Summary of key ISAs

Chapter 13

Summary of key ISAs

200 series: General principles and responsibilities: ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing

Objectives of the auditor

• To obtain reasonable assurance whether financial statements as a whole are free from material misstatement, whether due to fraud or error.

• To express an opinion on whether the financial statements are prepared, in all material respects, in accordance with a relevant financial reporting framework.

• To report on the financial statements, and communicate as required, in accordance with the auditor's findings.

Responsibilities of management:

• Preparation of the financial statements in accordance with the applicable financial reporting framework, including their fair presentation.

• Internal control necessary to enable preparation of financial statements that are free from material misstatement, whether due to fraud or error.

• To provide the auditor with:

– Access to all information relevant to the preparation of the financial statements

– Unrestricted access to persons from within the entity whom the auditor determines it necessary to obtain evidence.

Risk:

• Audit: risk of issuing an inappropriate opinion.

• Inherent: susceptibility of an assertion about a class of transaction (e.g. revenue) or account balance (e.g. receivables) to material misstatement before the consideration of any related internal controls.

• Control: risk that material misstatement not detected by entity’s internal control.

• Detection: risk that audit procedures do not detect material misstatements.

An auditor must perform the audit with professional scepticism: an attitude that includes a questioning mind; being alert to conditions which indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.

Inherent limitations of audit:

Audit evidence is persuasive rather than conclusive because of:

• The nature of financial reporting

• The nature of audit procedures

• The need to conduct audit a within reasonable time and at reasonable cost.

ISA 210 Agreeing the Terms of Audit Engagements: The auditor should accept or renew an engagement only if the preconditions for an audit are present:

• An appropriate financial reporting framework is to be applied in the preparation of the financial statements; and

• Management's acknowledgement and understanding of its responsibilities.

Contents of engagement letter:

• The objective and scope of the audit.

• The responsibilities of the auditor.

• The responsibilities of management.

• The identification of an applicable financial reporting framework.

• Reference to the expected form and content of any reports to be issued.

ISA 220 Quality Control for an Audit of Financial Statements: The firm should have a system of quality control to ensure:

• Compliance with professional standards, and

• Reports issued are appropriate in the circumstances.

The engagement partner takes overall responsibility for the overall quality of the engagement including the direction, supervision and performance of the engagement.

An engagement quality control reviewer must be assigned for listed entities and high risk engagements focusing on significant matters and areas involving significant judgment.

The firm's quality control processes must be monitored to ensure they are relevant, adequate and operating effectively.

ISA 230 Audit Documentation: Objective of documentation:

• Sufficient appropriate record of basis for independent auditor's report

• Evidence that audit planned and performed in accordance with ISAs and legal/regulatory requirements.

Content should enable an experienced independent auditor to understand:

• Nature, timing & extent of audit procedures:

– Specific items tested.

– Who performed work and when.

– Who reviewed work and when.

• Results of audit procedures.

• Significant conclusions and professional judgments.

ISA 240 The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements: Objectives of the auditor:

• Identify risks of material misstatement in FS due to fraud.

• Obtain sufficient appropriate evidence regarding assessed risks.

• Respond appropriately to fraud or suspected fraud identified.

Definition: An intentional act involving use of deception to obtain unjust/illegal advantage.

Two types of fraud:

• Fraudulent financial reporting.

• Misappropriation of assets.

Audit procedures must be performed to identify:

• Appropriateness of journal entries.

• Review of accounting estimates.

• Identify significant transactions outside normal course of business.

ISA 250 Consideration of Laws and Regulations in an Audit of Financial Statements: Auditor’s objectives:

• Obtain sufficient appropriate evidence regarding compliance with provisions of laws/regulations that may materially affect FS.

• Perform audit procedures to identify instances of non-compliance that may materially affect FS.

• Respond appropriately to non-compliance identified during the audit.

ISA 260 Communication With Those Charged With Governance: Those charged with governance:

• Those with responsibility for overseeing the strategic direction of the entity.

Matters to be communicated:

• Auditor’s responsibility in relation to the FS audit

• Planned scope and timing of audit

• Significant findings from audit

• Auditor’s independence (listed companies).

ISA 265 Communicating Deficiencies in Internal Control to Those Charged With Governance and Management: Reporting responsibilities:

• Significant deficiencies, to those charged with governance

• Other deficiencies, to an appropriate level of management.

What makes deficiencies significant:

• Likelihood of material misstatement in FS.

• Susceptibility to loss/fraud of related asset.

• Volume of activity in related account balance.

• Interaction of deficiency with other deficiencies.

300 & 400 series: Assessment and response to assessed risks

ISA 300 Planning an Audit of Financial Statements: Benefits of planning:

• Help auditor to devote appropriate attention to important areas of audit.

• Help identify and resolve issues on a timely basis.

• Assist in selection of suitable audit team.

• Help direction and supervision of audit team.

Content of audit strategy :

• Characteristics of the engagement

• Reporting objectives (e.g. reporting timetable)

• Factors significant in directing the team’s efforts

• Results of preliminary engagement activities

• Nature/timing/extent of resources.

Content of audit plan [9]:

• Risk assessment procedures.

• Nature, timing and extent of planned further audit procedures.

ISA 315 Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment: Required understanding of entity and environment:

• Industry/regulatory factors affecting FS

• Nature of entity:

– Operations

– Ownership and governance

– financing.

• Accounting policies

• Objectives and strategy

• Review of financial performance.

Components of internal control:

• Control environment

• Entity’s risk assessment process

• Information system relevant to financial reporting

• Control activities

• Monitoring.

Financial statement assertions:

• Account balances and related disclosures: Completeness; rights and obligations; accuracy, valuation & allocation; existence; classification; presentation.

• Transactions and events and related disclosures: Occurrence; completeness; accuracy; cut-off; classification; presentation.

ISA 320 Materiality in Planning and Performing an Audit

Materiality: Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

Performance materiality: an amount set at less than materiality for the FS as a whole, to reduce to an appropriately low level the probability that the FS as a whole are materially misstated.

ISA 330 The Auditor's Responses to Assessed Risks

The auditor shall design and perform audit procedures whose nature, timing and extent are based on and are responsive to the assessed risks of material misstatement.

Test of controls: to evaluate operating effectiveness of controls in preventing, or detecting and correcting material misstatements at the assertion level.

Substantive procedures: to detect material misstatements at assertion level, comprising tests of details and analytical procedures.

ISA 402 Audit Considerations Relating to an Entity Using a Service Organisation

The auditor of the user entity must obtain an understanding of the services provided by the service organisation and their effect on the user entity’s internal control relevant to audit, sufficient to identify and assess the risks of material misstatement and perform audit procedures responsive to those risks.

An understanding may be obtained by:

• Obtaining a type 1 or type 2 report

• Contacting the service organisation

• Visiting the service organisation and performing tests of controls

• Using another auditor to perform procedures and provide information about the relevant controls.

ISA 450 Evaluation of Misstatements Identified During the Audit

A misstatement is: A difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud.

Requirements:

• Accumulate identified misstatements.

• Determine whether audit strategy needs to be revised.

• Communicate misstatements to appropriate level of management on a timely basis.

• Evaluate effect of uncorrected misstatements on FS.

• Request written representation that uncorrected misstatements are not material.

500 series: Evidence

ISA 500 Audit Evidence

Characteristics:

• Sufficiency: quantity, linked to quality and to risk of material misstatement.

• Appropriateness: quality, linked to relevance and reliability.

Relevance: linked to FS assertions.

Reliability:

• Independent better than internal.

• Auditor generated better than indirectly obtained.

• Documentary better than oral.

• Originals better than photocopies.

Procedures:

• Inspection

• Observation

• External confirmation

• Recalculation

• Re-performance

• Analytical procedures

• Enquiry.

ISA 501 Audit Evidence – Specific Considerations for Selected Items

The auditor should obtain sufficient appropriate evidence regarding:

• Existence and condition of inventory.

• Completeness of litigation and claims involving the entity.

• Presentation and disclosure of segment information.

ISA 505 External Confirmations

External confirmations provide more persuasive evidence as the evidence is obtained directly by the auditor from an independent source.

This is important where there is a higher assessment of audit risk.

Definitions:

External confirmation – audit evidence obtained by the auditor directly from a third party in paper form or by electronic or other medium.

Positive confirmation request – a request for the third party to confirm whether they agree or disagree with the information in the request, or provide the requested information.

Negative confirmation request – a request for the third party to respond directly to the auditor only if they disagree with the information provided in the request.

ISA 520 Analytical Procedures

Definition:

• Evaluation of financial information.

• By analysing plausible relationships.

• Among financial and non-financial data.

May be used as a substantive procedure to assess the reasonableness of the balance in the FS.

Must be used at the completion stage to ensure the financial statements are consistent with the auditor's understanding.

ISA 530 Audit Sampling

Definitions:

• Audit sampling: The application of audit procedures to less than 100% of population to provide auditor with reasonable basis to draw conclusions on entire population.

• Sampling risk: The risk the auditor’s conclusion based on the sample is different from the conclusion if the entire population were subjected to the same audit procedure.

• Non-sampling risk: The risk the auditor reaches an erroneous conclusion for any reason not related to sampling risk.

• Statistical sampling: random sampling plus use of probability theory to evaluate results.

• Tolerable misstatement: A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population.

Factors increasing sample size:

• Increase in risk of material misstatement.

• Increase in tolerable misstatement.

• Increase in expected misstatement.

ISA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures

Audit approach:

• Review events after the reporting period

• Test management’s estimate:

– Appropriateness of method

– Reasonableness of assumptions

• Test the effectiveness of controls over the estimate

• Develop an independent estimate

• Obtain evidence from an expert.

ISA 560 Subsequent Events

Obtain sufficient appropriate evidence about whether events occurring between the date of the financial statements and the date of the auditor's report that require adjustment of or disclosure in the financial statements are appropriately reflected in those financial statements.

ISA 570 Going Concern

Auditor must:

• Obtain sufficient appropriate evidence regarding the appropriateness of management's use of the going concern basis of accounting.

• Conclude on whether a material uncertainty exists about the entity's ability to continue as a going concern.

• Report in accordance with ISA 570.

ISA 580 Written Representations

Contents :

• Management responsibility for preparation of FS.

• Auditor provided with all relevant information.

• All transactions recorded in FS.

• Plans that may affect the carrying value of the assets.

• As required by other ISAs e.g. ISA 240, 250, 450, 560, 570, 580.

600 series: Using the work of others

ISA 610 Using the Work of Internal Auditors

Evaluating the internal audit function:

• The extent to which the internal audit function's organisational status and relevant policies and procedures support the objectivity of the internal auditors)

• The competence of the internal audit function

• Whether the internal audit function applies a systematic and disciplined approach, including quality control.

Evaluating the internal audit work:

• The work was properly planned, performed, supervised, reviewed and documented

• Sufficient appropriate evidence has been obtained

• The conclusions reached are appropriate in the circumstances

• The reports prepared are consistent with the work performed.

Using internal audit to provide direct assistance

The external auditor may use the internal audit function to provide direct assistance with the external audit under the supervision and review of the external auditor.

• Direct assistance cannot be provided in countries where national law prohibits such assistance [26]

• Internal auditor must be objective and competent

• External auditor must not assign work which is judgmental, a high risk of material misstatement or which the internal auditor has been involved with

• External auditor must not use the internal auditor excessively

• Management must agree not to intervene with the work

• Internal auditor must observe confidentiality.

ISA 620 Using the Work of an Auditor's Expert

The auditor must evaluate whether the expert has the necessary competence, capability and objectivity for the purpose of the audit.

The auditor must assess the expert's work:

• The consistency of the findings with other evidence

• The significant assumptions made

• The use and accuracy of source data.

700 series: Audit conclusions and reporting

ISA 700 (Revised) Forming an Opinion and Reporting on Financial Statements

Content of an independent auditor's report:

• Title:

– reference to independent auditor

• Addressee:

– shareholders/members

• Audit Opinion:

– FS prepared in accordance with the applicable FR framework

– FS give true and fair view

• Basis for Opinion:

– Audit conducted in accordance with ISAs and ethical requirements

• Going concern

– Reference to any going concern disclosures made by management

• Key Audit Matters

– Significant matters to be drawn to the user's attention

• Responsibilities of Management:

– Preparation of FS

– Internal controls

• Auditor responsibilities:

– To express an opinion on the FS

• Name of engagement partner

• Signature

• Location of auditor's office

• Date

ISA 701 Communicating Key Audit Matters in the Independent Auditor's Report

Key audit matters are those that in the auditor's professional judgment were of most significance in the audit and are selected from matters communicated to those charged with governance.

The purpose of including these matters is to assist users in understanding the entity, and to provide a basis for the users to engage with management and those charged with governance about matters relating to the entity and the financial statements.

ISA 705 Modifications to the Audit Opinion in the Independent

Auditor's Report

Definitions:

• Modified: qualified, adverse or disclaimer

• Pervasive: not confined to specific elements or representing a substantial proportion of a single element

Modifications:

• FS as a whole not free from material misstatement

– Material: qualified

– Pervasive: adverse

• Unable to obtain sufficient appropriate evidence

– Material: qualified

– Pervasive: disclaimer

ISA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report

Emphasis of matter: refers to matters fundamental to the user’s understanding of the FS. Can only be used to highlight a matter already disclosed in the FS.

Other matter: refers to matters relevant to the audit, the auditor's report or the auditor's responsibilities.

ISA 720 The Auditor’s Responsibilities Relating to Other Information in Documents Containing Audited Financial Statements

Responsibilities:

• Read other information to identify material inconsistencies with the FS.

• If inconsistencies identified:

– Consider whether it is the financial statements or the other information that requires amendment.

– If other information is wrong, propose adjustment.

– If matter remains uncorrected, describe the inconsistency in the Other Information section of the auditor’s report.

Financial reporting revision

Chapter 14

Financial reporting revision

IAS 1 Presentation of Financial Statements: This standard provides formats for the statement of profit or loss and other comprehensive income, statement of financial position, and statement of changes in equity.

Accounting policies should be selected so that the financial statements comply with all international standards and interpretations. IAS 1 requires that other comprehensive income is presented in two categories, namely items that:

• will not be reclassified to profit or loss, and

• may be reclassified to profit or loss in future reporting periods.

IAS 2 Inventories: Inventories should be valued 'at the lower of cost and net realisable value' (IAS 2, para 9). IAS 2 says that the cost of inventory includes:

• Purchase price including import duties, transport and handling costs

• Direct production costs e.g. direct labour

• Direct expenses and subcontracted work

• Production overheads (based on the normal levels of activity)

• Other overheads, if attributable to bringing the product or service to its present location and condition.

IAS 2 specifies that cost excludes:

• Abnormal waste

• Storage costs

• Indirect administrative overheads

• Selling costs.

Some entities can identify individual units of inventory (e.g. vehicles can be identified by a chassis number). Those that cannot should keep track of costs using either the first in, first out (FIFO) or the weighted average cost (AVCO) assumption.

Some entities may use standard costing for valuing inventory. Standard costs may be used for convenience if it is a close approximation to actual cost, and is regularly reviewed and revised.

IAS 7 Statement of Cash Flows: IAS 7 requires a statement of cash flow that shows cash flows generated from:

• Operating activities

• Investing activities

• Financing activities.

IAS 10 Events After the Reporting Period

Definitions: Events after the reporting period are 'those events, favourable and unfavourable, that occur between the statement of financial position date and the date when the financial statements are authorised for issue' (IAS 10, para 3).

Adjusting events after the reporting period are those that 'provide evidence of conditions that existed at the reporting date' (IAS 10, para 3a).

Non-adjusting events after the reporting period are 'those that are indicative of conditions that arose after the reporting period' (IAS 10, para 3b).

Accounting treatment: Adjusting events affect the amounts stated in the financial statements so they must be adjusted.

Non-adjusting events do not concern the position as at the reporting date so the financial statements are not adjusted. If the event is material then the nature and its financial effect must be disclosed.

IAS 16 Property Plant and Equipment

Cost and depreciation of an asset: IAS 16 states that property, plant and equipment is initially recognised at cost.

An asset’s cost is its purchase price, less any trade discounts or rebates, plus any further costs directly attributable to bringing it into working condition for its intended use.

Subsequent expenditure on non-current assets is capitalised if it:

• Enhances the economic benefits of the asset e.g. adding a new wing to a building.

• Replaces part of an asset that has been separately depreciated and has been fully depreciated; e.g. furnace that requires new linings periodically.

• Replaces economic benefits previously consumed, e.g. a major inspection of aircraft.

The aim of depreciation is to spread the cost of the asset over its life in the business.

• IAS 16 requires that the depreciation method and useful life of an asset should be reviewed at the end of each year and revised where necessary. This is not a change in accounting policy, but a change of accounting estimate.

• If an asset has parts with different lives, (e.g. a building with a flat roof), the component parts should be capitalised and depreciated separately.

Revaluation of property, plant and equipment: Revaluation of PPE is optional. If one asset is revalued, all assets in that class must be revalued.

Valuations should be kept up to date to ensure that the carrying amount does not differ materially from the fair value at each statement of financial position date.

Revaluation gains are credited to other comprehensive income unless the gain reverses a previous revaluation loss of the same asset previously recognised in the statement of profit or loss.

Revaluation losses are debited to the statement of profit or loss unless the loss relates to a previous revaluation surplus, in which case the decrease should be debited to other comprehensive income to the extent of any credit balance existing in the revaluation surplus relating to that asset.

Depreciation is charged on the revalued amount less residual value (if any) over the remaining useful life of the asset.

An entity may choose to make an annual transfer of excess depreciation from revaluation reserve to retained earnings. If this is done, it should be applied consistently each year.

IAS 27 Separate Financial Statements: This standard applies when an entity has interests in subsidiaries, joint ventures or associates and either elects to, or is required to, prepare separate non-consolidated financial statements.

If separate financial statements are produced, investments in subsidiaries, associates or joint ventures can be measured:

• At cost

• using the equity method

• In accordance with IFRS 9 Financial Instruments.

IAS 28 Investments in associates and joint ventures

Joint ventures: A joint venture is a 'joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement' (IAS 28, para 3). This will normally be established in the form of a separate entity to conduct the joint venture activities.

Associates: An associate is defined as an entity 'over which the investor has significant influence' (IAS 28, para 3).

Significant influence is the 'power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies' (IAS 28, para 3).

It is normally assumed that significant influence exists if the holding company has a shareholding of 20% to 50%.

Equity accounting: In the consolidated financial statements of a group, an investment in an associate or joint venture is accounted for using the equity method.

The consolidated statement of profit or loss will show a single figure in respect of the associate or joint venture. This is calculated as the investor’s share of the associate or joint venture's profit for the period.

In the consolidated statement of financial position, the ‘investment in the associate/joint venture’ is presented in non-current assets. It is calculated as the initial cost of the investment plus/(minus) the investor's share of the post-acquisition reserve increase/(decrease).

The associate or joint venture is outside the group. Therefore transactions and balances between group companies and the associate or joint venture are not eliminated from the consolidated financial statements.

IAS 37 Provisions, Contingent Liabilities and Contingent Assets: IAS 37 provides the following definitions:

• A provision is 'a liability of uncertain timing or amount' (IAS 37, para 10).

• A contingent liability is a possible obligation arising from past events whose existence will only be confirmed by an uncertain future event outside of the entity's control.

• A contingent asset is a possible asset that arises from past events and whose existence will only be confirmed by an uncertain future event outside of the entity’s control.

Provisions: Provisions should be recognised when:

• An entity has a present obligation (legal or constructive) as a result of a past event

• It is probable that an outflow of economic benefits will be required to settle the obligation, and

• A reliable estimate can be made of the amount of the obligation.

Measurement of provisions:

• The provision amount should be the best estimate of the expenditure required to settle the present obligation.

• Where the time value of money is material, the provision should be discounted to present value.

Restructuring provisions:

• Provisions can only be recognised where an entity has a constructive obligation to carry out the restructuring.

• A constructive obligation arises when there is a detailed formal plan which identifies:

− The business concerned

− The principal location, function and approximate number of employees being made redundant

− The expenditures that will be incurred

− When the plan will be implemented

− There is a valid expectation that the plan will be carried out by either implementing the plan or announcing it to those affected.

Specific guidance:

• Future operating losses should not be recognised.

• Onerous contracts should be recognised for the present obligation under the contract.

Contingent liabilities should not be recognised. They should be disclosed unless the possibility of a transfer of economic benefits is remote.

Contingent assets should not be recognised. If the possibility of an inflow of economic benefits is probable they should be disclosed.

IAS 38 Intangible Assets: IAS 38 says that an intangible asset is 'an identifiable non-monetary asset without physical substance' (IAS 38, para 8).

Initial recognition: IAS 38 states that an intangible asset is initially recognised at cost if all of the following criteria are met.

(1) It is identifiable – it could be disposed of without disposing of the business at the same time.

(2) It is controlled by the entity – the entity has the power to obtain economic benefits from it, for example patents and copyrights give legal rights to future economic benefits.

(3) It will generate probable future economic benefits for the entity – this could be by a reduction in costs or increasing revenues.

(4) The cost can be measured reliably.

If an intangible does not meet the recognition criteria, then it should be charged to the statement of profit or loss as expenditure is incurred.

Items that do not meet the criteria are internally generated goodwill, brands, mastheads, publishing titles, customer lists, research, advertising, start-up costs and training.

Subsequent treatment: Intangible assets should be amortised over their useful lives.

If it can be demonstrated that the useful life is indefinite no amortisation should be charged, but an annual impairment review must be carried out.

Intangible assets can be revalued but fair values must be determined with reference to an active market. Active markets have homogenous products, willing buyers and sellers at all times and published prices. In practical terms, most intangible assets are likely to be valued using the cost model.

Research and development: The recognition of internally generated intangible assets is split into a research phase and a development phase.

Costs incurred in the research phase must be charged to the statement of profit or loss as they are incurred.

IAS 38 says that costs incurred in the development phase should be recognised as an intangible asset if they meet the following criteria:

(a) The project is technically feasible

(b) The asset will be completed then used or sold

(c) The entity is able to use or sell the asset

(d) The asset will generate future economic benefits (either because of internal use or because there is a market for it)

(e) The entity has adequate technical, financial and other resources to complete the project

(f) The expenditure on the project can be reliably measured.

Amortisation of development costs will occur over the period that benefits are expected.

IFRS 3 Business Combinations: On acquisition of a subsidiary, the purchase consideration transferred and the identifiable net assets acquired are recorded at fair value.

Fair value is 'the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date' (IFRS 13, para 9).

Purchase consideration: Purchase consideration is measured at fair value. Note that:

• Deferred cash consideration should be discounted to present value using a rate at which the acquirer could obtain similar borrowing.

• The fair value of the acquirer’s own shares is the market price at the acquisition date.

• Contingent consideration is included as part of the consideration at its fair value, even if payment is not probable.

Goodwill and the non-controlling interest: The non-controlling interest (NCI) at acquisition is measured at either:

• Fair value, or

• The NCI's proportionate share of the fair value of the subsidiary’s identifiable net assets.

Gain on bargain purchase: If the net assets acquired exceed the fair value of consideration, then a gain on bargain purchase (negative goodwill) arises.

After checking that the calculations have been done correctly, the gain on bargain purchase is credited to profit or loss.

Other adjustments: Other consolidation adjustments need to be made in order to present the parent its subsidiaries as a single economic entity. Transactions that require adjustments include:

• Interest on intragroup loans

• Intragroup management charges

• Intragroup sales, purchases and unrealised profit in inventory

• Intragroup transfer of non-current assets and unrealised profit on transfer

• Intragroup receivables, payables and loans.

IFRS 10 Consolidated Financial Statements: IFRS 10 states that consolidated financial statements must be prepared if one company controls another company.

Control, according to IFRS 10, consists of three components:

(1) Power over the investee: this is normally exercised through the majority of voting rights, but could also arise through other contractual arrangements.

(2) Exposure or rights to variable returns (positive and/or negative), and

(3) The ability to use power to affect the investor's returns.

It is normally assumed that control exists when one company owns more than half of the ordinary shares in another company.

IFRS 15 Revenue from Contracts with Customers: Revenue recognition is a five step process.

(1) Identify the contract: A contract is an agreement between two or more parties that creates rights and obligations.

(2) Identify the separate performance obligations within a contract: Performance obligations are, essentially, promises made to a customer.

(3) Determine the transaction price: The transaction price is the amount the entity expects to be entitled in exchange for satisfying all performance obligations. Amounts collected on behalf of third parties (such as sales tax) are excluded.

(4) Allocate the transaction price to the performance obligations in the contract: The total transaction price should be allocated to each performance obligation in proportion to stand-alone selling prices.

(5) Recognise revenue when (or as) a performance obligation is satisfied: For each performance obligation an entity must determine whether it satisfies the performance obligation over time or at a point in time.

An entity satisfies a performance obligation over time if one of the following criteria is met:

(a) 'the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs

(b) The entity’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced, or

(c) The entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date' (IFRS 15, para 35).

For a performance obligation satisfied over time, an entity recognises revenue based on progress towards satisfaction of that performance obligation.

If a performance obligation is not satisfied over time then it is satisfied at a point in time. The entity must determine the point in time at which a customer obtains control of the promised asset.