March 30, 2021

Exam focus   One of the questions in the exam will focus on completion, review and reporting. Recent events may result in adjustments to the financial statements. Information that has recently been made available might need to be included in the financial statement disclosures. The auditor will also evaluate the effect of any uncorrected misstatements as these may lead to a modified auditor’s report. In the exam you may have to evaluate misstatements and suggest additional audit procedures to be performed to reach a conclusion on such matters before stating the impact to the report if the issues are not resolved.   1      Subsequent events   ISA 560 Subsequent Events, requires the auditor to:   Obtain sufficient appropriate audit     about whether events occurring between the date of the financial statements and the date of the auditor’s report, that require adjustment or disclosure are appropriately reflected in accordance with the applicable financial reporting framework.   Respond appropriately to facts that become known to the auditor after the date of the auditor’s report.   [ISA 560, 4]   IAS 10 Events After the Reporting Period identifies two types of event after the reporting period:   Adjusting   Non-adjusting.     Illustration 1 – Adjusting and non-adjusting events   Adjusting events   These are events that provide additional     relating to conditions existing at the reporting date. Such events provide new information about the items included in the financial statements and hence the financial statements should be adjusted to reflect the new information.   Examples of adjusting events include:   Allowances for damaged inventory and doubtful receivables.   Amounts received or receivable in respect of insurance claims which were being negotiated at the reporting date.   The determination of the purchase or sale price of non-current assets purchased or sold before the year-end.   Agreement of a tax liability.   Discovery of errors/fraud revealing that the financial statements are incorrect.   Non-adjusting events   These are events concerning conditions which arose after the reporting date. In order to prevent the financial statements from presenting a misleading position, disclosure is required in the notes to the financial statements indicating what effect the events may have. Such events, therefore, will not have any effect on items in the statements of financial position or statement of profit or loss for the period.   Examples of non-adjusting events include:   Issue of new share or loan capital.   Major changes in the composition of the group (for example, mergers, acquisitions or reconstructions).   Losses of non-current assets or inventory as a result of fires or floods.   Strikes, government action such as nationalisation.   Purchases/sales of significant non-current assets.   (IAS 10 Events After the Reporting Period)   Auditor responsibilities Between the date of the financial statements and the date of the auditor’s report   The auditor should perform procedures to identify events that might require adjustment or disclosure in the financial statements.   [ISA 560, 6]   If material adjusting events are not adjusted for, or material non-adjusting events are not disclosed, the auditor will ask management to make the necessary amendments to the financial statements.   If the identified adjustments or disclosures necessary are not made then the auditor should consider the impact on the auditor’s report and whether a modification is necessary.   Subsequent events procedures   Enquiring of the directors if they are aware of any events, adjusting or non-   adjusting, that have not yet been included or disclosed in the financial statements.   Enquiring into management procedures/systems for the identification of events after the reporting period.   Reading minutes of members’ and directors’ meetings.   Reviewing accounting records including budgets, forecasts, cash flows, management accounts and interim information.   [ISA 560, 7]   Obtaining a written representation from management confirming that they have informed the auditor of all subsequent events and accounted for them appropriately in the financial statements. [ISA 560, 9]   Inspection of correspondence with legal advisors.   Reviewing the progress of known risk areas and contingencies.   Considering relevant information which has come to the auditor’s attention, from sources outside the entity, including public knowledge, competitors, suppliers and customers.   Inspecting after date receipts from receivables.   Inspecting the cash book after the year-end for payments/receipts that were not accrued for at the year-end.   Inspecting the sales price of inventories after the year-end.   Between the date of the auditor’s report and the date the financial statements are issued   The auditor is under no obligation to perform audit procedures after the auditor’s report has been issued, however, if they become aware of a fact which would cause them to issue a modified report, they must take action. [ISA 560, 10]   This will normally be in the form of asking the client to amend the financial statements, auditing the amendments and reissuing the auditor’s report.   If management do not amend the financial statements and the auditor’s report has not yet been issued to the client, the auditor can still modify the opinion. [ISA 560, 13a]   If the auditor’s report has been provided to the client, the auditor shall notify management and those charged with governance not to issue the financial statements before the amendments are made.   If the client issues the financial statements despite being requested not to by the auditor, the auditor shall take action to prevent reliance on the auditor’s report. [ISA 560, 13b]   After the financial statements are issued   The auditor is under no obligation to perform audit procedures after the financial statements have been issued, however, if they become aware of a fact which would have caused them to modify their report, they must take action.   The auditor should discuss the matter with management and consider if the financial statements require amendment.   [ISA 560, 14]   Management must also take the necessary actions to ensure anyone who   is in receipt of the previously issued financial statements is informed. [ISA 560, 15b]   The auditor

Exam focus   More than one question in the exam is likely to feature a requirement to design relevant audit or assurance procedures. It is essential that you understand the principles of audit     and can apply this knowledge to the scenario and design procedures relevant to the area being tested or the risk to be addressed.   1      The principles of   evidence Audit procedures are designed to obtain     in response to the assessment of risk at the planning stage.   gathered must be sufficient and appropriate to reduce assessed risk to an acceptable level.   If, at the review stage, the senior audit staff deem that the risk of misstatement has not been reduced to an acceptable level, more     will be required.   2      Obtaining audit       ISA 500 Audit     requires the auditor to obtain sufficient appropriate     to be able to draw reasonable conclusions. [ISA 500, 4]   Sufficient       A measure of quantity, i.e. does the auditor have enough     to draw a conclusion.   Affected by risk and materiality of the balances and quality of    . [ISA 500, 5e]   Appropriate       Measures quality of     – relevance and reliability. [ISA 500, 5b]   Reliability of     depends on several factors [ISA 500, A31]:   – Independent, externally generated     is better than     generated internally by the client.   – Effective controls imposed by the entity, generally improve the reliability of    .   –     obtained directly by the auditor is more reliable than     obtained indirectly or by inference.   – It is better to get written, documentary     rather than verbal confirmations.   – Original documents provide more reliable     than photocopies or facsimiles.   Relevance means the     relates to the financial statement assertions being tested. [ISA 500, A27]   Financial statement assertions Addressing disclosures in the audit of financial statements   Disclosures are an important part of the financial statements and seen as a way for communicating further information to users. Poor quality disclosures may obscure understanding of important matters.   Concerns have been raised about whether auditors are giving sufficient attention to disclosures during the audit. The IAASB believes that where the term financial statements is used in the ISAs it should be clarified that this is intended to include all disclosures subject to audit.   Recent changes to ISAs include:   Emphasis on the importance of giving appropriate attention to addressing disclosures.   Focus on matters relating to disclosures to be discussed with those charged with governance, particularly at the planning stage.   Emphasis on the need to agree with management their responsibility to make available the information relevant to disclosures, early in the audit process.   Audit procedures for obtaining       The methods of obtaining     are:   Inspection of records, documents or physical assets.   Observation of processes and procedures, e.g. inventory counts.   External confirmation obtained in the form of a direct written response to the auditor from a third party.   Recalculation to confirm the numerical accuracy of documents or records. Re-performance by the auditor of procedures or controls. Analytical procedures.   Enquiry of knowledgeable parties.   [ISA 500, A14 – A22]   The auditor obtains     to draw conclusions on which to base the audit opinion. This is achieved by performing procedures to:   Obtain an understanding of the entity and its environment, including internal control, to assess the risks of material misstatement by performing risk assessment procedures.   Test the operating effectiveness of controls in preventing, detecting and correcting material misstatements by performing tests of controls.   Detect material misstatements by performing substantive procedures. [ISA 500, A10]   Tests of control and substantive procedures   Tests of controls are designed to check that the audit client’s internal control systems operate effectively.   Examples of tests of controls:   Inspect purchase invoices for     of authorisation by a manager before payment is made.   Observe the process for despatch of goods to ensure the warehouse staff check the goods to the order before despatch.   Using test data, enter a dummy order over a customer’s credit limit   to verify that the system won’t allow the order to be accepted.   Substantive procedures are designed to find material misstatements in the financial statements (fraud and error).   Substantive procedures can be tests of detail or analytical procedures.   Substantive tests of detail look at the supporting     for individual transactions and traces them through to the financial statements to ensure they are dealt with appropriately.   Examples of tests of detail:   Inspect a purchase invoice for the amount and trace it into the purchase day book to ensure it has been recorded accurately.   Recalculate an allowance for doubtful receivables using the client’s formula to verify arithmetical accuracy.   Substantive analytical procedures test the balances as a whole to identify any unusual relationships e.g. comparison of a gross profit margin year on year might highlight that revenue is overstated if there is no known reason for the GPM to increase. An analytical procedure tests the ‘reasonableness’ of a balance.   Examples of analytical procedures:   Calculate the receivables days ratio and compare with credit terms offered to customers to identify any possible overstatement. If receivables days appears too high, discuss with management the need for an increase in the allowance for doubtful receivables.   Obtain a breakdown of sales by month and analyse the seasonal trend to ensure it is consistent with the auditor’s knowledge of the business. Discuss any unusual fluctuations with management.   Calculate the expected interest charge for a loan by multiplying the outstanding loan amount with the interest rate and compare with the client’s figure. Discuss any significant difference with management.     Recap: Example audit procedures   Non-current assets   Select a sample of assets from the asset register and physically inspect them to verify existence.   Select a sample of assets visible at the client premises and inspect the asset register to ensure they are included to verify completeness.   Recalculate the depreciation charge to verify arithmetical accuracy.

Exam focus   A group could appear in any question in the exam, and is relevant to all stages of an engagement.   Read the scenario to identify whether the question relates to a single entity or a group.   Take care to identify whether you are the auditor for the entire group (including subsidiaries) or just the parent company. Reliance on the work of other auditors will only be relevant if you are not responsible for the audit of the subsidiaries.   Revision of consolidation Consolidation involves taking a number of sets of individual company financial statements and adding them all together to form one combined set. Due to various complications, such as companies using different currencies and intergroup trading, a number of adjustments have to be made before the consolidated financial statements can be finalised.   Before the group financial statements can be audited, the individual company’s financial statements have to be prepared and audited. In the diagram above this includes Parent Co, Subsidiary Co 1 and Subsidiary Co 2. It is the responsibility of individual company directors/management to prepare their financial statements. These may be audited by the group auditor or another firm of auditors.   Once this process is complete the financial statements are combined to create a single set of consolidated financial statements. This process is the responsibility of the group’s directors.   Once the consolidated financial statements have been prepared the group auditor performs an audit of the consolidated financial statements.   As the group is a summary of the trading results and positions of the various components of the group (and is itself not a trading entity) the group auditor does not need to audit the group financial statements in the same way. They rely on the audited figures of the individual financial statements to confirm the majority of balances and then audit the consolidation process and adjustments.   1         Group audits – specific considerations   The principles of auditing a group are the same as the audit of a single company and all of the ISAs are still relevant to a group audit. There are, however, some specific considerations relevant to the audit of a group:   Group financial statements require numerous and potentially complicated consolidation adjustments.   Specific accounting standards relating to group financial statements must be complied with.   The components of the group (i.e. the subsidiaries) may be audited by firms other than the group auditor.   The organisation and planning of a group audit may be significantly more complex than for a single company.   The objectives of an auditor with regard to these matters are identified in ISA 600 Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors) as follows:   To determine whether it is appropriate to act as the auditor of the group financial statements.   If acting as the auditor of the group financial statements:   – To communicate clearly with the component auditors about the scope and timing of their work on financial information related to components and their findings.   – To obtain sufficient appropriate evidence regarding the financial information of the components and the consolidation process to express an opinion on whether the group financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.   [ISA 600, 8]   Key terms   The auditor with the responsibility for reporting on the consolidated group financial statements (as well as the parent company financial statements) is referred to as the group auditor.   The related subsidiaries, associates, joint ventures and branches etc. of the group are referred to as components.   The audit firms responsible for the audits of the components are referred to as the component auditors.   2      Acceptance   Acceptance as group auditor   In addition to the normal acceptance considerations discussed in    6, firms should consider whether to accept the role of group auditor. To assist the decision they must consider:   Whether sufficient appropriate audit evidence can reasonably be expected to be obtained in relation to the consolidation process and the financial information of the components of the group.   Where component auditors are involved, the engagement partner shall evaluate whether the group engagement team will be able to be involved in the work of the component auditors.   [ISA 600, 12]   If the engagement partner concludes that it will not be possible to obtain sufficient appropriate evidence due to restrictions imposed by group management and that the possible effect of this will result in a disclaimer of opinion then they must not accept the engagement. If it is a continuing engagement, the auditor should withdraw from the engagement, where possible under applicable laws and regulations. [ISA 600, 13]   Acceptance as component auditor   The component auditor will consider the following before accepting appointment:   Whether they are independent of the parent and component companies and can comply with ethical requirements applying to the group audit.   Whether they possess any special skills necessary to perform the audit of the component and are competent to perform the work.   Whether they have an understanding of the auditing standards relevant to group audits and can comply with them.   Whether they have an understanding of the relevant financial reporting framework applicable to the group.   Whether they can comply with the group audit team instructions including the deadlines.   Whether they are willing to have the group auditor involved in their work and evaluate it before relying on it for group audit purposes.   3         Planning and performing the group audit   Overall audit strategy and plan   The group auditor is responsible for establishing an overall group audit strategy and plan in accordance with ISA 300 Planning an Audit of Financial Statements. [ISA 600, 15]   The group engagement partner is ultimately responsible for reviewing and approving this. [ISA 600, 16]   The audit plan will describe the work to be performed covering areas

Exam focus   Risk assessment and planning normally makes up a significant number of marks of the exam. It is also essential for all areas of the exam that you are able to assess the materiality of a matter.   1      The audit strategy and plan   Planning an audit involves establishing the overall audit strategy for the engagement and developing an audit plan.   [ISA 300 Planning an Audit of Financial Statements, 2] Once the strategy has been established the auditor should develop an audit plan. The audit plan is more detailed than the strategy and should include specific descriptions of:   The nature, timing and extent of risk assessment procedures.   The nature, timing and extent of further audit procedures, including:   –    What audit procedures are to be carried out   –    Who should do them   –    How much work should be done (sample sizes, etc.)   – When the work should be done (interim vs. final) Any other procedures necessary to conform to ISAs.   [ISA 300, 9]   Both the strategy and the plan must be formally documented in the audit working papers.   Planning procedures for initial engagements   In an initial audit engagement there are several factors which should be considered in addition to the planning procedures which are carried out for every audit.   Arrangements should be made with the predecessor auditor to review their working papers.   Any matters which were brought to the firm’s attention when professional clearance was obtained should be considered for their potential impact on the audit strategy.   Matters which were discussed with management in connection with the appointment should be considered, for example, discussion of significant accounting policies which may impact on the planned audit strategy.   Audit procedures necessary to obtain sufficient appropriate audit evidence regarding opening balances, and procedures should be planned in accordance with ISA 510 Initial Audit Engagements – Opening Balances.   procedures may be increased for initial engagements, for example, the involvement of another partner or senior individual to review the overall audit strategy prior to commencing significant audit procedures and an engagement   review should be performed. Compliance with any such procedures should be fully documented.   [ISA 300, A22]   In addition:   Additional time and resource may be necessary in the first year of an audit for a new client, in order to obtain the required knowledge of the client, e.g. documenting the internal control systems of the client for the first time, understanding the business including the legal and regulatory framework applicable to the company.   It may be difficult to place reliance on analytical procedures as a source of substantive audit evidence as these require knowledge and experience of the client in order to set appropriate expectations, and therefore increased tests of detail may be necessary.   Given the increased risk associated with initial engagements, consideration should be given to using an experienced audit team in order to reduce detection risk.   The impact of ISAs and IFRS standards   The impact of ISAs   ISA 315 (Revised) Identifying and Assessing the Risks of Material   Misstatement through Understanding the Entity and Its Environment states that the auditor should adopt a risk based approach to the audit.   “The objective of the auditor is to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels, through understanding the entity and its environment, including the entity’s internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement.” [ISA 315, 3]   ISA 330 The Auditor’s Response to Assessed Risks further develops the concept by stating that:   “The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement, through designing and implementing appropriate responses to those risks.” [ISA 330, 3]   The importance of financial reporting standards   The audit opinion states whether or not the financial statements have been prepared in accordance with the financial reporting framework.   In order to reach this opinion, the auditor must fully understand the relevant financial reporting standards, and must evaluate whether the financial statements comply with these standards. This knowledge and understanding needs to be applied throughout the audit.   At the planning stage the auditor needs to assess the risk of material misstatement in the financial statements. The auditor must understand the required accounting treatment in order to identify potential omission or incorrect measurement, recognition, presentation or disclosure of an item.   The risk of material misstatement will increase with the complexity of the financial reporting issue, and where the matter requires the use of significant judgment.   2         Risk assessment   ISA 315 (Revised) Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment requires auditors to perform the following (minimum) risk assessment procedures:   Enquiries with management, of appropriate individuals within the internal audit function (if there is one), and others with relevant information within the client entity (e.g. about external and internal changes the company has experienced).   Analytical procedures to identify trends/relationships that are inconsistent with other relevant information or the auditor’s understanding of the business.   Observation (e.g. of control procedures).   Inspection (e.g. of key strategic documents and procedural manuals). [ISA 315, 6]   Analytical procedures at the planning stage   Analytical procedures involve analysis of plausible relationships among financial and non-financial data.   At the planning stage analytical procedures may be performed using management accounts or the draft financial statements if available.   Analytical procedures will be useful at the planning stage to help identify unusual fluctuations or balances which are not consistent with the auditor’s expectation. These areas indicate risks of material misstatement.   In the exam you may be provided with financial information and be expected to perform analytical procedures as part of your risk assessment.     Example risk assessment procedures   It is impossible

 Exam focus   covers aspects of running an accountancy firm such as winning new business and setting fees. Common requirements cover:   Matters to be included in a tender proposal.   Evaluating the suitability of an advertisement.   Factors to be considered when setting a fee.   Matters to be considered before accepting an engagement. Matters to be included in an engagement letter.   1      Changing auditors/professional accountants   Why change auditors? Why step down?   Audit firms may not seek re-appointment for many reasons. Examples include:   Independence issues which cannot be safeguarded   Doubts regarding the integrity of the company’s management   Strategic decision such as concentrating on other services or markets.   2      Tendering   Tendering is the process of quoting a fee for work before the work is carried out.   Most tenders include a formal written document supported by an oral presentation. All presentations should be dynamic, professional and within the limits of the ethical framework.   Matters to consider before tendering   When invited to tender, a firm must decide whether it wishes to take part in the tendering process.   Specific risks of being involved with the tender include:   Wasted time if the audit tender is not accepted. The firm will not be paid for the time spent putting the tender proposal together.   Setting an uncommercial fee in order to win the contract (lowballing covered later in this   ).   Making unrealistic claims or promises in order to win the contract.   Information required for the proposal   The preparation of an engagement proposal document is an important step in obtaining new work.   Prior to drafting any proposals an audit firm should consider the following:   What does the potential client expect from its auditors?   What timetable does the client expect: an interim audit followed by a final audit or a longer final audit after the year-end?   By which date are the audited financial statements required?   What are the company’s future plans, e.g. public flotation, expansion, contraction, concentration on certain markets?   Are there any perceived problems with the potential client’s current auditors?   The format required by the prospective client.     The content of the proposal   The content of the proposal should include:   The fee and how it has been calculated.   The nature, purpose and legal requirements of an audit (clients are often not clear about this).   An assessment of the requirements of the client.   An outline of how the audit firm proposes to satisfy those requirements and the assumptions made, e.g. on geographical coverage, deadlines, work done by client, availability of information, etc.   The proposed approach to the audit or audit methodology. An outline of the firm and its personnel. procedures of the firm including those relevant to the engagement.   The ability of the firm to offer other services.   The selection process of the proposal   In 2015 in the UK, a survey of audit committees found that the selection process for tenders focused on:   Independence.   Judgment and scepticism of key audit partners. Evidence of internal and external quality reviews. Price was not the deciding factor.   UK syllabus   The UK Corporate Governance Code states:   The audit committee should have primary responsibility for making a recommendation on the appointment, reappointment and removal of the external auditors.   FTSE 350 companies should put the external audit contract out to tender at least every ten years (but can retain the current auditor if they provide the best quality and most effective audit), or explain in the annual report why they have not.   If the board does not accept the audit committee’s recommendation, it should include in the annual report, and in any papers recommending appointment or reappointment, a statement from the audit committee explaining the recommendation and should set out reasons why the board has taken a different position.     Benefits and drawbacks of tendering process Benefits Firms are forced to look at ways of doing the work more efficiently to make the fee competitive.   Companies may look to improve their internal controls and increase the scope of their internal audit departments in order to reduce external audit costs.   Companies may simplify their group structures to reduce audit costs (among other reasons).   The threat of familiarity will reduce if tendering results in a change of audit firm.   Drawbacks   Greater market concentration, which has reduced market choice.   Loss of long-term relationships with auditors.   Focus on cost of the audit not quality. Lowballing issues.   The costs involved with the tendering process which affect both the company and the audit firm.     Test your understanding 1   You are an audit manager in Weller & Co, an audit firm which operates as part of an international network of firms. This morning you received a note from a partner regarding a potential new audit client:   ‘I have been approached by the audit committee of the Plant Group, which operates in the mobile telecommunications sector. Our firm has been invited to tender for the audit of the individual and group financial statements for the year ending 31 March 20X3, and I would like your help in preparing the tender document. This would be a major new client for our firm’s telecoms audit department.   The Plant Group comprises a parent company and six subsidiaries, one of which is located overseas. The audit committee is looking for a cost effective audit, and hopes that the strength of the Plant Group’s governance and internal control mean that the audit can be conducted quickly, with a proposed deadline of 31 May 20X3. The Plant Group has expanded rapidly in the last few years and significant finance was raised in July 20X2 through a stock exchange listing.’   Required:   Identify and explain the specific matters to be included in the tender document for the audit of the Plant Group.                                                                                                                                   

Exam focus   A common requirement in the exam is to critically evaluate the audit work already performed on an engagement and identify if the audit has been carried out to the required standard of quality. If the firm does not perform work to a high quality it increases the risk of issuing an inappropriate report which could damage the reputation of the firm and the profession.   1      The principles and purpose of     There are two professional standards that set out the responsibilities of auditors regarding  :   ISQC 1   for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements which sets out an accountancy firm’s responsibilities with regard to their systems of   for audits, reviews and other assurance engagements.   ISA 220   for an Audit of Financial Statements which applies to audit engagements only. It establishes the responsibilities of the auditor (mainly the engagement partner and engagement quality reviewer) regarding their   procedures during audits.   Most of the requirements of ISA 220 are covered by ISQC 1. This chapter therefore focuses on ISQC 1 requirements.   The purpose of assurance services is to enhance the intended user’s confidence in the subject matter they are using to make decisions. In order for there to be confidence in the assurance process, engagements must be performed to a satisfactory quality. Failure to do so would not only mean a loss of confidence in the profession as a whole but could lead to professional negligence claims against the assurance provider.     If a professional negligence claim is made, and the firm has followed suitable   procedures, they should be able to defend the claim.   Therefore firms must:   Perform work that complies with professional standards and regulatory and legal requirements.   Issue reports that are appropriate in the circumstances.   [ISQC 1, 11]   2      ISQC 1   ISQC 1 identifies six key principles: Leadership: Strong and ethical leadership demonstrated by the managing partners.   Ethics: Firms comply with ethical requirements such as the Code of Ethics.   Acceptance and continuance: Only suitable clients and engagements are accepted and retained.   Human resources: A firm and its employees have the necessary knowledge, technical competence, and experience.   Engagement performance: Engagements are performed in an effective manner.   Monitoring: Evaluating the   procedures to ensure they are effective.   [ISQC 1, 16]   Ethical considerations and arrangements for the acceptance and continuance of client relationships and specific engagements are covered in   s 3 and 6 respectively. In this    we will focus on the remaining four key principles.   Leadership   Firms must establish policies and procedures to promote an internal culture that recognises the importance of quality in performing engagements. This requires the firm’s management team (i.e. managing partners) to:   Establish policies and procedures to address performance evaluation, compensation and promotion to demonstrate commitment to quality.   Ensure commercial consideration does not override quality.   Ensure resources are sufficient to support the   procedures.   Assign operational responsibility to those with sufficient and appropriate   experience, ability and authority to implement those   procedures.   [ISQC 1, A5]   Human resources   The standard stresses that if a firm wants quality flowing through all levels of staff it must go through the steps outlined below. [ISQC 1, A24]   A firm must have policies and procedures in place to ensure an appropriate engagement partner is assigned to an engagement, i.e. one who has the competence, capability and time to perform the role.   The engagement partner should then ensure the right people are allocated to the engagement team, i.e. staff with the relevant knowledge, experience, and training.     Engagement performance   Firms must design policies and procedures to ensure engagements are performed to a satisfactory standard. Policies and procedures should cover:   Matters relevant to promoting consistency in the quality of engagements. Supervision responsibilities. Review responsibilities.   [ISQC 1, 32]   Consistency in the quality of engagement performance   Firms promote consistency through their policies and procedures. This is often accomplished through written manuals, software tools and standardised documentation. Particular matters that can be addressed include:   How engagement teams are briefed to obtain an understanding of the engagement and their objectives.   Processes for complying with engagement standards.   Processes of engagement supervision, training and coaching.   Methods of reviewing work, judgments and reports issued.   Documentation of work performed and the timing and extent of reviews. Processes to keep policies and procedures current. [ISQC 1, A32]   Supervision responsibilities   Supervision responsibilities include:   Tracking the progress of the engagement.   Considering the competence and capabilities of the team members.   Addressing significant matters that arise during the engagement.   Identifying difficult or contentious matters for consultation. Areas requiring consultation (both internally and externally) should be organised in advance to facilitate timely, and cost effective, completion of the engagement.   [ISQC 1, A34]   Review responsibilities   Work of less experienced team members should be reviewed by more experienced team members to identify whether:   The work has been performed in accordance with professional standards. Significant matters have been raised for further consideration. Appropriate consultations have taken place and resulting conclusions have been documented.   The work performed supports the conclusions reached and is appropriately documented.   The evidence obtained is sufficient and appropriate to support the report. The objectives of the engagement procedures have been achieved. [ISQC 1, A35]   Engagement   review   Listed entities and other high risk clients should be subject to an engagement   review (EQCR). This is also referred to as a pre-issuance review or ‘Hot’ review.   High risk clients include those which are in the public interest, those with unusual circumstances and risks, and those where laws or regulations require an EQCR.   The EQCR should include:   Discussion of significant matters with the engagement partner.   Review of the financial statements and the proposed report.   Review of selected engagement documentation relating to significant

Exam focus   Professional issues are usually examined alongside ethical issues but can be examined in their own right. Typical exam questions may ask for respective responsibilities of management and auditors in respect of fraud & error or laws & regulations, or could ask whether an auditor is liable in a given situation.           Laws and regulations   Guidance relating to laws and regulations in an audit of financial statements is provided in ISA    50 Consideration of Laws and Regulations in an Audit of   Financial Statements.   Non-compliance with laws and regulations may lead to material misstatement if liabilities for non-compliance are not recorded, contingent liabilities are not disclosed, or if they lead to going concern issues which would require disclosure or affect the basis of preparation of the financial statements.   ‘Non-compliance’ means acts of omission or commission by the entity, either intentional or unintentional, which are contrary to the prevailing laws or regulations. Non-compliance must specifically relate to the business activities i.e. transactions entered into on behalf of the company. It does not include personal misconduct.   [ISA    50,       ]     Responsibilities are considered from the perspective of both auditors and management.   Responsibilities of management   It is the responsibility of management, with the oversight of those charged with governance, to ensure that the entity’s operations are conducted in accordance with relevant laws and regulations, including those that determine the reported amounts and disclosures in the financial statements. [ISA    50, 3]   Management responsibilities     In order to help prevent and detect non-compliance, management can implement the following policies and procedures:   Monitoring legal requirements applicable to the company and ensuring that operating procedures are designed to meet these requirements.   Instituting and operating appropriate systems of internal control.   Developing, publicising and following a code of conduct.   Ensuring employees are properly trained and understand the code of conduct.   Monitoring compliance with the code of conduct and acting appropriately to discipline employees who fail to comply with it.   Engaging legal advisors to assist in monitoring legal requirements.   Maintaining a register of significant laws and regulations with which the entity has to comply.   In larger entities, these policies and procedures may be supplemented by assigning appropriate responsibilities to:   An internal audit function An audit committee A compliance function. [ISA    50, A   ]   Responsibilities of the auditor   The auditor is responsible for obtaining reasonable assurance that the financial statements taken as a whole, are free from material misstatement, whether caused by fraud or error. [ISA    00 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing,       a].   Therefore, in conducting an audit of financial statements the auditor must perform audit procedures to help identify non-compliance with laws and regulations that may have a material impact on the financial statements.   The auditor must obtain sufficient, appropriate evidence regarding compliance with:   Laws and regulations generally recognised to have a direct effect on the determination of material amounts and disclosures in the financial statements    e.g. company law, tax law, applicable financial reporting framework   . [ISA    50, 6a]   Other laws and regulations that may have a material impact on the financial statements    e.g. environmental legislation   . [6b]   Further discussion of auditor responsibility   IFAC recognises that the auditors have a role in relation to non-compliance with laws and regulations. Auditors plan, perform and evaluate their audit work with the aim of providing reasonable, though not absolute, assurance of detecting any material misstatement in the financial statements which arises from non-compliance with laws or regulations. However, auditors cannot be expected to be experts in all the many different laws and regulations where non-compliance might have such an effect. There is also an unavoidable risk that some material misstatements may not be detected due to the inherent limitations in auditing.   Audit procedures to identify instances of non-compliance   Obtaining a general understanding of the legal and regulatory framework applicable to the entity and the industry, and of how the entity is complying with that framework. [ISA    50,       ]   Enquiring of the management and those charged with governance as to whether the entity is in compliance with such laws and regulations. [   4a]   Inspecting correspondence with relevant licensing or regulatory authorities. [   4b]   Remaining alert to the possibility that other audit procedures applied may bring instances of non-compliance to the auditor’s attention. [   5]   Obtaining written representation from the directors that they have disclosed to the auditors all those events of which they are aware which involve possible non-compliance, together with the actual or contingent consequences which may arise from such non-compliance. [   6]   How to obtain a general understanding       Use the auditor’s existing understanding of the industry.   Update the auditor’s understanding of those laws and regulations that directly determine reported amounts and disclosures in the financial statements.   Enquire of management as to other laws and regulations that may be expected to have a fundamental effect on the operations of the entity.   Enquire of management concerning the entity’s policies and procedures regarding compliance with laws and regulations.   Enquire of management regarding the policies or procedures adopted for identifying, evaluating and accounting for litigation claims.   [ISA    50, A7]   Investigations of possible non-compliance   When the auditor becomes aware of information concerning a possible instance of non-compliance with laws or regulations, they should:   Understand the nature of the act and circumstances in which it has occurred.   Obtain further information to evaluate the possible effect on the financial statements.   [ISA    50,       ]   Audit procedures when non-compliance is identified   Enquire of management of the penalties to be imposed.   Inspect correspondence with the regulatory authority to identify the consequences.   Inspect board minutes for management’s discussion on actions to be taken regarding the non-compliance.   Enquire of the company’s legal department as

Exam focus   Professional and ethical considerations are a key element of the syllabus and will feature in every exam.   A typical requirement will ask you to evaluate the ethical and professional issues in a scenario. Note that this incorporates all of the fundamental principles, not just objectivity, as well as professional issues discussed in the next chapter.   Evaluation requires more than just identification and explanation of the threats. You will also need to consider the significance of the threat.   You should consider any safeguards available to reduce the threat to an acceptable level as part of your evaluation.   A question on ethics will require you to state the rules and principles and apply them to a scenario.           Conceptual framework   Ethical guidance can either use a principles-based approach or rules-based approach.   A conceptual framework relies on a principles-based approach.   Both IFAC and the ACCA adopt a principles-based approach.     Principles-based approach Rules-based approach           Ø   Flexible, so can be applied to Ø May be easier to follow because   new, unusual or rapidly changing   it is clearly defined.   situations. Ø Needs frequent updating to       Ø   Principles may be applied across   ensure the guidance applies to   national boundaries where laws   new situations.   may not. Ø May encourage accountants to       Ø   Requires the accountant to use   interpret requirements narrowly in   professional judgment.   order to get round the spirit of the   Ø   Requires compliance with the   requirements.         spirit of the guidance. Ø Virtually impossible to be able to   Ø   Can still incorporate specific rules   deal with every situation that may     arise, particularly across various   for ethical situations likely to       national boundaries and in a   affect many firms.       dynamic industry.                 The fundamental principles         IESBA develops and promotes the IFAC Code of Ethics for Professional Accountants, which applies to all professional accountants, whether in public practice or not. The IFAC Code serves as the foundation for codes of ethics developed and enforced by member bodies of IFAC. All ACCA members and students are obliged to follow the fundamental principles. Conflicts within the fundamental principles   An auditor or accountant may find themselves being asked to breach the fundamental principles by an employer e.g. if being asked to misrepresent the financial statements or being asked to lie to the auditor.   The professional accountant should always apply the conceptual framework, which requires assessment of the significance of the threat and the application of an appropriate safeguard.   Appropriate safeguards include:   Seeking advice from within the employer    e.g. Human Resources department   .   Seeking advice from the ACCA or other independent professional advisor. Using the organisation’s formal dispute resolution process.   Seeking legal advice.   Fundamental principles definitions   Integrity: Members should be straightforward and honest in all professional and business relationships.   Objectivity: Members should not allow bias, conflicts of interest or undue influence of others to override professional or business judgments.   Professional competence and due care: Members have a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. Members should act diligently and in accordance with applicable technical and professional standards when providing professional services.   Confidentiality: Members should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority or unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships should not be used for the personal advantage of members or third parties.   Professional behaviour: Members should comply with relevant laws and regulations and should avoid any action that discredits the profession.   [ACCA Rulebook    0   7, Section    00.5]           Ethical threats Assuming management responsibilities   Assuming management responsibilities for an assurance client may also create threats to independence. In some jurisdictions this is referred to as the management threat . A firm must not assume management responsibilities as part of an assurance engagement or for an audit client.     Activities considered management responsibility:   Setting policies and strategic direction. Hiring or dismissing employees.   Directing and taking responsibility for employee’s actions.   Authorising transactions.   Deciding which recommendations to implement.   Taking responsibility for the preparation and fair presentation of the financial statements.   Taking responsibility for designing, implementing and maintaining internal controls.   [ACCA Rulebook    0   7, Section    90.   60]   The firm should take steps to ensure that client management make all judgments and decisions.   Administrative services which are routine and do not involve professional judgment are generally not considered a threat. However, the significance of any threat created should be evaluated and safeguards applied if necessary. [Section    90.   63]   The auditor must ensure informed management is in place. This means the auditor believes management is capable of making decisions for the company based on the information available    rather than based solely on the auditor’s advice   .     Ethical implications for non-audit services     When a practitioner provides non-audit services, ethical implications must still be considered before accepting the work.   A practitioner must always be competent to provide the service being requested.   In addition, if assurance is being provided, the practitioner must be objective as a conclusion is being provided on a subject matter which will be relied upon by an intended user. For example, if a practitioner prepared a forecast for a client and then gave assurance on that forecast, a self-review threat would arise in the same way as a self-review threat

Definition   is the process by which criminals attempt to conceal the true origin and ownership of the proceeds generated by illegal means, allowing them to maintain control over the proceeds and, ultimately, providing a legitimate cover for their sources of income.   involves 3 main stages:   Placement – where cash obtained through criminal activity is first placed into the financial system.   Layering – where the illegal cash is disguised by passing it through complex transactions making it difficult to trace.   Integration – where the illegally obtained funds are moved back into the legitimate economy and is now ‘clean’.     offences   There are five basic   offences:   Acquiring, possession or use of criminal property.   Concealing or disguising or transferring criminal property, or removing it from the country.   Failure to disclose knowledge or suspicion of  .   Tipping off.   Failure by a financial services business to meet their obligations under   regulations.   ‘Tipping off’ means to carry out any action that may make suspected money launderers aware that they are under investigation, or prejudicing the outcome of an investigation.   Failure to disclose knowledge or suspicion of   may include:   Failure by an individual in the regulated sector to inform the Financial Intelligence Unit    FIU    or the firm’s   Reporting Officer    MLRO   , as soon as practicable, of knowledge or suspicion that another person is engaged in  , or   Failure by MLROs in the regulated sector to make the required report to the FIU as soon as practicable if an internal report leads them to know or suspect that a person is engaged in  .   Criminal property and criminal conduct   Criminal property is property that has arisen from criminal conduct. Examples include:   Property acquired by theft   The proceeds of tax evasion   Bribery or corruption   Saved costs arising from a criminal failure to comply with a regulatory requirement.   Examples   Consider the following scenarios.   Whilst preparing or auditing accounts you realise that a client has incorrectly reclaimed value added tax    or other national recoverable taxes    on the purchase of a motor car. You point this out to the client and propose an adjustment to the financial statements to provide for the additional tax that is due. You also advise the client that they must rectify this with the tax authorities. However, the client tells you that they have just had an inspection by the tax authorities that did not reveal the error and they do not wish to do anything further.   An auditor knowingly receives payment for one invoice twice    i.e. payment has been duplicated   . The sole director has told the accounts department to ignore negative balances when they issue statements of account to customers hoping that they fail to notice.   Errors and mistakes of the type illustrated above may not constitute criminal conduct, provided they are corrected. However, in both cases there appears to be an intention to gain a permanent benefit from another’s mistake or to avoid a legal liability. As such, each of these cases would result in the accountant knowing or suspecting that a client is involved in  .           Anti-  program: basic elements   The main legislation and requirements below relate to the   regulatory regime as it stands in the UK. The principles, however, are appropriate on an international basis.   Regulations impose certain obligations on financial services businesses, which are designed to assist in detecting   and preventing the financial services organisations being used for   purposes.   At a minimum, an anti-  program should incorporate:   and terrorist financing risk assessment.   Implementation of systems, policies, controls and procedures that effectively manage the risk that the firm is exposed to in relation to   activities and ensure compliance with the legislation.   Compliance with customer due diligence, enhanced due diligence and simplified due diligence requirements.   Enhanced record keeping and data protection systems, policies and procedures.   In the UK, for example, these measures are covered by the   Regulations    0   7    MLR    0   7    with reporting to the National Crime Agency    NCA   .     and terrorist financing risk assessment   A written risk assessment must be carried out to identify and assess the risk of  . The risk assessment must take into account information provided by the Supervisory Authority on risk factors in the sector. The following risk factors must also be taken into account:   The firm’s customers   The countries or geographic where the firm operates   The firm’s products or services   The firm’s transactions, and The firm’s delivery channels.   The risk assessment should be used to:   Develop policies, procedures and controls to mitigate the risk of  .   Apply a risk based approach to detecting and preventing  .   Internal controls   The firm must establish and maintain written policies, controls and procedures to effectively manage and mitigate the   and terrorist financing risks identified in the risk assessment. These must be proportionate to the size and nature of the business, approved by senior management, regularly reviewed and updated and communicated internally within the firm.   Officer responsible for compliance   Firms must appoint a   Compliance Principal    MLCP    and this person must be on the board of directors or a member of senior management. Sole practitioners with no employees are exempt from this requirement.   Firms must also appoint a nominated officer,   Reporting Officer    MLRO   , to receive internal suspicious activity reports and assess whether a suspicious activity report should be made to the appropriate regulatory body. The MLRO and MLCP may be the same person if the MLRO is sufficiently senior.   Employees   Firms must assess the skills, knowledge, conduct and integrity of employees involved in identification, preventing or detecting  .   Staff training must be provided on an ongoing basis in how to recognise and handle transactions and activities which may be related to  .   Independent audit function   Firms must establish an independent audit function to assess

The need for assurance services   Assurance professionals provide reports that give an independent opinion as to whether the subject matter complies with pre-determined criteria. This enables the end user of that information to place more or less reliance on that information when making decisions.   Decision makers within financial markets need to have the confidence to make informed decisions. In order to make these decisions they need information they can trust. The main investment decisions that take place concern the buying and selling of shares. Without credible, reliable information at their disposal investors cannot make those decisions.   It is not just shareholders who rely on this information, there are a range of other stakeholders who also rely on assurance services. For example, it is common for banks to seek audited financial statements and independently examined forecasts before making lending decisions. Many companies request audited financial statements before buying from, or supplying a company.   As well as investments in businesses, other stakeholders must make decisions about how to deploy resources: suppliers, customers, employees and prospective lenders all need information before making significant decisions that could have damaging financial repercussions.   2      Regulation of the profession   As a result of financial scandals, and the public concern that followed, many changes were implemented in the global auditing and accountancy profession.   Examples of developments include:   The IAASB’s International Standards on Auditing (ISAs) have been adopted or are being used as a basis for national standards in over 100 countries worldwide.   The World Federation of Exchanges endorsed the IAASB’s standard setting process and ISAs.   The Code of Ethics for Professional Accountants has been adopted by many member institutions.   The largest accountancy firms have all committed to auditing in accordance with ISAs and to apply relevant sections of the Code of Ethics.   Legislative changes have been established to introduce new corporate governance requirements. The most famous of these, The Sarbanes Oxley Act (SOX) in the US, led to the creation of the Public Company Accounting Oversight Board, who create standards for listed entities and conduct inspections of audit firms’ work.   The Public Interest Oversight Board was set up in 2005 to oversee IFAC’s auditing and assurance, ethics, and education standard setting activities and its membership compliance programme.   Global regulation   The main problem is that harmonisation requires national regimes to adopt ISAs. Many countries have adopted ISAs but they have been adapted to suit local customs/laws and as a result many differences still exist in the quality of audits worldwide.     The need for regulation     Business failures, particularly large, high-profile businesses, cause loss of confidence within global financial markets. Confidence in the reliability of financial information is essential to the functioning of these markets.   Whilst it is not the only factor in helping to achieve confidence, good quality, independent audit and assurance has a key role to play. A series of recent and high profile corporate failures has eroded trust in the assurance market and as a result mechanisms for increased regulation of the auditing profession have been introduced.   Self-regulation   The accountancy profession introduced standards to regulate financial reporting and shortly afterwards auditing standards were introduced.   Standards were set by the accounting profession for the accounting profession to follow.   Self-regulation seemed to make sense because:   the accountancy organisations usually had a ‘public interest’ remit written into their constitutions   they understood financial reporting and auditing better than anyone.   However, high profile corporate failures, such as Enron have led to the questioning of self-regulation as a satisfactory mechanism.     Global Regulation   The globalisation of business, professions and investment markets has been rapid.   Once businesses started to cross national borders it soon became clear that the variation of laws and regulations in different countries made life difficult, both for the multinationals and the professions trying to provide services to them.   This realisation led to the foundation of IFAC – the International Federation of Accountants in 1977.   IFAC is structured to operate through a network of boards and committees. Detailed explanation of IFAC structure       The International Federation of Accountants (IFAC) is the global organisation for the accountancy profession. It was formed in 1977 and is based in New York. As at 1 January 2018, IFAC has more than 175 member bodies of accountants (including the ACCA), representing 3 million accountants from 130 separate countries.   IFAC’s overall mission is to serve the public interest, strengthen the worldwide accountancy profession, and contribute to the development of strong international economies by establishing and promoting adherence to high quality professional standards.   The structure of IFAC is as follows:   The IFAC Council comprises one representative from each member body. It meets once a year and elects the board.   The IFAC Board is responsible for setting policy and overseeing the work of the various committees.   The IFAC Nominating Committee makes recommendations regarding the composition of IFAC boards, committees and task forces.   The main bodies to be aware of are:   The International Auditing and Assurance Standards Board (IAASB): develops and promotes ISAs and other assurance standards to improve the uniformity of auditing practices and related services throughout the world.   The International Ethics Standards Board for Accountants: promotes the Code of Ethics. Significantly, the committee continually monitors and stimulates debate on a wide range of ethical issues to ensure that its guidance is responsive to the expectations and challenges of individuals, businesses, financial institutions and others relying on the work of accountants.   The Transnational Auditors Committee (TAC): deals with issues arising from cross-border auditing. It is the executive committee of the Forum of Firms (FoF), open to all firms performing or wishing to perform transnational audits. The TAC is discussed in chapter 8.   Other constituent bodies include:   The Compliance Advisory Panel    CAP     The Professional Accountancy Organisation Development   Committee   The International Accounting Education

Conceptual Framework for Financial Reporting Introduction: the need for a conceptual framework A conceptual framework is a set of theoretical principles and concepts that underlie the preparation and presentation of financial statements. If no conceptual framework existed, then it is more likely that accounting standards would be produced on a haphazard basis as particular issues and circumstances arose. These accounting standards might be inconsistent with one another, or perhaps even contradictory. A strong conceptual framework therefore means that there is a set of principles in place from which all future accounting standards draw. It also acts as a reference point for the preparers of financial statements if there is no adequate accounting standard governing the types of transactions that an entity enters into (this will be extremely rare). This section of the text considers the contents of the Conceptual Framework for Financial Reporting (‘the Framework’) in more detail. The purpose of the Framework The purpose of the Framework is: (a) to assist the International Accounting Standards Board (the Board) when developing new standards (b) to help national standard setters develop new standards (c) to provide guidance on issues not covered by IFRS Standards (d) to assist auditors. The objective of financial reporting The Framework says that the objective of financial reporting is to provide information to existing and potential investors, lenders and other creditors which helps them when making decisions about providing resources to the reporting entity. Underlying assumption The Framework identifies going concern as the underlying assumption governing the preparation of financial statements. The going concern basis assumes that the entity will not liquidate or curtail the scale of its operations. Qualitative characteristics of useful financial information The Framework identifies types of information that are useful to the users of financial statements. It identifies two fundamental qualitative characteristics of useful financial information: Information is relevant if it will impact decisions made by its users. (1) Relevance – Relevant information has predictive value or confirmatory value to a user – Relevance is supported by materiality considerations: – Information is regarded as material if its omission or misstatement could influence the decisions made by users of that information – An omission or mis-statement could be material due to its size or nature – Materiality is an entity-specific consideration and so the Framework does not specify a minimum threshold. Faithful representation – complete – neutral – free from error Therefore, it must comprise information necessary for a proper understanding, it must be without bias or manipulation and clearly described. In addition to the two fundamental qualitative characteristics, there are four enhancing qualitative characteristics of useful financial information. These should be maximised when possible: Information is more useful if it can be compared with similar information about other entities, or even the same entity over different time periods. Consistency of presentation helps to achieve comparability of financial information. Permitting different accounting treatments for similar items is likely to reduce comparability. The Framework explains that verifiability means ‘that different, knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular presentation of an item or items is a faithful representation‘ (Framework, para QC26). Verifiability of financial information provides assurance to users regarding its credibility and reliability. Information should be made available to users within a timescale which is likely to influence their decisions. Older information is less useful. Information should be presented clearly and concisely. Prudence Older versions of the Framework referred to the importance of the concept of prudence. Being prudent means exercising caution. In corporate reporting, this is often interpreted as meaning that entities should not overstate their assets or understate their liabilities. The Board removed prudence from the Framework because they thought it was inconsistent with neutrality. This is because reducing assets in one period is likely to lead to the over-statement of financial performance in the next period. However, as discussed later in this chapter, the Board are considering reintroducing into the Framework an explicit reference to prudence. The cost constraint It is important that the costs incurred in reporting financial information are justified by the benefits that the information brings to its users. The elements of financial statements The financial effects of a transaction can be grouped into broad classes, known as the elements. According to the Framework, there are five elements of financial statements: Assets – resources controlled by an entity from a past event that will lead to a probable inflow of economic benefits. Liabilities – obligations of an entity arising from a past event that will lead to a probable outflow of economic resources. Equity – the residual net assets of an entity after deducting its liabilities. Incomes – increases in economic benefits during the accounting period. Expenses – decreases in economic benefits during the accounting period. Recognition of the elements of financial statements The Framework says that an item should be recognised in the financial statements if: Measurement of the elements of financial statements Measurement is the process of determining the amount at which the elements should be recognised and carried at in the statement of financial position and the statement of profit or loss and other comprehensive income. The Framework identifies four possible measurement bases: Historical cost Assets are recorded at the amount paid to acquire them. Liabilities are recorded at the value of the proceeds received, or at the amount expected to be paid to satisfy the liability. Current cost Assets are carried at their current purchase price. Liabilities are carried at the amount currently required to settle them. Realisable value Assets are carried at the amount that would be received in an orderly disposal. Liabilities are carried at the amount to be paid to satisfy them in the normal course of business. Present value Assets are carried at the present value of the future cash flows that the item will generate. Liabilities are carried at the present value of the future cash outflows required to settle them. • it meets the definition of an element • it