4 Generally up to 1½ marks for each matter and up to 1 mark for each evidence point explained.
(a) Dilley Co
Matters
– Materiality
– IFRS 10 definition of subsidiary is based on control and contains specific guidance on situations where control may exist when investor does NOT hold majority of voting rights
– Control and subsidiary status may be based on potential voting rights; following IFRS 10 rights do not have to be currently exercisable but must be ‘substantive’
– Here potential voting rights are exercisable in near future and are ‘in the money’, hence likely to be subsidiary; consolidated SOCI should therefore include line by line consolidation for 11 months and a loss of £11 million in relation to Dilley Co
– Difference of £6·6 million is material to group SOCI; management have incentive not to consolidate (especially in light of declining profitability)
– Group revenue should include £82·5 million for Dilley Co and will therefore also be materially understated
Evidence
– Copy of legal documents supporting acquisition of shares and options including voting rights and terms of exercise for options
– Audit working papers for Dilley Co confirming details of issued share capital and associated voting rights
– Board minutes relating to acquisition and management intentions in relation to Dilley Co
– Management representations on degree of influence and future intentions
– Copy of the adjusting journal required to reflect the correct treatment in the financial statements
Maximum marks 7
(b) Willis Co
Matters
– Materiality
– Group accounting policies should be consistent
– Treatment is acceptable in individual entity financial statements but not for Group accounts
– IFRS 9 requires recognition of derivatives on SOFP at fair value with gains and losses in profit or loss for period
– Fair value of derivatives is material to group profit (with supporting calculation)
– Directors may not have expertise required for valuation of the options
– Need for external independent evidence of fair value at reporting date
Evidence
– Fair value based on market prices or if not available, independent expert valuation
– Audit documentation of review of derivative contracts and confirmation of terms and maturity dates
– Notes of discussion with management in relation to the basis of their valuation and the accounting treatment
– Copy of the adjusting journal required to reflect the correct treatment in the financial statements
Maximum marks 6
(c) Knott Co
Matters
– Materiality
– Consolidated accounts are prepared from group perspective, inter-company transactions and balances must be eliminated on consolidation
– Details of the transactions need to be verified for individual entity financial statements
– Sales value of £77 million is material to group revenue and assets
– Unrealised profit of £7·7 million is material to group profit before tax
– Group receivables, revenue and profit therefore materially overstated
– Goods in transit: group inventory will be understated by £69·3 million (material to group assets)
– Group retained earnings will be overstated by £6·16 million and NCI by £1·54 million
Evidence
– Transaction agreed to underlying documents – sales invoices, goods despatch notes at Knott Co and goods received notes, purchase invoices at its parent company
– Cost of inventory confirmed to production records
– Confirmation of goods received note at parent dated 2 May 2018 confirming details of inventory in transit
– Workings for the unrealised profit in stock calculation
– Sales invoice traced to sales ledger and details of sales value, etc agreed
– Copy of adjusting journal noted on errors schedule
Maximum marks 7