Question Tag: Accounting estimates

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  • 8 Marks

FR – Nov 2023 – L2 – Q6a – Ethical Issues in Financial Reporting

Identify and discuss techniques for manipulating financial statements under ethical compliance.

The management of an entity experiencing a decline in profits or poor cash flows may use various forms of creative accounting techniques to manipulate the views shown by the financial statements while complying with all applicable accounting standards and regulations.

Required:
Identify and discuss FOUR techniques of creative accounting. (8 Marks)

 

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  • 20 Marks

FR – May 2022 – L2 – SB – Q2 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Explain accounting policies and estimates, and distinguish between changes in accounting policies and accounting estimates.

The aim of IAS 8 – Accounting Policies, Changes in Accounting Estimates, and Errors is to enhance the comparability of an entity’s financial statements with previous periods and with the financial statements of other entities.

Required:
Explain the terms, “accounting policies” and “accounting estimates.” (3 Marks)

b. In an in-house training for newly recruited trainee accountants in your organization, a disagreement arose on the distinction between change in accounting policies and change in accounting estimates. Consequent upon the above, the finance director requested you as the head of the accounting department to make a presentation on the subject matter.

Required:
Write a memo addressed to the finance director distinguishing changes in accounting policies and changes in accounting estimates, highlighting also the accounting treatment of the changes in accounting estimates. (8 Marks)

c. An extract from the non-current assets register of Eze Nigeria Limited at July 1, 2019, shows the following details:

Additional information includes details of impairment, revaluation, depreciation, and amortization.

Required:
Prepare, with comparative figures, statement of financial position extracts of Eze Nigeria Limited as at June 30, 2020. Show relevant notes for PPE and intangible assets. (9 Marks)

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  • 1 Marks

FA – May 2021 – L1 – SA – Q15 – Regulatory Environment of Accounting

Identify changes that are considered accounting estimates under IAS 8.

In accordance with IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors, which of the following is considered a change in accounting estimates?

i. Changing the useful life of an asset
ii. Changing from cost model to revaluation model
iii. Change in the allowances for doubtful receivables
iv. Change from FIFO to weighted average for valuation of inventory

A. I and II
B. I and III
C. II and III
D. II and IV
E. III and IV

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  • 8 Marks

FA – Nov 2023 – L1 – SB – Q5B -Regulatory Environment of Accounting

Explain the distinction between accounting policies and accounting estimates as per IAS 8.

Explain the distinction between accounting policies and accounting estimates in accordance with IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors.

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  • 8 Marks

FA – May 2023 – L1 – SB – Q3b – Regulatory Environment of Accounting, IAS 8

Defining accounting policies and changes in accounting estimates with examples, and outlining the required accounting treatment.

IAS 8 deals with the measurement, recognition, and disclosure of accounting policies, changes in accounting estimates, and correction of prior period errors.

i. Define an accounting policy and change in accounting estimates, with TWO examples each. (6 Marks)

ii. Outline the accounting treatments required to record a change in accounting estimates. (2 Marks)

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  • 5 Marks

FR – March 2024 – L2 – Q5c – Financial Reporting Standards and Their Applications

Identify the qualities required in information when management uses judgment in developing accounting policies under IAS 8.

According to IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors, when an IFRS specifically applies to a transaction, other event, or condition, the accounting policy applied to that item shall be determined by applying the IFRS. In the absence of an IFRS that specifically applies to a transaction, other event, or condition, management shall use its judgment in developing and applying an accounting policy that results in information that has certain qualities.

Required:
Identify the qualities that must be present in the resultant information when management of an entity uses its judgment in developing and applying an accounting policy.
(5 marks)

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  • 6 Marks

FR – Aug 2022 – L2 – Q2b – Financial Reporting Standards and Their Applications

Explain the key concepts of accounting policies, changes in accounting estimates, and prior period errors as per IAS 8.

IAS 8: Accounting Policies, Changes in Accounting Estimates, and Errors is applied in selecting and applying accounting policies, accounting for changes in estimates, and reflecting corrections of prior period errors. The standard requires compliance with any specific IFRS applying to a transaction, event, or condition, and provides guidance on developing accounting policies for other items that result in relevant and reliable information.

Required:

Explain the following in accordance with IAS 8:

i) Accounting policies (2 marks)
ii) A change in accounting estimate (2 marks)
iii) Prior period errors (2 marks)

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  • 14 Marks

FR – Nov 2015 – L2 – Q4b and c- Financial Reporting Standards and Their Applications

This question involves recalculating profit and financial position based on a change in the method for determining contract completion and explaining the difference between accounting estimates and policies.

LB Ltd is a construction contract company involved in building commercial properties. Its current policy for determining the percentage of completion of its contracts is based on the proportion of cost incurred to date compared to the total expected cost of the contract.

One of LB Ltd’s contracts has an agreed price of GHS 500 million and estimated total costs of GHS 400 million. The cumulative progress of this contract is:

Year ended 30 September 2011 30 September 2012
Costs incurred 160 290
Work certified and billed 150 320
Billing received 140 300

Based on the above, LB Ltd prepared and published its financial statements for the year ended 30 September 2011. Relevant extracts are:

STATEMENT OF PROFIT OR LOSS

Description GHSm
Revenue 200
Cost of sales (160)
Profit ((100 x 160/400)) 40

STATEMENT OF FINANCIAL POSITION

Description GHSm
Current assets: Amounts due from customers
Contract costs to date 160
Profit recognised 40
Total assets 200
Progress billings (150)
Net assets 50
Contract receivables (150-140) 10

LB Ltd has received some adverse publicity in the financial press for taking its profit too early in the contract process, leading to disappointing profits in the later stages of contracts. Most of LB Ltd’s competitors take profit based on the percentage of completion as determined by the work certified compared to the contract price.

Required:

(i) Assuming LB Ltd changes its method of determining the percentage of completion of contracts to that used by its competitors, and that this would represent a change in an accounting estimate, calculate equivalent extracts of profit or loss and statement of financial position for the year ended 30 September 2012. (7 marks)

(ii) Explain why the above represents a change in accounting estimate rather than a change in accounting policy. (2 marks)

c)

LB Ltd also sells building materials to other contractors from its warehouse and is considering setting up another retail branch in a different part of the country.

The directors have been told that the branch can be run directly through the head office or set up as a separate entity, but are not sure how the accounting will work.

Required:
Explain to the directors how this transaction should be treated in the books of LB Ltd.
(5 marks)

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  • 3 Marks

AAA – Nov 2020 – L3 – Q2b – Audit Evidence | Evaluation and Review

Explain significant audit procedures to be performed in the final audit regarding the warranty provision as at 31 March 2019

Explain the significant audit procedures to be performed during the final audit in respect of the estimated warranty provision in the statement of financial position of Manuf Co. as at 31 March 2019. (3 marks)

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  • 20 Marks

AAA – May 2021 – L3 – Q2 – Audit evidence | Evaluation and review

Recommend audit procedures for validating accounting estimates, evaluate the appropriateness of written representations, and assess the impact of management's refusal to provide representations on the audit report.

Oliso Private Company Ltd has been operating in the manufacturing sector for over a decade. One of its major products is manufacturing equipment, which can reduce toxic emissions in the production of chemicals. The company recently employed a new marketing manager who introduced a series of marketing initiatives. This has resulted in significant growth of the company since the appointment of the marketing manager. One of the initiatives is the warranties that the company gives to its customers. The company guarantees its products for three years, and if problems arise within the period, it undertakes to fix them or provide a replacement for the product.

You are the Senior Manager recently engaged by Integrity Audit Consult responsible for Oliso Private Company Ltd’s audit. You are performing the final review as required by ISA 520 Analytical procedures for the audit and have come across the following issues.

Receivable balance due from Obey Company Ltd: Oliso Private Company Ltd has a material receivable balance due from a customer named Obey Company Ltd. During the year-end audit, your team reviewed the ageing of this balance and found that no payments had been received from Obey Company Ltd for over eight months. Oliso Private Company Ltd however would not allow this balance to be included in the list of balances to be circulated. Instead, management has assured your team that they will provide a written representation confirming that the balance is recoverable.

Warranty provision: The warranty provision included in the statement of financial position is material. The audit team has performed testing over the calculations and assumptions, which are consistent with prior years. The team has requested a written representation from management confirming the basis and amount of the provision. Management is yet to confirm acceptance of the need to issue this representation.

Required:

a) Recommend THREE (3) audit procedures to validate the accounting estimates. (5 marks)

b) For each of the two issues above:

i) Evaluate the appropriateness of written representations as a form of audit evidence. (4 marks)

ii) Describe TWO (2) additional procedures the auditor should perform to conclude on the balances to be included in the financial statements. (6 marks)

c) The directors of Oliso Private Company Ltd have decided not to provide the audit firm with the written representation for the warranty provision as they feel it is unnecessary.

Required:

Explain the steps the auditor of Oliso Private Company Ltd should take to assess the impact of management’s refusal to provide a written representation on the auditor’s report. (5 marks)

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  • 8 Marks

FR – Nov 2023 – L2 – Q6a – Ethical Issues in Financial Reporting

Identify and discuss techniques for manipulating financial statements under ethical compliance.

The management of an entity experiencing a decline in profits or poor cash flows may use various forms of creative accounting techniques to manipulate the views shown by the financial statements while complying with all applicable accounting standards and regulations.

Required:
Identify and discuss FOUR techniques of creative accounting. (8 Marks)

 

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  • 20 Marks

FR – May 2022 – L2 – SB – Q2 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Explain accounting policies and estimates, and distinguish between changes in accounting policies and accounting estimates.

The aim of IAS 8 – Accounting Policies, Changes in Accounting Estimates, and Errors is to enhance the comparability of an entity’s financial statements with previous periods and with the financial statements of other entities.

Required:
Explain the terms, “accounting policies” and “accounting estimates.” (3 Marks)

b. In an in-house training for newly recruited trainee accountants in your organization, a disagreement arose on the distinction between change in accounting policies and change in accounting estimates. Consequent upon the above, the finance director requested you as the head of the accounting department to make a presentation on the subject matter.

Required:
Write a memo addressed to the finance director distinguishing changes in accounting policies and changes in accounting estimates, highlighting also the accounting treatment of the changes in accounting estimates. (8 Marks)

c. An extract from the non-current assets register of Eze Nigeria Limited at July 1, 2019, shows the following details:

Additional information includes details of impairment, revaluation, depreciation, and amortization.

Required:
Prepare, with comparative figures, statement of financial position extracts of Eze Nigeria Limited as at June 30, 2020. Show relevant notes for PPE and intangible assets. (9 Marks)

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  • 1 Marks

FA – May 2021 – L1 – SA – Q15 – Regulatory Environment of Accounting

Identify changes that are considered accounting estimates under IAS 8.

In accordance with IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors, which of the following is considered a change in accounting estimates?

i. Changing the useful life of an asset
ii. Changing from cost model to revaluation model
iii. Change in the allowances for doubtful receivables
iv. Change from FIFO to weighted average for valuation of inventory

A. I and II
B. I and III
C. II and III
D. II and IV
E. III and IV

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  • 8 Marks

FA – Nov 2023 – L1 – SB – Q5B -Regulatory Environment of Accounting

Explain the distinction between accounting policies and accounting estimates as per IAS 8.

Explain the distinction between accounting policies and accounting estimates in accordance with IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors.

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  • 8 Marks

FA – May 2023 – L1 – SB – Q3b – Regulatory Environment of Accounting, IAS 8

Defining accounting policies and changes in accounting estimates with examples, and outlining the required accounting treatment.

IAS 8 deals with the measurement, recognition, and disclosure of accounting policies, changes in accounting estimates, and correction of prior period errors.

i. Define an accounting policy and change in accounting estimates, with TWO examples each. (6 Marks)

ii. Outline the accounting treatments required to record a change in accounting estimates. (2 Marks)

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  • 5 Marks

FR – March 2024 – L2 – Q5c – Financial Reporting Standards and Their Applications

Identify the qualities required in information when management uses judgment in developing accounting policies under IAS 8.

According to IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors, when an IFRS specifically applies to a transaction, other event, or condition, the accounting policy applied to that item shall be determined by applying the IFRS. In the absence of an IFRS that specifically applies to a transaction, other event, or condition, management shall use its judgment in developing and applying an accounting policy that results in information that has certain qualities.

Required:
Identify the qualities that must be present in the resultant information when management of an entity uses its judgment in developing and applying an accounting policy.
(5 marks)

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  • 6 Marks

FR – Aug 2022 – L2 – Q2b – Financial Reporting Standards and Their Applications

Explain the key concepts of accounting policies, changes in accounting estimates, and prior period errors as per IAS 8.

IAS 8: Accounting Policies, Changes in Accounting Estimates, and Errors is applied in selecting and applying accounting policies, accounting for changes in estimates, and reflecting corrections of prior period errors. The standard requires compliance with any specific IFRS applying to a transaction, event, or condition, and provides guidance on developing accounting policies for other items that result in relevant and reliable information.

Required:

Explain the following in accordance with IAS 8:

i) Accounting policies (2 marks)
ii) A change in accounting estimate (2 marks)
iii) Prior period errors (2 marks)

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  • 14 Marks

FR – Nov 2015 – L2 – Q4b and c- Financial Reporting Standards and Their Applications

This question involves recalculating profit and financial position based on a change in the method for determining contract completion and explaining the difference between accounting estimates and policies.

LB Ltd is a construction contract company involved in building commercial properties. Its current policy for determining the percentage of completion of its contracts is based on the proportion of cost incurred to date compared to the total expected cost of the contract.

One of LB Ltd’s contracts has an agreed price of GHS 500 million and estimated total costs of GHS 400 million. The cumulative progress of this contract is:

Year ended 30 September 2011 30 September 2012
Costs incurred 160 290
Work certified and billed 150 320
Billing received 140 300

Based on the above, LB Ltd prepared and published its financial statements for the year ended 30 September 2011. Relevant extracts are:

STATEMENT OF PROFIT OR LOSS

Description GHSm
Revenue 200
Cost of sales (160)
Profit ((100 x 160/400)) 40

STATEMENT OF FINANCIAL POSITION

Description GHSm
Current assets: Amounts due from customers
Contract costs to date 160
Profit recognised 40
Total assets 200
Progress billings (150)
Net assets 50
Contract receivables (150-140) 10

LB Ltd has received some adverse publicity in the financial press for taking its profit too early in the contract process, leading to disappointing profits in the later stages of contracts. Most of LB Ltd’s competitors take profit based on the percentage of completion as determined by the work certified compared to the contract price.

Required:

(i) Assuming LB Ltd changes its method of determining the percentage of completion of contracts to that used by its competitors, and that this would represent a change in an accounting estimate, calculate equivalent extracts of profit or loss and statement of financial position for the year ended 30 September 2012. (7 marks)

(ii) Explain why the above represents a change in accounting estimate rather than a change in accounting policy. (2 marks)

c)

LB Ltd also sells building materials to other contractors from its warehouse and is considering setting up another retail branch in a different part of the country.

The directors have been told that the branch can be run directly through the head office or set up as a separate entity, but are not sure how the accounting will work.

Required:
Explain to the directors how this transaction should be treated in the books of LB Ltd.
(5 marks)

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  • 3 Marks

AAA – Nov 2020 – L3 – Q2b – Audit Evidence | Evaluation and Review

Explain significant audit procedures to be performed in the final audit regarding the warranty provision as at 31 March 2019

Explain the significant audit procedures to be performed during the final audit in respect of the estimated warranty provision in the statement of financial position of Manuf Co. as at 31 March 2019. (3 marks)

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  • 20 Marks

AAA – May 2021 – L3 – Q2 – Audit evidence | Evaluation and review

Recommend audit procedures for validating accounting estimates, evaluate the appropriateness of written representations, and assess the impact of management's refusal to provide representations on the audit report.

Oliso Private Company Ltd has been operating in the manufacturing sector for over a decade. One of its major products is manufacturing equipment, which can reduce toxic emissions in the production of chemicals. The company recently employed a new marketing manager who introduced a series of marketing initiatives. This has resulted in significant growth of the company since the appointment of the marketing manager. One of the initiatives is the warranties that the company gives to its customers. The company guarantees its products for three years, and if problems arise within the period, it undertakes to fix them or provide a replacement for the product.

You are the Senior Manager recently engaged by Integrity Audit Consult responsible for Oliso Private Company Ltd’s audit. You are performing the final review as required by ISA 520 Analytical procedures for the audit and have come across the following issues.

Receivable balance due from Obey Company Ltd: Oliso Private Company Ltd has a material receivable balance due from a customer named Obey Company Ltd. During the year-end audit, your team reviewed the ageing of this balance and found that no payments had been received from Obey Company Ltd for over eight months. Oliso Private Company Ltd however would not allow this balance to be included in the list of balances to be circulated. Instead, management has assured your team that they will provide a written representation confirming that the balance is recoverable.

Warranty provision: The warranty provision included in the statement of financial position is material. The audit team has performed testing over the calculations and assumptions, which are consistent with prior years. The team has requested a written representation from management confirming the basis and amount of the provision. Management is yet to confirm acceptance of the need to issue this representation.

Required:

a) Recommend THREE (3) audit procedures to validate the accounting estimates. (5 marks)

b) For each of the two issues above:

i) Evaluate the appropriateness of written representations as a form of audit evidence. (4 marks)

ii) Describe TWO (2) additional procedures the auditor should perform to conclude on the balances to be included in the financial statements. (6 marks)

c) The directors of Oliso Private Company Ltd have decided not to provide the audit firm with the written representation for the warranty provision as they feel it is unnecessary.

Required:

Explain the steps the auditor of Oliso Private Company Ltd should take to assess the impact of management’s refusal to provide a written representation on the auditor’s report. (5 marks)

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