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Kazakhstan Auditor Attestation practice questions

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Question 1Auditing Standards and Methodology

Under auditing standards, what is the primary purpose of an auditor's understanding of the entity and its environment?

  1. To prepare the entity's financial statements
  2. To replace the need for substantive testing
  3. To guarantee detection of all fraud
  4. To identify and assess risks of material misstatement Correct answer.

Explanation

Understanding the entity and its environment informs the risk assessment process, allowing the auditor to identify and assess risks of material misstatement at the financial statement and assertion levels. It is a planning input, not a substitute for further audit procedures.

Question 2Auditing Standards and Methodology

Which of the following best describes the concept of audit materiality?

  1. The fee negotiated with the client
  2. The number of samples selected
  3. The threshold above which misstatements could influence users' decisions Correct answer.
  4. The total value of all assets tested

Explanation

Materiality is the level at which misstatements, individually or in aggregate, could reasonably be expected to influence the economic decisions of users of the financial statements. It is a judgment applied throughout planning and evaluation.

Question 3Auditing Standards and Methodology

Professional skepticism requires the auditor to do which of the following?

  1. Accept management explanations without further evidence
  2. Remain alert to conditions indicating possible misstatement Correct answer.
  3. Assume all records are fraudulent
  4. Delegate all judgments to the engagement partner

Explanation

Professional skepticism is an attitude of questioning and critical assessment of evidence, remaining alert to indications of possible misstatement due to error or fraud. It does not presume dishonesty but avoids unquestioning acceptance.

Question 4Auditing Standards and Methodology

An auditor obtains evidence that the client's inventory count was observed but the count sheets were subsequently altered. Which type of risk does this most directly illustrate?

  1. Risk of material misstatement due to fraud Correct answer.
  2. Detection risk only
  3. Inherent risk only
  4. Control risk only

Explanation

Deliberate alteration of count documentation suggests intentional misstatement, which falls under the risk of material misstatement due to fraud. Fraud risk is a subset of the risks the auditor must assess and respond to.

Question 5Auditing Standards and Methodology

Which procedure provides the most reliable audit evidence about the existence of a bank balance?

  1. A direct confirmation received from the bank Correct answer.
  2. Inquiry of the client's controller
  3. Review of the prior year's bank statement
  4. Inspection of an internal memo

Explanation

External confirmations received directly from an independent third party are generally more reliable than internally generated evidence. Direct confirmation reduces the opportunity for client manipulation.

Question 6Auditing Standards and Methodology

When designing audit sampling, which factor generally increases the required sample size?

  1. A higher expected misstatement in the population Correct answer.
  2. A higher tolerable misstatement
  3. A lower assessed risk of material misstatement
  4. A larger population with low variability

Explanation

Higher expected misstatement in the population requires a larger sample to achieve the desired level of assurance. Sample size responds directly to the auditor's expectation of error.

Question 7Auditing Standards and Methodology

An auditor is unable to obtain sufficient appropriate evidence about a material investment. What type of opinion is most appropriate?

  1. Qualified or disclaimer of opinion depending on pervasiveness Correct answer.
  2. Adverse opinion in all cases
  3. Unmodified opinion with no further action
  4. Unmodified opinion with an emphasis of matter paragraph

Explanation

A scope limitation that is material but not pervasive leads to a qualified opinion; if the possible effects are both material and pervasive, a disclaimer of opinion is required. An emphasis of matter paragraph does not address a lack of evidence.

Question 8Auditing Standards and Methodology

What is the purpose of an engagement letter?

  1. To list all adjusting journal entries
  2. To record the auditor's conclusion on internal controls
  3. To document the agreed terms of the audit engagement Correct answer.
  4. To serve as the audit report

Explanation

The engagement letter confirms the auditor's acceptance and the agreed terms of the engagement, reducing the risk of misunderstanding between auditor and client. It is agreed before the audit begins.

Question 9Auditing Standards and Methodology

Which of the following is an example of an analytical procedure used in audit planning?

  1. Counting cash on hand
  2. Inspecting a signed contract
  3. Comparing current-year gross margin to prior-year and budgeted figures Correct answer.
  4. Sending a confirmation to a supplier

Explanation

Analytical procedures evaluate financial information by studying plausible relationships among data, such as comparing ratios and trends. Comparing margins to prior periods and budgets is a classic analytical procedure.

Question 10Auditing Standards and Methodology

The auditor's documentation should be sufficient to enable which of the following?

  1. The engagement to skip quality review
  2. An experienced auditor with no prior connection to the engagement to understand the work performed Correct answer.
  3. The auditor to avoid supervision
  4. The client to prepare tax returns

Explanation

Audit documentation must allow an experienced auditor with no previous connection to the engagement to understand the nature, timing, and extent of procedures, results, and significant judgments. This supports review and quality control.

Question 11Auditing Standards and Methodology

Which assertion is most directly tested by confirming accounts receivable balances with customers?

  1. Completeness
  2. Classification
  3. Existence Correct answer.
  4. Valuation of inventory

Explanation

Confirming receivable balances with customers provides evidence that the recorded receivables exist and are owed by the named parties. It addresses the existence assertion most directly.

Question 12Auditing Standards and Methodology

An auditor identifies a significant risk. What is the required response?

  1. Rely solely on prior-year evidence
  2. Ignore the risk if controls appear strong
  3. Reduce the extent of substantive testing
  4. Obtain more persuasive evidence and perform procedures specifically responsive to that risk Correct answer.

Explanation

For significant risks, the auditor must obtain more persuasive audit evidence and design procedures specifically responsive to the risk, often including substantive procedures. Controls alone are insufficient.

Question 13Auditing Standards and Methodology

Which of the following best describes the purpose of a management representation letter?

  1. To confirm written representations management has made about the financial statements Correct answer.
  2. To transfer the auditor's responsibility to management
  3. To serve as the audit opinion
  4. To replace substantive audit procedures

Explanation

The representation letter obtains written confirmation of management's representations on matters relevant to the financial statements. It complements, but does not replace, other audit evidence.

Question 14Auditing Standards and Methodology

An auditor plans to use the work of an internal audit function. Which condition is most important?

  1. The internal audit function is objective and competent for the relevant area Correct answer.
  2. The internal auditors prepare the financial statements
  3. The internal auditors charge lower fees
  4. The internal auditors report to the same manager as the external auditor

Explanation

Before relying on internal audit work, the external auditor evaluates the objectivity and competence of the internal audit function and the adequacy of its work. Objectivity and competence are the core criteria.

Question 15Auditing Standards and Methodology

Which of the following is a test of control rather than a substantive procedure?

  1. Vouching a sale to a shipping document
  2. Confirming a payable balance
  3. Inspecting evidence that a purchase was approved before payment Correct answer.
  4. Recomputing depreciation expense

Explanation

Testing whether an approval control operated as designed is a test of controls. The other options obtain evidence about amounts and balances, which are substantive procedures.

Question 16Auditing Standards and Methodology

What is the auditor's responsibility regarding subsequent events after the date of the financial statements?

  1. Only review events reported in the news
  2. Perform procedures to identify events that may require adjustment or disclosure Correct answer.
  3. Rely entirely on management's oral assurances
  4. No responsibility exists after year-end

Explanation

The auditor performs procedures designed to identify subsequent events up to the date of the auditor's report that may require adjustment or disclosure in the financial statements. This is an active responsibility.

Question 17Auditing Standards and Methodology

An auditor determines that a misstatement is material but not pervasive and the financial statements are otherwise fairly presented except for that matter. What opinion is appropriate?

  1. Adverse opinion
  2. Unmodified opinion
  3. Qualified opinion Correct answer.
  4. Disclaimer of opinion

Explanation

A material misstatement that is not pervasive results in a qualified opinion. An adverse opinion is used when the misstatement is both material and pervasive.

Question 18Auditing Standards and Methodology

Which of the following best describes the purpose of the auditor's overall review at the end of the audit?

  1. To design the internal control system
  2. To prepare the tax computation
  3. To evaluate whether the financial statements are consistent with the auditor's understanding of the entity Correct answer.
  4. To negotiate the audit fee

Explanation

The overall review assesses whether the financial statements, taken as a whole, are consistent with the auditor's understanding of the entity and whether the conclusions reached are appropriate. It is a final quality check on the audit.

Question 19Auditing Standards and Methodology

An auditor uses a larger sample than planned because the population was found to contain more errors than expected. This decision reflects which concept?

  1. Segregation of duties
  2. Audit fee budgeting
  3. Professional skepticism applied to sampling risk Correct answer.
  4. Materiality

Explanation

When errors exceed expectations, the auditor increases the sample or extends testing to control sampling risk and maintain the planned level of assurance. This reflects a skeptical response to evidence.

Question 20Auditing Standards and Methodology

Which of the following is the most appropriate source of evidence about the existence of a legal claim against the entity?

  1. Inquiry of the entity's sales staff
  2. A verbal statement from a supplier
  3. A letter from the entity's external legal counsel Correct answer.
  4. The prior-year trial balance

Explanation

A response from external legal counsel provides corroborated, independent evidence about legal claims and contingencies. It is more reliable than internal inquiry or unrelated records.

Question 21Auditing Standards and Methodology

What is the primary objective of audit quality control at the engagement level?

  1. To ensure the engagement is performed in accordance with professional standards and applicable requirements Correct answer.
  2. To reduce the client's tax liability
  3. To maximize the number of procedures performed
  4. To guarantee a profit for the firm

Explanation

Engagement quality control aims to ensure the audit complies with professional standards and legal requirements and that the report issued is appropriate. It focuses on consistency and quality, not volume or commercial outcomes.

Question 22Auditing Standards and Methodology

An auditor discovers that a client changed its accounting policy without disclosure. This most directly affects which assertion?

  1. Existence
  2. Rights and obligations
  3. Presentation and disclosure Correct answer.
  4. Occurrence

Explanation

Failure to disclose a change in accounting policy concerns how items are classified, described, and disclosed in the financial statements. This is the presentation and disclosure assertion.

Question 23Auditing Standards and Methodology

When is it appropriate for the auditor to use the work of an expert?

  1. Whenever the client requests it
  2. Only when the audit fee is high
  3. When the expert's field is outside the auditor's competence and the expert's work is relevant to the audit Correct answer.
  4. When the auditor wants to avoid substantive testing

Explanation

An auditor's expert may be used when specialized knowledge outside the auditor's competence is needed to obtain sufficient appropriate evidence. The auditor remains responsible for evaluating the expert's work.

Question 24Auditing Standards and Methodology

Which of the following best explains why the auditor obtains an understanding of the entity's internal control?

  1. To take over management's control responsibilities
  2. To express an opinion on the effectiveness of internal control in every audit
  3. To identify types of potential misstatement and design further audit procedures Correct answer.
  4. To eliminate the need for substantive testing

Explanation

Understanding internal control helps the auditor identify where misstatements could arise and informs the design of further audit procedures. An opinion on internal control is not required in every audit.

Question 25Auditing Standards and Methodology

An auditor concludes that the going concern assumption is appropriate but a material uncertainty exists that is adequately disclosed. What is the appropriate treatment?

  1. Do not mention the matter in the report
  2. Include a separate section in the auditor's report drawing attention to the material uncertainty Correct answer.
  3. Issue a disclaimer of opinion
  4. Issue an adverse opinion

Explanation

When a material uncertainty related to going concern exists and is adequately disclosed, the auditor includes a separate section in the report highlighting the uncertainty while still expressing an unmodified opinion. The disclosure is adequate, so the opinion is not modified.

Question 26Auditing Standards and Methodology

Which of the following best describes the purpose of the auditor's assessment of the risk of material misstatement at the financial statement level?

  1. To determine the exact monetary amount of misstatement that exists in each account balance
  2. To provide a basis for the auditor's opinion on the effectiveness of internal control
  3. To evaluate the effectiveness of the entity's internal control over a specific transaction cycle
  4. To identify risks that relate pervasively to the financial statements as a whole and potentially affect many assertions Correct answer.

Explanation

Risks at the financial statement level are those that relate pervasively to the financial statements as a whole and potentially affect many assertions. They do not provide specific monetary amounts or evaluate specific controls. They are also not a basis for an opinion on internal control effectiveness, as that is a separate engagement.

Question 27Auditing Standards and Methodology

An auditor is designing substantive procedures for accounts payable. Which of the following procedures is most likely to detect unrecorded liabilities?

  1. Confirming balances with suppliers who have a zero balance at period end
  2. Examining the entity's cash payments journal for the last month of the period
  3. Comparing the accounts payable balance with the prior year balance
  4. Reviewing payments made after the period end to identify liabilities that should have been recorded Correct answer.

Explanation

Reviewing subsequent payments helps identify obligations that existed at period end but were not recorded. Confirming zero balances is less effective because suppliers with no balance are unlikely to reveal unrecorded liabilities. Comparing balances and examining the cash payments journal do not specifically target unrecorded liabilities.

Question 28Auditing Standards and Methodology

Which of the following best describes the auditor's responsibility regarding the detection of fraud?

  1. The auditor is responsible for obtaining reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error Correct answer.
  2. The auditor is responsible for reporting all identified fraud to the appropriate regulatory authorities
  3. The auditor is responsible for preventing fraud by designing and implementing effective internal controls
  4. The auditor is responsible for detecting all fraud, regardless of materiality

Explanation

The auditor's responsibility is to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error. The auditor is not responsible for preventing fraud, as that is management's responsibility. The auditor is also not responsible for detecting all fraud, only material misstatements.

Question 29Auditing Standards and Methodology

An auditor is evaluating the reliability of evidence obtained from different sources. Which of the following is generally considered the most reliable evidence?

  1. An oral representation made by the entity's chief financial officer
  2. A confirmation received directly from an independent third party Correct answer.
  3. A photocopy of a sales invoice provided by the client
  4. A document produced internally and approved by the entity's management

Explanation

Evidence is more reliable when it is obtained from independent sources outside the entity. A confirmation received directly from a third party is considered more reliable than internal documents, oral representations, or photocopies. Internal documents and oral representations are less reliable because they originate from the entity.

Question 30Auditing Standards and Methodology

In an audit of a small entity, the auditor may use a substantive approach because internal controls are not well developed. Which of the following best describes the auditor's consideration of internal control in such an audit?

  1. The auditor still needs to obtain an understanding of internal control relevant to the audit, but may not test operating effectiveness Correct answer.
  2. The auditor must test the operating effectiveness of all controls if they are documented
  3. The auditor does not need to obtain any understanding of internal control if a substantive approach is used
  4. The auditor can rely on the entity's internal control without obtaining an understanding if the entity is small

Explanation

The auditor is required to obtain an understanding of internal control relevant to the audit in all audits. However, if the auditor uses a substantive approach, testing the operating effectiveness of controls is not required. A small entity does not exempt the auditor from obtaining an understanding.

Question 31Auditing Standards and Methodology

Which of the following best describes the auditor's responsibility for communicating with those charged with governance?

  1. The auditor's communication with those charged with governance is limited to the auditor's opinion on the financial statements
  2. The auditor must communicate significant findings from the audit, including significant difficulties encountered and uncorrected misstatements Correct answer.
  3. The auditor must communicate all audit findings, regardless of significance, to those charged with governance
  4. The auditor is not required to communicate with those charged with governance if management objects

Explanation

The auditor is required to communicate significant findings from the audit to those charged with governance. This includes significant difficulties encountered, uncorrected misstatements, and other matters of governance interest. The communication is not limited to the auditor's opinion, and management cannot override this requirement.

Question 32Auditing Standards and Methodology

An auditor is performing a review of interim financial information. Which of the following procedures is most appropriate for this engagement?

  1. Performing tests of controls to assess operating effectiveness
  2. Confirming accounts receivable balances with customers
  3. Performing a physical inventory count
  4. Making inquiries and performing analytical procedures Correct answer.

Explanation

A review of interim financial information primarily consists of inquiries and analytical procedures. It does not involve tests of controls, confirmations, or physical counts, which are audit procedures. The objective is to obtain limited assurance, not reasonable assurance.

Question 33Auditing Standards and Methodology

Which of the following best describes the auditor's use of professional skepticism?

  1. The auditor should rely on management's representations without further evidence
  2. The auditor should only question evidence that appears unusual
  3. The auditor should be alert to conditions that may indicate possible misstatement due to fraud or error and critically assess audit evidence Correct answer.
  4. The auditor should assume that management is dishonest and verify every transaction

Explanation

Professional skepticism involves being alert to conditions that may indicate possible misstatement and critically assessing evidence. It does not mean assuming dishonesty or verifying every transaction, nor does it mean relying solely on management representations. The auditor should question all evidence, not just unusual items.

Question 34Auditing Standards and Methodology

An auditor is using audit sampling to test the occurrence of sales transactions. Which of the following best describes the risk that the auditor's conclusion based on a sample may differ from the conclusion if the entire population were tested?

  1. Sampling risk Correct answer.
  2. Inherent risk
  3. Non-sampling risk
  4. Detection risk

Explanation

Sampling risk is the risk that the auditor's conclusion based on a sample may differ from the conclusion if the entire population were tested. Non-sampling risk arises from factors unrelated to sample size, such as human error. Detection risk and inherent risk are components of audit risk, not sampling risk.

Question 35Auditing Standards and Methodology

Which of the following best describes the auditor's responsibility when using the work of an auditor's external expert?

  1. The auditor should evaluate the adequacy of the expert's work as audit evidence for the relevant assertion Correct answer.
  2. The auditor is not permitted to use the work of an external expert
  3. The auditor may rely entirely on the expert's findings without further evaluation
  4. The auditor should obtain the expert's consent to share their report with management

Explanation

The auditor is responsible for evaluating the adequacy of the expert's work as audit evidence. The auditor cannot rely entirely on the expert's findings without evaluation. The use of experts is permitted, and consent to share the report is not a requirement of auditing standards.

Question 36Auditing Standards and Methodology

Which of the following best describes the auditor's documentation requirement for significant matters?

  1. The auditor's documentation of significant matters is optional and depends on the auditor's judgment
  2. The auditor must document significant matters, including the rationale for conclusions reached Correct answer.
  3. The auditor only needs to document significant matters if they result in a modified opinion
  4. The auditor may choose not to document significant matters if they are discussed with management

Explanation

The auditor is required to document significant matters, including the rationale for conclusions reached. This documentation is necessary to support the auditor's report and to enable an experienced auditor to understand the work performed. It is not optional and is not limited to modified opinions.

Question 37Auditing Standards and Methodology

An auditor is assessing the appropriateness of the going concern assumption. Which of the following conditions most likely indicates a doubt about the entity's ability to continue as a going concern?

  1. The entity has negative operating cash flows and difficulty in meeting its debt covenants Correct answer.
  2. The entity has a strong market share and a loyal customer base
  3. The entity has recently increased its dividend payments to shareholders
  4. The entity has a history of profitable operations and ready access to financing

Explanation

Negative operating cash flows and difficulty meeting debt covenants are indicators of going concern doubt. A history of profitable operations, strong market share, and increased dividends are generally positive indicators. The auditor should consider all available information in assessing going concern.

Question 38Auditing Standards and Methodology

Which of the following best describes the auditor's responsibility for other information included in documents containing audited financial statements?

  1. The auditor must audit the other information to the same extent as the financial statements
  2. The auditor's responsibility for other information is limited to verifying its mathematical accuracy
  3. The auditor should read the other information to identify material inconsistencies with the audited financial statements Correct answer.
  4. The auditor is not required to consider other information because it is not part of the financial statements

Explanation

The auditor is required to read the other information to identify material inconsistencies with the audited financial statements. The auditor does not audit the other information, nor is the responsibility limited to mathematical accuracy. The auditor must consider other information because it may affect the credibility of the financial statements.

Question 39Auditing Standards and Methodology

An auditor is evaluating the adequacy of disclosures in the financial statements. Which of the following best describes the auditor's consideration of the entity's compliance with disclosure requirements?

  1. The auditor is not responsible for evaluating the adequacy of disclosures if management confirms they are complete
  2. The auditor only needs to check that all required disclosures are present, regardless of their content
  3. The auditor's responsibility is limited to verifying that the disclosures are mathematically accurate
  4. The auditor should assess whether the disclosures are relevant, reliable, comparable, and understandable Correct answer.

Explanation

The auditor evaluates whether disclosures are relevant, reliable, comparable, and understandable, in addition to checking completeness. Management representations do not relieve the auditor of this responsibility. Mathematical accuracy alone is insufficient.

Question 40Auditing Standards and Methodology

Which of the following best describes the auditor's responsibility when planning the audit to consider the applicable financial reporting framework?

  1. The auditor should consider the entity's selection and application of accounting policies and whether they are appropriate for the entity's circumstances Correct answer.
  2. The auditor's consideration of the financial reporting framework is limited to verifying that the financial statements are prepared on a going concern basis
  3. The auditor should apply the financial reporting framework uniformly to all entities without considering entity-specific factors
  4. The auditor is not required to consider the financial reporting framework if management has confirmed its appropriateness

Explanation

The auditor considers whether the entity's accounting policies are appropriate for its circumstances and consistent with the applicable financial reporting framework. The auditor cannot rely solely on management's confirmation. The consideration is broader than just the going concern basis.

Question 41International Financial Reporting Standards (IFRS)

Under IFRS, which body is responsible for issuing International Financial Reporting Standards?

  1. The IFRS Interpretations Committee
  2. The International Accounting Standards Board Correct answer.
  3. The IFRS Foundation Trustees
  4. The Monitoring Board

Explanation

The International Accounting Standards Board (IASB) is the independent standard-setting body that develops and issues IFRS. The Trustees govern and fund the organisation, the Interpretations Committee issues IFRIC interpretations, and the Monitoring Board provides public oversight.

Question 42International Financial Reporting Standards (IFRS)

According to the IASB Conceptual Framework, which qualitative characteristic is enhanced when information is comparable, verifiable, timely and understandable?

  1. Materiality
  2. Prudence
  3. Faithful representation Correct answer.
  4. Relevance

Explanation

The Framework identifies two fundamental qualitative characteristics: relevance and faithful representation. Comparability, verifiability, timeliness and understandability are enhancing characteristics that increase the usefulness of information that is already relevant and faithfully represented.

Question 43International Financial Reporting Standards (IFRS)

An entity's financial statements are normally prepared on the going concern basis. When does IFRS require an entity to depart from that basis?

  1. When management intends to liquidate or cease trading, or has no realistic alternative Correct answer.
  2. When the entity's debt covenants are close to being breached
  3. When the entity reports a net loss for the current period
  4. When the reporting entity changes its functional currency

Explanation

IAS 1 requires the going concern assumption unless management intends to liquidate the entity, cease trading, or has no realistic alternative but to do so. Losses, covenant pressure or currency changes do not by themselves require a departure from going concern.

Question 44International Financial Reporting Standards (IFRS)

Under IAS 2, how are inventories measured after initial recognition?

  1. At fair value through profit or loss
  2. At the lower of cost and net realisable value Correct answer.
  3. At cost
  4. At the lower of cost and fair value less costs to sell

Explanation

IAS 2 requires inventories to be measured at the lower of cost and net realisable value. Net realisable value is estimated selling price less costs of completion and costs necessary to make the sale.

Question 45International Financial Reporting Standards (IFRS)

Which of the following costs is capitalised as part of the cost of property, plant and equipment under IAS 16?

  1. Initial delivery and handling costs of the asset Correct answer.
  2. Costs of opening a new retail outlet
  3. Costs of relocating staff to the new facility
  4. General administrative overheads

Explanation

IAS 16 includes in the cost of an item of PPE its purchase price, directly attributable costs of bringing the asset to the location and condition for intended use, and initial estimates of dismantling costs. Delivery and handling costs are directly attributable.

Question 46International Financial Reporting Standards (IFRS)

Under IFRS 15, when is revenue from a contract with a customer recognised?

  1. When the contract is signed and the price is fixed
  2. When the entity transfers a promised good or service to the customer Correct answer.
  3. When cash is collected from the customer
  4. When the invoice is issued to the customer

Explanation

IFRS 15's core principle is that revenue is recognised when control of a promised good or service transfers to the customer. This is the basis of the five-step model, regardless of invoicing or cash timing.

Question 47International Financial Reporting Standards (IFRS)

Under IAS 7, which of the following is classified as a cash equivalent?

  1. A trade receivable due in 30 days
  2. A short-term, highly liquid investment with a three-month original maturity Correct answer.
  3. A five-year government bond held to maturity
  4. Inventory expected to be sold within six months

Explanation

IAS 7 defines cash equivalents as short-term, highly liquid investments readily convertible to known amounts of cash and subject to an insignificant risk of changes in value, typically with original maturities of three months or less.

Question 48International Financial Reporting Standards (IFRS)

Under IAS 38, how should an entity treat research costs and development costs?

  1. Research is expensed; development is capitalised when specified criteria are met Correct answer.
  2. Both are always expensed as incurred
  3. Research is capitalised; development is always expensed
  4. Both are capitalised if a viable project exists

Explanation

IAS 38 requires research expenditure to be expensed as incurred because no intangible asset can be demonstrated at that stage. Development expenditure is capitalised only when the entity can demonstrate all the specified criteria, including technical feasibility and probable future economic benefits.

Question 49International Financial Reporting Standards (IFRS)

An entity acquires equipment for 100,000 with an estimated residual value of 10,000 and a useful life of 5 years. Using straight-line depreciation, what is the annual depreciation charge?

  1. 10,000
  2. 20,000
  3. 22,000
  4. 18,000 Correct answer.

Explanation

Depreciation under IAS 16 is allocated over the useful life after deducting residual value. (100,000 − 10,000) ÷ 5 = 18,000 per year.

Question 50International Financial Reporting Standards (IFRS)

On 1 January an entity issues a bond with a face value of 1,000,000 for 950,000, incurring transaction costs of 20,000. Under IFRS 9, what is the initial carrying amount of the financial liability?

  1. 1,000,000
  2. 930,000 Correct answer.
  3. 970,000
  4. 950,000

Explanation

IFRS 9 requires a financial liability to be measured initially at fair value less transaction costs that are directly attributable to its issue. Fair value is 950,000, so the initial carrying amount is 950,000 − 20,000 = 930,000.