AAA CH10 Example 2 by Amani Hasnah Binti Supian

Matter to consider

amanihasnahbintisupian — 2025-07-11 07:33:36 UTC

Materiality

Accounting treatment

Risk of material misstatement

Audit evidence

amanihasnahbintisupian — 2025-07-11 07:34:17 UTC

Copy of ......

Matter to consider

2025-07-11 09:18:18 UTC

Materiality: The shares are 4.5% of PBIT and therefore just below the materiality threshold of 5% - 10%.

Accounting Treatment: As per the accounting standard, the shares should be re-valued and any gain/loss should be recognised through OCI.

Risk: There is a risk that the investment is overstatted

Audit Evidence

2025-07-11 09:19:50 UTC

With regards to the dividend, the auditor should obtain copies of the bank statements to verify whether the dividend has been received

2025-07-11 09:20:20 UTC

Shares recorded at fair value of 240k may be overstated if the co is now insolvent, as the shares may be worth nothing now and the dividends receivable recorded of 45k may not be paid. This represents 5.7% of PBIT together and hence is material.

The fair value of the investment should be impaired if the investment is now worth less, and the dividends may not be receivable if they are unlikely to be paid.

From the case, 285k may be recorded in net assets that shouldn't be, so current assets may be overstated, income overstated and expenses understated

Answer

2025-07-11 09:20:26 UTC

Possibility that non-current assets is being overstated due to potential impairment of the investment, this is currently being recognised at FV of $240,000.

An impairment review should be completed if there are signs of an assets value decreasing below its carrying amount.

This would be not be a material misstatement as materiality of profit sits between 5-10%, the investment being at 4.8% of PBT.

There is a risk that assets are overstated.

Matter to consider

2025-07-11 09:21:09 UTC

Materiality

The materiality of the investment in Maracaibo is 4.8% so overall below the materiality level of 5-10%. However if the unpaid dividend is added to this, then the total value of $285,000 is material to the financial statments.

Accounting treatment

In line with the accounting standards the shares should be recorded at fair value, however as the business is insolvent, a loss should be recognised in the statement of profit or loss to reflect the loss on the investment

Risk:

There is a risk that asset investments will be overstated in the SFP, and the profit will be overstated if the loss is not recognised in the SPL

Matters to consider

2025-07-11 09:21:18 UTC

Materiality has been set at 5% of the PBT for the year ($5,000,000). The materiality of the dividends is 0.9% and the fair value at 4.8%.

The combined loss would however be 5.7%, which would be material.

The fair value of this investment should be written down to nil, along with the dividends as this is not likely to be received. This is in line with IAS10, due to the news on the company being insolvent.

There is a risk that the investments and receivables are overstated in the financial statements.

2025-07-11 09:22:52 UTC

Materiality

The investment in Maracaibo Co represents 4.8% of profit before taxes and therefore is not material by value, however it would be material by nature due to the uncertainty and judgment involved.

Accounting treatment

The investment has been measured at FV. Given the article reporting insolvency it's likely that the FV has been overstated and any loss in FV should be recognised in in P&L as FVPL.

Risk

There is a risk that assets are overstated on the FS