Related parties are entities or persons that are related to the entity preparing the financial statements. Related parties may include the entity’s parent, subsidiaries, associates, joint ventures, and directors, key management personnel, and their immediate families.
Related parties may also include entities or persons that have the ability to exercise significant influence over the entity, such as major shareholders, close members of the entity’s governing body, or other entities or persons that have a close relationship with the entity.
The definition of related parties and the identification of related parties are important in the preparation of the financial statements, as transactions with related parties may be subject to special disclosure requirements and may require special accounting treatment to ensure that they are presented in a consistent and transparent manner.
You should refer to the accounting standards for the precise definitions.
To account for leases under IFRS 16, the entity should follow the principles and rules of accounting for leases, which are the principles and rules that govern the recognition, measurement, and disclosure of leases in the financial statements.
IFRS 16 is the International Financial Reporting Standard that applies to leases. IFRS 16 replaces the previous leases standard, IAS 17, and introduces a single, on-balance sheet model for lessees. Under IFRS 16, lessees are required to recognize a right-of-use asset and a lease liability for all leases, except for short-term and low-value leases.
The key steps in accounting for leases under IFRS 16 are as follows:
Identify the lease: The first step in accounting for leases under IFRS 16 is to identify the lease. A lease is a contract that conveys the right to use an asset for a specified period of time in exchange for consideration. A lease is classified as a finance lease or an operating lease based on the nature of the underlying asset and the extent to which the risks and rewards of ownership of the asset are transferred to the lessee.
Measure the right-of-use asset and the lease liability: The second step in accounting for leases under IFRS 16 is to measure the right-of-use asset and the lease liability. The right-of-use asset is measured at the present value of the lease payments, discounted at the lessee’s incremental borrowing rate. The lease liability is measured at the present value of the lease payments, discounted at the lessee’s incremental borrowing rate, plus any lease incentives received by the lessee.
Recognize the right-of-use asset and the lease liability in the balance sheet: The third step in accounting for leases under IFRS 16 is to recognize the right-of-use asset and the lease liability in the balance sheet. The right-of-use asset is recognized as a non-current asset, and the lease liability is recognized as a non-current liability. The right-of-use asset and the lease liability are recognized at the commencement date of the lease.
The right of use asset has to be depreciated over the lease term. At each year end the value of the remaining asset should be compared to the lease liability to assess for any impairment.
The business may have coded rental/lease payments to the rent nominal in the p&l. This needs to be reclassified to reducing the lease liability. Instead the p&l will show the lease interest payable for the year.
The lease term is generally used for the calculations, unless there is a break clause at the option of the lessee etc.
There is an exemption available for short leases such as 1 year lease/tenancy agreements.
To account for an associate, the entity should follow the principles and rules of accounting for associates, which are the principles and rules that govern the recognition, measurement, and disclosure of associates in the financial statements.
The key steps in accounting for an associate are as follows:
Identify the associate: The first step in accounting for an associate is to identify the associate. An associate is an entity over which the entity has significant influence, but not control. Significant influence is the power to participate in the financial and operating policies of the associate, but not the power to control those policies.
Measure the investment in the associate: The second step in accounting for an associate is to measure the investment in the associate. The investment in the associate is measured at the cost of acquisition, adjusted for post-acquisition changes in the entity’s share of the associate’s net assets. The cost of acquisition includes the fair value of any assets or liabilities assumed by the entity in the acquisition of the associate.
Recognize the entity’s share of the associate’s net income and net assets: The third step in accounting for an associate is to recognize the entity’s share of the associate’s net income and net assets. The entity’s share of the associate’s net income is recognized in the income statement, and the entity’s share of the associate’s net assets is recognized in the balance sheet.
Disclose the investment in the associate and the entity’s share of the associate’s financial performance: The fourth step in accounting for an associate is to disclose the investment in the associate and the entity’s share of the associate’s financial performance. The entity should disclose the carrying amount of the investment in the associate, the nature of the investment, and the entity’s share of the associate’s profit or loss and other comprehensive income.
Overall, the key steps in accounting for an associate are to identify the associate, measure the investment in the associate, recognize the entity’s share of the associate’s net income and net assets, and disclose the investment in the associate and the entity’s share of the associate’s financial performance.
Consolidated accounts are financial statements that present the financial position, performance, and cash flows of a group of entities as if they were a single entity. Consolidated accounts are prepared in accordance with the principles and rules of consolidation, which are the principles and rules that govern the combination of the financial statements of the entities in the group.
The key steps and rules in preparing consolidated accounts are as follows:
Identify the entities in the group: The first step in preparing consolidated accounts is to identify the entities in the group. The entities in the group are typically subsidiaries of the parent entity, which is the entity that controls the group. The parent entity and the subsidiaries are referred to as the consolidated entities.
Eliminate intragroup transactions and balances: The second step in preparing consolidated accounts is to eliminate intragroup transactions and balances. Intragroup transactions and balances are transactions and balances that arise between the consolidated entities, and are not transactions and balances between the group and third parties. Intragroup transactions and balances are eliminated in the consolidated accounts to avoid double-counting and to present the group’s financial position, performance, and cash flows as if the consolidated entities were a single entity.
Measure the non-controlling interest in the consolidated entities: The third step in preparing consolidated accounts is to measure the non-controlling interest in the consolidated entities. The non-controlling interest is the equity interest in the consolidated entities that is not owned by the parent entity. The non-controlling interest is measured at its proportionate share of the fair value of the consolidated entities, and is presented as a separate component of equity in the consolidated financial statements.
Prepare the consolidated financial statements: The fourth step in preparing consolidated accounts is to prepare the consolidated financial statements. The consolidated financial statements include the consolidated balance sheet, the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity, and the consolidated statement of cash flows. The consolidated financial statements present the financial position, performance, and cash flows of the group as if the consolidated entities were a single entity.
Overall, the key steps and rules in preparing consolidated accounts are to identify the entities in the group, eliminate intragroup transactions and balances, measure the non-controlling interest in the consolidated entities, and prepare the consolidated financial statements.
To audit trade payables, the auditor should perform the following steps:
Understand the entity’s trade payables and the related business processes: The auditor should obtain an understanding of the entity’s trade payables, including the nature, timing, and amount of the payables, and the related business processes, such as the purchasing and payment processes.
Assess the risks of material misstatement in the trade payables: The auditor should assess the risks of material misstatement in the trade payables, taking into account the entity’s industry, the economic environment, the credit quality of the entity’s suppliers, and the entity’s internal controls.
Develop an audit plan and audit procedures for the trade payables: Based on the understanding of the trade payables and the risks of material misstatement, the auditor should develop an audit plan and audit procedures for the trade payables, including the nature, timing, and extent of the audit procedures.
Test the trade payables and evaluate the results: The auditor should test the trade payables and evaluate the results, using appropriate audit procedures, such as confirmation, observation, inspection, and recalculation. The auditor should also evaluate the entity’s accounting policies and estimates related to the trade payables, such as the accrual of unpaid expenses.
Conclude on the trade payables and communicate the findings: Based on the audit evidence obtained, the auditor should conclude on the trade payables and communicate the findings to the entity’s management and the audit committee. The auditor should also evaluate the entity’s disclosure of the trade payables in the financial statements.
To audit trade receivables, the auditor should perform the following steps:
Understand the entity’s trade receivables and the related business processes: The auditor should obtain an understanding of the entity’s trade receivables, including the nature, timing, and amount of the receivables, and the related business processes, such as the sales and billing processes.
Assess the risks of material misstatement in the trade receivables: The auditor should assess the risks of material misstatement in the trade receivables, taking into account the entity’s industry, the economic environment, the credit quality of the entity’s customers, and the entity’s internal controls.
Develop an audit plan and audit procedures for the trade receivables: Based on the understanding of the trade receivables and the risks of material misstatement, the auditor should develop an audit plan and audit procedures for the trade receivables, including the nature, timing, and extent of the audit procedures.
Test the trade receivables and evaluate the results: The auditor should test the trade receivables and evaluate the results, using appropriate audit procedures, such as confirmation, observation, inspection, and recalculation. The auditor should also evaluate the entity’s accounting policies and estimates related to the trade receivables, such as the allowance for doubtful accounts.
Conclude on the trade receivables and communicate the findings: Based on the audit evidence obtained, the auditor should conclude on the trade receivables and communicate the findings to the entity’s management and the audit committee. The auditor should also evaluate the entity’s disclosure of the trade receivables in the financial statements.
In auditing, sampling is the process of selecting a subset of items or transactions from a population for the purpose of testing and evaluating the population. Sampling is used in auditing to provide the auditor with sufficient appropriate audit evidence to support the audit opinion, while avoiding the need to test and evaluate the entire population.
There are two types of sampling methods used in auditing: statistical sampling and non-statistical sampling. Statistical sampling involves the use of mathematical techniques and probabilities to determine the sample size and the selection of items in the sample. Non-statistical sampling involves the use of the auditor’s professional judgment to determine the sample size and the selection of items in the sample.
In statistical sampling, the sample size and the selection of items in the sample are determined based on the auditor’s desired level of precision and the expected population characteristics, such as the expected mean and the expected standard deviation. The auditor uses statistical formulas and tables to determine the sample size and the selection of items in the sample, and to evaluate the results of the sample.
In non-statistical sampling, the sample size and the selection of items in the sample are determined based on the auditor’s professional judgment and experience, taking into account the nature of the population, the auditor’s assessment of the risks of material misstatement, and the auditor’s overall audit strategy. The auditor uses the sample to evaluate the population, and may use statistical techniques to evaluate the results of the sample.
Overall, sampling is an important concept in auditing, as it allows the auditor to obtain sufficient appropriate audit evidence to support the audit opinion, while avoiding the need to test and evaluate the entire population. The use of sampling in auditing requires the auditor to have a deep understanding of statistical techniques and probabilities, as well as the ability to use professional judgment and experience to determine the sample size and the selection of items in the sample.
Impact on audit work
For a small population it may be difficult to use statistical sampling, so we would normally use our judgement to pick the sample size and items, mainly picking risky/large items as well as a few other small items to ensure we cover a cross section of the population.
For a large population we would normally use the sample calculator to calculate the sample size, after selecting large and risky items. The results of the sample test can then be projected to the population.
In auditing, the concept of trivial refers to an item or matter that is insignificant or immaterial, and therefore does not require further attention or audit procedures.
An item or matter is considered trivial if it is small in relation to the overall size and nature of the financial statements, and if it does not have a significant impact on the financial statements. An item or matter is considered trivial if it is not material, and if it is not indicative of a potential material misstatement or error in the financial statements.
The determination of triviality is based on the auditor’s professional judgment, and takes into account the auditor’s assessment of the risks of material misstatement and the auditor’s tolerance for misstatements in the financial statements. The determination of triviality should be made on a case-by-case basis, and should be documented in the audit working papers.
For example, if an auditor is reviewing the accounts payable balance for an entity, and the auditor determines that a small account payable balance of $50 is not material and does not have a significant impact on the financial statements, the auditor may consider the account payable balance to be trivial and may not perform further audit procedures on the account.
Overall, the concept of triviality is an important concept in auditing, as it allows the auditor to focus on items or matters that are significant or material, and to avoid spending unnecessary time and resources on immaterial items or matters. The determination of triviality should be based on the auditor’s professional judgment, and should be documented in the audit working papers.
Materiality and performance materiality are important concepts in auditing and financial reporting, as they help to determine the nature, timing, and extent of the audit procedures and the disclosures in the financial statements.
Materiality refers to the significance of an item or matter to the financial statements. An item or matter is material if its omission or misstatement could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality depends on the size and nature of the item or matter, and the surrounding circumstances.
Performance materiality is the level of misstatement in the financial statements that the auditor is willing to accept without modifying the audit opinion, taking into account the auditor’s assessment of the risks of material misstatement and the auditor’s professional judgment. Performance materiality is typically set at a lower level than materiality, as it reflects the auditor’s tolerance for misstatements in the financial statements.
There are several benchmarks that can be used to determine materiality and performance materiality, including the relative size of the item or matter, the nature of the item or matter, and the overall size and nature of the financial statements.
For example, the relative size of the item or matter can be used as a benchmark for materiality and performance materiality. An item or matter with a large relative size, such as a significant transaction or account balance, is more likely to be material than an item or matter with a small relative size.
The nature of the item or matter can also be used as a benchmark for materiality and performance materiality. An item or matter with a significant impact on the financial statements, such as a transaction that affects the entity’s revenue or expenses, is more likely to be material than an item or matter with a limited impact on the financial statements.
The overall size and nature of the financial statements can also be used as a benchmark for materiality and performance materiality. For example, an item or matter that represents a large percentage of the entity’s total assets or revenue is more likely to be material for a small entity than for a large entity.
Overall, materiality and performance materiality are important concepts in auditing and financial reporting, as they help to determine the nature, timing, and extent of the audit procedures and the disclosures in the financial statements. There are several benchmarks that can be used to determine materiality and performance materiality, including the relative size of the item or matter, the nature of the item or matter, and the overall size and nature of the financial statements.
Typical Benchmarks
Range of turnover or gross assets
Percentage of turnover or gross assets
Materiality ranges
£0 – £500,000
3.00%
£1 – £15,000
£500,001 – £2,000,000
2.50%
£15,001 – £50,000
£2,000,001 – £3,500,000
2.00%
£50,001 – £70,000
£3,500,001 – £6,000,000
1.50%
£70,001 – £90,000
over £6,000,000
1.00%
over £90,000
Performance materiality
For low risk engagements, performance materiality is generally calculated around 75%-80% of materiality.
For high risk, it may be around 60%.
Trivial
We would normally use 5% of materiality to calculate the level below which misstatements are considered to be trivial.
Audit assertions are the statements made by the management of an entity about the financial statements, and are the basis for the auditor’s audit procedures and conclusions. The International Standards on Auditing (ISAs) specify certain audit assertions that the auditor should consider when planning and performing the audit, in order to obtain sufficient appropriate audit evidence.
The ISAs specify three types of audit assertions: presentation and disclosure assertions, transaction and event assertions, and assertion about account balances.
Presentation and disclosure assertions relate to the overall presentation and disclosure of the financial statements, and include assertions such as the completeness of the financial statements, the classification of transactions and events, and the accuracy and completeness of the disclosures.
Transaction and event assertions relate to the recognition, measurement, and presentation of transactions and events, and include assertions such as the accuracy and completeness of the transactions, the existence and occurrence of the transactions, and the rights and obligations of the entity arising from the transactions.
Assertions about account balances relate to the accuracy and completeness of the account balances in the financial statements, and include assertions such as the accuracy and completeness of the account balances, the valuation and allocation of assets and liabilities, and the presentation and disclosure of the account balances.
The auditor should consider the relevant audit assertions when planning and performing the audit, in order to obtain sufficient appropriate audit evidence to support the audit opinion. The audit assertions should be discussed with the management of the entity, and any significant assumptions and estimates used by the management should be assessed by the auditor.
