(b) Difficulties and procedures

Generally up to 1 mark for each difficulty evaluated and each relevant procedure designed.

(i) Cash-settled share-based payments
– Material expense to profit and borderline material to assets (with calculation(s))
– Treatment complies with IFRS 2 rules for accounting for cash settled share-based payments

Difficulties when performing audit:
– Management assumption of 100% staff retention may be unrealistic
– Predicted staff retention is estimation based on historic trends and future expectations; actual outcomes unlikely to correspond exactly
– Options pricing models are complex and challenging to audit
– Judgement involved in which option pricing model to use
– Option pricing models include judgemental inputs such as current risk-free interest rate and measures of share price volatility

Procedures:
– Obtain copy of share-based payments agreement and supporting file notes detailing principal terms (½ mark per term agreed)
– Perform assessment of appropriateness of model used to value rights/options
– Obtain details of external expert used including assessment of professional certification, experience, reputation and objectivity
– Critically review expert’s valuation including assessment of assumptions used to determine fair value of the SARs
– Obtain details of historic staff turnover rates obtained from human resources/payroll department
– Review of forecast staffing levels through to end of vesting period including assessment of reasonableness of assumptions based on auditor’s knowledge and understanding of client
– Discuss basis of staff retention assumptions with management and challenge their appropriateness
– Perform sensitivity analyses on valuation model and staffing forecasts

Maximum marks 6