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ICAN CAP-III practice questions

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Question 1Advanced Financial Reporting

Under IFRS 3, how is goodwill measured at the acquisition date?

  1. As the excess of the fair value of consideration transferred over the carrying amount of the subsidiary's net assets
  2. As the excess of the purchase price over the book value of the acquirer's own equity
  3. As the sum of the fair values of all identifiable intangible assets acquired in the business combination
  4. As the excess of the consideration transferred plus non-controlling interest plus previously held equity interest over the net identifiable assets acquired Correct answer.

Explanation

IFRS 3 requires goodwill to be measured as consideration transferred plus any non-controlling interest plus the fair value of previously held interests, less the net of identifiable assets acquired and liabilities assumed, all measured at fair value. Using carrying amounts or excluding NCI components produces a measurement inconsistent with the standard.

Question 2Advanced Financial Reporting

A parent sells goods costing CU 80 to its subsidiary for CU 120. At year-end the subsidiary still holds the entire inventory. What consolidation adjustment is required, ignoring tax?

  1. Eliminate the CU 120 intragroup sale only, with no profit adjustment
  2. Increase consolidated inventory by CU 40 to reflect fair value
  3. Eliminate CU 40 of unrealised profit by reducing inventory and consolidated profit Correct answer.
  4. Recognise CU 40 of additional profit in the consolidated statement of profit or loss

Explanation

Unrealised profit on intragroup inventory sales must be eliminated in full while the goods remain within the group, reducing both inventory and consolidated profit by CU 40. The intragroup sale and purchase are also eliminated, but the profit element is the key adjustment.

Question 3Advanced Financial Reporting

Under IAS 21, at what rate are monetary items denominated in a foreign currency translated at the reporting date?

  1. The average rate for the reporting period
  2. The historical rate at the date the item was recognised
  3. The closing rate at the reporting date Correct answer.
  4. The forward rate for a maturity matching the item

Explanation

IAS 21 requires monetary items to be retranslated using the closing rate at the reporting date, with exchange differences recognised in profit or loss. Historical and average rates are used for non-monetary items and for translation of results respectively.

Question 4Advanced Financial Reporting

Which statement correctly describes the treatment of actuarial gains and losses under IAS 19 when an entity elects the reclassification (OCI) option?

  1. Remeasurements are deferred and amortised over the expected remaining working lives of employees
  2. Remeasurements are recognised in OCI and recycled to profit or loss when the related obligation is settled
  3. Remeasurements are recognised immediately in profit or loss as part of employee benefit expense
  4. Remeasurements are recognised in OCI and are never reclassified to profit or loss in subsequent periods Correct answer.

Explanation

Under the IAS 19 reclassification option, actuarial gains and losses are presented in OCI and are not subsequently reclassified to profit or loss, although they may be transferred within equity. Immediate recognition in profit or loss is the separate net-interest approach outcome only for service cost and net interest, not remeasurements.

Question 5Advanced Financial Reporting

An entity classifies a non-current asset as held for sale under IFRS 5. How is it measured on initial classification?

  1. At carrying amount, with no remeasurement permitted
  2. At fair value with changes recognised in OCI
  3. At the higher of fair value less costs to sell and value in use
  4. At the lower of its carrying amount and fair value less costs to sell Correct answer.

Explanation

IFRS 5 requires a non-current asset held for sale to be measured at the lower of carrying amount and fair value less costs to sell, and depreciation ceases. Value in use is an IAS 36 concept, not the IFRS 5 measurement basis.

Question 6Advanced Financial Reporting

Under IFRS 15, a entity enters a contract with a fixed fee of CU 1,000 and a bonus of CU 200 payable only if a specified performance milestone is met. At inception the entity concludes the milestone is highly probable of being achieved. How much transaction price should be included?

  1. CU 1,000, because variable consideration is never included until received
  2. CU 1,100, representing the expected value of the bonus
  3. CU 1,200, because all variable consideration is always included at inception
  4. CU 1,200, because the variable consideration is constrained only to the extent it is highly probable not to reverse Correct answer.

Explanation

IFRS 15 includes variable consideration in the transaction price to the extent it is highly probable that a significant reversal will not occur when the uncertainty resolves. Where the milestone is highly probable, the CU 200 bonus is included, giving CU 1,200.

Question 7Advanced Financial Reporting

Which of the following best describes the objective of IFRS 8 operating segments?

  1. To require disclosure of every legal entity within a group regardless of size
  2. To replace consolidated financial statements with segment-only reporting
  3. To enable users to evaluate the nature and financial effects of the business activities and economic environments in which an entity operates Correct answer.
  4. To prescribe a single uniform segmentation basis for all industries

Explanation

IFRS 8 requires disclosure of information about an entity's operating segments so users can evaluate the nature and financial effects of its business activities and economic environments. It uses the management approach, aligning segments with internal reporting.

Question 8Advanced Financial Reporting

An entity issues 1,000 convertible bonds with a face value of CU 1,000 each. The liability component is measured at CU 900,000 using a market interest rate for similar non-convertible debt. How is the equity component determined under IAS 32?

  1. As zero, because convertible bonds are always classified wholly as liabilities
  2. As the full proceeds of CU 1,000,000, with the liability recognised only on conversion
  3. As the fair value of the conversion option determined by an option pricing model and recognised even if it exceeds the residual
  4. As the residual of CU 100,000, being the proceeds less the fair value of the liability component Correct answer.

Explanation

IAS 32 requires the issuer of a compound instrument to split the proceeds between liability and equity by first measuring the liability at the fair value of a similar liability without the equity feature, then allocating the residual to equity. The equity component is therefore CU 100,000.

Question 9Advanced Financial Reporting

Under IAS 12, a deferred tax liability is recognised on which of the following temporary differences?

  1. Deductible temporary differences arising from the initial recognition of an asset in a transaction that is not a business combination and affects neither accounting nor taxable profit
  2. Taxable temporary differences arising from the revaluation of property, plant and equipment Correct answer.
  3. Taxable temporary differences relating to investments in subsidiaries where the parent controls the reversal and reversal is not probable
  4. Taxable temporary differences arising from the initial recognition of goodwill

Explanation

Revaluation of property, plant and equipment creates a taxable temporary difference because the carrying amount exceeds the tax base, so a deferred tax liability is recognised. IAS 12 provides specific initial-recognition exemptions for goodwill and for certain non-business-combination transactions.

Question 10Advanced Financial Reporting

A parent owns 80% of a subsidiary. During the year the subsidiary issues additional shares to a third party, diluting the parent's interest to 70% without loss of control. How is this transaction accounted for in the consolidated financial statements?

  1. As an equity transaction with no gain or loss recognised, with the difference between consideration and the carrying amount of the interest disposed of recognised in equity attributable to owners Correct answer.
  2. As a remeasurement of the retained interest to fair value through OCI
  3. As a business combination requiring remeasurement of all assets and liabilities to fair value
  4. As a disposal giving rise to a gain or loss in profit or loss

Explanation

A change in ownership interest that does not result in loss of control is accounted for as an equity transaction, with no gain or loss in profit or loss. The carrying amount of the non-controlling interest is adjusted and any difference is recognised in equity attributable to owners of the parent.

Question 11Advanced Financial Reporting

Under IAS 36, how is a cash-generating unit's impairment loss allocated when the unit includes goodwill and other assets?

  1. First to the other assets pro rata, then to goodwill for any remaining amount
  2. Pro rata to all assets including goodwill on the basis of carrying amounts
  3. First to reduce goodwill, then to the other assets pro rata to their carrying amounts, subject to no asset being reduced below its recoverable amount Correct answer.
  4. Entirely to goodwill regardless of the size of the impairment loss

Explanation

IAS 36 requires an impairment loss for a cash-generating unit to be allocated first to reduce the carrying amount of any goodwill, then to other assets pro rata to their carrying amounts. No individual asset may be reduced below the higher of fair value less costs of disposal, value in use and zero.

Question 12Advanced Financial Reporting

An entity enters a sale and leaseback transaction under IFRS 16 where the transfer qualifies as a sale. The asset had a carrying amount of CU 800,000 and is sold for CU 1,000,000, and the leaseback is an operating lease. How is the right-of-use asset initially measured?

  1. At the proportion of the previous carrying amount that relates to the retained right of use Correct answer.
  2. At the full fair value of CU 1,000,000
  3. At zero, because the asset has been sold
  4. At the present value of all future lease payments without adjustment

Explanation

Under IFRS 16, where the transfer qualifies as a sale, the seller-lessee measures the right-of-use asset at the proportion of the previous carrying amount that relates to the retained right of use. Only the rights transferred to the buyer are derecognised, and any gain is limited to that proportion.

Question 13Advanced Financial Reporting

Under IFRS 9, an entity holds a debt instrument with contractual cash flows that are solely payments of principal and interest, and the business model is to collect contractual cash flows and sell the assets. How is the instrument classified?

  1. At fair value through profit or loss
  2. As an equity instrument at cost
  3. At fair value through other comprehensive income Correct answer.
  4. At amortised cost

Explanation

A debt instrument with SPPI cash flows held in a business model whose objective is achieved by both collecting cash flows and selling assets is measured at fair value through other comprehensive income. Amortised cost applies only where the objective is solely to collect cash flows.

Question 14Advanced Financial Reporting

A company's functional currency is the naira, but its presentation currency is the US dollar. Where are translation differences arising from translating the financial statements into the presentation currency recognised?

  1. As an adjustment to the opening balance of retained earnings without disclosure
  2. In other comprehensive income and accumulated in a separate component of equity Correct answer.
  3. Directly against the carrying amount of goodwill
  4. In profit or loss as a component of finance costs

Explanation

IAS 21 requires exchange differences arising from translating a foreign operation's financial statements into a different presentation currency to be recognised in OCI and accumulated in a separate component of equity. They are reclassified to profit or loss only on disposal of the foreign operation.

Question 15Advanced Financial Reporting

Under IAS 37, an entity faces a lawsuit where it is probable that an outflow will occur but the amount cannot be measured reliably. What is the correct treatment?

  1. Disclose the contingent liability unless the possibility of outflow is remote, and recognise no provision Correct answer.
  2. Recognise no provision and provide no disclosure
  3. Recognise a provision at the maximum possible amount
  4. Recognise a provision at the best estimate of the amount

Explanation

A provision requires both a present obligation and a reliable estimate. Where a reliable estimate cannot be made, no provision is recognised but the contingent liability is disclosed unless the possibility of outflow is remote.

Question 16Advanced Financial Reporting

Under IFRS 15, a construction contract has a transaction price of CU 10 million and total expected costs of CU 8 million. At the reporting date costs incurred are CU 2 million and the entity uses an input method based on costs. What revenue is recognised to date?

  1. CU 2 million
  2. CU 10 million
  3. CU 2.5 million Correct answer.
  4. CU 8 million

Explanation

Progress is measured as costs incurred of CU 2 million divided by total expected costs of CU 8 million, giving 25%. Revenue recognised to date is 25% of the CU 10 million transaction price, i.e. CU 2.5 million.

Question 17Advanced Financial Reporting

An entity recognises a defined benefit obligation of CU 5 million and plan assets of CU 4.8 million. It has an unconditional right to a refund of surplus on winding up. How is the net defined benefit position presented?

  1. A net defined benefit liability of CU 0.2 million Correct answer.
  2. A liability of CU 5 million and an asset of CU 4.8 million presented separately
  3. A net defined benefit asset of CU 0.2 million
  4. A net defined benefit liability of CU 5 million

Explanation

Where the fair value of plan assets is less than the defined benefit obligation, the net position is a liability presented in the statement of financial position. The asset ceiling is relevant only where a surplus exists.

Question 18Advanced Financial Reporting

Under IFRS 10, which factor is most significant in determining whether an investor controls an investee when decision-making rights are not straightforward?

  1. The investor's ability to direct the relevant activities of the investee Correct answer.
  2. The number of board seats held, regardless of voting arrangements
  3. The existence of a management services agreement with the investee
  4. The size of the investor's equity holding relative to other shareholders

Explanation

IFRS 10 defines control as power over the investee, exposure to variable returns and the ability to use power to affect those returns. Power is the ability to direct the relevant activities, which is the critical determinant where rights are complex.

Question 19Advanced Financial Reporting

An entity revalues its building from a carrying amount of CU 2 million to a fair value of CU 2.5 million under the revaluation model in IAS 16. The building had previously been impaired by CU 300,000 through profit or loss. How is the revaluation surplus treated?

  1. CU 300,000 is recognised in OCI and CU 200,000 in profit or loss
  2. The full CU 500,000 is recognised in profit or loss
  3. The full CU 500,000 is recognised in OCI
  4. CU 300,000 is recognised in profit or loss to reverse the prior impairment and CU 200,000 is recognised in OCI Correct answer.

Explanation

A revaluation increase is recognised in OCI, except to the extent it reverses a previous impairment loss recognised in profit or loss, which is recognised in profit or loss. The remaining CU 200,000 increase goes to OCI as revaluation surplus.

Question 20Advanced Financial Reporting

A lessee enters a five-year lease with annual payments of CU 100,000 payable in arrears and an incremental borrowing rate of 10%. The present value of the payments is CU 379,079. What is the interest expense in the first year under IFRS 16?

  1. CU 27,908
  2. CU 37,908 Correct answer.
  3. CU 10,000
  4. CU 100,000

Explanation

Interest is calculated on the lease liability at the beginning of the period using the discount rate, so CU 379,079 multiplied by 10% gives CU 37,908. The payment of CU 100,000 then reduces the liability by the balance of CU 62,092.

Question 21Advanced Financial Reporting

Under IFRS 5, a subsidiary that is part of a disposal group meets the criteria to be classified as held for sale and represents a separate major line of business. How is its results presented?

  1. As a discontinued operation, with a single amount in profit or loss comprising post-tax profit or loss and post-tax gain or loss on remeasurement, plus supporting analysis Correct answer.
  2. As an item of other comprehensive income
  3. As a prior period adjustment to opening retained earnings
  4. As continuing operations, with no separate presentation

Explanation

IFRS 5 requires a component that is a separate major line of business and is held for sale to be presented as a discontinued operation. A single amount is shown in profit or loss, with analysis of revenue, expenses and tax disclosed either in the notes or in the statement.

Question 22Advanced Financial Reporting

An entity has a loan measured at amortised cost with a carrying amount of CU 1,000,000 and 12-month expected credit losses of CU 25,000. In the next reporting period the credit risk increases significantly but the asset is not credit-impaired, and lifetime ECL is CU 180,000. What loss allowance is recognised?

  1. CU 1,000,000, because the asset is in default
  2. CU 25,000, because the asset is not credit-impaired
  3. CU 0, because no default has occurred
  4. CU 180,000, with the increase of CU 155,000 recognised in profit or loss Correct answer.

Explanation

Under IFRS 9, once credit risk has increased significantly since initial recognition, the loss allowance is measured at an amount equal to lifetime expected credit losses. The increase from CU 25,000 to CU 180,000 is recognised in profit or loss.

Question 23Advanced Financial Reporting

A group disposes of a foreign subsidiary that had a cumulative translation reserve of CU 400,000 credit. On disposal, how is the reserve treated?

  1. Transferred directly to retained earnings with no effect on profit or loss
  2. Reclassified to OCI as a reclassification adjustment with no effect on profit or loss
  3. Left in equity indefinitely as a separate reserve
  4. Reclassified to profit or loss as part of the gain or loss on disposal Correct answer.

Explanation

IAS 21 requires the cumulative exchange differences recognised in OCI to be reclassified to profit or loss as part of the gain or loss on disposal of the foreign operation. This applies on loss of control of a subsidiary.

Question 24Advanced Financial Reporting

Under IAS 12, an entity recognises a deferred tax asset of CU 500,000 relating to tax losses. It concludes that future taxable profit will probably support recovery of only CU 400,000 of that deferred tax asset. What is the required treatment?

  1. Recognise no deferred tax asset at all
  2. Recognise the full CU 500,000 and disclose the uncertainty
  3. Recognise CU 500,000 and reduce the tax rate applied to reflect the uncertainty
  4. Recognise the deferred tax asset only to the extent of CU 400,000 and disclose the unrecognised amount Correct answer.

Explanation

A deferred tax asset is recognised only to the extent that recovery through future taxable profit is probable. Here, CU 400,000 is explicitly the recoverable tax benefit, so the asset is reduced from CU 500,000 to CU 400,000. Required disclosures cover tax losses for which no deferred tax asset is recognised.

Question 25Advanced Financial Reporting

An entity applies the expected value method to estimate variable consideration. It assesses that the constraint is met for CU 300,000 of the estimate but not for the remaining CU 100,000. Which statement is correct?

  1. CU 300,000 is included in the transaction price and the estimate is updated at each reporting date Correct answer.
  2. CU 100,000 is included because only the uncertain portion is constrained
  3. CU 400,000 is included because the expected value method captures all possible outcomes
  4. No variable consideration is included until the uncertainty is fully resolved

Explanation

Under IFRS 15 the transaction price includes only the amount of variable consideration for which it is highly probable that a significant reversal will not occur. The included amount is updated at each reporting date as the uncertainty resolves.

Question 26Advanced Financial Reporting

Under IAS 21, an entity's functional currency is the currency of the primary economic environment in which it operates. Which factor is given priority in determining functional currency?

  1. The currency that mainly influences sales prices for goods and services Correct answer.
  2. The currency of the country where the entity is incorporated
  3. The currency in which the entity presents its financial statements
  4. The currency in which the entity's share capital is denominated

Explanation

IAS 21 paragraph 9 lists primary indicators, and the currency that mainly influences sales prices is the first of these. The currency of incorporation, share capital denomination and presentation currency are secondary or irrelevant considerations. Management applies judgement weighing all indicators.

Question 27Advanced Financial Reporting

An entity has a building with a carrying amount of CU 800,000 and a tax base of CU 500,000. The difference arises because tax depreciation claimed to date exceeds accounting depreciation. Assuming the entity expects to recover the carrying amount through use, what is the deferred tax consequence at a tax rate of 25%?

  1. A deferred tax asset of CU 75,000
  2. A deferred tax liability of CU 75,000 Correct answer.
  3. No deferred tax is recognised because the difference is not a temporary difference
  4. A deferred tax liability of CU 200,000

Explanation

The carrying amount exceeds the tax base by CU 300,000, creating a taxable temporary difference. IAS 12 requires a deferred tax liability of 25% × CU 300,000 = CU 75,000. The difference reverses through future taxable profits as tax deductions fall below accounting depreciation.

Question 28Advanced Financial Reporting

Under IFRS 15, which of the following indicates that an entity is acting as a principal rather than an agent in a transaction?

  1. The entity's consideration is the net amount it retains after paying the supplier
  2. The entity is primarily responsible for fulfilling the promise to provide the specified good or service Correct answer.
  3. The entity does not control the specified good or service before it is transferred to the customer
  4. The entity earns a fixed commission regardless of the outcome of the transaction

Explanation

IFRS 15 paragraph B37 lists indicators of control, including primary responsibility for fulfilment, inventory risk and discretion in setting price. An entity that is primarily responsible controls the good or service before transfer and is a principal. A net-retention or fixed-commission arrangement points to agent status.

Question 29Advanced Financial Reporting

An entity prepares consolidated financial statements and applies IFRS 3 to a business combination. Which of the following costs is expensed rather than included in the consideration transferred?

  1. The fair value of assets transferred by the acquirer to the former owners
  2. The fair value of contingent consideration classified as a liability
  3. Acquisition-related costs such as advisory, legal and valuation fees Correct answer.
  4. The fair value of equity instruments issued as consideration

Explanation

IFRS 3 requires acquisition-related costs to be recognised as expenses in the periods in which they are incurred and the services received. Consideration transferred comprises the fair values of assets transferred, liabilities incurred and equity interests issued. Contingent consideration is part of consideration at fair value.

Question 30Advanced Financial Reporting

An entity has a machine with a carrying amount of CU 1,200,000 and a remaining useful life of four years. At the start of the year, management revises the useful life to three years and the residual value to CU 300,000. Under IAS 16, what is the depreciation charge for the year using the straight-line method?

  1. CU 300,000 Correct answer.
  2. CU 400,000
  3. CU 100,000
  4. CU 225,000

Explanation

A change in useful life or residual value is a change in accounting estimate applied prospectively. The revised depreciable amount is CU 1,200,000 − CU 300,000 = CU 900,000 spread over the revised remaining three years, giving CU 300,000 per year. Prior periods are not restated.

Question 31Advanced Financial Reporting

Under IAS 38, an entity is developing a new production process. Which condition must be satisfied before development costs can be capitalised?

  1. The entity has completed the intangible asset and begun commercial production
  2. The entity has a patent granted by the relevant authority
  3. The entity can demonstrate that the intangible asset will generate probable future economic benefits Correct answer.
  4. The entity has recognised the costs as an expense in a prior period

Explanation

IAS 38 paragraph 57 sets out six criteria for capitalising development costs, including technical feasibility, intention to complete, ability to use or sell, probable future economic benefits, availability of resources and reliable measurement. Completion of the asset or grant of a patent is not required.

Question 32Advanced Financial Reporting

An entity measures a cash-generating unit and identifies an impairment loss of CU 500,000. The unit comprises goodwill of CU 200,000, a building of CU 300,000 and a receivable of CU 100,000. After allocating the loss to goodwill, how should the remaining loss be allocated under IAS 36?

  1. To the building pro rata to its carrying amount, but not below its recoverable amount Correct answer.
  2. To the receivable and building equally
  3. To the building only up to CU 200,000, with any excess recognised as a liability
  4. To the building and receivable pro rata to their carrying amounts

Explanation

IAS 36 requires the impairment loss to be allocated first to goodwill, then to other assets of the unit pro rata to their carrying amounts. The allocation must not reduce any asset below its own recoverable amount or fair value less costs of disposal.

Question 33Advanced Financial Reporting

Under IFRS 16, a lessee enters a lease with annual payments of CU 50,000 payable in advance for five years. The interest rate implicit in the lease is 5% and the first payment is made at commencement. How is the lease liability initially measured?

  1. The present value of four payments plus the first payment of CU 50,000
  2. The present value of five payments of CU 50,000 discounted at 5%
  3. The undiscounted total of CU 250,000
  4. The present value of four remaining payments of CU 50,000 discounted at 5% Correct answer.

Explanation

The lease liability is the present value of lease payments not paid at the commencement date. Because the first payment is made in advance at commencement, only the four remaining payments are discounted. The first payment reduces the liability immediately.

Question 34Advanced Financial Reporting

An entity holds an investment in a subsidiary classified as held for sale under IFRS 5. The subsidiary is a disposal group that does not constitute a discontinued operation. How should the disposal group be measured?

  1. At the higher of carrying amount and fair value less costs to sell
  2. At the lower of carrying amount and fair value less costs to sell, with no depreciation on non-current assets Correct answer.
  3. At carrying amount, with impairment losses reversed through other comprehensive income
  4. At fair value less costs to sell, with depreciation continuing on non-current assets

Explanation

IFRS 5 requires a non-current asset or disposal group held for sale to be measured at the lower of carrying amount and fair value less costs to sell. Once classified as held for sale, non-current assets are no longer depreciated. Impairment losses are recognised in profit or loss.

Question 35Advanced Financial Reporting

A parent owns 75% of a subsidiary. The non-controlling interest is measured at its proportionate share of the subsidiary's identifiable net assets at acquisition. The subsidiary reports profit after tax of CU 400,000 and other comprehensive income of CU 100,000. What amount is attributed to the non-controlling interest for the year?

  1. CU 150,000
  2. CU 125,000 Correct answer.
  3. CU 75,000
  4. CU 100,000

Explanation

Under IFRS 10, profit or loss and each component of OCI are attributed to owners of the parent and to the non-controlling interest. The NCI share is 25% × (CU 400,000 + CU 100,000) = CU 125,000. The measurement basis at acquisition does not affect the attribution of post-acquisition results.

Question 36Advanced Financial Reporting

Under IFRS 9, an entity applies the expected credit loss model to a portfolio of trade receivables without a significant financing component. Which approach is required?

  1. A provision matrix measuring lifetime expected credit losses Correct answer.
  2. Twelve-month expected credit losses until a significant increase in credit risk occurs
  3. Fair value measurement with changes in profit or loss
  4. Specific identification of defaulted receivables only

Explanation

IFRS 9 provides a simplified approach for trade receivables, contract assets and lease receivables, requiring lifetime expected credit losses. A provision matrix based on historical loss experience adjusted for forward-looking information is commonly used. The general three-stage model does not apply.

Question 37Advanced Financial Reporting

An entity has a defined benefit plan with a present value of obligation of CU 10 million and fair value of plan assets of CU 9 million. The entity has an unconditional right to a refund of CU 300,000 from the plan. How should the net defined benefit asset or liability be presented under IAS 19?

  1. A net defined benefit liability of CU 1 million Correct answer.
  2. A net defined benefit asset of CU 300,000
  3. A net defined benefit liability of CU 700,000
  4. A net defined benefit asset of CU 1 million

Explanation

The net defined benefit liability is the present value of the obligation less the fair value of plan assets, giving CU 1 million. The right to a refund affects the recognition of a surplus as an asset but does not reduce a deficit. The refund right is not netted against the liability.

Question 38Advanced Financial Reporting

An entity issues a financial instrument that is convertible into a fixed number of its own ordinary shares. Under IAS 32, how should the instrument be classified?

  1. Entirely as a financial liability measured at fair value
  2. As a compound instrument, with the liability and equity components presented separately Correct answer.
  3. Entirely as equity because it will be settled in shares
  4. As a derivative measured at fair value through profit or loss

Explanation

IAS 32 requires a compound instrument to be split into its liability and equity components. The liability is measured first at the fair value of a similar non-convertible instrument, and the equity component is the residual. The fixed-for-fixed conversion feature is an equity component.

Question 39Advanced Financial Reporting

A group disposes of a foreign operation and the cumulative exchange differences relating to that operation are CU 600,000 credit, recognised in other comprehensive income. On loss of control, how should these differences be treated under IAS 21?

  1. Reclassified from equity to profit or loss as part of the gain or loss on disposal Correct answer.
  2. Offset against goodwill arising on the original acquisition
  3. Recognised directly in the consolidated statement of changes in equity
  4. Retained in equity and transferred to retained earnings without recycling

Explanation

IAS 21 requires the cumulative amount of exchange differences recognised in OCI for a foreign operation to be reclassified to profit or loss when the entity loses control. The recycling is presented as part of the gain or loss on disposal. A partial disposal reclassifies only the proportionate amount.

Question 40Advanced Financial Reporting

An entity has a taxable temporary difference of CU 400,000 arising from accelerated tax depreciation. It also has unused tax losses of CU 250,000 for which it is probable that future taxable profit will be available. The tax rate is 30%. How should the deferred tax balances be presented in the statement of financial position?

  1. A deferred tax asset of CU 120,000 and a deferred tax liability of CU 75,000
  2. A deferred tax liability of CU 120,000 and a deferred tax asset of CU 75,000, offset only if a legally enforceable right exists Correct answer.
  3. A single net deferred tax liability of CU 45,000 in all circumstances
  4. No deferred tax balances because the amounts relate to the same tax authority

Explanation

IAS 12 requires deferred tax assets and liabilities to be measured at the tax rates expected to apply on reversal. Offsetting is permitted only when the entity has a legally enforceable right to offset current tax and the balances relate to the same taxation authority. The gross amounts are 30% × CU 400,000 and 30% × CU 250,000.

Question 41Advanced Audit and Assurance

Under ISA 700 (Revised), which element is required in the auditor's report on a complete set of general purpose financial statements?

  1. An opinion section placed at the end of the report
  2. A listing of every audit procedure performed during the engagement
  3. A statement that the audit provides absolute assurance on the financial statements
  4. Identification of the entity and the period covered by the financial statements Correct answer.

Explanation

ISA 700 requires the auditor's report to identify the entity whose financial statements have been audited, the title of each statement, and the date or period covered. This identification element ensures readers know precisely what was audited. The opinion must appear in an early section, not at the end.

Question 42Advanced Audit and Assurance

An audit firm's engagement quality control reviewer identifies a significant judgement issue on a listed entity audit. Under ISQM 2, which action is the reviewer required to take before the report is dated?

  1. Re-perform the substantive testing on the disputed balance
  2. Obtain written consent from the client's audit committee
  3. Document that the significant judgements are appropriate and the report is appropriate Correct answer.
  4. Delegate the review to the engagement partner's assistant

Explanation

ISQM 2 requires the engagement quality reviewer to perform an objective evaluation and document that significant judgements are appropriate and that the report is appropriate before the report date. The reviewer evaluates rather than re-performs the engagement work. The engagement cannot be completed until this documentation exists.

Question 43Advanced Audit and Assurance

During an audit, the auditor identifies a fraud involving the finance director's override of controls. Under ISA 240, which communication is required regardless of materiality?

  1. Communication only if the fraud exceeds the overall materiality threshold
  2. Communication to the appropriate level of management and, where relevant, those charged with governance on a timely basis Correct answer.
  3. Communication only to those charged with governance, after the audit is complete
  4. Communication to the external regulator before informing management

Explanation

ISA 240 requires timely communication of fraud identified to the appropriate level of management and, where the fraud involves management or others with significant roles, to those charged with governance. Materiality is not the trigger for this communication. Timeliness matters because governance needs to act promptly.

Question 44Advanced Audit and Assurance

Which circumstance most clearly creates a self-interest threat to auditor independence?

  1. The audit firm holds a material indirect financial interest in the audit client through a diversified mutual fund it controls Correct answer.
  2. A partner's spouse is employed as a receptionist by the audit client
  3. The audit firm provides tax compliance services to a non-listed audit client
  4. A former partner joined the client as a junior accountant two years ago

Explanation

A direct or material indirect financial interest in the client creates a self-interest threat because the firm benefits financially from the client's success. A controlled mutual fund holding shares in the client is an indirect interest that becomes material when the fund is controlled. Safeguards or elimination are required.

Question 45Advanced Audit and Assurance

An auditor performing a group audit under ISA 600 (Revised) is considering component auditors. Which statement best reflects the revised standard's requirement on direction and supervision?

  1. The group engagement partner must be involved in the work of component auditors to an extent sufficient to direct and supervise them Correct answer.
  2. The group auditor may rely on component auditors without any communication if the component is immaterial
  3. Component auditors must use the same audit software as the group team
  4. The group engagement partner may delegate full responsibility for component work to the component auditor

Explanation

ISA 600 (Revised) strengthens the group engagement partner's responsibility to direct and supervise component auditors and to be involved in their work. The group auditor retains sole responsibility for the group opinion. This involvement must be sufficient to fulfil that responsibility.

Question 46Advanced Audit and Assurance

The auditor concludes that a material uncertainty related to going concern exists and that the disclosures in the financial statements are adequate. Under ISA 570 (Revised), how should the auditor report this?

  1. Include a separate 'Material Uncertainty Related to Going Concern' section and express an unmodified opinion Correct answer.
  2. Issue a qualified opinion because of the uncertainty
  3. Include an emphasis of matter paragraph instead of a separate section
  4. Issue an adverse opinion because the going concern basis is inappropriate

Explanation

Where the going concern basis remains appropriate and disclosures are adequate, ISA 570 requires an unmodified opinion with a separate section headed 'Material Uncertainty Related to Going Concern'. The section draws attention to the relevant note. An emphasis of matter paragraph is not used for this purpose.

Question 47Advanced Audit and Assurance

Which of the following best describes the auditor's responsibility for other information under ISA 720 (Revised)?

  1. The auditor has no responsibility for other information outside the financial statements
  2. The auditor must audit the other information to the same level of assurance as the financial statements
  3. The auditor must express an opinion on the other information
  4. The auditor must read and consider the other information and report if a material inconsistency or material misstatement of fact is identified Correct answer.

Explanation

ISA 720 requires the auditor to read the other information and consider whether it is materially inconsistent with the financial statements or the auditor's knowledge. The auditor reports identified material inconsistencies or misstatements of fact. The auditor does not opine on the other information.

Question 48Advanced Audit and Assurance

An auditor uses a monetary unit sampling approach for testing the existence of trade receivables. Which statement is correct about this sampling technique?

  1. It gives each receivable an equal chance of selection regardless of amount
  2. It is only appropriate for tests of controls
  3. It selects individual monetary units, so larger balances have a higher selection probability Correct answer.
  4. It eliminates sampling risk entirely

Explanation

Monetary unit sampling treats each currency unit as a sampling unit, so larger balances are more likely to be selected. This makes it effective for detecting overstatement. Sampling risk is reduced but not eliminated.

Question 49Advanced Audit and Assurance

An auditor is assessing the reliability of a valuation prepared by management for an investment property. Which factor most increases the reliability of the evidence?

  1. The valuation was reviewed by the client's internal legal counsel
  2. The valuation was prepared by management using a model they designed
  3. The valuation is supported by observable market prices for identical properties on the measurement date Correct answer.
  4. The valuation is consistent with the prior year's figure

Explanation

Under the fair value hierarchy, observable market prices for identical assets provide the most reliable evidence. Management-prepared models and consistency with prior years are weaker indicators. The auditor should consider the source and nature of the evidence.

Question 50Advanced Audit and Assurance

Which matter would normally be communicated to those charged with governance under ISA 260 (Revised)?

  1. The audit firm's internal staff appraisal records
  2. Significant difficulties encountered during the audit Correct answer.
  3. The detailed audit workpapers for each account balance
  4. The names of all staff assigned to the engagement

Explanation

ISA 260 requires communication of significant difficulties encountered during the audit, along with the auditor's views on significant qualitative aspects of accounting practices. These matters assist governance in overseeing the financial reporting process.