ICAN Professional Case Study flashcards
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- IFRS 15 five-step model
- Identify contract, identify performance obligations, determine transaction price, allocate price to obligations, recognise revenue when or as each obligation is satisfied.
- Materiality in audit
- Misstatements are material if they could influence economic decisions of users; performance materiality is set below overall materiality to reduce uncorrected misstatement risk.
- Going concern assessment
- Management assesses at least twelve months from reporting date; auditor evaluates adequacy and considers whether a material uncertainty requires disclosure.
- Control for consolidation
- Investor has power over investee, exposure to variable returns, and ability to use power to affect returns; intra-group balances are eliminated in full.
- WACC formula
- WACC = (E/V) × Re + (D/V) × Rd × (1 − tax rate), where V = E + D; use market values where available.
- CAPM formula
- Re = Rf + β × (Rm − Rf); beta measures systematic risk; unsystematic risk is diversifiable and not priced.
- NPV decision rule
- NPV = present value of cash inflows minus present value of cash outflows; accept project if NPV > 0; preferred to IRR for mutually exclusive projects.
- Working capital cycle
- Inventory days plus receivable days minus payable days; a shorter cycle reduces financing needs.
- Deferred tax recognition
- Recognise on temporary differences using liability method; deferred tax asset only to extent future taxable profit is probable.
- Transfer pricing arm's length
- Related-party transactions priced as if between independent parties; OECD methods include CUP, resale price, cost plus, TNMM, profit split.
- Tax avoidance vs evasion
- Avoidance is legal use of tax law to reduce liability; evasion is illegal concealment or false declaration and attracts penalties and criminal liability.
- VAT mechanics
- Output tax minus input tax; businesses act as collection agents; zero-rated supplies allow input recovery, exempt supplies do not.
- Porter's five forces
- Threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitutes, intensity of rivalry; assesses industry attractiveness.
- COSO ERM components
- Governance and culture, strategy and objective-setting, performance, review and revision, information, communication and reporting - five components, twenty principles.
- Risk response options
- Avoid, reduce (mitigate), transfer (insurance, hedging), accept; select based on risk appetite and cost-benefit.
- Three lines model
- First line owns and manages risk; second line provides oversight and compliance; third line (internal audit) provides independent assurance.
- ICAN fundamental principles
- Integrity, objectivity, professional competence and due care, confidentiality, professional behaviour.
- Independence threats
- Self-interest, self-review, advocacy, familiarity, intimidation; apply safeguards or decline engagement if threats cannot be reduced to acceptable level.
- Conflict of interest handling
- Disclose to all affected parties and obtain consent, or withdraw; do not use confidential information for personal advantage.
- Whistleblowing escalation
- Internal escalation first (line manager, audit committee); external reporting permitted where internal channels fail or where required by law.
- CPD requirement
- ICAN members must undertake and record continuing professional development annually; non-compliance can lead to sanctions.
- Money laundering controls
- Customer due diligence, record-keeping, suspicious transaction reporting to Financial Intelligence Unit; tipping-off is prohibited.
- Anti-bribery adequate procedures
- Risk assessment, due diligence, top-level commitment, communication and training, monitoring and review; provides defence under UK Bribery Act.
- Professional indemnity insurance
- Required for practising firms; covers negligence claims; does not cover fraud or deliberate wrongdoing.
- DuPont analysis
- Return on equity = net profit margin × asset turnover × equity multiplier; decomposes performance into profitability, efficiency, and leverage.
- Free cash flow
- Operating cash flow minus capital expenditure; used for valuation and debt service capacity; differs from accounting profit.
- Quality of earnings
- Compare cash flow from operations with profit; persistent positive accruals gap may indicate aggressive revenue recognition or weak cash conversion.
- Covenant headroom analysis
- Calculate headroom against debt covenants such as net debt/EBITDA and interest cover; breach can trigger acceleration or penalty pricing.
- Relevant costs
- Differential future cash flows; ignore sunk costs, allocated fixed costs, and non-cash items unless they affect future cash flows.
- Break-even point
- Fixed costs divided by contribution per unit; contribution per unit = selling price minus variable cost per unit; margin of safety = (budgeted sales − break-even sales)/budgeted sales.
- Make-or-buy decision
- Compare avoidable costs of making with purchase price plus additional fixed costs; consider quality control and supplier reliability.
- Board reporting structure
- Present executive summary, key metrics, risks, and recommendations; avoid jargon; distinguish facts from estimates.