ICAP CFAP flashcards

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

Accrual basis

Accounting method recognising revenue when earned and expenses when incurred, regardless of when cash is received or paid. It underpins the matching of costs to related income in financial statements.

Revenue recognition five steps

Identify the contract, identify performance obligations, determine the transaction price, allocate it to obligations, and recognise revenue when each obligation is satisfied. This is the IFRS 15 core model.

Audit risk model

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

Impairment recoverable amount

The higher of fair value less costs of disposal and value in use. An asset is written down when its carrying amount exceeds this recoverable amount under IAS 36.

Materiality in audit

The threshold at which misstatements, individually or in aggregate, could influence users' economic decisions. It drives planning, sample sizes, and evaluation of uncorrected misstatements.

Net present value rule

NPV discounts all project cash flows at the cost of capital and subtracts the initial outlay. Accept positive-NPV projects; among mutually exclusive options, choose the highest NPV.

Internal rate of return

The discount rate that makes a project's NPV equal to zero. Accept when IRR exceeds the cost of capital, but IRR can mislead for non-conventional cash flows or differing project scales.

Weighted average cost of capital

WACC = (E/V) × Ke + (D/V) × Kd × (1 − tax rate). It blends the after-tax cost of debt and equity by market-value weights and is the hurdle rate for average-risk investment.

Capital asset pricing model

Ke = risk-free rate + beta × (market return − risk-free rate). Beta captures systematic risk, the only risk priced because unsystematic risk can be diversified away.

Cash conversion cycle

Inventory days plus receivable days minus payable days. It measures how long cash is tied up in operations; shortening it releases working capital without changing reported profit.

Gearing ratio

Debt divided by total capital (debt plus equity). Higher gearing increases financial risk and the required return on equity, partly offset by the tax shield on interest.

Deferred tax liability

A provision for tax payable in future periods arising from taxable temporary differences, where the tax base of an asset is below its carrying amount. Measured at expected reversal rates.

Tax base of a liability

The carrying amount of a liability minus any amount deductible for tax in future periods. Comparing it with carrying amount identifies temporary differences giving rise to deferred tax.

Tax avoidance versus evasion

Avoidance uses legal arrangements to reduce tax; evasion involves illegal concealment or misrepresentation of facts. Evasion attracts penalties and possible criminal prosecution, avoidance does not.

Value added tax

A consumption tax charged on the value added at each stage of supply. Registered businesses collect output VAT, reclaim input VAT, and remit the net to the tax authority.

Withholding tax

Tax deducted at source by the payer on payments such as dividends, interest, and royalties. Double-tax treaties often reduce the rate to avoid double taxation of cross-border income.

Capital allowances

Tax deductions that replace accounting depreciation, allowing the cost of qualifying assets to be relieved against taxable profits. They create temporary differences between tax and accounting figures.

Porter's five forces

A framework analysing industry attractiveness through rivalry among existing firms, threat of new entrants, threat of substitutes, buyer bargaining power, and supplier bargaining power.

PESTLE analysis

A scan of the external macro-environment across Political, Economic, Social, Technological, Legal, and Environmental factors. It informs strategy by identifying opportunities and threats outside the firm's control.

Ansoff growth matrix

Four growth options combining existing or new products with existing or new markets: market penetration, market development, product development, and diversification. Diversification carries the highest risk.

BCG matrix

Classifies business units by market growth and relative market share into stars, cash cows, question marks, and dogs. Cash cows fund stars and selected question marks; dogs are candidates for divestment.

Break-even quantity

Fixed costs divided by contribution per unit, where contribution equals selling price minus variable cost. It is the sales volume at which total revenue equals total cost and profit is zero.

Balanced scorecard

A performance measurement system using four perspectives: financial, customer, internal business process, and learning and growth. It links operational measures to long-term strategic objectives.

Reasonable assurance

The high but not absolute level of assurance the auditor obtains that financial statements are free from material misstatement. It reflects sampling, judgement, and the limits of evidence.

Substantive procedures

Tests of detail and substantive analytical procedures designed to detect material misstatements at the assertion level. They are required regardless of the assessed level of control risk.

Sampling risk

The risk that conclusions drawn from a sample differ from those that would be reached by testing the entire population. It is managed by sample size and selection method.

Management representation letter

Written confirmations from management of their responsibilities and the completeness of information provided. It is dated no earlier than the auditor's report and supports other audit evidence.

Tests of controls

Procedures evaluating the operating effectiveness of internal controls in preventing or detecting material misstatements. Their results determine whether the auditor can reduce substantive testing.

Five ethical principles

Integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. These fundamental principles underpin the codes of ethics for professional accountants.

Self-interest threat

A threat to objectivity arising from financial or other interests of the firm or individual, such as a fee dependency or shareholding in a client. Safeguards include removal or independent review.

Self-review threat

A threat occurring when the firm evaluates its own prior work, such as auditing figures it helped prepare. It impairs objectivity and may require declining the engagement.

Audit committee role

A board committee of independent non-executive directors overseeing financial reporting, internal controls, and external audit. It strengthens governance and supports auditor independence.

Agency theory

A theory explaining conflicts between principals (shareholders) and agents (managers) pursuing self-interest. Governance mechanisms such as incentives and monitoring align their interests and reduce agency costs.