ESAA Final Level Exam flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Conceptual Framework Threats

The five threat categories in the IESBA Code are self-interest, self-review, advocacy, familiarity, and intimidation. Each must be identified, evaluated for significance, and addressed through elimination, safeguards, or declining the engagement.

Independence of Mind

The state of mind that permits a conclusion without being affected by influences that compromise professional judgement, allowing the member to act with integrity and exercise objectivity and professional scepticism.

Confidentiality After Engagement

The duty of confidentiality continues after the professional relationship ends. Disclosure is allowed only when required by law, permitted by law with client consent, or there is a professional right or duty to disclose.

Accounting Equation

Assets equal liabilities plus equity. Every transaction maintains this balance, and total debits must equal total credits in the double-entry system at all times.

Revenue Recognition Five Steps

Identify the contract with the customer, identify the distinct performance obligations, determine the transaction price, allocate the price to the obligations, and recognise revenue when each obligation is satisfied.

Impairment Recoverable Amount

Recoverable amount is the higher of fair value less costs of disposal and value in use. An asset is impaired when its carrying amount exceeds recoverable amount, and the loss is recognised immediately.

Fair Value Hierarchy Levels

Level 1 uses quoted prices in active markets for identical assets. Level 2 uses observable inputs other than Level 1 prices. Level 3 uses unobservable inputs supported by the entity's own assumptions.

Break-Even Point

Break-even units equal total fixed costs divided by contribution per unit. At this volume total contribution exactly covers fixed costs and operating profit is zero.

Margin of Safety

The excess of budgeted or actual sales over break-even sales, expressed as a percentage of budgeted sales. It measures how far sales can fall before a loss arises.

Material Price Variance

Material price variance equals standard price minus actual price, multiplied by the actual quantity purchased. A positive result is favourable because less was paid than the standard.

Residual Income

Residual income equals divisional operating profit minus the required rate of return multiplied by invested capital. Unlike ROI, it encourages managers to accept profitable investments above the required rate.

Net Present Value Rule

NPV is the sum of discounted future cash flows minus the initial investment. Accept independent projects with positive NPV; when mutually exclusive, choose the highest positive NPV.

Weighted Average Cost of Capital

WACC equals equity weight times cost of equity plus debt weight times cost of debt times one minus the tax rate. Weights are based on market values of equity and debt.

Capital Asset Pricing Model

Cost of equity equals the risk-free rate plus beta multiplied by the market risk premium. Beta measures the sensitivity of the share's returns to movements in the market portfolio.

Cash Conversion Cycle

Inventory days plus receivable days minus payable days. A shorter cycle reduces the cash tied up in working capital and improves liquidity.

Audit Risk Model

Audit risk equals inherent risk times control risk times detection risk. The auditor sets detection risk by adjusting the nature, timing, and extent of substantive procedures.

Performance Materiality

An amount set below overall materiality to reduce to an appropriately low level the probability that uncorrected and undetected misstatements exceed overall materiality for the financial statements as a whole.

COSO Control Components

The five COSO components are control environment, risk assessment, control activities, information and communication, and monitoring activities. They apply across the entity and at the transaction level.

Going Concern Assessment

The auditor evaluates management's going concern assessment covering at least twelve months from the reporting date and considers whether the related disclosures are adequate and appropriate.

Porter's Five Forces

Competitive intensity is shaped by threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitutes, and rivalry among existing competitors.

Ansoff Growth Matrix

Four growth options combine products and markets: market penetration (existing products, existing markets), market development, product development, and diversification (new products, new markets).

Risk Response Options

Organisations respond to risk by avoiding the activity, reducing likelihood or impact through controls, transferring or sharing risk such as through insurance, or accepting and monitoring the residual risk.

Three Lines Model

Operational management owns and manages risk in the first line. Risk and compliance functions provide oversight in the second line. Internal audit provides independent assurance in the third line.

Recovery Time Objective

The maximum acceptable time to restore a business process or system after disruption. It drives continuity planning and differs from recovery point objective, which concerns tolerable data loss.

General IT Controls

Controls over the IT environment supporting application controls: access management, change management, IT operations, and backup and recovery. Weak general controls undermine reliance on automated application controls.

Data Quality Dimensions

Common dimensions are completeness, accuracy, validity, consistency, uniqueness, and timeliness. Analytics conclusions are only as reliable as the underlying data quality.

Benford's Law

In many naturally occurring datasets, lower leading digits appear more frequently than higher ones. Significant deviations from the expected distribution can indicate errors, manipulation, or fraud.

Cloud Shared Responsibility

The provider secures the underlying infrastructure, while the customer remains responsible for data classification, identity and access management, and secure configuration of services used.

Taxable Income Formula

Accounting profit adjusted for permanent differences, temporary differences, and allowable reliefs such as tax losses. Permanent differences affect the effective tax rate but never create deferred tax.

Tax Avoidance Versus Evasion

Tax avoidance uses arrangements within the letter of the law to reduce tax and may be challenged under general anti-avoidance rules. Tax evasion is illegal and involves concealment or misrepresentation.

Contract Formation Elements

A valid contract requires offer, acceptance, consideration, intention to create legal relations, and capacity. A counter-offer rejects the original offer and creates a new one.

Insolvency Tests

Cash-flow insolvency is inability to pay debts as they fall due. Balance-sheet insolvency is liabilities exceeding assets. Different legal consequences attach to each test in most jurisdictions.