Institute of Chartered Accountants in England and Wales (ICAEW) ACA Professional Level: Financial Reporting and Audit Syllabus

Under IFRS 15, how is variable consideration measured and what is the constraint?

Estimated using the expected value or the most likely amount. It is included in the transaction price only to the extent it is highly probable that a significant reversal of cumulative revenue will not occur when the uncertainty is resolved (the constraint).

Under IFRS 16, how does a lessee initially recognise a lease?

Recognise a right-of-use asset and a lease liability. The liability is the present value of lease payments discounted at the rate implicit in the lease (or the incremental borrowing rate). The right-of-use asset = liability + initial direct costs + prepayments + estimated dismantling costs − lease incentives received.

Under IFRS 16, what two recognition exemptions are available to lessees?

Short-term leases (term of 12 months or less with no purchase option) and leases of low-value underlying assets; payments may be recognised on a straight-line basis as an expense.

Under IFRS 16, how does a lessor classify and account for leases?

As finance leases (transfer substantially all risks and rewards of ownership; derecognise the asset and recognise a net investment/receivable) or operating leases (retain the asset and recognise lease income, usually straight-line).

Under IFRS 9, what are the three classification categories for financial assets and what drives classification?

Amortised cost; fair value through OCI (FVOCI); and fair value through profit or loss (FVTPL). Classification depends on the business model for managing the assets and the contractual cash flow characteristics (the 'solely payments of principal and interest' / SPPI test).

Under IFRS 9, describe the expected credit loss (ECL) impairment model stages.

Stage 1: 12-month ECL on initial recognition. Stage 2: lifetime ECL once credit risk has increased significantly. Stage 3: lifetime ECL with interest on net carrying amount once credit-impaired. A simplified lifetime-ECL approach applies to trade receivables, contract assets and lease receivables.

Under IAS 37, what three conditions must be met to recognise a provision?

1) A present obligation (legal or constructive) exists as a result of a past event; 2) it is probable an outflow of resources will be required to settle it; and 3) a reliable estimate of the amount can be made.

Under IAS 37, how are a contingent liability and a contingent asset treated?

A contingent liability is not recognised but disclosed unless the outflow is remote. A contingent asset is not recognised; it is disclosed where an inflow is probable and recognised only when realisation is virtually certain.

Under IAS 10, distinguish adjusting and non-adjusting events after the reporting period.

Adjusting events provide evidence of conditions that existed at the reporting date (adjust the figures). Non-adjusting events are indicative of conditions arising after the reporting date (disclose if material, do not adjust). Dividends declared after the period end are non-adjusting.

Under IAS 2, how are inventories measured and what costs are included?

At the lower of cost and net realisable value (NRV). Cost includes purchase costs, conversion costs (direct labour and a systematic allocation of fixed and variable production overheads) and other costs to bring inventories to their present location and condition. Cost is assigned using FIFO or weighted average (LIFO is prohibited).

Define net realisable value (NRV) under IAS 2.

The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

Under IAS 38, what are the recognition criteria for an intangible asset and the key research/development distinction?

Recognise if it is identifiable, controlled, gives probable future economic benefits and cost can be measured reliably. Research costs are expensed; development costs are capitalised once the PIRATE criteria are met (Probable benefits, Intention to complete, Resources adequate, Ability to use/sell, Technical feasibility, Expenditure measurable).

Under IAS 36, how is the recoverable amount of an asset defined and when is an impairment recognised?

Recoverable amount is the higher of fair value less costs of disposal and value in use (present value of future cash flows). An impairment loss is recognised when carrying amount exceeds recoverable amount, reducing the asset to its recoverable amount.

Under IAS 36, what is the order for allocating an impairment loss within a cash-generating unit that contains goodwill?

First reduce the carrying amount of any goodwill allocated to the CGU, then allocate the remainder to the other assets pro rata on the basis of carrying amount (subject to each asset not falling below its own recoverable amount).

In a consolidated statement of financial position, how is goodwill on acquisition calculated?

$$\text{Goodwill} = (\text{Consideration transferred} + \text{NCI at acquisition} + \text{FV of previously held interest}) - \text{FV of net identifiable assets acquired}$$

In consolidation, how is non-controlling interest at the reporting date calculated (under the full goodwill / proportionate net assets approach)?

$$\text{NCI} = \text{NCI at acquisition} + (\text{NCI}\% \times \text{post-acquisition change in net assets})$$ NCI at acquisition is either fair value (full goodwill method) or the NCI share of fair value of net identifiable assets.

How is consolidated retained earnings calculated in the statement of financial position?

$$\text{Group RE} = \text{Parent's RE} + (\text{Parent}\% \times \text{subsidiary post-acquisition RE}) - \text{goodwill impairment to date} - \text{unrealised profit (if parent is seller)}$$

On consolidation, how is an unrealised profit on intra-group inventory eliminated?

Remove the profit element still held in closing inventory: reduce consolidated inventory and reduce the seller's retained earnings (the provision for unrealised profit, PURP). If the subsidiary is the seller, the adjustment also affects NCI.

In a consolidated statement of profit or loss, how are intra-group sales and purchases treated?

Eliminate the full intra-group sales and purchases (cancel from group revenue and cost of sales) and adjust cost of sales for any unrealised profit in closing inventory. 100% of the subsidiary's income and expenses are added line-by-line regardless of the NCI percentage.

In the consolidated statement of profit or loss, how is profit attributed and how is NCI's share calculated?

Total profit for the year is split between owners of the parent and NCI. NCI's share = NCI% × subsidiary's profit for the year, adjusted for fair value depreciation, goodwill impairment attributable to NCI and any PURP where the subsidiary is the seller.

Under IAS 28, define an associate and the threshold normally indicating significant influence.

An associate is an entity over which the investor has significant influence (the power to participate in financial and operating policy decisions but not control). A holding of 20% to 50% of voting power is presumed to give significant influence unless demonstrated otherwise.

Under IAS 28, explain the equity method of accounting for an associate.

Initially recognise the investment at cost; subsequently increase/decrease the carrying amount by the investor's share of the associate's post-acquisition profit or loss (recognised in P/L) and OCI, less dividends received from the associate. The associate's results are shown as a one-line item, not consolidated.

Compare key recognition differences between FRS 102 (UK GAAP) and full IFRS for development costs and goodwill.

FRS 102 permits a policy choice to capitalise or expense qualifying development costs (IAS 38 requires capitalisation when criteria are met). FRS 102 amortises goodwill over its useful life (max presumed life if unreliable estimate), whereas IFRS 3 does not amortise goodwill but tests it annually for impairment.

Name three further presentation/disclosure differences between FRS 102 and IFRS.

FRS 102 has fewer disclosure requirements; it does not require a statement of comprehensive income with mandatory OCI recycling categories in the same way; investment property revaluation gains go through P/L; and qualifying entities can take reduced disclosure exemptions. FRS 102 also previously allowed off-balance-sheet operating leases (unlike IFRS 16 for lessees).

Per ISA 210, what preconditions for an audit must be present before accepting an engagement?

The financial reporting framework to be applied is acceptable, and management acknowledges and understands its responsibility for: preparing the financial statements; internal control necessary for them to be free from material misstatement; and providing the auditor with access to information and unrestricted access to people.

What matters should an auditor consider before accepting a new audit engagement (client acceptance)?

Integrity of the client/management, the firm's competence, capabilities and resources, ability to comply with ethical requirements (especially independence), the reason for any change of auditor (and communication with the predecessor), and management of money laundering and other risks.

What is the purpose of an audit engagement letter and name two key contents (ISA 210)?

It documents and confirms the terms of the engagement to avoid misunderstanding. Contents include: the objective and scope of the audit; the responsibilities of the auditor and of management; the applicable financial reporting framework; and the expected form and content of reports.

Under ISA 315, why does the auditor obtain an understanding of the entity and its environment?

To identify and assess the risks of material misstatement (whether due to fraud or error) at the financial statement and assertion levels, thereby providing a basis for designing and performing further audit procedures.

Under ISA 315, what are the five components of internal control the auditor must understand?

The control environment; the entity's risk assessment process; the information system and communication; control activities relevant to the audit; and monitoring of controls. (Revised ISA 315 frames these as the control environment, the entity's risk assessment process, the process to monitor the system of internal control, the information system and communication, and control activities.)

Define audit risk and state its components in the audit risk model.

Audit risk is the risk the auditor expresses an inappropriate opinion when the financial statements are materially misstated. $$\text{Audit risk} = \text{Inherent risk} \times \text{Control risk} \times \text{Detection risk}$$ Inherent and control risk together form the risk of material misstatement.

Distinguish the overall audit strategy from the audit plan under ISA 300.

The overall audit strategy sets the scope, timing and direction of the audit and guides development of the plan (e.g. resources, materiality, reporting deadlines). The audit plan is more detailed, setting out the nature, timing and extent of planned risk assessment procedures and further audit procedures at the assertion level.

How is performance materiality defined and why is it set lower than overall materiality?

Performance materiality is the amount(s) set at less than materiality for the financial statements as a whole, to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. It provides a margin for undetected and individually immaterial errors.

Under ISA 240, what are the auditor's responsibilities relating to fraud and what is the 'fraud triangle'?

The auditor must identify and assess the risks of material misstatement due to fraud, obtain sufficient appropriate evidence, and respond appropriately, maintaining professional scepticism throughout. The fraud triangle comprises incentive/pressure, opportunity, and rationalisation/attitude.

Under ISA 250, distinguish the auditor's responsibility for laws and regulations that directly determine material amounts from other laws and regulations.

For laws/regulations with a direct effect on material amounts and disclosures (e.g. tax, pensions), the auditor obtains sufficient appropriate evidence of compliance. For other laws/regulations (e.g. operating licences, environmental), the auditor performs specified procedures to identify non-compliance that may have a material effect (inquiry and inspecting correspondence with regulators).

List the financial statement assertions about classes of transactions and events under ISA 315.

Occurrence, completeness, accuracy, cut-off, classification, and presentation. (For account balances: existence, rights and obligations, completeness, accuracy/valuation and allocation, classification, and presentation.)

What audit procedures would typically test the existence and valuation of trade receivables?

Existence: external confirmation (positive circularisation) of balances with customers and review of after-date cash receipts. Valuation: review the aged receivables analysis, assess the allowance for expected credit losses, test cash received after the year end, and review for credit notes/disputes.

Name the eight generic types of audit procedure for obtaining evidence (ISA 500).

Inspection, observation, external confirmation, recalculation, re-performance, analytical procedures, inquiry, and (within these) examining documents/assets. Sufficient appropriate evidence relates to quantity (sufficiency) and quality (appropriateness = relevance and reliability).

Under ISA 530, distinguish statistical from non-statistical sampling and define sampling risk.

Statistical sampling uses random selection and probability theory to evaluate results and measure sampling risk; non-statistical sampling uses auditor judgement. Sampling risk is the risk that the conclusion based on a sample differs from the conclusion if the entire population were tested.

How can data analytics enhance audit testing compared with traditional sampling?

Data analytics can interrogate entire populations (100% testing) rather than samples, identify anomalies, outliers and unusual journal entries, perform three-way matching, re-perform calculations, and visualise trends — improving risk identification and audit quality, though results still require professional judgement to evaluate.

Under ISA 520, what are analytical procedures and at which audit stages are they required?

Evaluations of financial information through analysis of plausible relationships among financial and non-financial data. They are required at the risk assessment (planning) stage and at the overall review near the end of the audit, and may also be used as substantive procedures.

Under ISA 560, what are the auditor's responsibilities for subsequent events between the reporting date and the date of the auditor's report?

The auditor must perform procedures to obtain sufficient appropriate evidence that all events requiring adjustment or disclosure (per IAS 10) have been identified, e.g. reviewing management procedures, reading minutes, inquiring of management/legal counsel, and examining latest interim accounts.

Under ISA 570, what is the auditor's responsibility regarding going concern?

To obtain sufficient appropriate evidence about, and conclude on, the appropriateness of management's use of the going concern basis, and to conclude whether a material uncertainty exists relating to events/conditions that may cast significant doubt on the entity's ability to continue as a going concern.

Under ISA 580, what is the purpose of a written representation letter and give two examples of representations sought.

It provides audit evidence that management has fulfilled its responsibilities and confirms matters where other sufficient evidence cannot reasonably be expected to exist. Examples: management has provided all relevant information and access; all transactions are recorded; and management acknowledges responsibility for the financial statements and internal control.

Under ISA 700, what are the elements of an unmodified (clean) auditor's report?

Title; addressee; opinion paragraph; basis for opinion; (key audit matters where applicable); going concern; responsibilities of management/those charged with governance; auditor's responsibilities for the audit; signature, auditor's address and date. The opinion states the financial statements give a true and fair view (present fairly) in accordance with the framework.

Under ISA 705, what three types of modified opinion exist and when is each used?

Qualified opinion ('except for') — misstatements/lack of evidence are material but not pervasive. Adverse opinion — misstatements are material and pervasive. Disclaimer of opinion — inability to obtain evidence is both material and pervasive so the auditor cannot form an opinion.

Distinguish an Emphasis of Matter paragraph from an Other Matter paragraph (ISA 706).

An Emphasis of Matter paragraph refers to a matter appropriately presented or disclosed in the financial statements that is fundamental to users' understanding (it does not modify the opinion). An Other Matter paragraph refers to a matter not presented/disclosed in the financial statements that is relevant to users' understanding of the audit, the auditor's responsibilities or the report.

Under ISA 701, what are Key Audit Matters and which entities must report them?

KAM are those matters that, in the auditor's professional judgement, were of most significance in the audit of the current period's financial statements, selected from matters communicated with those charged with governance. They are required for audits of listed entities (and where law/regulation requires or the auditor decides to communicate them).

Under IAS 16, state the straight-line and reducing-balance depreciation formulae.

Straight-line: $$\text{Annual charge} = \frac{\text{Cost} - \text{Residual value}}{\text{Useful life}}$$ Reducing balance: $$\text{Annual charge} = \text{Carrying amount} \times r$$ where $r$ is the fixed depreciation rate applied each year.