(ii) Describe the basis for the calculation of the provision for deferred taxation on first time adoption of IFRSincluding the provision in the opening IFRS balance sheet. (4 marks)

正确答案：

(b) Provisions – IAS37
An entity must recognise a provision under IAS37 if, and only if:
(a) a present obligation (legal or constructive) has arisen as a result of a past event (the obligating event)
(b) it is probable (‘more likely than not’), that an outflow of resources embodying economic benefits will be required to settle
the obligation
(c) the amount can be estimated reliably
An obligating event is an event that creates a legal or constructive obligation and, therefore, results in an enterprise having
no realistic alternative but to settle the obligation. A constructive obligation arises if past practice creates a valid expectation
on the part of a third party. If it is more likely than not that no present obligation exists, the enterprise should disclose a
contingent liability, unless the possibility of an outflow of resources is remote.
The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation
at the balance sheet date, that is, the amount that an enterprise would rationally pay to settle the obligation at the balance
sheet date or to transfer it to a third party. This means provisions for large populations of events such as warranties, are
measured at a probability weighted expected value. In reaching its best estimate, the entity should take into account the risks
and uncertainties that surround the underlying events.
Expected cash outflows should be discounted to their present values, where the effect of the time value of money is material
using a risk adjusted rate (it should not reflect risks for which future cash flows have been adjusted). If some or all of the
expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement should be
recognised as a separate asset when, and only when, it is virtually certain that reimbursement will be received if the entity
settles the obligation. The amount recognised should not exceed the amount of the provision. In measuring a provision future
events should be considered. The provision for the warranty claim will be determined by using the expected value method.
The past event which causes the obligation is the initial sale of the product with the warranty given at that time. It would be
appropriate for the company to make a provision for the Year 1 warranty of $280,000 and Year 2 warranty of $350,000,
which represents the best estimate of the obligation (see Appendix 2). Only if the insurance company have validated the
counter claim will Macaljoy be able to recognise the asset and income. Recovery has to be virtually certain. If it is virtually
certain, then Macaljoy may be able to recognise the asset. Generally contingent assets are never recognised, but disclosed
where an inflow of economic benefits is probable.
The company could discount the provision if it was considered that the time value of money was material. The majority of
provisions will reverse in the short term (within two years) and, therefore, the effects of discounting are likely to be immaterial.
In this case, using the risk adjusted rate (IAS37), the provision would be reduced to $269,000 in Year 1 and $323,000 in
Year 2. The company will have to determine whether this is material.
Appendix 1
The accounting for the defined benefit plan is as follows:

正确答案：
(b) The use of residual income as a basis for the management incentive plan operated by NCL plc would have the following
advantages:
Divisional management would be more willing to accept a project with a positive residual income and this would contribute
to the improved performance of NCL plc. Also, the disincentive to accept a project with a positive residual income but a return
on investment regarded by divisional management as not being in their best interests would be removed, because divisional
management would be rewarded.
The use of annuity depreciation may improve performance appraisal by removing the effect of straight-line depreciation which
tends to distort project returns especially in the early years of a project’s life when invested capital remains relatively high due
to the constant depreciation charge. The residual income approach using annuity depreciation will only match the NPV if the
annual cashflows of a project are constant. Hence the method when applied to the North or South projects would produce
an NPV which does not exactly match that previously calculated. By way of contrast it is forecast that the East project will
have constant cashflows and in this instance the NPV and residual income based approach when discounted, will produce
the same result.

正确答案：
(ii) The flat
The following additional information is required in order to calculate the employment income benefit in respect of the
flat.
– The flat’s annual value.
– The cost of any improvements made to the flat prior to 6 April 2007.
– The cost of power, water, repairs and maintenance etc borne by Summer Glow plc.
– The cost of the furniture provided by Summer Glow plc.
– Any use of the flat by Benny wholly, exclusively and necessarily for the purposes of his employment.
Tutorial note
The market value of the flat is not required as Summer Glow plc has owned it for less than six years.
One element of the employment income benefit in respect of the flat is calculated by reference to its original cost plus
the cost of any capital improvements prior to 6 April 2007. If Benny requests a flat in a different location, this element
of the benefit will be computed instead by reference to the cost of the new flat, which in turn equals the proceeds of
sale of the old flat.
Accordingly, if, as is likely, the value of the flat has increased since it was purchased, Benny’s employment income
benefit will also increase. The increase in the employment income benefit will be the flat’s sales proceeds less its original
cost less the cost of any capital improvements prior to 6 April 2007 multiplied by 5%.

正确答案：
(d) Principal audit work
(i) Trade receivables
■ Review of agreements to determine the volume rebates terms. For example,
– the % discounts;
– the volumes to which they apply;
– the period over which they accumulate;
– settlement method (e.g. by credit note or other off-set or repayment).
■ Direct positive confirmation of a value-weighted sample of balances (i.e. larger amounts) to identify potential
overstatement (e.g. due to discounts earned not being awarded).
■ Monitoring of after-date cash receipts and matching against amounts due as shortfalls may indicate disputed
amounts.
■ Review of after-date credit notes to ensure adequate allowance (accrual) is made for discounts earned in the year
to 30 June 2006.
■ Credit risk analysis of individually significant balances and assessment of impairment losses (where carrying value
is less than the present value of the estimated cash flows discounted at the effective interest rate).

正确答案：
4 JOHNSTON CO
(a) Reporting responsibilities specific to initial engagements
For initial audit engagements, the auditor should obtain sufficient appropriate audit evidence that:
■ the opening balances do not contain misstatements that materially affect the current period’s financial statements;
■ the prior period’s closing balances have been correctly brought forward to the current period (or, where appropriate, have
been restated); and
■ appropriate accounting policies are consistently applied or changes in accounting policies have been properly accounted
for (and adequately presented and disclosed).
If the auditor is unable to obtain sufficient appropriate audit evidence concerning opening balances there will be a limitation
on the scope of the audit. The auditor’s report should include:
■ a qualified (‘except for’) opinion;
■ a disclaimer of opinion; or
■ in those jurisdictions where it is permitted, an opinion which is:
– qualified (or disclaimed) regarding the results of operations (i.e. on the income statement); and
– unqualified regarding financial position (i.e. on the balance sheet).
If the effect of a misstatement in the opening balances is not properly accounted for and adequately presented and disclosed,
the auditor should express a qualified (‘except for’ disagreement) opinion or an adverse opinion, as appropriate.
If the current period’s accounting policies have not been consistently applied in relation to opening balances and if the change
has not been properly accounted for and adequately presented and disclosed, the auditor should similarly express
disagreement (‘except for’ or adverse opinion as appropriate).
However, if a modification regarding the prior period’s financial statements remains relevant and material to the current
period’s financial statements, the auditor should modify the current auditor’s report accordingly.

正确答案：
(iii) Warranty provision
■ Agree the principal assumptions in management’s estimate of liabilities under warranties to the terms of warranty
as set out in contracts for sale of vehicle. For example:
– the period for which warranties are given;
– whether for parts replacement only or parts and labour;
– exclusion clauses, perhaps for vehicles sold into a particular market, or used in a specified industry (e.g. filmmaking).
■ Agree the reasonableness of management’s assumptions in the calculation of the provision. For example, the
proportion of vehicles for which claims are made within three months, three to six months, six to nine months, etc.
■ Substantiate the economic reality of the basis of management’s calculations. For example:
– agree the number of vehicles sold each month to a summary sales report;
– agree the calculation of average cost of a repair under warranty to job records;
– test costs of repair on a sample basis (e.g. parts replaced to price lists and labour charges to hours worked
(per job records) and charge-out rates).
■ Consider the reasonableness of management’s estimate by comparing:
– the actual cost of after-date repairs (say for three months) against the appropriate proportion of the provision
made;
– current year provision per vehicle sold against prior provision per vehicle sold.
■ Assess management’s ability to make reliable estimates in this area by comparing last year’s provision with the
actual repairs under warranty costs incurred during the year in respect of sales made in previous years.
Tutorial note: The basis of management’s estimate may tend to overstate or understate the provision required
and should be revised accordingly.
■ Agree the extent to which the provision takes account of (has been reduced by) any recourse to suppliers (e.g. in
respect of faulty parts). For example:
– by reviewing terms of purchases from major suppliers;
– by examining records of replacement parts received free of charge.

正确答案：
(ii) Evidence supporting the assertion that development costs are technically feasible would include the following:
– Review the results of scientific tests performed on the products, for example, the results of animal or human testing
of the products.
– Discuss any detrimental results of these tests, e.g. harmful side effects, with the scientists working on the project
to determine what corrective action is being taken.
– Enquire whether any licences necessary for continued development and/or commercial production have been
granted by the appropriate regulatory body.
– Compare expected to actual development costs incurred per product being developed. Where actual costs are in
excess of expected costs investigate whether the extra costs have been incurred in order to make good any problems
identified in the development process.
– Review board minutes for relevant discussion of the product development taking place during the year.

正确答案：
(ii) Principal audit procedures – recoverability of deferred tax asset
– Obtain a copy of Bluebell Co’s current tax computation and deferred tax calculations and agree figures to any
relevant tax correspondence and/or underlying accounting records.
– Develop an independent expectation of the estimate to corroborate the reasonableness of management’s estimate.
– Obtain forecasts of profitability and agree that there is sufficient forecast taxable profit available for the losses to be
offset against. Evaluate the assumptions used in the forecast against business understanding. In particular consider
assumptions regarding the growth rate of taxable profit in light of the underlying detrimental trend in profit before
tax.
– Assess the time period it will take to generate sufficient profits to utilise the tax losses. If it is going to take a number
of years to generate such profits, it may be that the recognition of the asset should be restricted.
– Using tax correspondence, verify that there is no restriction on the ability of Bluebell Co to carry the losses forward
and to use the losses against future taxable profits.
Tutorial note: in many tax jurisdictions losses can only be carried forward to be utilised against profits generated
from the same trade. Although in the scenario there is no evidence of such a change in trade, or indeed any kind
of restriction on the use of losses, it is still a valid audit procedure to verify that this is the case

正确答案：

(a) (i) The definition of what constitutes a contract for the purpose of applying the standard is critical. The definition of contract is based on the definition of a contract in the USA and is similar to that in IAS 32 Financial Instruments: Presentation. A contract exists when an agreement between two or more parties creates enforceable rights and obligations between those parties. The agreement does not need to be in writing to be a contract but the decision as to whether a contractual right or obligation is enforceable is considered within the context of the relevant legal framework of a jurisdiction. Thus, whether a contract is enforceable will vary across jurisdictions. The performance obligation could include promises which result in a valid expectation that the entity will transfer goods or services to the customer even though those promises are not legally enforceable.

The first criteria set out in IFRS 15 is that the parties should have approved the contract and are committed to perform. their respective obligations. It would be questionable whether that contract is enforceable if this were not the case. In the case of oral or implied contracts, this may be difficult but all relevant facts and circumstances should be considered in assessing the parties’ commitment. The parties need not always be committed to fulfilling all of the obligations under a contract. IFRS 15 gives the example where a customer is required to purchase a minimum quantity of goods but past experience shows that the customer does not always do this and the other party does not enforce their contract rights. However, there needs to be evidence that the parties are substantially committed to the contract.

It is essential that each party’s rights and the payment terms can be identified regarding the goods or services to be transferred. This latter requirement is the key to determining the transaction price.

The contract must have commercial substance before revenue can be recognised, as without this requirement, entities might artificially inflate their revenue and it would be questionable whether the transaction has economic consequences. Further, it should be probable that the entity will collect the consideration due under the contract. An assessment of a customer’s credit risk is an important element in deciding whether a contract has validity but customer credit risk does not affect the measurement or presentation of revenue. The consideration may be different to the contract price because of discounts and bonus offerings. The entity should assess the ability of the customer to pay and the customer’s intention to pay the consideration. If a contract with a customer does not meet these criteria, the entity can continually re-assess the contract to determine whether it subsequently meets the criteria.

Two or more contracts which are entered into around the same time with the same customer may be combined and accounted for as a single contract, if they meet the specified criteria. The standard provides detailed requirements for contract modifications. A modification may be accounted for as a separate contract or a modification of the original contract, depending upon the circumstances of the case.

(ii) Step one in the five-step model requires the identification of the contract with the customer. After a contract has been determined to fall under IFRS 15, the following steps are required before revenue can be recognised.

Step two requires the identification of the separate performance obligations in the contract. This is often referred to as ’unbundling’, and is done at the beginning of a contract. The key factor in identifying a separate performance obligation is the distinctiveness of the good or service, or a bundle of goods or services. A good or service is distinct if the customer can benefit from the good or service on its own or together with other readily available resources and is separately identifiable from other elements of the contract. IFRS 15 requires a series of distinct goods or services which are substantially the same with the same pattern of transfer, to be regarded as a single performance obligation. A good or service, which has been delivered, may not be distinct if it cannot be used without another good or service which has not yet been delivered. Similarly, goods or services which are not distinct should be combined with other goods or services until the entity identifies a bundle of goods or services which is distinct. IFRS 15 provides indicators rather than criteria to determine when a good or service is distinct within the context of the contract. This allows management to apply judgement to determine the separate performance obligations which best reflect the economic substance of a transaction.

Step three requires the entity to determine the transaction price, which is the amount of consideration which an entity expects to be entitled to in exchange for the promised goods or services. This amount excludes amounts collected on behalf of a third party, for example, government taxes. An entity must determine the amount of consideration to which it expects to be entitled in order to recognise revenue.

The transaction price might include variable or contingent consideration. Variable consideration should be estimated as either the expected value or the most likely amount. Management should use the approach which it expects will best predict the amount of consideration and should be applied consistently throughout the contract. An entity can only include variable consideration in the transaction price to the extent that it is highly probable that a subsequent change in the estimated variable consideration will not result in a significant revenue reversal. If it is not appropriate to include all of the variable consideration in the transaction price, the entity should assess whether it should include part of the variable consideration. However, this latter amount still has to pass the ’revenue reversal’ test.

Additionally, an entity should estimate the transaction price taking into account non-cash consideration, consideration payable to the customer and the time value of money if a significant financing component is present. The latter is not required if the time period between the transfer of goods or services and payment is less than one year. If an entity anticipates that it may ultimately accept an amount lower than that initially promised in the contract due to, for example, past experience of discounts given, then revenue would be estimated at the lower amount with the collectability of that lower amount being assessed. Subsequently, if revenue already recognised is not collectable, impairment losses should be taken to profit or loss.

Step four requires the allocation of the transaction price to the separate performance obligations. The allocation is based on the relative standalone selling prices of the goods or services promised and is made at inception of the contract. It is not adjusted to reflect subsequent changes in the standalone selling prices of those goods or services. The best evidence of standalone selling price is the observable price of a good or service when the entity sells that good or service separately. If that is not available, an estimate is made by using an approach which maximises the use of observable inputs. For example, expected cost plus an appropriate margin or the assessment of market prices for similar goods or services adjusted for entity-specific costs and margins or in limited circumstances a residual approach. When a contract contains more than one distinct performance obligation, an entity allocates the transaction price to each distinct performance obligation on the basis of the standalone selling price.

Where the transaction price includes a variable amount and discounts, consideration needs to be given as to whether these amounts relate to all or only some of the performance obligations in the contract. Discounts and variable consideration will typically be allocated proportionately to all of the performance obligations in the contract. However, if certain conditions are met, they can be allocated to one or more separate performance obligations.

Step five requires revenue to be recognised as each performance obligation is satisfied. An entity satisfies a performance obligation by transferring control of a promised good or service to the customer, which could occur over time or at a point in time. The definition of control includes the ability to prevent others from directing the use of and obtaining the benefits from the asset. A performance obligation is satisfied at a point in time unless it meets one of three criteria set out in IFRS 15. Revenue is recognised in line with the pattern of transfer.

If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time and revenue will be recognised when control is passed at that point in time. Factors which may indicate the passing of control include the present right to payment for the asset or the customer has legal title to the asset or the entity has transferred physical possession of the asset.

(b) (i) The contract contains a significant financing component because of the length of time between when the customer pays for the asset and when Tang transfers the asset to the customer, as well as the prevailing interest rates in the market. A contract with a customer which has a significant financing component should be separated into a revenue component (for the notional cash sales price) and a loan component. Consequently, the accounting for a sale arising from a contract which has a significant financing component should be comparable to the accounting for a loan with the same features. An entity should use the discount rate which would be reflected in a separate financing transaction between the entity and its customer at contract inception. The interest rate implicit in the transaction may be different from the rate to be used to discount the cash flows, which should be the entity’s incremental borrowing rate. IFRS 15 would therefore dictate that the rate which should be used in adjusting the promised consideration is 5%, which is the entity’s incremental borrowing rate, and not 11·8%.

Tang would account for the significant financing component as follows:

Recognise a contract liability for the $240,000 payment received on 1 December 2014 at the contract inception:

Dr Cash $240,000
Cr Contract liability $240,000

During the two years from contract inception (1 December 2014) until the transfer of the printing machine, Tang adjusts the amount of consideration and accretes the contract liability by recognising interest on $240,000 at 5% for two years.

Year to 30 November 2015
Dr Interest expense $12,000
Cr Contract liability $12,000

Contract liability would stand at $252,000 at 30 November 2015.

Year to 30 November 2016
Dr Interest expense $12,600
Cr Contract liability $12,600

Recognition of contract revenue on transfer of printing machine at 30 November 2016 of $264,600 by debiting contract liability and crediting revenue with this amount.

(ii) Tang accounts for the promised bundle of goods and services as a single performance obligation satisfied over time in accordance with IFRS 15. At the inception of the contract, Tang expects the following:

Transaction price $1,500,000
Expected costs $800,000
Expected profit (46·7%) $700,000

At contract inception, Tang excludes the $100,000 bonus from the transaction price because it cannot conclude that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. Completion of the printing machine is highly susceptible to factors outside the entity’s influence. By the end of the first year, the entity has satisfied 65% of its performance obligation on the basis of costs incurred to date. Costs incurred to date are therefore $520,000 and Tang reassesses the variable consideration and concludes that the amount is still constrained. Therefore at 30 November 2015, the following would be recognised:

Revenue $975,000
Costs $520,000
Gross profit $455,000

However, on 4 December 2015, the contract is modified. As a result, the fixed consideration and expected costs increase by $110,000 and $60,000, respectively. The total potential consideration after the modification is $1,710,000 which is $1,610,000 fixed consideration + $100,000 completion bonus. In addition, the allowable time for achieving the bonus is extended by six months with the result that Tang concludes that it is highly probable that including the bonus in the transaction price will not result in a significant reversal in the amount of cumulative revenue recognised in accordance with IFRS 15. Therefore the bonus of $100,000 can be included in the transaction price. Tang also concludes that the contract remains a single performance obligation. Thus,Tang accounts for the contract modification as if it were part of the original contract. Therefore, Tang updates its estimates of costs and revenue as follows:

Tang has satisfied 60·5% of its performance obligation ($520,000 actual costs incurred compared to $860,000 total expected costs). The entity recognises additional revenue of $59,550 [(60·5% of $1,710,000) – $975,000 revenue recognised to date] at the date of the modification as a cumulative catch-up adjustment. As the contract amendment took place after the year end, the additional revenue would not be treated as an adjusting event.

正确答案：
(ii) Stakeholder claims
Four external stakeholders in the case and their claims are as follows.
The client, i.e. the government of the East Asian country. This stakeholder wants the project completed to budget and
on time. It may also be concerned to minimise negative publicity in respect of the construction of the dam and the
possible negative environmental consequences.
Stop-the-dam, the vocal and well organised pressure group. This stakeholder wants the project stopped completely,
seemingly and slightly paradoxically, for environmental and social footprint reasons.
First Nation, the indigenous people group currently resident on the land behind the dam that would be flooded after its
construction. This stakeholder also wants the project stopped so they can continue to live on and farm the land.
The banks (identified as a single group). These seem happy to lend to the project and will want it to proceed so they
make a return on their loans commensurate with the risk of the loan. They do not want to be publicly identified as being
associated with the Giant Dam Project.
Shareholders. The shareholders have the right to have their investment in the company managed in such a way as to
maximise the value of their shareholding. The shareholders seek projects providing positive NPVs within the normal
constraints of sound risk management.
Tutorial note: only four stakeholders need to be identified. Marks will be given for up to four relevant stakeholders
only.

正确答案：
(c) It would appear that in operating a bus service to the Western region of Geeland that GBC is fulfilling a social objective since
a contribution loss amounting to $38,400 ($230,400 – $268,800) was made as a consequence of operating the route to
the Western region during 2007. As an organisation which is partially funded by the government it is highly probable that
GBC has objectives which differ from those of TTC which is a profit-seeking organisation.
The value of a social service such as the provision of public transport can be quantified, albeit, in non-financial times. It is
possible to apply quantitative measures to the bus service itself, the most obvious ones being the number of passengers
carried and the number of passenger miles travelled.
The cost of the provision of alternative transport to the Western region might also enable a value to be placed on the current
service by GBC.
It might be possible to estimate quantitatively some of the social benefits resulting from the provision of the transport facility
to and from the Western region. For example, GBC could undertake a survey of the population of the Western region in order
to help estimate the extent to which rural depopulation would otherwise have occurred had the transport facility not been
made.
The application of the technique of cost-benefit analysis makes it possible to estimate money values for non-monetary
benefits. Social benefits can therefore be expressed in financial terms. It is highly probable that the fact that the Western region
is served by GBC will increase the attractiveness of living in a rural area, which may in turn precipitate an increase in property
values in the Western region and the financial benefit could be expressed in terms of the aggregate increase in property values
in the region as a whole.

正确答案：
(ii) A company needs to be aware of the following issues:
Equity
(1) Costs incurred in issuing share capital are not allowed as a trading deduction.
(2) Distributions to investors are not allowed as a trading deduction.
(3) The cost of making distributions to shareholders are disallowable.
(4) Where profits are taxed at an effective rate of less than 19%, any profits used to make a distribution to noncorporate
shareholders will themselves be taxed at the full 19% rate.
Loan finance/debt
(1) The incidental costs of obtaining/raising loan finance are broadly deductible as a trading expense.
(2) Capital costs of raising loan finance (for example, loans issued at a discount) are not deductible for tax purposes.
(3) Interest incurred on a loan to finance a business is deductible from trading income.

正确答案：
3 KEFFLER CO
Tutorial note: None of the issues have any bearing on revenue. Therefore any materiality calculations assessed on revenue are
inappropriate and will not be awarded marks.
(a) Landfill site
(i) Matters
■ $1·1m cost of the right represents 3·3% of total assets and is therefore material.
■ The right should be amortised over its useful life, that is just 10 years, rather than the 15-year period for which
the right has been granted.
Tutorial note: Recalculation on the stated basis (see audit evidence) shows that a 10-year amortisation has been
correctly used.
■ The amortisation charge represents 1% of profit before tax (PBT) and is not material.
■ The amortisation method used should reflect the pattern in which the future economic benefits of the right are
expected to be consumed by Keffler. If that pattern cannot be determined reliably, the straight-line method must
be used (IAS 38 ‘Intangible Assets’).
■ Using an increasing sum-of-digits will ‘end-load’ the amortisation charge (i.e. least charge in the first year, highest
charge in the last year). However, according to IAS 38 there is rarely, if ever, persuasive evidence to support an
amortisation method that results in accumulated amortisation lower than that under the straight-line method.
Tutorial note: Over the first half of the asset’s life, depreciation will be lower than under the straight-line basis
(and higher over the second half of the asset’s life).
■ On a straight line basis the annual amortisation charge would be $0·11m, an increase of $90,000. Although this
difference is just below materiality (4·5% PBT) the cumulative effect (of undercharging amortisation) will become
material.
■ Also, when account is taken of the understatement of cost (see below), the undercharging of amortisation will be
material.
■ The sum-of-digits method might be suitable as an approximation to the unit-of-production method if Keffler has
evidence to show that use of the landfill site will increase annually.
■ However, in the absence of such evidence, the audit opinion should be qualified ‘except for’ disagreement with the
amortisation method (resulting in intangible asset overstatement/amortisation expense understatement).
■ The annual restoration provision represents 5% of PBT and 0·3% of total assets. Although this is only borderline
material (in terms of profit), there will be a cumulative impact.
■ Annual provisioning is contrary to IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’.
■ The estimate of the future restoration cost is (presumably) $1·5m (i.e. $0·1 × 15). The present value of this
amount should have been provided in full in the current year and included in the cost of the right.
■ Thus the amortisation being charged on the cost of the right (including the restoration cost) is currently understated
(on any basis).
Tutorial note: A 15-year discount factor at 10% (say) is 0·239. $1·5m × 0·239 is approximately $0·36m. The
resulting present value (of the future cost) would be added to the cost of the right. Amortisation over 10 years
on a straight-line basis would then be increased by $36,000, increasing the difference between amortisation
charged and that which should be charged. The lower the discount rate, the greater the understatement of
amortisation expense.
Total amount expensed ($120k) is less than what should have been expensed (say $146k amortisation + $36k
unwinding of discount). However, this is not material.
■ Whether Keffler will wait until the right is about to expire before restoring the land or might restore earlier (if the
site is completely filled in 10 years).
(ii) Audit evidence
■ Written agreement for purchase of right and contractual terms therein (e.g. to make restoration in 15 years’ time).
■ Cash book/bank statement entries in April 2005 for $1·1m payment.
■ Physical inspection of the landfill site to confirm Keffler’s use of it.
■ Annual dump budget/projection over next 10 years and comparison with sum-of-digits proportions.
■ Amount actually dumped in the year (per dump records) compared with budget and as a percentage/proportion of
the total available.
■ Recalculation of current year’s amortisation based on sum-of-digits. That is, $1·1m ÷ 55 = $20,000.
Tutorial note: The sum-of-digits from 1 to 10 may be calculated long-hand or using the formula n(n+1)/2 i.e.
(10 × 11)/2 = 55.
■ The basis of the calculation of the estimated restoration costs and principal assumptions made.
■ If estimated by a quantity surveyor/other expert then a copy of the expert’s report.
■ Written management representation confirming the planned timing of the restoration in 15 years (or sooner).

正确答案：
(c) Principal audit work
(i) Development expenditure on the Fox model
■ Agree opening balance, $6·3 million, to prior year working papers.
■ Physically inspect assembly plant/factory where the Fox is being developed and any vehicles so far manufactured
(e.g. for testing).
■ Substantiate costs incurred during the year, for example:
– goods (e.g. components) and services (e.g. consultants) to purchase invoices;
– labour (e.g. design engineers/technicians, mechanics, test drivers) to the payroll analysis;
– overheads (e.g. depreciation of development buildings and equipment, power, consumables) to
management’s calculation of overhead absorption and underlying cost accounts.
■ Review of internal trials/test drive results (e.g. in reports to management and video recordings of events).
■ Reperform. management’s impairment test of development expenditure. In particular recalculate value in use.
Tutorial note: It is highly unlikely that a reasonable estimate of fair value less costs to sell could be made for so
unique an asset.
■ Substantiate the key assumptions made by management in calculating value in use. For example:
– the level of sales expected when the car is launched to advance orders (this may have fallen with the delay
in the launch);
– the discount rate used to Pavia’s cost of capital;
– projected growth in sales to actual sales growth seen last time a new model was launched.

正确答案：
(b) ISA 540 Audit of Accounting Estimates requires that auditors should obtain sufficient audit evidence as to whether an
accounting estimate, such as a warranty provision, is reasonable given the entity’s circumstances, and that disclosure is
appropriate. One, or a combination of the following approaches should be used:
Review and test the process used by management to develop the estimate
– Review contracts or orders for the terms of the warranty to gain an understanding of the obligation of Island Co
– Review correspondence with customers during the year to gain an understanding of claims already in progress at the
year end
– Perform. analytical procedures to compare the level of warranty provision year on year, and compare actual to budgeted
provisions. If possible disaggregate the data, for example, compare provision for specific types of machinery or customer
by customer
– Re-calculate the warranty provision
– Agree the percentage applied in the calculation to the stated accounting policy of Island Co
– Review board minutes for discussion of on-going warranty claims, and for approval of the amount provided
– Use management accounts to ascertain normal level of warranty rectification costs during the year
– Discuss with Kate Shannon the assumptions she used to determine the percentage used in her calculations
– Consider whether assumptions used are consistent with the auditors’ understanding of the business
– Compare prior year provision with actual expenditure on warranty claims in the accounting period
– Compare the current year provision with prior year and discuss any fluctuation with Kate Shannon.
Review subsequent events which confirm the estimate made
– Review any work carried out post year end on specific faults that have been provided for. Agree that all costs are included
in the year end provision.
– Agree cash expended on rectification work in the post balance sheet period to the cash book
– Agree cash expended on rectification work post year end to suppliers’ invoices, or to internal cost ledgers if work carried
out by employees of Island Co
– Read customer correspondence received post year end for any claims received since the year end.

正确答案：
(ii) Procedures to verify the number of serious accidents during 2007 could include the following:
Tutorial note: procedures should focus on the completeness of the disclosure as it is in the interest of Sci-Tech Co to
understate the number of serious accidents.
– Review the accident log book and count the total number of accidents during the year
– Discuss the definition of ‘serious accident’ with the directors and clarify exactly what criteria need to be met to
satisfy the definition
– For serious accidents identified:
? review HR records to determine the amount of time taken off work
? review payroll records to determine the financial amount of sick pay awarded to the employee
? review correspondence with the employee regarding the accident.
Tutorial note: the above will help to clarify that the accident was indeed serious.
– Review board minutes where the increase in the number of serious accidents has been discussed
– Review correspondence with Sci-Tech Co’s legal advisors to ascertain any legal claims made against the company
due to accidents at work
– Enquire as to whether any health and safety visits have been conducted during the year by regulatory bodies, and
review any documentation or correspondence issued to Sci-Tech Co after such visits.
Tutorial note: it is highly likely that in a regulated industry such as pharmaceutical research, any serious accident
would trigger a health and safety inspection from the appropriate regulatory body.
– Discuss the level of accidents with representatives of Sci-Tech Co’s employees to reach an understanding as to
whether accidents sometimes go unreported in the accident log book.

正确答案：
(c) Application of ethical principles to a fraud investigation
IFAC’s Code of Ethics for Professional Accountants applies to all ACCA members involved in professional assignments,
including forensic investigations. There are specific considerations in the application of each of the principles in providing
such a service.
Integrity
The forensic investigator is likely to deal frequently with individuals who lack integrity, are dishonest, and attempt to conceal
the true facts from the investigator. It is imperative that the investigator recognises this, and acts with impeccable integrity
throughout the whole investigation.
Objectivity
As in an audit engagement, the investigator’s objectivity must be beyond question. The report that is the outcome of the
forensic investigation must be perceived as independent, as it forms part of the legal evidence presented at court. The
investigator must adhere to the concept that the overriding objective of court proceedings is to deal with cases fairly and justly.
Any real or perceived threats to objectivity could undermine the credibility of the evidence provided by the investigator.
This issue poses a particular problem where an audit client requests its auditors to conduct a forensic investigation. In this
situation, the audit firm would be exposed to threats to objectivity in terms of advocacy, management involvement and selfreview.
The advocacy threat arises because the audit firm may feel pressured into promoting the interests and point of view
of their client, which would breach the overriding issue of objectivity in court proceedings. Secondly, the investigators could
be perceived to be involved in management decisions regarding the implications of the fraud, especially where the investigator
acts as an expert witness. It is however the self-review threat that would be the most significant threat to objectivity. The selfreview
threat arises because the investigation is likely to involve the estimation of an amount (i.e. the loss), which could be
material to the financial statements.
For the reasons outlined above, The Code states that the firm should evaluate threats and put appropriate safeguards in place,
and if safeguards cannot reduce the threats to an acceptable level, then the firm cannot provide both the audit service and
the forensic investigation.
Professional competence and due care
Forensic investigations will involve very specialist skills, which accountants are unlikely to possess without extensive training.
Such skills would include:
– Detailed knowledge of the relevant legal framework surrounding fraud,
– An understanding of how to gather specialist evidence,
– Skills in the safe custody of evidence, including maintaining a clear ‘chain’ of evidence, and
– Strong personal skills in, for example, interview techniques, presentation of material at court, and tactful dealing with
difficult and stressful situations.
It is therefore essential that forensic work is only ever undertaken by highly skilled individuals, under the direction and
supervision of an experienced fraud investigator. Any doubt over the competence of the investigation team could severely
undermine the credibility of the evidence presented at court.
Confidentiality
Normally accountants should not disclose information without the explicit consent of their client. However, during legal
proceedings arising from a fraud investigation, the court will require the investigator to reveal information discovered during
the investigation. There is an overriding requirement for the investigator to disclose all of the information deemed necessary
by the court.
Outside of the court, the investigator must ensure faultless confidentiality, especially because much of the information they
have access to will be highly sensitive.
Professional behaviour
Fraud investigations can become a matter of public interest, and much media attention is often focused on the work of the
forensic investigator. A highly professional attitude must be displayed at all times, in order to avoid damage to the reputation
of the firm, and of the profession. Any lapse in professional behaviour could also undermine the integrity of the forensic
evidence, and of the credibility of the investigator, especially when acting in the capacity of expert witness.
During legal proceedings, the forensic investigator may be involved in discussions with both sides in the court case, and here
it is essential that a courteous and considerate attitude is presented to all parties.