CH IP - Lecture notes 1-10 PDF

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To: Owen, All Starr From: CPA Audit Manager Subject: Financial Instruments as per ASPE, and IFRS, and Audit Risk Assessment and procedures to address key risk. Below is my analysis on the Financial Instruments under ASPE and IFRS, I have also identified the risk of material statement relevant to All Starr, and procedures to address key risk.

Notes Receivables: As per the IFRS 9 Guideline: Accounts Receivables are Financial Instruments, because a business entity holds the financial assets in order to collect contractual cash flows. As per the ASPE 3856 Guideline: Accounts Receivables are also Financial Instruments, financial assets of one entity is considered as the financial liability or equity of another entity. In this case, All Starr and Doyle has landed into an agreement, All Starr would sell approximately $80,000 worth of equipment and not collect the balance for three years. Moreover, as per the ASPE guidelines and the contract between All Starr assets has become liability for the Doyle Games as it takes control of All Starr’s assets. Initial Measurement of Financial Instruments: Under IFRS 9 5.1.1 & 5.1.3 Guidelines: All Starr would measure their financial instruments at the Transaction Price or at Fair Market Value, the requirement condition; there is no significant element of financing. Since, All Starr has agreed to waive the interest for this contract hence, Future Fair Market Value of their accounts receivables will be $80,000. Upon the condition Doyle Games pay their portion of liability within three years. Under ASPE 3856.07 Guideline: There isn’t much significant difference between the ASPE and IFRS guidelines. ASPE guidelines require that initial Financial Instrument transaction shall be measured at Fair Market Value. Hence, the value of All Starr account receivable would remain the same $80,000. Subsequent Measurement of Financial Instruments: Under IFRS 9 5.2.1 Guideline: Since the initial guidelines were on the basis, where Doyle Games would pay All Starr within 3 years. Assuming a situation where time goes by the risk, amount, and timing of expected cash inflow changes over time from the original cash flow expectation. In this situation impairment loss will be applied, and in Doyle’s case amortized cost method will be applicable for this situation, which allows the use of effective interest method. Under ASPE 3856.11 Guideline: Under this guideline, there isn’t much of a difference; All Starr can use the same method used previously provided in IFRS guidelines, measuring the Financial Instrument through Amortized Cost Method less any reduction due to impairment. Warranty:

As per IAS 37 Guideline: Warranties are considered as an obligation, probability that an outflow will be required in the future for settlement by considering the class of obligation as a whole. The likelihood of outflow for warranties may be small. But it is determined that some outflow would be required in future to settle the obligation as a whole. If such a case then provision is required. As per my research, IAS 37.1 shall be applicable by all entities, except IAS 37.2 where this standard is not applicable to financial instruments. As per ASPE 3290.04 Guidelines: Warranties are regarded as contingencies, and contingencies are situations which involves uncertainty to a possible gain or loss to an entity that will impact one or more future events or fail to occur. As per Section ASPE 3856 (i) financial instruments are contracts that creates a financial assets or liabilities or equity of another enterprise, since warranties are based on uncertainties therefore they won’t be classified as financial instruments. Therefore, in more simple words warranties are provision of estimates which a company make, and provisions are not categorized as financial instrument if the amount is based on estimates. Securities: As per IFRS 9 Guideline: Assets that are acquired or incurred principally for the purpose of selling or repurchasing in the near term are considered as Held-For-Trading. Financial assets meeting this definition in which entities gains control over the assets, does not meet the criteria of amortized cost as they are designated as Fair Value through Profit and Loss. As per ASPE 3856 Guideline: There are no specific guidelines to financial instruments under this section, however it does suggests that an entity shall recognize the financial assets when the entity has become a party to a contractual provision. In All Starr’s case, where the investments from Pacific Loans and Saving (Pacific Securities) are acquired for the purpose of selling, in case if the short term price increased overtime. These financial assets are considered as passive investments, and they are considered as financial instruments. Initial Measurement of Financial Instruments: As per IFRS 9 5.1.1 Guideline: Financial investments needs to be initially measured at fair value. A fair value is price that is received in an ordinary transaction between the two parties at the measurement date. In All Starr case, this transaction purchase of 1500 shares will be valued at their fair value. Moreover, it also suggest that transaction costs are directly attributed to this transaction within financial assets. As Per ASPE 3856.07 Guideline: Financial assets which are acquired by an entity shall be initially measured at their Fair Value. Which means upon the initial recognition the investment made into Pacific Loans and Savings will be recorded at fair value method. Fair Value a price that would generally be received in an ordinary transaction between the two parties. Subsequent Measurement of Financial Instruments: As per IFRS 9 5.2 Guideline: For subsequent measurement purposes; financial instruments classified under the category of Fair Value through Profit and Loss needs to

be measured at fair value. Therefore, 1500 shares purchased for $22 can’t be revalued at $22 again, the must be valued at their current fair market value which is $18.95. As per ASPE 3856.11 (a) (1) Guidelines: For subsequent measurement of this financial instrument, based on how they were initially measured they will again be measured at their fair value. Hence, in All Star case where the financial instruments will be later reported at $18.95 for the purchase of 1500 shares, they will not be reported at $22 for subsequent measurement purposes. Risk of Material Misstatement to Transactions: Notes Receivables: 

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The risk related to this notes receivables transaction involves, that notes receivables may be recorded on the financial statement at the value that does not actually represents the true value of note receivable. This material misstatement relates to existence and valuation assertion. Collectability of the balance from Doyle Games, generally there is a significant risk of collecting this amount $80,000 since it is supposed to be repaid within 3 years. Assertion related to this risk; completeness. Lastly, classification of receivables; as to whether classify as short term or long term receivables on the financial statement since controller has already included the amount in accounts receivable. Assertion related to this risk is existence and valuation.

Procedure to address the key risk: 

As practitioner, I would be more inclined to perform substantive audit procedure to address this key risk of collection of Notes Receivables, which involves sending out credit reference check to Doyle Game’s trade references in order to understand their current accounts payable cycle of Doyle Games, also to understand if Doyle current credit rating is reasonable to grant him credit and total balance still owed to its vendors.

Investment in Shares: 

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The risk related of material misstatement; shares transaction was incorrectly valued by the issuer of shares, which means instead a value of 1500 shares to be printed, they can be understated to 1400 shares resulting an understatement in the value and an incorrect amount gets reported on financial statement understating the value of net assets. Assertion related to this risk of material misstatement is existence. Another risk of material misstatement related to fair market value of share price; The price of the share had dropped significantly due to a slowdown in the housing market and recent government policy, which resulted in an unrealized loss on the value of the shares. The loss on the investment will not be recovered. Assertion related to material misstatement is valuation.

Procedure to address the key risk: 

As a practitioner, I would perform a substantive audit procedure for the value of shares that are understated, if an agent outside the organization safeguards the securities, I would request a confirmation, which needs to address the type of security company owns, if the securities include stocks, it would be a good idea

to know how many shares the company actually bought and their fair market value. Receiving a confirmation from the outside agent would actually verify its existence....