKM's consulting division and we know its finance team well. We have not done
much work for the MegaB group in the last twelve months but MKM is currently tendering for a large
consultancy contract with MegaB which MKM is keen to win. It is therefore important that we perform
well on the EF audit this year.
MegaB is audited by Lewis-Morson LLP and today I received a telephone call from the Lewis-Morson
group audit partner. The telephone call raises issues for our audit approach and I have summarised it in
a brief note (Exhibit 3).
Instructions from the MKM audit manager
I need to respond to the CFO's email (Exhibit
( Exhibit 2) and consider its implications for the EF audit. To help
me, please prepare a briefing note in which you:
(a) Explain, for each
each of the four matters in the email attachment (Exhibit 2), the appropriate financial
reporting treatment in the financial statements of EF fo
forr the year ending 31 December 20X7.
Identify any additional information you need to finalise the accounting entries required. Ignore any
adjustments for current and deferred taxation.
This website(b)stores dataand
Identify such as the changes that
explain
explain that we nee
needd to make
make to each element of thethe planned audit
approach site
summarised in the file note (Exhibit 1). You should
sh ould also consider any additional key areas
functionality, as of
well as marketing,
audit focus and risk using all the information available.
may change (c)your
Explain anyatethical
settings matters which MKM now needs to consider in respect of the
any time the 20X7 EF audit and
any actions
or accept the default that MKM should take."
settings.
Requirement
Respond to the MKM audit manager's instructions.
Privacy Policy Total: 40 marks
Exhibit 1: File note – planned approach for EF audit
audit – prepared by audit
audit senior in July 20X7
Marketing
The key elements of our planned audit approach for EF for the year ending 31 December 20X7 are set
Personalization
out below.
Analytics
We have done the following:
followi ng:
 Agreed engagement terms and an audit fee of £60,000,
£60,000, giving us an inflationary increase from the
Save Accept
prior year. All
• Established planning materiality
materiality at £800,000 based on a forecast profit after tax of £1
£16
6 million for
the year ending 31 December 20X7.
• Considered factors affecting the inherent risk associated with the client, noting:
– no new business risks;
– no unusual pressures on management; and
– no factors which cause us to question the effectiveness of the general control environment.
• Assessed the risk of material misstatement, identifying the following balances

balances and assertions as key
areas of audit focus:
– The accuracy and cut-off of revenue recognition
– The valuation of future obligations for the defined benefit pension scheme
• Evaluated the design of the
the controls over revenue and trade receivables. We also performed testing
to ensure that these controls had been implemented and we also tested their operating
effectiveness for the six months ended 30 June 20X7. No exceptions were identified from this work
so we plan to rely on the operating effectiveness of controls over revenue and trade receivables.
• Scheduled our final audit visit for March
March 2 20X8
0X8 in line with tthe
he timing
timing of our audit procedures in
previous years. During this final visit, we plan to update our testing of operating effectiveness to
cover the operation of controls in the six months ending 31 December 20X7.
Exhibit 2: Email from EF CFO
To: MKM audit manager
From: EF CFO
Subject: Information and attachment including adjustments required by MegaB
Change in ownership of EF
EF was acquired by MegaB on 31 August 20X7. As a result, there have been some changes in EF's staff,
systems and procedures. With effect from 1 November 20X7, responsibility for routine accounting was
transferred to the MegaB shared service centre. This now processes all our accounting transactions. As
EF CFO, I still have overall responsibility for the EF financial statements. I am responsible for reviewing
the draft financial statements and for processing journal entries for judgemental, complex or one-off
items.
MegaB does not get involved in detailed operational matters but expects the EF board to achieve the
forecast results. MegaB has made
made it clear that EF will
will face cuts in staff if we fail to do so.
In the future, it may make sense to appoint the MegaB group auditor
a uditor as the EF auditor. However, the
board has decided that it would like MKM to complete the audit of EF for the year ending
31 December 20X7. Cost control is very tight under our new owners so I am unlikely to be able to
approve any increase in the £60,000 audit fee already agreed.
Pension scheme
MegaB asked its actuary to provide a valuation of the EF defined benefit pension scheme at
Augustdata such
20X7, as as
it questioned the assumptions that EF's actuary used last year. Because of changes in
the actuarial assumptions used, the revised valuation resulted in a reduction of £10.5 million in the net
functionality, as wellobligation
pension as marketing,
recognised at 31 August 20X7. The MegaB auditor has reviewed the actuarial
calculations You with them.
and is happy
may change Theyour settings
MegaB at any
actuary hastime
confirmed that he expects his actuarial assumptions to be very similar at
or accept the
31 default
Decembersettings.
20X7 and he plans to use the same assumptions at that date.
Re-organisation and bonus costs
Privacy Policy
Because of MegaB's acquisition of EF, there are several employees whose services will not be required. A
redundancy programme was announced on 1 October 20X7 and 12 members of the finance and
Marketing
administration staff have already left the company, together with three directors and six other members
Personalization
of senior management. They received redundancy payments totalling £1.25 million, which will be
recognised in our October 20X7 management accounts.
Analytics
A further 50 members of staff are due
due to leave on 28 February 20
20X8,
X8, by which time we hope to have
signed off our
Save f inancial
financial
Accept Allstatements. They will receive redundancy payments totalling £635,000.
There is a new executive bonus scheme for me and
an d the two other remaining directors of EF. If the
company exceeds its forecast operating profit of £34 million, we will each receive a bonus payment of
£100,000. I have not accrued for this cost, as the bonus will be payable in 20X8.

Financial performance
I summarise below key financial data from EF's management accounts for the nine months ended
30 September 20X7.
20X7. The results for October 20X7 are not yet available. I hope to provide these in early
December 20X7.
9 months ended Year ending Year ended
30 September 20X7 31 December 20X7 31 December 20X6
Actual Updated forecast Actual
£m £m £m
Revenue 175.0 274.3 214.0
Gross profit 51.0 76.2 64.2
Operating profit 18.9 34.0 21.4
Profit after tax 14.7 26.0 16.1
Net assets 53.1 74.9 38.4
Performance for the eight months to 31 August 20X7 was in line with the forecast and the previous year.
In September 20X7, revenue
revenue increased by around £15 million because of sales of EF products to MegaB
subsidiaries outside of the UK. These sales represent our first
f irst international revenue and are expected to
continue at the same level for the rest of the year. The gross margin is lower than on EF's other sales, as
the prices charged to group companies are lower than those charged to third parties.
p arties. I have updated
the whole forecast to reflect these sales.
There have been no changes to costs and revenue other than the additional international sales.
Attachment to CFO's email – adjustments required by MegaB
Bob Wright (the MegaB group financial controller) has

h as reviewed EF's accounting policies and estimates
at the acquisition date, 31 August 20X7. He has told me to adjust EF's financial statements for the year
ending 31 December 20X7 for the four matters set out below.
Brand
At 31 August 20X7, an expert valued the EF brand at £20 million and Bob expects to to see this asset in
the EF statement of financial position. We have not previously recognised any value for the brand and I
am unsure as to what costs were incurred to acquire or develop it.
Goodwill
MegaB has recognised goodwill of £11.2 million relating to the EF
E F business and Bob wants me to
recognise this in the EF statement of financial position.
Investment such as
property
MegaB
functionality, hasasa marketing,
as well policy of measuring both its investment properties and all other land and buildings at fair
value and
personalization, it requires You
and analytics. EF to adopt the same policy, although we have historically used the cost model for
may change all your settings
property, at any
plant and time
equipment (PPE).
or accept the
MegaBdefault settings.
valued EF's PPE as at 31 August 20X7. There was no difference between the carrying amount
and fair value of PPE, except for EF's head office
off ice property. The carrying amount of the property at
31 August 20X7 was £1.3 million, including land at £0.7 million. The property had a remaining useful
Privacy Policy
life of 30 years at that date.
Because there are plans for EF to vacate the head office property and to rent it to tenants, MegaB wants
Marketing
us to treat it as an investment
i nvestment property. At 31 August 20X7, MegaB valued the head office property at
Personalization
£3.7 million, including land at £0.7 million, based on anticipated rental income.
Analytics
The head office property has three identical floors and each floor can be rented to tenants separately.
Until 1 September 20X7,
20X7, EF occupied the whole building. At that date, it signed a 10-year lease with a
Save Accept
tenant for the Allor, at an annual rental of £40,000. EF continues to occupy the other two floors.
third floor,
flo floo rs.
Trade receivables allowance
Historically, EF has made only small impairment allowances for specific trade receivables which it does
not expect to recover in full. Bob has now
no w also asked us to establish a general allowance based on the
ageing of receivables that, at 31 August 20X7, amounts to £1.35 million. A general allowance
a llowance
calculated on the same basis as at 31 December 20X6 would have h ave amounted to £800,000.
I would welcome your advice as to what, if anything, we should adjust. I am not sure Bob has really
considered the effect on EF's single company financial statements. The above four matters
ma tters are not
recognised in EF's management accounts.
Exhibit 3: Note of my telephone call with Petra Newton – prepared by MKM audit manager
I received a telephone call today from Petra Newton, the group audit partner from Lewis-Morson,
MegaB's auditor.
Lewis-Morson LLP expects to sign off the group audit opinion
opinio n by 28 February 20X8.
EF is a significant component of the MegaB group. By 15 February 20X8, Lewis-Morson needs us to do
a full audit of EF's financial
f inancial statements for the year ending 31 December 20X7, based on the component
materiality of £3 million, and to prepare a reporting memorandum to Lewis-Morson.
The partner confirmed that Lewis-Morson has completed audit procedures on the defined benefit
pension scheme obligations at 31 August 20X7, so we may not need to perform
perfo rm separate procedures on
these. He will send an email confirming the work done and that no issues were noted.
It is likely that, during 20X8, the EF business will be transferred into an existing MegaB subsidiary. As a
result, the audit this year may be MKM's last for EF. The MegaB board is interested only in ensuring that
there is no material misstatement at group level. Therefore, it expects MKM to adopt component
materiality of £3 million for the single company EF audit.
a udit. The MegaB board sees no great value in the
single company audit and just wants it to be completed as quickly and efficiently as possible.
59 Wayte
You are Damian Field, an ICAEW
ICAEW Chartered AcAccountant
countant and the financial controller at Wayte Ltd, a
manufacturer of industrial weighing machines. The ordinary shares in Wayte are held equally by four
f our
members of the Benson family, who are also the directors of the company. You have just returned to
work after a period of sick leave. During your absence, Wayte employed an unqualified accountant,
Jenny Smith, on an interim contract.
On your return to work, you received the following note from Gerard Benson, the production director
who is your line manager.
Wayte needs to expand production facilities and requires a loan of £10 million from the bank to invest
in plant and machinery. The bank has asked for information to support Wayte's application for this loan.
Jenny has prepared a draft information schedule as requested by the bank ( Exhibit 1). She has also
prepared such
a draft as
statement of cash flows for the year ended 30 September 20X7 ( Exhibit 2). Jenny told
cookies to me
enable
thatessential
her worksiteis incomplete and adjustments
ad justments are still required. She has left some handover notes for
you (Exhibit 3).marketing,
I believe at any
that Wayte time
will have no problem obtaining bank finance because profitability is high and
increasing, liquidity is generally good and there is ample security for the loan.
Instructions
Instructions
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I would like you to do the following:
(a) Explain the financial reporting adjustments required for the year ended 30 September 2 20X7
0X7 in
Marketing
respect of the issues identified in Jenny's handover notes (Exhibit 3). Include journal entries for
fo r
Personalization
each adjustment.
Analytics
(b) Prepare a revised information schedule for the bank (Exhibit 1) including your financial reporting
adjustments to both the figures and the key ratios.
ratios .
Save
(c) PrepareAccept
a reportAll
for the board in which you analyse and interpret the financial position and
performance of Wayte using your revised information
info rmation schedule and the draft statement of
cashflows (Exhibit 2). Provide a reasoned conclusion on whether the bank is likely to advance
ad vance the
£10 million loan.
Requirement
Respond to Gerard Benson's instructions. Total: 30 marks

Exhibit 1: Wayte draft information schedule requested by the bank – prepared by Jenny
Performance information
information for the year ended 30 September
20X7 20X6
£'000 £'000
Revenue 35,400 34,500
Cash generated from operations 6,320 3,990
Extracts from statement of financial position at 30 September
20X7 20X6
£'000 £'000
Total liabilities 8,490 8,730
Equity 27,180 24,830
Net debt 450
Non-current assets available as security at 30 September 20X7
20X7
£'000
Land 1,000
Buildings 18,200
Financial assets: available-for-sale 430
Financial assets: fair value through profit or loss 192
Plant and equipment 8,678
28,500
Key ratios
20X7
Gearing (Net debt/equity)  100 1.7%
Gross profit margin 28.3%
Return on capital employed (Operating profit/net debt + equity)  100 16.0%
Exhibit 2: Wayte draft statement of cash flows for year ended 30 September 20X7 – prepared
by Jenny
20X7 20X6
£'000 £'000
Cash generated from operations (Note) 6,320 3,990
This websiteTaxstores
paid data such as (810))
(810 (790)
cookies to Net
enable
cashessential site
from operating activities 5,510 3,200
may change your
Cash settings
flows
Dividends fromatinvesting
received any
timeactivities
activities 30
or accept the defaultofsettings.
Purchase PPE (2,408) (2,656)
Purchase of financial asset (192))
(192 (430)
(2,570) (3,086)
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Marketing
Dividends paid (3,000) –
Directors' interest-free loan accounts repaid
Personalization (1,000) –
(4,000) –
Analytics
Net change in cash and cash equivalents (1,060) 114
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Cash and cash All brought forward
equivalents 610 496
Cash and cash equivalents carried forward (450) 610
Note: Reconciliation of profit before tax to cash generated from operations

20X7 20X6
£'000 £'000
Investment income (30) –
Depreciation charge 1,100 690
Decrease (increase) in inventories 250 (400)
Decrease (increase) in trade receivables 330 (360)
Increase in trade payables 230 20
Cash generated from operations
operations 6,320
6,320 3,990
Exhibit 3: Handover notes for Damian, financial controller – prepared by Jenny
(1) Financial instruments
I have accounted for the foreign exchange implications of all trading transactions, and I am
satisfied that these are correctly recognised. However, I was unsure about the correct treatment of
the two financial assets and have made no year-end adjustments in respect of them.
• On 30 September 20X6, Wayte invested in 2% of the issued ordinary share capital of PSN,
PSN, a
company based in Ausland, where the currency is the Auslandian dollar (AS$). The investment
comprised 2,000 shares and was recognised as an available-for-sale financial asset at
£430,000. On 30 September 20X7,
20X7, the shares in PSN were quoted in an active market at
AS$310 per share.
• On 1 January 20X7, Wayte invested in 1% of the issued ordinary share capital of another
a nother
Auslandian company, LXP. Wayte bought 50,000
50,000 shares at AS$5 eac
each,
h, and the investment
was recognised by Wayte at £192,000. Wayte correctly classified this investment as fair value
through profit or loss. On 30 September 20X7,
20X7, the shares in LXP were quoted in an active
market at AS$7 per share.
The exchange rates for the Auslandian dollar were:
At 30 September 20X6
20X6 £1 = AS$1.4
At 1 January 20X7 £1 = AS$1.3
20X7 £1 = AS$1.6
(2) Revenue
Until recently, Wayte sold weighing machines without service contracts. On 31 July 20X7, Wayte
signed a new contract with a large customer, JM Ltd, to supply weighing machines together with a
two-year as service contract. For two years after delivery of the machines, Wayte's
fixed-term
engineers site
will make quarterly visits to JM to service them.
Sales made under this contract
co ntract in August and September 20X7 were £4,500,000,
£4,500,000, comprising
may change your settingssales
machine at any time
of £3,750,000 and services valued at £750,000. No service visits are due until
December 20X7 at the earliest, so no service costs were incurred under this contract before
30 September 20X7.
I have left the full amount of £4,500,000 in revenue.
revenue. I understand that under IFRS 15, Revenue from
Privacy Policy Contracts with Customers , it would be incorrect to recognise the service revenue immediately but
IFRS 15 is not yet mandatory and so I have applied IAS 18, Revenue .
Marketing
(3) Deferred tax
Personalization
A deferred tax balance of £1,200,000
£1,200,000 was brought forward on 1 OctoberOctober 20X6. This relates
Analyticsentirely to temporary differences in respect of the revaluation of land and buildings.
bu ildings. I have made
no adjustment to the balance of o f £1,200,000, but I think it is likely that adjustments will be required
Save Accept
in respect of theAll
following:
• Land and buildings are carried at revalued amounts. I have adjusted for the revaluation on
30 September 20X7, which increased the value to £19,200,000. The original cost of the land
and buildings was £11,400,000. In Wayte's tax jurisdiction no tax allowances are given for f or
depreciation charged on land and buildings. A taxable capital gain will arise in future on the
sale of land and buildings. This capital gain is calculated as the difference between the sale
proceeds and the original cost. A tax on capital gains of 20% will apply when the land and
buildings are sold.

• Any temporary differences arising in respect of adjustments you make from note (1) above.
The tax treatment for financial instruments follows the accounting treatment in respect of
gains and losses recognised through profit or loss. Deferred tax arises in respect of gains or
losses on financial instruments which are recognised in other comprehensive income.
(4) Current tax
Adjustments from notes (1) and (2) above may require adjustments to the current tax
tax charge. Tax
is charged at 20%.
60 SettleBlue
SettleBlue plc (SB) is a UK AIM-listed company, operating in the outdoor retail sector. SB owns several
subsidiaries and has an
a n investment in CeeGreen Ltd (CG). Owen-Grey LLP, a firm
f irm of ICAEW Chartered
Accountants, is the auditor of SB and its subsidiaries. It also audits CG.
You are an audit senior working on the SB group audit and SB parent
parent company audit for the year ended
30 September 20X7. Other audit teams from Owen-Grey are responsible for
f or the individual audits of SB's
subsidiaries and CG.
The group audit engagement manager left you the following briefing note including instructions:
Briefing note
The draft consolidated financial statements for SB for the year ended 30 September 20X7 show profit
after tax of £5.3 million. SB uses the proportion of net asset
a sset method to value non-controlling interests
when preparing consolidated financial statements.

Our audit procedures are nearly complete and I need your help in respect of the following:
Investment in CG
The SB financial controller, Geri Hawes, has sent me a note with information about two key matters
concerning SB's investment in CG ( Exhibit 1).
Audit of parent company's trade and other payables
SB's purchases and its trade and other payables balances have been identified as high audit au dit risk
balances. Ann Zhang, the Owen-Grey audit associate responsible for this area of our work, has just gone
on leave. She has left a file note summarising two issues arising from her audit procedures for the year
ended 30 September 20X7 ( Exhibit 2). Ann asked Owen-Grey's data analytics an alytics team to analyse SB's
purchase data using our new data analytics system, Titan. This analysis was delayed and has only just
cookies to been
enable essentialItsite
provided. su mmarising the results (Exhibit 3).
includes a dashboard summarising
Instructions
personalization,
and analytics. You
may change (a)your settings
Explain, forateach
any of
time
the tw
two
o matters identified in Geri's note (Exhibit
(Exhibit 1), the appropriate financial
reporting treatment in SB's consolidated financial statements for the year ended 30 September 20X7.
Set out appropriate adjustments. Ignore any potential adjustments for current and deferred
taxation.
Privacy Policy
(b) Review the file note prepared
prepared by Ann (Exhibit 2) and the dashboard (Exhibit 3) and:
Marketing
• identify and explain any weaknesses in the audit procedures completed by Ann on the two
Personalization
issues;
Analytics• iden tify the audit risks; and

analyse the information provided in the dashboard to identify
• set out any additional audit procedures
pro cedures that we will need to perform.
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Requirement
Respond to the audit engagement manager's instructions. Total: 30 marks
Exhibit 1: Note prepared by Geri Hawes, SB's financial controller

There are two key matters concerning SB's investment in CG which have arisen during
du ring the year ended
30 September 20X7.
(1) Additional investment in CG
CG was set up by the Troon family ten years ago to manufacture tents. CG is one of SB's key
suppliers. On 1 June 20X5, CG issued 100,000 new ordinary
ordina ry £1 shares to SB for cash at £20 per
share. At 30 September 20X5 and 20X6, the issued ordinary share capital was held as a s follows:
Shareholder Number of £1 ordinary shares

John Troon 600,000
Ken Troon – John's son 200,000
Sharon Troon – Ken's wife 100,000
SB 100,000
1,000,000
John, Ken and Sharon were the only directors of CG until 1 January 20X7. At 30 September 20X5,
SB recognised its investment in CG as an available-for-sale financial asset at its fair value of
£2 million. At 30 September 20X6, the SB board estimated the fair value
valu e of the investment
in vestment to be
£2.5 million and an increase of £0.5 million was recognised in other comprehensive income.
On 1 January 20X7, John offered to sell his 600,000 shares to SB for £15 million. SB bought 40% of
John's shares on 1 January 20X7 for a consideration of £6 million. SB also holds a call option to buy
the remaining 60% of John's shares on 1 January 20X8 for £9 million.
million .
On 1 January 20X7, John resigned as a director of CG. SB appointed two representatives to the CG
board as marketing and production directors. Since they joined the board, CG's performance has
improved significantly and this trend is expected to continue.
In SB's consolidated financial statements for the year ended 30 September 20X7, the investment in
CG is recognised at £8.5 million, as an available-for-sale financial
f inancial asset, since SB does not own the
majority of the shares in CG.
(2) Share options
On 1 January 20X7, as an incentive to work more closely with SB, Ken and Sharon were appointed
appo inted
as directors of SB. The service agreement includes the following key terms:
• Ken and Sharon are not paid cash salaries.
• data
This website stores On 1such
January
as 20X9, Ken and S Sharon
haron have the right to receive
receive (provided that they are still
directors
cookies to enable essential of SB at 1 January 20X9) either 32,000 SB shares or cash to the equivalent value of
site
28,000
functionality, as well as SB shares.
marketing,
personalization,•and Atanalytics.
1 JanuaryYou20X7,
20X7, the fair value of the share route has been calculated
calculated at £20 for the right to
receive one SB share on 1 January 20X9.
• The market
market value of SB's shares at 1 January 20X7 was £22 £22 per share and at
30 September 20X7, it was £24 per share. I have not n ot made any adjustment for this service
Privacy Policy agreement in the consolidated financial statements as no cash has been paid.
Exhibit 2: File note: Key issues arising from audit procedures on purchases, trade and other
Marketing
payables – prepared by Ann Zhang, Owen-Grey audit associate on SB audit
Personalization
Issue 1: Goods received not invoiced (GRNI)
( GRNI) accrual of £610,000
Analytics
When goods are received in SB's factory, they are matched to a purchase order on SB'sSB's computer system
and a goods received note (GRN) is produced and recorded on a list of goods received not invoiced
Save Accept
(GRNI). When All
the purchase invoice is received from the supplier,
sup plier, it is matched to the GRN, which is
removed from the GRNI list on SB's computer system. The purchase invoice is then authorised forfo r
payment and recorded in the purchases and payables accounts.
20X7, SB has calculated an accrual of £61
£610,000
0,000 from the list of GRNI and made the
following adjustment:
DEBIT Cost of sales £610,000
CREDIT Trade and other payables £610,000

My controls testing of the matching of GRNs to purchase
pu rchase invoices showed that the controls did not
operate effectively during the year ended 30 September 20X7
20X7.. This was due to inexperienced SB staff
members not matching purchase invoices to the correct GRNs. Therefore, I tested a sample of 10 GRNs
included on the GRNI list at 30 September 20X7 to make sure that the goods were received before the
year-end. I also tested completeness by agreeing large
large payments made to suppliers after
30 September 20X7 to the payables account for the appropriate supplier.
Issue 2: Accrual for a debit balance of £290,000 on MAK Ltd payables account
20X7, the payable account of MAK Ltd, a large ssupplier
upplier of goods to SB, shows a debit
balance of £290,000. This balance arose because SB did not receive purchase invoices from MAK for
goods received in June and July 20X7 when MAK's accountant was on sick leave.
To authorise payments to MAK without purchase invoices, SB's accounts staff used GRNs prepared by
SB's warehouse and recorded on the GRNI list as evidence that the goods had been received from MAK.
SB accounted for the payments to MAK for these goods by crediting the cash account and
an d debiting
MAK's payables account. No adjustment has been made to the GRNI list for these payments.
SB has corrected the transaction by recording the following journal entry:
DEBIT Cost of sales £290,000
CREDIT Trade and other payables £290,000
I agreed payments of £290,000 made to MAK before 30 September 20X7 to SB's bank statements. I
confirmed that SB did not receive the invoices from MAK by agreeing the amounts to GRN on the GRNI
list at 30 September 20X7. Invoices relating to these goods have been received by SB and recorded
after 30 September 20X7. I have asked SB to provide a supplier statement from MAK but have not yet
received a response.
Exhibit 3: Dashboard of results from the application of the Titan analytics system
SB provided Owen-Grey with its purchases data files for the year ended 30 September 20X7.
Owen-Grey's Titan analytics system has been applied to this data. The system analysed 100% of
purchase orders and goods received notes raised in the year ended 30 September 20X7. The following
results have been obtained:
Test for all data (including MAK Ltd) Outcome Largest 4 suppliers:
Average number
number of days
Number of purchase orders raised 7,246
from GRN to receipt of
Number of GRNs raised and matched 6,884 purchase invoice
to stores
This website purchase such as
orders
data
cookies to Average
enable essential
number site
of days from GRN to 10 days
receipt of purchase invoice
MAK Ltd
Number of GRNs at not
anyinvoiced
time at 311
30 September 20X7 (GRNI) CG Ltd
Number of GRNs over 2 months old 156 UMD Ltd

Privacy Policy
not invoiced at 30 September 20X7
Marketing Pegs Ltd
Average order value £1,900
Personalization
Analytics
0 10 20 30
Save Accept All

One supplier, MAK Ltd was identified as an outlier showing the following data:
Test for MAK Ltd Outcome

Frequency of order value
Number of purchase orders raised 771 for MAK Ltd
Number of GRNs raised and matched 732 40%
to purchase orders
35%
Average number of days from GRN to 21 days 30%
receipt of purchase invoice 25%
Number of GRNs not invoiced at 142 20%
30 September 20X7 (GRNI)
15%
10%
Number of GRNs over 2 months old 122
5%
not invoiced at 30 September 20X7
0%
Average order value £2,040 0 0 0 0 0 0 0 0 0
0
7 4 1 8 5
£
- 1 , £
£ 2 , £ 2 , £
3 ,
0
£ 1 - 0 1 - 0 1 - 0 1 -
0
7 4
, 1 8
,
£ 1
£ 2
£ £ 2 ,

Privacy Policy
Marketing
Personalization
Analytics
Save Accept All

Answer Bank

Privacy Policy
Marketing
Personalization
Analytics
Save Accept All

177

Privacy Policy
Marketing
Personalization
Analytics
Save Accept All

178 Corporate Reporting: Answer Bank
Financial reporting answers
1 Kime
Marking guide
Marks
(a) Explain the potentially contentious financial reporting issues.

Determine any adjustments you consider necessary and explain the
impact of your adjustments on the financial statements, identifying any
alternative accounting treatments
 Renovation of Ferris Street 3
 IAS 11 6
 FX House disposal 5
 Estate agency buildings 4
 Foreign currency receivable and forward contract 4
 Taxation 3
Total 25
Maximum 22

(b) After making adjustments for matters arising from your review of the
outstanding issues, prepare a draft statement of financial position and
statement of comprehensive income. 8
Maximum available marks 30
Scenario
The candidate has been appointed to assist an FD for a property company, in the preparation of the
financial statements.
statements. The auditors are due to start their work andand the FD would
would like to be aware of any
contentious issue in advance of their arrival. The candidate is required to determine whether the
This websiteaccounting
stores datatreatment
such as applied is correct and determine the appropriate treatment given directors'
instructions
cookies to enable essentialto maximise
site the profit in the current period. The adjustments in respect of current tax and
deferred
functionality, as welltaxation are to be completed given the assumptions in the scenario. The financial reporting
as marketing,
issues and
personalization, include IAS 16You
analytics. (recognition of appropriate costs and depreciation), IAS 11, Construction Contracts ,
may change youraccounting,
lessor settings at any
assettime
held for sale and foreign currency adjustment in respect of a receivable, and a
or accept the default settings. candidate is required to prepare a summary statement of financial position and
cash flow hedge. The
statement of profit or loss and other comprehensive income.
Email
Privacy Policy
From: Jo Ng
From:
Marketing
To:
To: FD
Sent:
Sent: xx July 20X2
Personalization
Subject: Draft financial statements
Subject:
Analytics
Please find attached a draft statement of financial position and statement of profit or loss and other
comprehensive income (Attachment
(Attachment 1). I have also attached an explanation of my adjustments and a
Save Accept All
determination of their impact and proposed alternative accounting treatments (Attachment 2).
Regards
Jo
Financial reporting answers 179
Attachment 1
Draft statement of profit or loss and other comprehensive income for the year ended
30 June 20X2
£m
Revenue (549.8 + 10.2) 560.0
Cost of sales (322.4 + 18) 340.4
Gross profit 219.6
Distribution costs 60.3
expenses (80.7 – 21.5
21.5 + 8)
8) 67.2
67.2
Finance costs (4.8 + 2.0 – 1.3 + 0.2 + 1.3 ) 7.0
Finance income (1.0)
Income tax expense (17.3 + 3.4) (20.7)
Cash flow hedge 1.3
Reclassification of cash flow hedge (1.3)
Draft statement of financial position as at 30 June 20X2
ASSETS £m
Non-current assets
(80.7 – 18 + 120 – 22.8) 159.9
Current assets
Finance
Gross lease receivable
amounts receivable
due from customers 20.5
20.5
10.2
Trade receivables (174.5 – 10 + 1.3) 165.8
Cash and cash equivalents 183.1
379.6
Non-current assets classified as held for sale 2.0
Total assets 541.5

Equity
Share capital 100.0
Share premium 84.0
This website stores earnings
Retained data such as b/f 102 Profit for year 65.4 167.4
cookies to Non-current
liabilities
Long-term marketing,
borrowings 80.0
personalization, andtax
Deferred analytics.
liability You
(33 + 3.4) 36.4
Current settings.
liabilities
Trade and other payables (54.9 + 17.3) 72.2
Financial liabilities 1.5
Privacy Policy
Total equity and liabilities 541.5
Marketing
Attachment 2
Freehold land and buildings
Personalization
(a) Additions
Analytics
Renovation of Ferris Street property – allocation of costs
Save Accept All
The basis on which the renovation costs have been allocated between repairs and maintenance
and capital appears somewhat arbitrary and has not been supported by adequate analysis.
IAS 16 requires that only direct expenditure on property improvements should be capitalised and
that maintenance
budgeted costs butcosts
has should be written
been used off to
to allocate profitspend
actual or loss.
to The
date.80:20 split was based on
It is possible that the expenditure to date may include a higher or lower proportion of maintenance
than that expected for the project as a whole. As repairs should be expensed as the work is
180 Corporate Reporting: Answer

Reporting: Answer Bank
Bank

performed, this could affect the result for the period. Hence it is important to review a breakdown
of the costs actually incurred for the period.
For costs which are capital in nature, we need to evaluate whether any could more appropriately
be recorded as plant and machinery rather than included within building costs. The asset lives and
depreciation rates would then differ if the asset is not treated as a single composite property asset. I
need much more information on the nature of the project to do this.
No disposals have been recorded in the year for any previous renovation or construction work on
the Ferris Street building which has been replaced by the work done in the year. In a major project
of this type it is likely
li kely that there will be elements of the original cost or of previous renovation
projects which should be written off. I need to ascertain the nature of building and previous work
on it in order to determine what element of the carrying amount, if any, should be written off. For
example there may be partition walls which have been demolished and replaced.
I need to review the budget and the basis of the 80:20 split proposed by the project
pr oject manager. The
project manager may not understand the requirements of accounting standards and in particular
of IAS 16 and may have been motivated by capital budget constraints or other funding/approval
limits than by an analysis of the true nature of the costs to be incurred.
The allocation of costs on a project which includes both types of cost is open to manipulation and
can be judgmental and be challenged by our auditors.
Adjustments required?
I cannot at present quantify
qu antify whether any adjustment is required without further analysis being
performed on the additions accounts in the general ledger.
Construction of a sports stadium

The cost of £18 million has been incorrectly treated as an addition to PPE and I have therefore
corrected this as follows:
Kime as the contractor should account for the construction of the sports stadium in accordance
with IAS 11. This appears to be a contract specifically negotiated for the construct
construction
ion of an asset for
which a fixed contract price has been agreed.
IAS 11 requires revenue and costs to be recognised as contract activity progresses. There is a
significant amount of judgement required in determining the appropriate accounting policy and in
the assessment of progress to date.
Contract costs were predicted to be £16 million. However the estimated total costs to complete
the project
This website stores have
data such asnow increased to £22.5 million. The project is still expected to make a profit of
£11.5
cookies to enable million.
essential site
functionality, as This
well isasa marketing,
fixed price contract and therefore there is reasonable reliability in respect of the
personalization,measurement
and analytics.ofYou contract revenue but there is less certainty regarding the costs to be incurred.
may change your settings at any
However the surveyor time has determined that these can now be reliably determined.
Using the contract costs as a method of accounting for this contract, the contract is
((£18m/£22.5m)
((£18m/£22 .5m) × 100 =) 80% complete. Therefore £27.2 million representing 80% of the
contract revenue would be recognised.
Privacy Policy
Using the certified sales method, the contract is 70% complete ((£23.8/34.0) × 100). Revenue of
Marketing £23.8 million would therefore be recognised.
Personalization
In the statement of financial position gross amounts due from customers should be presented as
contract costs incurred plus recognised profits less invoices raised to customers. Trade receivables
Analytics
should include the amounts invoiced less amounts received from the local authority.
Save
A comparison of the two methods
Accept All
methods (assuming costs
costs are recognised on an incurred basis) is as
follows:
Contract cost Work certified
basis basis
£m £m
Revenue 27.2 23.8
Cost of sales (18.0))
(18.0 (18.0)
Profit 9.2 5.8

Contract costs Work certified
£m £m
Gross amounts from customers
Costs incurred 18.0 18.0
Recognised profit 9.2 5.8
27.2 23.8
Progress billings (17.0) (17.0)
10.2 6.8
Trade receivables (£17.0m – £17.0m) 0 0

An alternative presentation
presentation for the
the work certified
certified method is to include
include the costs on the basis of the
work certified. This would result in an increase in the amount of profit recognised under this
method.
Work certified
£m
Revenue 23.80
Costs 70% × 22.5m 15.75
Profit 8.05
Work certified
£m
Gross amounts from customers
Costs 18.00
Recognised profit 8.05
26.05
26.05
Progress billings (17.00)
9.05
Implication for the financial statements
Using the work certified to date method results in a lower profit, although this method is also less
subjective since it does not rely on estimations of future costs to calculate the percentage
complete. To maximise the amount of profit recognised the directors could select the contract cost
method. Ultimately the profit recognised overall on the contract is i s the same over time, but the
allocation to accounting periods is affected by the choice of presentation.
As £17 million ofof revenue has already been recognised,
recognised, the follow
following
ing adjustment to the financial
statements as
is required if the maximum amount of profit is to be recognised:
DEBIT Gross amounts from customers £10.2m
CREDIT Revenue £10.2m
Also I have reversed
reversed the additions to property, plant and equipment
equipment as follows:
DEBIT Cost of sales £18m
CREDIT PPE £18m
Privacy Policy The assumption has been made that this has been classified as an asset under construction and no
depreciation has been charged.
Marketing
(b) Disposals
Disposals
Personalization
FX House
AnalyticsThe lease does appear to be a finance lease given the transfer to the lessee at the end of the
contract; this appears to be the case for both the buildings and the land.
Save Accept All
As the lease to the
the third party is a finance
finance lease it is correct to treat the property sale as a disposal.
However the junior assistant has failed to account correctly for the disposal and the new finance
lease following the guidance for lessor accounting as set out in IAS 17. As title to both land and
buildings transfer to the lessor at the end of the lease period, the lease should be accounted for as
a single lease comprising both land and building elements. Assuming that the new lease is at fair
market rates, Kime should realise a gain on the asset disposal and show a new lease receivable
equal to the net investment in the lease. This will be equal to the minimum lease payments
discounted at the rate implicit in the lease.

Bank

Correcting journal entries
Hence entries required to correct the accounting are:
At inception of
of lease on 1 January
January 20X2:
DEBIT Non-current assets – net investment in lease £21.5m
CREDIT Gain/loss on non-current asset disposal £21.5m
DEBIT Gain/loss on non-current asset disposal £5.8m
CREDIT Administrative expenses £5.8m

Thus giving rise to a gain on disposal of £21.5 million less carrying amount at date of disposal of
£5.8 million
million = £15.7 million.
As this is material it will require disclosure.
To record correctly the receipt of annual rental payment on 1 January 20X2:
DEBIT Finance costs £2m
(reversing incorrect entry made by the assistant)
CREDIT Non-current assets – net investment in lease £2m
To record interest income for 6 months to 30 June 20X2:
DEBIT Non-current assets – net investment in lease £975,000
(6/12 of interest income at 10% on (£21.5m less £2m)
CREDIT Interest income £975,000
Therefore the net investment in the finance lease receivable will be £20.475 million (£21.5m – £2m
+ £0.975m).
To confirm that these are the correct entries, I need to see evidence that £21.5 million is the fair
value of the property at its disposal date.
Estate agency buildings
As the properties were
were not sold at th
thee year end, it is incorrect
incorrect to derecognise
derecognise the assets and
recognise a gain in profit or loss. IFRS 5 requires that a non-current asset should be classified as
'held for sale' when the company does not intend to utilise the asset as part of its ongoing business
but intends to sell it. The Estate agency buildings, having been closed, potentially fall in this
category. To be held in this category, the likelihood of a sale taking place should be highly
probable. As the sale is to be completed within 12 months of the year end, then this categorisation
This website stores
woulddata such to
appear asbe appropriate. Therefore the following adjustment has been made:
DEBIT Assets held for sale
£10m
CREDIT Trade receivables £10m
DEBIT Admin expenses (Gain on disposal) £8m
CREDITsettings.
Assets held for sale £8m
Discontinued
Discontinued operations
Privacy Policy Separate disclosure in the statement of profit or loss as 'discontinued operations' may also be
required.
Marketing
The question of whether the closures are a withdrawal from the market is a question of judgment
Personalization
as the business is now operated entirely online.
AnalyticsThere is insufficient information in the summarised trial balance to determine this issue but it will
be required before the auditors can commence their work next week.
Save Accept All
Depreciation
The depreciation charge suggests a cost of £295 million based upon the accounting policy of the
company (£5.9m × 50 years).
This is significantly greater than the cost in the financial statements and is an issue which should be
investigated.
Foreign currency receivables and forward contract

£m
Receivable originally recorded (R$60.48m/5.6)
(R$60.48m/5.6) 10.8
Receivable at year end (R$60.48m/5.0) 12.1
Exchange gain 1.3
£m £m
DEBIT Trade receivables 1.3
CREDIT Profit or loss (other income) 1.3

Forward contract:
This is a cash flow hedge:
DEBIT Equity – (Other comprehensive income) 1.3
DEBIT Finance cost 0.2
CREDIT Financial liability 1.5
As the change in cash flow affects
affects profit or loss in the current period,
period, a reclassification adjustment
adjustment is
required:
DEBIT Profit or loss 1.3
CREDIT Equity – (Other comprehensive income) 1.3
Foreign currency and financial instruments gains and losses are taxed on the same basis as IFRS profits.
As the finance
finance cost and the exchange
exchange gain are both in profit or
or loss, there are no further current or
deferred tax implications.
The scenario states that "the arrangement satisfies the necessary criteria to be accounted for as a
hedge." This transaction could be treated as either a fair value or cash flow hedge. However as a
receivable is created there is no need for hedge accounting as the exchange difference on the receivable
and the future are both recognised through profit or loss.
Therefore an alternative accounting treatment would be not to apply hedge accounting.
IFRS 9, Financial Instruments has different criteria for hedge accounting. The 80–125% range is replaced
by an objective-based test that focuses on the economic relationship between the hedged item and the
hedging instrument, and the effect of credit risk on that economic relationship. Otherwise the
accounting for cash flow hedges is unchanged.
Taxation
This websiteThestores data journal
following such asis required to adjust for current and deferred tax as noted in the assumptions:
DEBIT Income tax expense £17.3m
CREDIT Current tax obligation £17.3m
Being current tax adjustment – revised profit (86.1 – 14) × 24%
DEBIT Income tax expense
£14m × 24% £3.4m
CREDIT Deferred tax obligation £3.4m
Privacy Policy
Being adjustment for increase in temporary differences
Marketing
Deferred tax summary
Personalization £m
Deferred tax liability brought forward 33.0
Analytics
Increase in taxable temporary differences
(£14m  24%) 3.4
Save Accept All
Deferred tax liability at 30 June 20X2 36.4
Bank

2 Mervyn plc
Marking guide
Marks
(a) Explanations:
Sale of land: The Ridings/Event after reporting period 2
Sale of land: Hanger Hill/sale and leaseback 4
Pensions 6
Provision 3
Revenue 2
Share appreciation rights 2
(b) Adjusted profit calculations:

Elimination of gain on sale of The Ridings 1
Sale and leaseback 4
Pensions 5
Provision 1
SARs 5
Revenue 1
Closing inventories 1
Quality of discussion 2
Total marks 39
Maximum marks 30
(a) Sale of land: The Ridings

Ridings
This sale and profit earned have been treated as an adjusting event after the reporting period. This
appears to contravene IAS 10, Events After the Reporting Period . The completion of the sale in
November does not give evidence of circumstances as at the reporting date. This would only have
been the case if the contract in existence at 30 September had been unconditional, or if the
condition, that is, detailed planning consent, had been met by the year-end.
The gain, and associated tax effect, should be eliminated from the financial statements, to be
recognised
This website stores in the
data such as following accounting period.
The site met the criteria to be classed as 'held for sale' under IFRS 5, Non-current Assets
land probably
functionality, as Held
well for
as marketing,
Sale and Discontinued Operations at
at the year-end. However, this has no profit impact as
personalization,IFRS
and 5analytics. You
only requires recognition of a loss when fair value less costs to sell is below book value,
which is clearly not the case here.
The transaction may be disclosed in the notes as a non-adjusting event after the reporting period if
considered material to the user.
Privacy Policy Sale of land: Hanger Hill
MarketingIAS 17, Leases requires

requires sale and leaseback transactions to be treated according to their substance,
which may differ from their legal form.
Personalization
The first consideration is whether a sale has taken place. In this case, the lease is clearly an
Analyticsoperating lease, as it is short-term and the lease payments are significantly less than the fair value
of the asset. It is therefore appropriate to derecognise the asset but the true nature of the profit
Save must beAccept All
established.
According to IAS
IAS 17, the excess
excess of fair value over
over the carrying amount
amount of the asset is a normal profit
and should be recognised immediately in profit or loss. Any excess profit, here £200,000 (W1)
should be deferred and amortised over the period the asset is expected to be used, and therefore
eliminated from the profit or loss for the year at the point of the sale and leaseback contract.
IAS 17 does not provide guidance as to how the excess profit should be amortised. There are two
possible methods.
One is to spread the gain of £200,000 over the life of the lease on a straight line basis. This gives
an annual credit of £40,000 to profit or loss for the year (200,000/5). The balance of £160,000 is
deferred income and recognised as a liability.
The other method looks at the substance of the arrangement. It treats the excess profit as a loan
paid back through higher lease rentals. Under IAS 39, Financial Instruments: Recognition and
Measurement the
the lease rentals must be split between the amount deemed to be a genuine lease
rental and the amount deemed to be a repayment of the loan.
The appropriate treatment here is (see (W1) for detailed calculations):
£
Loan repayment: Capital 33,000
Interest 20,000 Correct to charge
 Lease rental 27,000 to profit or loss
Total rental paid 80,000
The capital repayment element must be eliminated from the profit or loss and offset against the
loan.
Tutorial note:
Either method of recognising the amortised profit is acceptable. The amended profit computation
in (b) below uses figures from the first method, giving the second method based on IAS 39 as an
alternative.
Under IFRS 16, Leases, the lease would not be an operating lease, as this distinction does not apply
for lessees. The transaction would need
need to meet the
the criteria in IFRS 15, Revenue from Contracts with
Customers for a genuine sale. There is some doubt
doubt as to whether
whether it does. If it does,
does, the asset sold is
derecognised and a right-of-use asset recognised together with a lease liability relating to the right
of use retained and a gain/loss in relation to the rights transferred.
Pensions
Pensions
The contributions paid have been charged to profit or loss in contravention of IAS 19, Employee
Benefits .
Under IAS 19, the following must be done:
 Actuarial valuations of assets and liabilities revised at the year-end
 All gains and losses recognised:
– marketing,
Current service cost
personalization, and –analytics. You
Transfers In profit or loss
or accept the default –settings.
Interest on net defined asset/liability
– Remeasurement (actuarial) gains and losses – In other comprehensive income (per
IAS 19, as revised in 2011)
Privacy Policy
Deferred tax must also be recognised. The deferred tax is calculated as the difference between the
MarketingIAS 19 net defined benefit liability less its tax base (ie, nil as no tax deduction is allowed until the
pension payments are made). IAS 12, Income Taxes requires
requires deferred tax relating to items charged
Personalization
or credited to other comprehensive income to be recognised in other comprehensive income
Analyticshence the amount of the deferred tax movement relating to the actuarial losses charged directly to
OCI must be split out and credited directly to OCI.
Save Accept All
Provision
According to IAS
IAS 37, Provisions, Contingent Liabilities and Contingent Assets a provision shall be
recognised when:
 an entity has a present obligation as a result of a past event;
 it is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation; and
 a reliable estimate can be made of the amount of the obligation.

Bank

If these conditions are met then a provision must be recognised.
The assessment of a provision for a legal claim is always a difficult area as it will be based upon the
evidence available but it could also be argued that any provision or disclosure could be prejudicial
to the court case itself.
In this case it would appear that the lawyers and management are fairly certain that damages and
costs will be payable. The problem is the amount of any provision to be made. As there is a
timescale involved here then the first stage will be to calculate the present value of each of the
outcomes. Management have also assigned probabilities to each of the three possible outcomes so
a further decision must be made as to whether to calculate an expected value or take the value of
the most likely outcome. IAS 37 states that where a single obligation is being measured the
individual most likely outcome may be the best estimate of the liability. Although in some
circumstances the range of outcomes may mean that a higher figure is required.
Outcome Discount factor Expected
@ 10% Present value Probability value
£'000 £'000 £'000
Best 200 1/1.10 182 25% 46
2
Most likely 800 1/1.10 661 60% 397
Worst 1,500
3
1/1.10 1,127 15% 169
612
IAS 37 requires the estimated value of the provision to be the amount that the entity would
rationally pay to settle the obligation. The directors are likely to want as low a provision as possible
so they are likely to prefer the expected value of £612,000. However, this is a single event, and
IAS 37 requires £661,000 as the most likely outcome or £612,000.
Bill and hold sales
When a buyer requests that the delivery of goods purchased does not take place immediately even
though the buyer takes legal title of the goods and pays for them such arrangements are
commonly referred to as 'bill and hold' sales. Revenue from such sales should be recognised when
the buyer takes title to the goods provided that:
 it is probable that delivery will take place;
 the goods are available and ready for delivery at the time that title passes;
 the buyer specifies the deferred delivery arrangements; and
 payment is under the usual terms of the seller.
In this such
case as appear that these sales are bill and hold sales. There is an established
it would
relationship with the customer and the arrangement
arr angement has taken place during the year. Therefore the
functionality, as revenue
well as marketing,
should be recognised when the title to the goods passes to the buyer which will be when
personalization,theandgoods
analytics. You for delivery and the buyer has been invoiced. Therefore the goods must be
are ready
removed
or accept the default from closing inventories in the statement of financial position at their cost price of
settings.
£99,000, with a corresponding increase in cost of sales, and the additional revenue for the year to
30 September 20X7 must be recognised in the profit or loss for the year.
Privacy Policy Share appreciation rights

The granting of share appreciation rights is a cash settled share based payment transaction as
Marketingdefined by IFRS 2, Share-based Payment . IFRS 2 requires these to be measured at the fair value of
the liability to pay cash. The liability should be re-measured at each reporting date and at the date
Personalization
of settlement. Any changes in fair value should be recognised in profit or loss for the period.
Analytics
However, the company has not remeasured the liability since 30 September 20X6. Because IFRS 2
requires the expense and the related liability to be recognised over the two-year vesting period, the
Save Accept All
rights should be measured as follows:
£'000
September 20X6: (£6  10,000  ½)
At 30 September 30
September 20X7 (£8  10,000)
At 30 September 80
At 1 November (settlement date) (£9  10,000)
November 20X7 (settlement 90
Therefore at 30 September 20X7 the liability should be re-measured to £80,000 and an expense of
£50,000 should be recognised in profit or loss for the year.
The additional expense of £10 million resulting from the remeasurement at the settlement date is
not included in the financial statements for the year ended 30 September 20X7, but is recognised
the following year.
(b) Amended profit
£'000
Profit for the year – per question 1,471
Eliminate net gain on sale – The Ridings (100 – 27) (73)
Eliminate gain on sale in excess of fair value – Hanger Hill Estate (W1) (200)
 40
Portion of gain credited
Pension contributions to P/L (200,000 5) (W1)
(W1) 405
Current service cost (374)
Interest on obligation (W2) (253)
Interest on plan assets (W2) 216
Transfers (400,000 – 350,000) (50)
Share appreciation rights (50)
Deferred tax on pension obligation (W3) 13
Provision for damages for court case (see above) (661)
Additional revenue from bill and holdhold sales 138
Reduction in closing inventories (99))
(99
Amended profit for the year 523
Alternative calculation – IAS 39 method
method for sale and leaseback:
£'000
Profit for the year – per question 1,471
Eliminate net gain on sale – The Ridings (100 – 27) (73)
Eliminate gain on
Rental element sale inasexcess
treated capitalofrepayment
fair value –(W1)
Hanger Hill Estate (W1)
(W1) (200)
(200)
33

Pension contributions 405
Current service cost (374)
Interest cost (253)
Interest on plan assets 216
Share appreciation rights (50)
Transfers (400,000 – 350,000) (50)
Deferred tax on pension obligation (W3) 13
Provision for damages for court case (see above) (661)
Additional revenue
revenue from bill and hold hold sales 138
Reduction in closing inventories (99))
(99
Amended
This website stores data such profitasfor the year 516
cookies to WORKINGS
(1) Sale
personalization, and and leaseback
analytics. You (Hanger Hill Estate)
or accept the default settings. £
Proceeds (bal. fig.) 1,150,000
Carrying value 900,000
900,000
Gain 250,000
Privacy Policy
Marketing
Personalization
FV – CV Proceeds
Proceeds – FV
Analytics £50,000 £200,000
= 'true' profit = loan
Rentals £80,000 pa
Save Accept All
Bank

For alternative IAS 39 method only:
Loan repayment: repayment  3.791 = £200,000
200 000
,
Repayment =
3 791
.
= £53,000 (rounded)
Interest Capital
200,000  = 33,000
10% = 20,000
Remaining £27,000 (£80,000 – £53,000) represents operating lease rental.
(2) Pension scheme
scheme
Pension scheme Pension scheme
assets liabilities
£'000 £'000
At 1 October 20X6
20X6 2,160 2,530
Interest cost (10%  2,530,000) 253
Interest on plan assets (10%  2,160,000) 216
Contributions 405
Transfers (400) (350)
Pensions paid (220) (220)
 Loss on remeasurement through other
comprehensive income* (71) 38
At 30 September
September 20X7 2,090 2,625
Note: IAS 19 (revised) stipulates that remeasurement losses must be recognised in other
*Note:
comprehensive income in the period in which they arise.
(3) Deferred tax on pension liability
liability
£'000
Net pension liability (2,625 – 2,090) (535)
Tax base (no deduction until benefits paid) (0)
This website stores data such as (535)
functionality, as Deferred tax asset @ 23%
well as marketing, 123
Deferred tax
personalization, and analytics.asset
Youb/f (85)
may change your settings at any time 38
Credited
or accept the default to OCI re losses ((38,000 + 71,000) × 23%)
settings. (25))
(25
 Credit to profit or loss for the year 13
3 Policy
Privacy Billinge
Marketing
Marking guide
Personalization
Marks
Analytics
Explanations and calculations of deferred tax implications of: 1
(1) Fair valueAccept
Save adjustment
All 5
(2) Share-based payment 6
(3) Unrealised profit 5
(4) Unremitted earnings 5
(5) Property, plant and equipment 5
(6) Lease
Lease
Total
marks 8
35

Maximum marks 30
MEMO
To:
To: Peter McLaughlin
From: Anna Wotton
From:
Subject: Deferred Tax Issues relating to Billinge
Billinge
(1) Fair value adjustment
IFRS 3, Business Combinations requires the net assets in the subsidiary acquired to be recognised at
their fair value in the group financial statements. Therefore, in the group financial statements at the
acquisition date of 1 November 20X2, the net assets of Hindley will be recognised at their fair value
of £8 million.
The revaluation gain of £1 million will not be recognised by the tax authorities until the item of
property, plant and equipment has been disposed of or taxable income has been generated
through use of the asset. This gives rise to a temporary difference.
As Hindley will have
have to pay tax on the taxable income
income generated through
through use of the asset and
ultimately on any gain on disposal, this temporary difference results in a deferred tax liability in the
group financial statements.
£m
Carrying amount in group financial statements 8
Tax base (7)
Temporary difference 1
Deferred tax liability (30%) (0.3)
The deferred tax is recognised as a liability in the statement of financial position and results in an
increase in goodwill, rather than a charge to other comprehensive income,
income, as the fair value gain is
is
recognised on acquisition.
The deferred tax is recognised even though the entity does not intend to dispose of the asset. The
fair value adjustment still represents
represents a taxable temporary
temporary difference as the asset's value will be
recovered through use rather than sale, generating taxable income in excess of the depreciation
(based on original cost) allowed for tax purposes.
In Hindley's individual accounts, no fair value adjustment is required and no deferred tax liability
will arise as both the carrying amount and the tax base will be the same ie, £7 million.
The initial recognition of goodwill that arises on acquisition (£10m – £8m = £2m) will not give rise
to any deferred tax: IAS 12 does not permit recognition of deferred tax as goodwill is measured as
a residual as recognition of a deferred tax liability would increase the carrying amount of the
and the
goodwill.
(2) Share-based
personalization, and analytics.payment
You
IFRS 2,
or accept the default Share-based Payment requires equity settled share based payments to be recognised at the
settings.
fair value at the grant date ie, £5. The expense
expense should be spread over the vesting
vesting period of three
three
years with a corresponding
corresponding increase in equity.
equity.
Privacy Policy For the year ended 31 October 20X2, the equity and expense would have been recorded at
£666,667 (1,000 options  500 employees  80% to remove estimated leavers  £5 fair value at
Marketing
grant date  1/3 vested).
Personalization
As at 31 October 20X3, equity would
would be revised to £1.25m (1,000 options  500 employees 
£1.25m (1,000
75% to remove revised estimated leavers  £5 fair value at grant date  2/3 vested). The
Analytics
movement in the year of £583,333 (£1.25m – £666,667) would be posted to profit or loss.
Save The taxAccept

authorities,
All however, do not give tax relief until exercise. This gives rise to a temporary
difference.
The tax relief is based on the intrinsic value so this is the value used to measure the deferred tax
asset.

Bank

The deferred tax asset correctly recognised at 31 October 20X2 would have been calculated as
follows:
£m
Carrying amount of share-based payment expense 0
Tax base (1,000 options  500 employees  80% to remove leavers  £3 intrinsic (0.4)
value  1/3 vested)
Temporary difference (0.4)
Deferred tax asset (30%) 0.12
The deferred tax asset to be recognised at 31 October 20X3 is calculated as follows:

£m
Carrying amount of share-based payment expense 0
Tax base (1,000  500  75%  £8  2/3) (2)
Temporary difference (2)
The amount of deferred tax that relates to the excess of the intrinsic value over the fair value at the
grant date should be recognised in equity as there is no corresponding expense to match it to in
profit or loss:
£m
Cumulative tax deduction 2
Cumulative expense (1,000  500  75%  £5 at grant date  2/3) (1.25)
Excess 0.75
Deferred tax to be recognised in equity (30%) 0.225
The remaining movement in the deferred tax asset of £0.255 million (£0.6m – £0.12m b/d –
£0.225m to equity) should be credited to profit or loss for the year.
(3) Unrealised profit
In the group accounts, the unrealised profits on goods sold internally, which still remain in
inventories at the year-end, must be cancelled. In future years, once the inventories have been sold
on to third parties, this cancellation is no longer required.
This gives rise to a temporary difference as the tax authorities still tax the sale regardless of whether
it is internal or external as they work from the individual companies' profit figures not the group
figures.
The unrealised profit is calculated as follows:
This website stores
£5mdata such as  ¾ in inventories = £0.75m
 25%/125%
The temporary difference results in a deferred tax asset as, in the group accounts, there is a tax
charge on a non-existent profit which needs to be removed.
The deferred
or accept the default settings.tax asset in the group accounts is calculated as follows: £m
Carrying amount in group accounts – inventories [(£5m  3/4) – £0.75m] 3
Tax base – inventories (£5m  ¾) (3.75))
(3.75
Privacy Policy Temporary difference (0.75)
Marketing
The result is a deferred tax credit to profit or loss of £0.225 million in the current period.
Personalization
There is no deferred tax impact in Ince's individual accounts because the unrealised profit is not
Analyticscancelled.
(4) Unremitted earnings

Save Accept All
There is a potential deferred tax liability of £0.4 million on the unremitted earnings of Quando.
This is because the Quando's profits of 5 million corona have been consolidated in the group
accounts, but the additional tax will not be paid by Billinge until these profits are remitted to
owners as dividends, giving rise to a temporary difference. However, as Billinge controls the timing
of the Quando's dividends (being a 100% shareholder) and it is probable that the temporary
difference will not reverse in the foreseeable future as Billinge intends to leave the profits within
Quando for reinvestment, IAS 12, Income Taxes dictates that no deferred tax liability should be
recognised.
(5) Property, plant and equipment

The carrying amount of property, plant and equipment is its net book value. The grant may either
be deferred and released to profit or loss over the useful life of the asset or deducted from the cost
of the asset.
The tax base is the tax written down value.
Since the depreciation and capital allowances are charged at different rates, this gives rise to a
temporary difference.
The resultant deferred tax liability is calculated as follows (on the assumption that the grant is
recognised as deferred income):
£m £m
Carrying amount:
Property, plant & equipment (£12m – £12m/5) 9.6
Deferred grant (£2m – £2m/5) (1.6) 8
Tax base (£12m – £2m) – [(£12m – £2m)  25%] (7.5)
Temporary difference 0.5
Deferred tax liability (30%) (0.15)
A deferred tax liability has arisen because the capital allowances granted
granted to date are greater than
than
the depreciation and grant amortisation recognised in profit or loss. Therefore too much tax relief
has been granted and this needs to be reversed.
The deferred tax liability of £0.15 million is charged to profit or loss as that is where the effect of
the depreciation and grant amortisation have been shown.
Tutorial note:
It the grant had been deducted from the cost of the asset, the carrying amount would have been
calculated as [(£12m – £2m) – ((£12m – £2m)  1/5)] ie, £8 million, resulting in the same carrying
amount as if it had been treated as deferred income.
(6) Lease
This is a finance lease as the risks and rewards incidental to ownership have been transferred to the
lessee (Billinge). The evidence for this is that the present value of the minimum lease payments
(£6 million) as same as the fair value and the economic life of the asset is the same as the lease
is the
term.
Under IAS 17, Leases, the accounting treatment for a finance lease follows the substance of the
transaction rather than the form. This results in recognising an asset and a corresponding liability.
or accept the default settings.difference
A temporary difference arises because in the accounts, th
thee asset is written off
off over its useful life
life and
the finance cost is recognised at a constant rate on the carrying amount of the liability; whereas the
tax authorities give tax relief as the rentals are paid.
Privacy Policy
The deferred tax is calculated as follows:
Marketing £m £m
Carrying amount:
Personalization
Property, plant and equipment (£6m – £6m/5 years) 4.8
Lease liability (£6m + [8%  £6m] – £1.5m) (4.98) (0.18)
AnalyticsTax base 0

Temporary difference (0.18)
Save Deferred Accept All(30%)
tax asset 0.054
The resultant deferred tax is an asset (and credit in profit or loss) because the tax relief is based on
the rental of £1.5 million yet the expense in the profit or loss is £1.68 million (ie, depreciation of
£1.2 million and interest of £0.48 million) which means that part of the future tax saving on rental
deductions is recognised
the tax recoverable in thenow for accounting purposes, so the tax charge is reduced representing
future.

Bank

4 Longwood
Marking guide
Marks
Change in tax rate 8

Revised tax losses adjustment 8
Fair value adjustments 7
Goodwill calculation 7
Deferred taxes, goodwill and share versus asset deals 8
Total marks 38
Maximum marks 30
(a) Change of tax rate

rate
Per IAS 12, Income Taxes , the tax rate to be used is that expected to apply when the asset is
realised or the liability settled, based upon laws already enacted or substantively enacted by the
year end.
The deferred tax assets and liabilities therefore need to be measured using the enacted rate for
20X7 of 23%, rather than 30%.
The net change in the carrying amount of the deferred tax assets and liabilities (£0.26 million, as
shown in the table below) arising from a change in rates will normally need to be taken to profit or
loss for the year of Portobello Alloys. However, this will not be the case where it relates to a
transaction or event which is recognised in equity (in the same or a different period), when the
resulting deferred tax is also included in 'other comprehensive income'. This is the case for the
available-for-sale investments.
The schedule below calculates the adjustments to the deferred tax assets and liabilities by
reworking the temporary differences at the new rate.
Deferred tax schedule (in £m)
at 30% at
at 23% Adjustment
Property, plant and equipment (1.54) (1.18) 0.36
This website stores data such as investments
Available-for-sale investments (0.32) (0.25) 0.07
cookies to enable essential site liability
Post-retirement 0.11 0.09 (0.02)
Unrelieved tax losses – recognised
functionality, as well as marketing, 0.66 0.51 (0.15)
personalization, and analytics. You (1.09) (0.83) 0.26
may change your Deferred
settingstax
at liability
any time (1.86) (1.43) 0.43
Deferred tax
or accept the default settings. asset 0.77 0.60 (0.17)
(1.09) (0.84) 0.26
The resultant adjustments are:
Privacy Policy Debit Credit
£m £m
MarketingDeferred tax asset 0.17
Deferred tax liability
Personalization
0.43
Tax charge – profit or loss 0.19
AnalyticsEquity – available-for-sale investments 0.07
(b) Deferred tax asset recognition for losses
losses
Save Accept All
The increased forecast profitability may allow Portobello Alloys to recognise a deferred tax asset in
respect of all the thus-far unrecognised unrelieved tax losses incurred. However, there is a risk that
no losses will be available to carry forward. This will be the case if there is a major change in the
no losses will be available to carry forward. This will be the case if there is a major change in the
nature and conduct of the trade post-acquisition. The amount of unrecognised losses is shown
below.
Tax losses working

£m
Total losses for tax purposes 7.40
Already utilised (1.20)
Remaining 6.20
Recognised (2.20)
Unrecognised 4.00
The analysis of the adjustment between current and non-current deferred taxes can be derived
from the profit

profit forecast as below.
Profit forecasts for tax loss utilisation
20X7 20X8 Total
£m £m £m
Forecast taxable profit – original 0.98 1.22 2.20
Forecast taxable profit – revised 1.90 4.74 6.64
Additional taxable profits
profits 0.92 3.52 4.44
Additional recoverable
recoverable losses 0.92 3.08 4.00
Addition to deferred
deferred tax asset at 23% 0.21 0.71 0.92
Note that the additional recoverable losses for 20X8 are restricted to £3.08 million (rather than
being equal to the additional taxable profits of £3.52 million) since the total of unrecognised losses
is only £4.00 million.
Note that the change in the deferred tax asset must be recognised in profit or loss:
£m £m
DEBIT
CREDIT Deferred
Tax tax– asset
charge profit or loss 0.92 0.92
(c) Deferred taxes on fair value adjustments
These adjustments will arise as consolidation adjustments rather than in the financial statements of
Portobello Alloys.
The deferred tax adjustment in respect of the PPE should be to equity since the underlying
revaluation on land will be recognised through equity in the revaluation reserve. The land will not
be depreciated, and the deferred tax on the temporary difference will only crystallise when the
land is sold. It is clear that there is no intention to sell the property in the current horizon.
The required adjustments to the deferred tax assets and liabilities are summarised in the table
below.
cookies to enable essential site Carrying Temporary Deferred
functionality, as well as marketing, Fair value amount difference tax at 23%
personalization, and analytics. You £m £m £m £m
Property,
or accept the default plant and
settings.
equipment and 21.65 18.92 (2.73) (0.63)
Development asset 5.26 0.00 (5.26) (1.21)
Post-retirement liability (1.65))
(1.65 (0.37) 1.28 0.29
Privacy Policy 25.26 18.55 (6.71) (1.55)
Deferred tax liability (1.84)
Marketing Deferred tax asset 0.29
(1.55)
Personalization
The resulting consolidation adjustment is:
Analytics
Debit Credit
£m £m
Save Accept
Deferred tax assetAll 0.29
Deferred tax liability 1.84
Goodwill adjustment 1.55
Bank

(d) Goodwill calculation
calculation
The first step is to determine the fair value of the consideration.
Deferred consideration must be measured at its fair value at the date that the consideration is
recognised in the acquirer's financial statements, usually the acquisition date. The fair value
depends on the form of the deferred consideration.
Where the deferred
deferred consideration is in the form of
of equity shares:
 Fair value
value is measured
measured at the
the date the consideration is recognised,
recognised, usually the
the acquisition
acquisition date.
Consequently, the share price used must be £1.88.
Where the deferred
deferred consideration is payable in cash:
 Fair value is measured at the present value of the
the amount
amount payable, hence the present value of
of
the £10 million cash.
Under IFRS 3 (revised) all acquisition-related costs must be written off as incurred. They are not
included in the consideration transferred.
Fair value of consideration
£m
Cash payment 57.00
Deferred equity consideration (5m  £1.88) 9.40
3
Deferred cash consideration (£10m/1.1 ) 7.51
73.91
The value of the net assets acquired needs to be adjusted for the changes to reflect the fair value of
PPE, the development asset, the pension and deferred taxes as shown below.
Fair value of net assets acquired
£m
Book value per statement of financial position provided 9.90
Fair value adjustment to PPE 2.73
Fair value adjustment to development asset 5.26
Fair value adjustment to pension liability (1.28)
Deferred tax – rate change 0.26
Deferred tax – tax losses (0.21 + 0.71) 0.92
Deferred tax – fair value adjustments (0.29 – 1.84) (1.55)
16.24
cookies to enableThe resultingsite
essential fair value of goodwill, on which no deferred tax is applicable is:
£m
Fair value of consideration 73.91
Fair value of net assets acquired (16.24)
Goodwill
Goodwill 57.67
57.67
(e) Deferred taxes and goodwill
goodwill
Goodwill and share acquisitions
Privacy Policy
When an entity
entity purchases the shares
shares in a target and gains control,
control, IFRS 3 requires that consolidated
Marketing
statements are produced and thethe target is introduced at fair value, including any
any
attributable goodwill.
Personalization
The goodwill arising in this manner does not appear in any of the companies' individual financial
Analytics
statements, but arises as a consolidation adjustment in the consolidated financial statements.
Save Accept look

Tax authorities All at the individual financial statements of the companies within the group and
tax the individual entities. As such, no goodwill is recognised for tax purposes. The individual
statements of the buyer will
will simply reflect an investment
investment in shares
shares in its statement of
of
financial position, not the subsidiary assets, liabilities or goodwill.
Under IAS 12, Income Taxes , a deferred tax liability or asset should be recognised for all taxable and
deductible temporary differences, unless they arise from (inter alia) goodwill arising in a business
combination. As such, no deferred tax is recognised.
Goodwill and asset acquisitions

The essential difference here is that the buyer has not purchased shares, but the assets and
liabilities of the target. The assets and liabilities are measured and introduced at fair value,
including any purchased goodwill. These are introduced directly into the individual financial
statements of the buyer.
It is this goodwill that the tax authorities will recognise as a purchased asset and on which they
may charge tax.
As tax relief is permitted

permitted over 15 years but
but goodwill is not amortised, then the
the tax base and the
accounting base are not the same, therefore a taxable temporary difference arises and deferred
tax recognised.
5 Upstart records
The candidate is required to reply to a request by a group finance director to assist with the finalisation
of the group accounts. The group's investment in Liddle Music Ltd has increased twice during the year
such that the investment has moved from being accounted for as an associate to a subsidiary requiring
the calculation of a profit to be recognised in the statement of profit or loss on crossing the 'control'
threshold. A further acquisition of more shares later in the year however, requires no further profit to be
recognised but does require changes to the percentage of non-controlling interest. Adjustments are
required for a restructuring provision and for share-based payment.
The candidate is required to explain the impact of the acquisition of shares in Liddle Music on goodwill
and non-controlling
restructuring interest,
provisions to explain
and share andtocalculate
options, prepareany required adjustments
a consolidated statement with regard
of profit to
or loss
including Liddle Music and finally to explain the impact of Upstart adopting an alternative accounting
policy regarding the recognition of the non-controlling interest.
Marking guide
Requirement Marks Skills
Show and explain with supporting 16  Apply technical knowledge

knowledge to identify
identify
This website stores datathe
calculations, such as
appropriate financial implications of crossing control
cookies to reporting
enable essential siteof goodwill and
treatment threshold.
non-controlling
non-controllin g interests for Liddle in
 Apply technical knowledge
knowledge to
Upstart's consolidated Youstatement of
distinguish between and calculate the
financial positionatas
any
at time
30 June 20X5.
20X5.
or accept the
Usedefault settings. of net assets
the proportion deferred and contingent consideration.
method to determine non-controlling
non-controlling  Identify the incorrect treatment of the
interests. professional fees.
Privacy Policy
knowledge to calculate
Marketing goodwill including the fair value
adjustment and subsequent
Personalization depreciation adjustment.
Analytics  Appreciate that the second acquisition
does not create a further profit and
Save Accept All recommend the appropriate
adjustment.
 Identify intra-group transactions and
recommend adjustments.
 Explain incorrect treatment of the

German loan and recommend the
accounting adjustment required.

Bank

Requirement Marks Skills
Explain, with supporting calculations, 9  Apply technical knowledge

knowledge to
the appropriate financial reporting determine whether a provision should
treatment for the restructuring plans be recognised and calculate the
and the share options. amount of the provision.
 Appreciate that no provision should be
made in respect of the second proposal.
 Identify that the share options represent
an equity-settled share-based payment.
knowledge to account
account
for the share-based payment correctly.
Prepare Upstart's consolidated 8 Assimilate adjustments and prepare revised
statement of profit or loss for the year consolidated statement of profit or loss.
ended 30 June 20X5, to include Liddle.
Explain (without calculations) the 5 Assimilate information, and apply technical
impact on Upstart's consolidated knowledge to explain that NCI valuation
statements if the fair value would impact on goodwill.
method for measuring non-contro
non-controlling
lling
interests were to be used instead of the
proportion of net assets method.
Total marks 38
Maximum marks 30
To: Susan
To: Susan Ballion
From: Thomas
From: Thomas Mensforth
Subject: Liddle
Subject: Liddle
(a) Explanation of financial reporting treatment of goodwill and non-controlling interest
Goodwill
cookies to enableGoodwill arises
essential siteat the date when control is achieved. In the case of Upstart and Liddle this is on
functionality, as well as marketing,when Upstart's investment in Liddle passes the 50% threshold.
1 October 20X4,
personalization,Until
and analytics.
that date, You
Liddle has been treated as an associate.
a ssociate. Under the equity accounting method the
group's at any
share time profits after tax is credited to the consolidated statement of profit or loss,
of Liddle's
and the investment is measured at cost plus share of post-acquisition profits in the consolidated
statement of financial position. In the year ended 30 June 20X5 Liddle is therefore treated as an
associate for the period 1 July to 1 October 20X4.
Privacy Policy On 1 October 20X4, the equity value of Liddle was £7.174 million (W8) and this was remeasured
to fair value of £7.5 million (W8) for the purposes of calculating goodwill. The difference between
Marketing
the two figures (£326,000) was credited to the statement of profit or loss.
Personalization
Goodwill is measured as the fair value of consideration paid less the fair value of the net assets
Analyticsacquired.
The fair value of the consideration consists of the following elements:
Save  Accept
Cash paid All
of £2 million.
 The fair value
value of the original 25% investment in Liddle at 1 October 20X4.
 The shares issued on 1 October 20X4.
 The £3 million
million payable
payable on 1 October
October 20X6 is discounted
discounted to fair
fair value, and the interest is then
then
unwound in the statement of profit or loss.
 The £3 million contingent consideration payable on 1 October 20X7 is measured
measured at its fair
fair
value (determined by the probability of it occurring), again discounted to a present value, and
unwound in the statement of profit or loss.
The professional fees of £250,000 are excluded from the goodwill calculation and instead
expensed to the statement of profit or loss as incurred.
As a result of applying these
these principles a goodwill
goodwill figure of £13.077
£13.077 million arose on
on the acquisition
of Liddle (W3).
There is no further adjustment to goodwill when Upstart acquired a further 100,000 shares in
Liddle on 1 April 20X5. Instead, the difference between the consideration paid and the decrease in
the non-controlling interest's share of net assets is taken to group reserves (W6).
Goodwill is subject to annual impairment reviews.

Non-controlling
Non-controlli ng interests (NCI)
When Upstart acquired a controlling
controlling interest in Liddle on 1 October
October 20X4, NCI
NCI arose in relation to
the 30% of Liddle not owned by Upstart at this date.
There are two permitted methods of determining the NCI, the proportionate and fair value
method, and Upstart chose the former.
The NCI is therefore measured at its share of the net assets of Liddle at the control date, adjusted
for fair value movements.
movements.
In the six months between 1 October 20X4 to 1 April 20X5 the NCI are allocated 30% of the
profits of Liddle (W4). This is added to the original NCI total.
On 1 April 20X5 the NCI reduce their investment in Liddle from 30% to 20%. The reduction in net
assets (W4) is compared to the cost of the shares bought by Upstart, and the difference is taken to
group reserves (W6).
From 1 April to 30 June 20X5 the NCI are allocated 20% of the profits of Liddle (W4).
In the statement of financial position the NCI are effectively given their share (20%) of the fair
value of Liddle's net assets at 30 June 20X5. This gives a figure of £3.664 million (W4).
(b) Financial reporting treatment of restructuring plans and share options
Restructuring plans
Plan 1:
A provision for
for restructuring should be recognised
recognised in respect of the closure of
of the retail outlets in
accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets. The plan has been
communicated
This website stores data such as to the relevant employees (those who will be made redundant) and the outlets
cookies to enable have alreadysite
essential been identified. A provision should only be recognised for directly attributable costs
functionality, as that
well will not benefit on-going activities of the entity. Thus, a provision should be recognised for the
as marketing,
redundancy
personalization, and analytics. costs
Youand the lease termination costs, but none for the retraining costs:
or accept the default settings. £'000
£'000
Redundancy costs 300
Retraining –
Privacy Policy Lease termination costs 50
Liability 350
Marketing
DEBIT
Personalization Profit or loss £350,000
CREDIT Current liabilities £350,000
Analytics
Plan 2:
Save Accept
No provision All be recognised for the reorganisation of the finance and IT department. Since
should
the reorganisation is not due to start for two years, the plan may change, and so a valid
expectation that management is committed to the plan has not been raised. As regards any
provision for redundancy, individuals have not been identified and communicated with, and so no
provision should be made at 30 June 20X5 for redundancy costs.

Bank

Share options
IFRS 2, Share-based Payment requires
requires that the expense in respect of the share options must be
recognised in profit or loss for the year. This is an equity-settled share-based payment, so the fair
value of the share options is that at the grant date, and the corresponding credit is to equity:
DEBIT Profit or loss £133,333
CREDIT Equity £133,333
The expense is calculated as follows:
£'000
30 June 20X4 Equity b/d: 1,000  4  £50  13 66.67
Profit or loss (balancing figure) 133.33

30 June 20X5 Equity c/d: 1,000  6  £50  2 3 200.00
(c) Consolidated Statement of Profit or Loss for year ended 30 June 20X5
£'000
Revenue (see (W5)) 34,420
Cost of sales (10,640)
Gross profit 23,780
Operating costs (5,358))
(5,358
Profit from operations 18,422
Investment income 905
Fair value gain on associate 326
Associate income 424
Interest paid (625 + 169 + 78 + 123 + 141)
141) (1,136)
(1,136)
Taxation (3,700)
Profit for year 15,241
Profit attributable to:

Shareholders of the parent 13,901
Non-controlling
Non-controllin g interests 1,340
15,241
(d) Fair value method implications
(d)
This website stores
If thedata
fair such
value as
method in relation to the non-controlling interest was used instead of the
cookies to enable essentialof
proportion site
net assets method, the potential implications would be as follows:
personalization,and
Goodwill
analytics.would
You be higher, because the non-controlling
non-controlling interest (NCI) would include their
may change your settingsshare at
of any
goodwill
time in addition to their share of net assets.
 Ifsettings.
a go
goodwill
odwill impairment arose, the NCI would bear a shareshare of the impairment, this would
decrease the NCI allocation in the consolidated statement of profit or loss.
Privacy Policy  Assuming that the

the NCI
NCI is higher for the
the re
reasons
asons discussed above,
above, gearing would be lower
lower as
NCI is deemed to be part of equity.
Marketing
WORKINGS
WORKINGS
Personalization
(1) Group Structure
Analytics Upstart
Save Accept All

25% 3 months
70% 6 months
80% 3 months
Liddle
(2) Net Assets 30 June 20X5 1 April 20X5 1 Oct 1 Jan

20X4 20X3
£'000 £'000 £'000 £'000
Share capital 1,000 1,000 1,000 1,000
Reserves: At 1 January 20X3 6,600
Reserves: At 1 July 20X4 9,000 9,000 9,000
Profits for 12/9/3 months 6,780 5,085 1,695
Fair value adjustment 1,600 1,600 1,600

Depreciation on FV adjustment
adjustment (60)
(60) (40)
(40)
(1,600  1/20  9/12 and 6/12) 18,320 16,645 13,295 7,600
Movement 1,675 3,350 5,695
(3) Goodwill
Consideration: £'000
Shares issued (800,000  £11.50) 9,200
Cash 1/10/20X4 2,000
2
Deferred cash (£3 million/1.09 ) 2,525
3
Contingent cash ((£3 million  50%)/1.09 ) 1,158
Fair value of previously held equity investment (250,000  £30) 7,500
Non-controlling
Non-controllin g interest at 1/10/X4 3,989 (13,295  30%)
Less: Net assets at control (W2) (13,295))
(13,295
Goodwill 13,077
(4) Non-controllin
(4) Non-controlling g interests £'000
At 1 October 20X4
20X4 (W3) 3,989
Share of profit to 1 April 20X5
£5,025,000 (W5)  6/9  30% 1,005
NCI at 1 April 20X5 4,994
*Share transferred to Upstart
(4,994  10/30) see working below (1,665)
Share of profits 1 April-30 June 20X5
(1,675 (W2)  20%) 335
At 30 June 20X5
20X5 3,664
*Share of net assets based on old interest = 16,645  30% 4,994

Share such
of net as based on new interest = 16,645  20%
assets 3,329
Adjustment required 1,665
personalization, and analytics. You Liddle
(5) Group SPL
(5)
may change your settings at any time Upstart (9/12) Adjust Group
or accept the default settings. £'000 £'000 £'000 £'000
Revenue 23,800 11,700 (1,080) 34,420
Privacy Policy Additional depreciation (60)

Cost of sales (7,400) (4,050) 1,080 (10,640)
MarketingUnrealised profit (210) (W9)
Operating costs
Personalization (3,500) (1,125) (5,358)
Professional fees (250)
AnalyticsRestructuring provision (350)
Share-based payment (133)
Save Investment income
Accept All 890 135 (120) (W9) 905
Gain on previously held equity 326 326
investment (W8)
Associate income (6,780  25%
 3/12) 424 424
Interest paid (520) (225) 120 (W9) (625)
Unwinding of discount on deferred
consideration (W10) (169) (169)
Unwinding of discount on contingent
consideration
considera tion (W10) (78) (78)

Bank

Liddle
Upstart (9/12) Adjust Group
£'000 £'000 £'000 £'000
Foreign loan interest (W11) (141) (141)
Exchange loss on loan (W7) (123) (123)
Taxation (2,350) (1,350) (3,700)
Profit for year 9,676 5,025 15,241
NCI: (5,025  6/9  30%) 1,005

(5,025  3/9  20%) 335
335
Total 1,340
(6) Increase in inve

(6) investment
stment in Liddle 1 April 20X5
20X5
£'000
CR Cash 3,500
DR NCI 1,665
DR Group Reserves (balance) 1,835
(7) Exchange loss on loan

(7)
£'000
Borrowed at 1 October 20X4
( €
€4 million at £1 = €1.30) 3,077
Restate at 30 June 20X5 ( € €4 million at £1 = €1.25) 3,200
Exchange loss (123)
(8) Associate
Associate
£'000
Cost 5,750
Share 1/1/20X3 to 1/10/20X4 1,424
(25%  5,695 (W2)) 7,174
Fair value at 1 October 20X4 (250  £30) 7,500
Increase in value to SPL 326
(9) Profit in inventories

(9)
100% 60% 160%
This website stores data such as Cost Profit Sales Price
cookies to enable essential site 210 560
Reduce profit by £210,000
may change your settings at transactions
Intra-group any time
£120,000  9 months = £1,080,000 – remove from revenue and cost of sales
Cancel £2 million  8%  9/12 = £120,000 from investment income and finance cost
Privacy Policy
(10) Deferred consideration
Marketing At 1.10.20X4 At 30.6.20X5 Movement
Personalization £'000 £'000 £'000
2
Deferred cash (£3 million/1.09 ) 2,525 2,694 169
AnalyticsContingent cash
3
((£3 million  50%)/1.09 ) 1,158 1,236 78
Save Accept All
£2,525,000  9%  9/12 = £170,000
Also acceptable = £2,525,000
(11) Foreign loan interest
€4 million  6%  9/12 = €180,000 at £1 = €1.28 = £141,000
6 MaxiMart plc
Marking guide
Marks
(a) Share option scheme 7

(b) Pension scheme 14
(c) Reward card
card 5
(d) Futures contract 7
(e) Proposed dividend 5
Total marks 38
Maximum marks 30
MEMO
To
To:: Jane Lewis
From::
From Vimal Subramanian
Date::
Date 15 November 20X1
Transactions of MaxiMart
(a) Share options awarded
This is an equity-settled share-based payment. An expense should be recorded in profit or loss,

spread over the vesting period of five years with a corresponding increase in equity.
Each option should be measured at the fair value at the grant date ie, £2. The year end estimate of
total leavers over the five-year vesting period (25%) should be removed in the calculation of the
expense as they will never be able to exercise their share options.
There are two other vesting criteria here:
(1) The average profit which should be takentaken into account because it is a performance
performance criterion.
criterion.
The average profit for the next five years is £1.3 million ([£0.9m + £1.1m + £1.3m + £1.5m +
£1.7m]/5 years), resulting in 120 options per employee.
This website stores
(2) data
The such
shareas
price
price which should not be taken into
into account because it is a market condition
condition
which is already factored into the fair value. So the fact that the share price target of £8 has
notmarketing,
been met by the year end does not need to be taken into account.
may change your The expense
settings at and the corresponding increase in equity for the year ended 30 September 20X1 is
any time
= 1,000 employees  75% employees remaining  120 options  £2 FV  1/5 vested
= £36,000
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(b) Pension scheme
Marketing
Statement of financial position as at 30 September 20X1 (extract)
Personalization 30 September 30 September
Analytics 20X1 20X0
£'000 £'000
Non-current assets
Save DefinedAccept
benefit All
pension plan – 100
Defined benefit pension plan 40 –
Bank

Statement of profit or loss and other comprehensive income for the year ended 30
September 20X1 (extracts)
£'000
Profit or loss
Defined benefit expense 185
Actuarial gain on defined
defined benefit obligation
obligation (30)
Return on plan assets (excluding amounts in net interest) 53
Net remeasurement loss 23
Note:
Note: IAS 19 (revised 2011) requires remeasurement gains and losses to be recognised in other
comprehensive income.
Notes to the financial statements
Defined benefit plan: amounts recognised in the statement of financial position
30 September 30 September
20X1 20X0
£'000 £'000
Present value of defined benefit obligation 2,410 2,200
Fair value of plan assets (2,370) (2,300)
40 (100)
Defined benefit expense recognised
recognised in profit or loss for the year ended 30 September 20X1
£'000
Net interest on the net defined benefit asset (115 – 110) (5)
Past service cost 100
100
185
Changes in the present value of the defined benefit obligation
£'000
Opening defined benefit obligation at 1 October 20X0 2,200
Past service cost 100
Interest on obligation (2,200  5%) 110
Benefits paid (60)
Remeasurement gain through OCI (balancing figure) (30))
(30
Closing defined benefit obligation at 30 September 20X1 2,410
cookies to enable Changes the fair value of plan assets
in site
essential
functionality, as well as marketing, £'000
Opening fair value of plan assets at 1 October 20X0
2,300
Interest on at
plan  115
may change your settings anyassets
time (2,300 5%)
Contributions
Contributions
Benefits paid 68
68
(60)
Remeasurement loss through OCI (balancing figure) (53))
(53
Closing fair value of plan assets at 30 September 20X1 2,370
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(c) Reward card
Marketing
IFRIC 13, Customer Loyalty Programmes requires
requires that reward points are treated as a separate
Personalization
component of the sale. They should be measured at the fair value to the customer (effectively the
amount for which they could be sold separately). This amount should be deferred and recognised
Analytics
in revenue when the reward points are redeemed.
Save In substance,
Acceptcustomers
All are implicitly paying for the reward points they receive when they buy
other goods and services and hence some of that revenue should be allocated to the points.
Here, total reward points have a face value of £5 million at the year end but only two in five
customers are expected to redeem their points, giving a value of £2 million (ie, £5m × 2/5).
Effectively MaxiMart has sold goods worth £102 million (ie, £100m + £2m) for a consideration of
£100 million.
£98.04 millionThus allocating
(£100m/£1
(£100m/£102m 02mthe× £2 millionwould
£100m) between the two elements
be allocated would mean
to food revenue that
and the balance of
£1.96 million (£2m/£102m × £100m) to the reward points. £98.04 million would be recognised as
revenue in year ended 30 September 20X1 and £1.96 million would be deferred in the statement
of financial position until the reward points are redeemed.
(d) Futures contract

The loss on the forecast sale should not be accounted for as the sale has not yet taken place.
However, the gain on the future should be accounted for under IAS 39. Hedge accounting can be
applied because the hedge has fallen within the required 80–125% effectiveness range (2/1.9 =
105%).
The double entry required is:
DEBIT Financial asset (future) £2m
CREDIT Retained earnings (with effective portion) £1.9m
CREDIT Profit or loss (with ineffective portion) £0.1m
While the accounting
accounting treatment of
of cash flow hedges
hedges will not change
change under IFRS 9, Financial
Instruments, the somewhat arbitrary 80%–125% 'bright line' test of IAS 39 will be replaced with an
objective-based assessment for hedge effectiveness, under which the following criteria must be
met.
(1) There is an economic relationship between
between the hedged item and the hedging
hedging instrument
instrument ie,
the hedging instrument and the hedged item have values that generally move in the opposite
direction because of the same risk, which is the hedged risk.
(2) The effect of
of credit risk does not
not dominate the value changes that result from that economic
economic
relationship ie, the gain or loss from credit risk does not frustrate the effect of changes in the
underlyings on the value of the hedging instrument or the hedged item, even if those
changes were significant.
(3) The hedge ratio of the
the hedging relationship (quantity
(quantity of hedging
hedging instrument vs quantity of
of
hedged item) is the same as that resulting from the quantity of the hedged item that the
entity actually hedges and the quantity of the hedging instrument that the entity actually uses
to hedge that quantity of hedged item.
While the above criteria will certainly involve
involve calculations, the
the assessment is more
more sophisticated and
arguably more realistic.
(e) Proposed dividend
The dividend was proposed after the end of the reporting period and therefore IAS 10, Events After
the Reporting Period applies. This prohibits the recognition of proposed equity dividends unless
these are declared before the end of the reporting period. The directors did not have an obligation
to pay the dividend at 30 September 20X1 and therefore there cannot be a liability. The directors
This website stores
seemdata such
to be as that their past record creates a constructive obligation as defined by IAS 37,
arguing
cookies to enable essentialContingent
Provisions, site Liabilities and Contingent Assets . A constructive obligation may exist as a result
functionality, as of
well as marketing,
the proposal of the dividend, but this had not arisen at the end of the reporting period.
may change your Although
settingsthe proposed
at any time dividend is not recognised it was approved before before the financial statements
statements
were settings.
authorised for issue and should be disclosed in the notes to the financial statements.
7 Robicorp plc
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Marking guide
Marketing
Personalization
Requirement
Analytics Marks Skills
Recommend any 26 Apply technical knowledge
knowledge of IAS 38 to the scenario to determine
determine
Save
adjustments,Accept
with All appropriate accounting treatment of the application.
accompanying journal
Identify need for amortisation of development costs.
entries, that are
required to make the Analyse and interpret
interpret journal to determine
determine reversal of accrued
accounting treatment production costs required.
comply with IFRS, Link information to determine the correct accounting treatment for
explaining the
the revenue from the XL5 order.
reasons for your
proposed changes. Apply technical knowledge
knowledge to determine
determine treatment of
of bond.

Bank

Explain the appropriate treatment required to reflect the share
option scheme and the adjustment required.
Calculate the profit on disposal of the Lopex shares and the
appropriate recognition of the investment in Saltor.
Identify the difference between the fair value and the face value of
the interest-free loan to the employees as being the cost to the
employer, to be treated as compensation under IAS 19.
Apply the IAS 39
39 rules in accounting
accounting for the loan at amortised cost
using the effective interest method.\
method.\
Revise the draft basic 8 Assimilate adjustments and prepare revised profit after tax.
earnings per share
Calculate basic EPS and diluted EPS.
(Exhibit 2)
figure (Exhibit 2)
taking into account
your adjustments and
calculate the diluted
earnings per share.
Total marks available 34
Maximum marks 30
To: Murphy
Alex Murphy
From: Nelitova
Marina Nelitova
Subject: 20X4
Review of financial statements for year ended 30 September 20X4
XL5 costs and revenues
In order for development costs to be capitalised, the following criteria have to be satisfied. The project
must:
 be technically feasible
 be intended to be completed and used/sold
 be able to be used/sold
cookies to enable
beessential
expectedsiteto generate probable future economic benefits
 have sufficient resources to be completed
 have
personalization, costs that You
and analytics. can be separately recognised
may change In your settings
the period to at any time20X4 not all these criteria appear to have been satisfied, and so the costs of
1 January
or accept the
£2 default
million settings.
a month should have been expensed in the statement of profit or loss.
Once the breakthrough was made on 1 January, the development costs should have been capitalised
until the project was completed on 30 June. An intangible asset of £15 million (6  £2.5 million) should
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therefore have been created.
Marketing
The following journal is therefore required:
Personalization
DEBIT Profit or loss £6m
CREDIT
Analytics Intangible asset £6m
Once sales of the XL5 commenced on 1 August 20X4 the development costs should be amortised. This
Save
could be doneAccept
eitherAll
on a time or sales basis. I have amortised the £15 million over the number of XL5
units delivered to customers by 30 September 20X4, and this gives an amortisation charge of £500,000
(£15 million  1,200/36,000).
1,200/36,000).
CREDIT Intangible asset £500,000
Revenue should only be recognised once the risks in relation to the XL5 orders have been transferred to
the buyer. This normally is upon delivery, and so revenue in respect of 1,200 units should be included in
the statement of profit or loss.
The accrual for cost of sales should therefore be removed in relation to the original journal for revenue
and the cash received in relation to orders not yet fulfilled should be treated as deferred income.
DEBIT Revenue (1,800  £25,000) £45m
CREDIT Deferred income £45m
DEBIT Accrued expenses

expenses £19.8m
CREDIT Cost of sales (1,800  £11,000) £19.8m
The net impact is to reduce profits by £25.2 million.

Convertible bond
Per IFRS the bond should be split between a debt and equity element at the issue date. The debt
element is calculated by discounting the cash flows in relation to the bond by the rate chargeable for a
similar non-convertible
non-convertible instrument.
This gives a debt bond element of £33.037 million (W1) and the balance of the bond is taken directly to
equity, giving a figure of £6.963 million.
DEBIT Share capital £4m
DEBIT Share premium £36m
CREDIT Bond liability £33.037m
CREDIT Equity £6.963m
An interest charge
charge of £2.478 (£33.037m  10%  9/12) should therefore have been charged in
£2.478 million (£33.037m
the statement of profit or loss and added to the liability and the interest accrual reversed.
DEBIT Profit or loss £2.478m

CREDIT Bond liability £2.478m

DEBIT Accruals £0.9m
CREDIT Finance costs £0.9m
Share option scheme
Robicorp's share option scheme is equity settled because the company is committed to issuing shares if
the scheme conditions are satisfied.
The scheme is partially market based as the options will only vest if a share price target is achieved.
Because
This website storesthis
datapart of as
such the scheme is market based the achievement of the share price target is ignored
cookies to when
enablecalculating the option cost.
essential site
functionality,
Theasscheme
well as ismarketing,
also non-market based because the shares will only be issued if the executives are still
employed by Robicorp Youat 1 October 20X6. Therefore the total cost of the options takes into
may change your settingsthe
consideration at expected
any time number of executives at the vesting date.
Per IFRS 2 the fair value of the options at 1 October 20X3 should be expensed over the vesting period of
the scheme.
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This gives a cost for the year to 30 September 20X4 of £1.568 million (2 8 execs (30 – 2 leavers) 
(28
48,000 options  350 pence  1/3).
Marketing
An expense is recognised for this
this amount and an equal
equal sum credited to equity at 30 September 20X4.
20X4.
Personalization
DEBIT Profit or loss £1.568m
Analytics
CREDIT Equity £1.568m
Investment in Lopex/Saltor
Save Accept All
Robicorp's original investment in Lopex is insignificant in terms of group accounting, and is therefore
governed by IAS 32/39.
Because they were being treated as available-for-sale at 30 September 20X3, they would have been
measured at fair value of £3.68 million (400,000  £9.20) and a credit to other comprehensive income
and an available-for-sale reserve in equity of £1.28 million would have been credited (400,000  £3.20).

Bank

The takeover by Saltor means that the investment in Lopex should be derecognised because Robicorp
no longer has any rights to cash flows in respect of the Lopex shares. The deemed consideration would
be the fair value of the shares in Saltor at the takeover date of £5.5 million (400,000  2.5  £5.50). The
balance in the available for sale reserve should be transferred to profit or loss at the derecognition date.
Robicorp should also have recognised a new financial asset in the form of the shares in Saltor at
1 August 20X4 at the fair value of £5.5 million.
DEBIT Financial asset (shares in Saltor) £5.5m
CREDIT
DEBIT Financial asset
Available (shares
for sale in Lopex)
reserve £1.28m £3.68m
CREDIT Profit or loss account, gain on disposal £3.10m
At 30 September
September 20X4 the shares
shares in Saltor should be remeasured at fair value,
value, which per IAS 39 is the
bid price of £4.80. This gives a value of £4.8 million (1m  480 pence) and the movement in fair value
of £700,000 (£5.5 million less £4.8 million) is taken to profit or loss.
CREDIT Financial asset £700,000
The sales commission of 4 pence per share is ignored.
Loans to employees
IAS 39, Financial Instruments: Recognition and Measurement requires
requires financial assets (except those at
FVTPL) to be measured on initial recognition at fair value plus transaction costs. Usually the fair value of
the consideration given represents the fair value of the asset. However, this is not necessarily the case
with an interest-free loan. An interest free loan to an employee is not costless to the employer, and the
face value may not
not be the same as the
the fair value.
To arrive at the fair value of the loan, Robicorp needs to consider other market transaction
transactionss in the same
instrument. The market rate of interest for a two year loan on the date of issue (1 October 20X3) and
the date of repayment (30 September 20X5) is 6% pa, and this is the rate that should be used in valuing
the instrument. The fair value may be estimated as the present value of future receipts using the market
interest rate. There will be a difference between the face value and the fair value of the instrument,
£'000
Face value of loan at 1 October 20X3 8,000
2
Fair value of loan at 1 October 20X3: (£8m/(1.06) ) 7,120
Difference 880
functionality,
Theasdifference
well as marketing,
of £880,000 is the extra cost to the employer of not charging a market rate of interest. It
will be treated as employee compensation under IAS 19, Employee Benefits . This employee compensation
must be charged over the two year period to the statement of profit or loss and other comprehensive
income, settings.
through profit or loss for the year.
Robicorp wishes to classify the loan under IAS 39 as 'loans and receivables'. It must therefore be
measured at 30 September 20X4 at amortised cost using the effective interest method. The effective
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interest rate is 6%, so the value of the loan in the statement of financial position is: £7,120,000  1.06 =
£7,547,200.. Interest will be credited to profit or loss for the year of: £7,120,000  6% = £427,200.
Marketing
£7,547,200
The double entry is as follows:
Personalization
At 1 October 20X3
Analytics
DEBIT Loan £7,120,000
Save
DEBIT Accept All
Employee compensation £880,000
CREDIT Cash £8,000,000
£8,000,000
DEBIT Loan £427,200
CREDIT Profit or loss – interest £427,200
If Robicorp wishes to continue to hold the loans at amortised cost under IFRS 9, Financial Instruments,
two criteria must be met under IFRS 9:
(1) Business model test. The
test. The objective of the entity's business model is to hold the financial asset to
collect the contractual cash flows (rather than to sell the instrument prior to its contractual
maturity to realise its fair value changes).
(2) Cash flow characteristics test. The
test. The contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and interest on the principal outstanding.
These criteria have been met. Accordingly, following the introduction of IFRS 9, the loan may continue
to be measured at amortised cost using
cost using the effective interest method.
Earnings per share
After taking into consideration the
the above changes
changes basic earnings per share
share decreases to 83.4
83.4 pence
(W2).
A diluted earnings per share
share figure is calculated to take into account
account the worst case scenario
scenario in respect
of potential increases in the equity base of the company. This therefore takes into consideration that:
(a) the convertible
convertible bond could
could potentially increase
increase Robicorp's share capital by 4 million new
new shares,
but the interest saved by conversion is added back to profit. This is usually calculated net of tax,
but as per your instructions I have ignored the tax consequences; and
(b) the share option scheme could increase
increase Robicorp's share capital by a number of free shares. This is
calculated by converting the amount to be recognised in the profit or loss to a per share amount.
This is then added to the exercise price to work out the amount that is expected to be received on
exercise. Dividing
issued results in thethis by theofexercise
number price and comparing to the total number of shares to be
free shares.
Diluted earnings per share is
i s 82.9 pence (W3).
WORKINGS
(1)
Robicorp convertible bond £'000
PV Interest 31/12/X4 @10% 1,091
PV Interest 31/12/X5 @10% 992
PV Interest and capital 1/1/X7 @10% 30,954
Total 33,037
This website(2)stores data such as
functionality, as Basic
well asearnings per share
marketing, Earnings Shares
personalization, and analytics. You £'000
may change your Draft
settings
at any time 66,270 44,000,000
Development
Developmen
Developmenttt costs
Developmen costs expensed
expensed
amortised (6,000)
(6,000)
(500)
Revenue/costs not recognised (25,200)
Bonds instead of shares (4,000,000)
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Interest expense (2,478)
Marketing Finance cost previously charged 900
Share option expense (1,568)
Personalization
Gain on sale of Lopex 3,100
Fair value loss on Saltor (700)
AnalyticsEmployee compensation (loan to employees)
(880)
Interest on employee loan 427
Save RevisedAccept
totals All 33,371 40,000,000
Basic EPS 83.4 pence

Bank

(3)
Diluted EPS
£'000
Basic totals 33,371 40,000,000
Convertibles (see below) 2,478 3,000,000
Share options (free shares) – 232,611
Total 35,849 43,232,611
Diluted EPS
EPS 82.9 pence
pence
Options calculation
Fair value of services yet to be rendered (48,000  (30 – 2))  £3.50  2/3) £3,136,000
Per option £3.136m/(48,000  (30 – 2)) £2.33
Adjusted exercise price (£4.00 + £2.33)
£2.33) £6.33
Number of shares under option: 48,000  29 = 1,392,000

Number that would have been issued at average market price
[1.392m  £6.33/£7.60]
£6.33/£7.60] (1,159,389)
 Number of shares treated as issued for nil consideration (free shares) 232,611
Convertibles calculation – dilution test
 9 
Earnings/shares = £2,478,000/
£2,478,000/ × 4m = 82.6p
 12 
As 82.6p is less than
than the basic EPS of
of 83.4p then the convertibles
convertibles are dilutive and therefore
therefore must be
included in the diluted EPS calculation.
8 Flynt plc
Scenario
The candidate is in the role of a newly appointed financial cont
controller
roller who is asked to produce journals
and adjust a statement of profit or loss and other comprehensive income in respect of three technical
issues: share options, defined benefit scheme and lease of surplus machinery. The candidate is also asked
This websiteto stores data
calculate thesuch
EPS as
and diluted EPS taking into account the adjustments to the statement of profit or
cookies to loss
enable
andessential site
other comprehensive income.
Marking guide You
Marks
(1) Redraft consolidated statement of profit or loss and other comprehensive income 28
Privacy Policy
(2) Calculate EPS and diluted EPS where appropriate 7
Total marks 35
Marketing
Maximum marks 30
Personalization
Analytics
To:
To: Andrea.Ward@flynt.co.uk
From: Miles.Goodwin@flynt.co.uk
From:
Save Accept All
Re:
Re: Finalisation of financial statements for year ended 31 May 20X6
I would respond to your email as follows:
Share option scheme
Shane Ponting's treatment of the option scheme is incorrect. IFRS 2, Share-based Payment should
should have
been applied as follows:
The fair value of the options at the grant date should be treated as an expense in profit or loss and
spread over the vesting period, which is from the grant date until the date the scheme conditions vest.
The scheme conditions are both market and non-market based, as they are impacted by both the share
price and continuing employment.
The fact that the share price has increased since the grant date is ignored when determining
determining the charge
to profit or loss. This is because market based conditions are embedded in the fair value calculations.
The continuing employment condition should be based on the best estimates at the statement of
financial position date, which in this case is for 16 executives
executives to be employed
employed at the vesting
vesting date.
The journal entry is as follows:
CREDIT Equity (retained earnings) £378,000
The charge to profit or loss is therefore £378,000 (10,000 × 16 × £12.60 × ¼ × 9/12). This will reduce
profit after tax and therefore EPS.
In addition this sum is also credited in
i n the statement of financial position to equity. IFRS 2 does not state
where in equity this entry should arise, and many companies add it to retained earnings.
When calculating diluted EPS it will normally be necessary to take into consideration the number of 'free'
shares being allocated to executives assuming the whole scheme will vest. Also, normally, there is an
adjustment to be made to the option exercise price in terms of the remaining IFRS 2 cost to be
expensed in future (per IAS 33 example 5A). However in the case of Flynt there is a share price condition
to be satisfied, in addition to the mere passage of time. There are therefore performance
performance based share
options and, in accordance with para 48 of IAS 33, these should be treated as contingently issuable
shares.
Para 54 of
number of IAS 33 therefore
ordinary applies
shares that which
would states that
be issued if the'the calculation
market price atofthe
diluted EPS
end of is reporting
the based on the
period
were the market price at the end of the contingency period'. In the case of Flynt, to satisfy this
contingency the price would need to rise to £58.5 (ie, £39 × 150%). At the period end it is only £52, so
in accordance with para 54 there is no dilution.
Lease of machinery
Shane Ponting's analysis of the agreement as an operating lease is incorrect. This would appear to be a
finance lease because:
because:
(a) the lease term and useful life of the asset are the
the same; and
This website(b)stores
the present value
data such as of the
the lease payments
payments received, plus the residual value guaranteed by Prior plc
come to £607,000
cookies to enable essential site (Appendix 2), which is almost all of the fair value of the machinery.
functionality,
Theasasset
well should
as marketing,
therefore be derecognised and a receivable created. This is called the net investment in
personalization,
the lease. The direct You
and analytics. costs incurred should be included in the initial measurement of the finance lease
receivable at any
and will time be recognised in profit or loss over the lease term as part of interest
therefore
receivable.
The rental income of £150,000 is removed from profit or loss. Interest receivable of £61,000 is credited
to profit or loss (Appendix 3).
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Because the machinery is being derecognised the depreciation charge should be added back to profit.
Marketing
Overall the reclassification of the lease to a finance lease will increase EPS.
Personalization
In the statement of financial position at 31 May 20X6 there will be a receivable of £524,000 (Appendix
(Appendix
Analytics
3) which should be analysed between amounts due in less than and more than one year.
Journal entries are as follows:
Save Accept All
DEBIT Depreciation provision £122,000
CREDIT Profit or loss £122,000
Being removal of the depreciation charge
DEBIT Net investment in lease £1,000
Being adjustment re-allocation of direct costs
CREDIT Net investment in the lease £150,000

Bank

Being removal of rental income
DEBIT Net investment in the lease £61,000
Being interest income
The treatment under IFRS 16 will be the same – accounting for lessors is largely unchanged. IFRS 16 still
makes a distinction between finance and operating leases, but this is a finance lease under both
standards.
Dipper pension scheme
The accounting treatment for a defined benefit scheme is considerably different to that of a defined
contribution scheme. It is therefore necessary to remove the charge of £480,000 made by Shane
Ponting and replace it with the following.
The profit or loss charge is split into two elements:
(a) Service cost: This is the pension earned
earned by the employees ofof Dipper in the year, and
and is an operating
operating
cost. This means that operating costs will rise by a net £80,000 after deducting the contributions
paid into the scheme that have been incorrectly charged by Shane Ponting.
(b) Net interest on the net defined
defined benefit liability.
liability. This in turn consists of
of two elements:
elements:
(1) Interest on plan assets:.
assets:. This works out as £55,000 (5%
(5% × £2.2m × 6/12). IAS 19 does not
specify where this should appear in the statement of profit or loss and other comprehensive
income. I have treated it as investment income but it would not be incorrect to offset it
against operating costs.
(2) Interest on obligation: This is the unwinding
unwinding of the
the present value
value of the
the pension liability due
to employees who are one year closer to retirement at the end of the accounting period. A
charge of £65,000 (5% × £2.6m × 6/12) should therefore be made in profit or loss. Because it
relates to a present value, I have added this to finance costs, but once again IAS 19 is silent on
the issue.
The net charge to profit or loss is thus £(65,000 – 55,000) = £10,000
The actuarial difference reflects that so me of the above figures are estimates, and also the increase in
the net liability in the pension fund to £670,000 (£2.75m – £2.08m). This net liability will appear in the
statement of financial position as a liability.
This websitePerstores data 4such
Appendix asis a net remeasurement loss of £180,000. IAS 19 requires immediate recognition
there
cookies to of
enable
this inessential site
other comprehensive income.
Journal as marketing,
entries are as follows:
may change DEBIT
your settingsProfit or time
at any loss £560,000
CREDIT
or accept the Pension obligation
default settings. £560,000
Being recognition of service costs
DEBIT Pension asset £480,000
Privacy Policy
Marketing
Being contributions paid into the scheme
DEBIT
Personalization Interest on assets £55,000
Analytics
Being recognition of interest on assets
Save
DEBIT Accept Allloss
Profit or £65,000
CREDIT Pension obligation £65,000
Being recognition of interest on obligation
DEBIT Other comprehensive income £205,000
CREDIT Pension asset £205,000
Being recognition of remeasurement loss on pension asset

DEBIT Pension obligation £25,000
CREDIT Other comprehensive income £25,000
Being recognition of gain on pension obligation
Goodwill impairment
The goodwill impairment should be charged to profit or loss rather than other comprehensive income.
The entries to correct are:

CREDIT Other comprehensive income £400,000
Being correct treatment of goodwill
This will impact on EPS.
Summary of adjustments
As a result of these adjustments EPS has in
increased
creased from £1
£1.21
.21 to £1.50 per share from the
the previous year.
Appendix 1 – Flynt plc: Revised statement of profit or loss and other comprehensiv
comprehensive
e income
for year ended 31 May 20X6
20X6 Options Lease Pension Goodwill Total
£'000 £'000 £'000 £'000 £'000 £'000
Revenue 14,725 14,725
Cost of sales (7,450) (7,450)
Gross profit
profit 7,275 7,275
Operating costs (3,296) (378) 122+1 (80) (3,631)
Goodwill impairment (400) (400)
Other operating income 150 (150) 0
Operating profit 4,129 3,244
Investment income 39 61 100
Finance costs (452) (10) (462)
Taxation at 23% (1,003) (663)
This websiteOther comprehensive
stores data such as income
cookies to Remeasurement
enable essential loss
site on pension (180) (180)
Goodwill
functionality, as well impairment
as marketing,
(400) 400 0
personalization, and analytics. You 2,313 2,039
Appendix at any
2 – PV time agreement at 10%
of lease
Cash flow PV
Year £'000 £'000
1
Privacy Policy 150 136
2 150 124
3
Marketing 150 113
4 150 103
Personalization
5 211 131
5 Unguaranteed
Analytics 9 6
Total 613
Save Accept
Fair value plus All costs is equal to the net investment in the lease.
the direct
£612,100 + 1,000 = 613,100
Bank

Appendix 3 – Net investment in lease
Bal b/f Interest income Instalment At 31 May
£'000 £'000 £'000 £'000
1 June 20X5 613 61 (150) 524
1 June 20X6 524 52 (150) 426
Appendix 4 – Pension calculations
Asset Obligation
Balance at Acquisition £'000

£'000
2,200 £'000
£'000
2,600

Interest on assets 55
Unwinding of discount (interest on liability) 65
Service cost 560
Contributions 480
Pension Paid (450) (450)
Expected closing bal 2,285 2,775
Actual closing balance 2,080 2,750
Difference on remeasurement through OCI (205) 25
Net actuarial loss (180)
Appendix 5 – Basic EPS
20X6 20X5
£'000 £'000
Shares at start and end of year (000s) *1,475 1,400
Basic EPS £1.50 £1.21
*6/12 × 1,400,000 = 700,000

6/12 × 1,550,000 = 775,000
1,475,000
As reported above,

above, there is a share price condition to be satisfied, in addition to
to the mere passage of
time. There are therefore performance based share options and, in accordance with para 48 of IAS 33,
This website stores
these databe
should such as as contingently issuable shares. Para 54 of IAS 33 applies and there should
treated
cookies to therefore
be no dilution.
9 Gustavo plc
Scenario
The candidate is in the role of a newly appointed financial contro
controller
ller of a company called Gustavo who
is asked to prepare a draft consolidated statement of profit or loss and other comprehensive income
Privacy Policy
incorporating the results of two subsidiaries. The company has sold and purchased shares in the
Marketing
subsidiaries during the year.
Personalization
The sale of shares in its UK subsidiary called Taricco involves the candidate recognising that the investment
should be consolidated as a subsidiary for the six months until the date of disposal takes place. On sale of
Analytics
the shares the investment decreases to 35% and is therefore a partial disposal. Candidates need to
recognise that because Gustavo has the ability to appoint directors to the board this is a strong indication
Save AcceptbeAll
that Taricco would treated as an associate for the remaining six months of the year.
The acquisition of shares is an investment in 80% of the share capital of an overseas company. The
investment is made on 1 January and therefore should be treated as a subsidiary from that date.
The candidate is specifically asked to explain the impact on the consolidated statement of profit or loss
and other comprehensive income and to show separately the impact on the non controlling interest and
the impact of future changes in exchange rates on the consolidated statement of financial position. The
candidate must also deal with issues involving revenue recognition.
Marking guide
Marks
(1) Prepare the draft consolidated statement

statement of profit or loss and other co
comprehensive
mprehensive 27
income for the year ended 30 September 20X6 including other comprehensive
income showing separately the profit attributable to the non-controlling interest
Prepare briefing notes to explain the impact of the share transactions (Exhibit 2) on
the consolidated statement of profit or loss and other comprehensive income.
(2) Advise on the impact that any future

future changes in exchange rates w
will
ill have on the 7
consolidated statement of financial position.
(3) Advise on how to account

account for the impaired receivable unde
underr current IAS 18 rules,
and show what effect taking account of credit risk
ri sk would have. 5
Total marks 39
Maximum marks 30
To:
To: Antonio Bloom
From:
From: Anita Hadjivassili
Subject:
Subject: Gustavo plc financial statements
I attach the draft consolidated statement of profit or loss and other comprehensive income for the year
ended 30 September 20X6, the explanations you requested, and supporting workings.
Gustavo plc: Consolidated statement of profit or loss and other comprehensive income for year
ended 30 September 20X6 (Requirement 1)
£'000
Revenue 57,357
Cost of sales (37,221)
Gross profit 20,136
Operating costs (9,489)
Gain on sale of subsidiary 13,340
This website stores
Profit fromdata such as
operations 23,987
cookies to Share
enableofessential
profit of site
associate 160
Investment income
functionality, as well as marketing, 424
Finance
personalization, andcosts
analytics.
You (2,998)
Profit before taxation
may change your settings at any time 21,573
Income
or accept the taxsettings.
default expense (2,974)
Exchange differences on translating foreign operations
Privacy Policy 7,369
(Restatement of goodwill 4,370
Exchange gain in year
Marketing 2,999)
Total comprehensive income for the year 25,968
Personalization
Profit attributable to:
Non controlling interests (W9) 170
Analytics
Owners of parent company 18,429
18,599
Save Accept All
Total comprehensive income attributable to:
Non controlling interests (W9) 1,644
Owners of parent company 24,324

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The Institute of Chartered Accountants in England and Wales

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For exams in 2018

First edition 2014

All rights reserved.

British Library Cataloguing

Originally printed in the United Kingdom on paper obtained from traceable,

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The International Accounting Standards Board (IASB)

Disclaimer: The IASB, the International Financial Reporting Standa

Copyright © IFRS Foundation

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Financial reporting questions

Audit and integrated questions

July 2015 exam questions

November 2015 exam questions

July 2016 exam questions

50 EyeOP 30 63 140 472

November 2016 exam questions

July 2017 exam questions

November 2017 exam questions

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Your exam will consist

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Financial reporting questions

30 June year end.

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Financial reporting questions 3

At 30 June 20X1

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4 Corporate Reporting: Question Bank

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Financial reporting questions 5

Deferred tax asset

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6 Corporate Reporting: Question Bank

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Financial reporting questions 7

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8 Corporate Reporting: Question Bank

Long-term debt 16.34

Accounts payable and

Share capital 2.50

Deferred tax schedule

Privacy Policy fair value adjustments to the development asset

fair value adjustments to the post-retirement liability

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Upstart has an annual cost of capital of 9%.

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Retained earnings at 1 July 20X4 15,840 9,000

Exhibit 3: Outstanding financial reporting issues

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