Question 1

Explain and discuss some of the issues that arise for auditors from the IASB's move to incorporate more fair value measurements into accounting standards.

Accepted Answer

The move by the International Accounting Standards Board (IASB) to incorporate more fair value measurements into accounting standards has raised several issues for auditors. Fair value measurements involve estimating the price at which an asset or liability could be exchanged in an orderly transaction between market participants, and this can be challenging for auditors to assess and verify.

One issue is the subjectivity and complexity of fair value measurements. Unlike historical cost measurements, fair value measurements require judgment and estimation, which can lead to increased risk of misstatement or manipulation. Auditors must carefully evaluate the reasonableness of fair value measurements and consider the reliability of the inputs used in the valuation process.

Another issue is the increased reliance on third-party valuation specialists. As fair value measurements often require specialized knowledge and expertise, companies may engage external valuation specialists to assist in determining fair values. Auditors must assess the qualifications and independence of these specialists and evaluate the reasonableness of their assumptions and methods.

Additionally, the increased use of fair value measurements can lead to greater volatility in financial statements. Fluctuations in fair values can impact reported earnings and financial ratios, which may require auditors to perform additional procedures to understand the reasons for these fluctuations and assess the impact on the overall financial position of the company.

Furthermore, the complexity of fair value measurements can pose challenges for auditors in terms of understanding and evaluating the underlying assumptions and methodologies used by management. Auditors must have a deep understanding of the valuation techniques and models employed by the company and be able to challenge management's judgments and assumptions where necessary.

Overall, the move to incorporate more fair value measurements into accounting standards presents auditors with the challenge of ensuring the reliability and accuracy of these measurements, as well as the need to adapt their audit approach to address the increased complexity and subjectivity inherent in fair value accounting.

Question 2

The FASB and IASB have concluded that derivatives should be measured at:

Accepted Answer

A)  Fair value
B)  Cost
C)  The lower of cost or fair value
D)  Cost less accumulated amortisation A

Question 3

Which of these items would meet the asset criteria of 'having future economic benefits' for a local council?

Accepted Answer

A)  Air in the park
B)  A bank overdraft
C)  A council park
D)  A and C C

Question 4

The statement in relation to conservatism (prudence)that is true is:

Accepted Answer

A)  Conservatism is inconsistent with the principle of neutrality
B)  Conservatism means recording assets early
C)  Conservatism means not depleting future resources
D)  All of the statements are true.

Question 5

The statement concerning auditing and fair value that is true is:

Accepted Answer

A)  Using fair values for assets could appear more attractive to management and more risky for auditors during periods of rising asset values
B)  Further research is needed on the auditing of fair values
C)  Auditors will have to become valuers
D)  All of the above are true

Question 6

IAS 39 created a separate category of assets and liabilities,financial assets and liabilities,and introduced associated measurement rules.

Accepted Answer

A) True 
 B)False

Question 7

Which approach does the FASB's SFAS 157 'Fair value measurements' recommend to be used in determining fair value?

Accepted Answer

A)  The market approach
B)  The income approach
C)  The cost approach
D)  All are possible approaches which the standard suggests could be used to determine fair value

Question 8

Cairns argues that under the IASB standards fair value is used to measure assets on initial recognition but subsequent measurement at fair value is more rare.

Accepted Answer

A) True 
 B)False

Question 9

The statement concerning the measurement of tangible assets that is not true is:

Accepted Answer

A)  The traditional approach has been to measure tangible assets at historical cost
B)  IAS 16 requires the use of the revaluation model for subsequent measurement of tangible assets
C)  IAS 16 permits the use of a current value measurement model for tangible assets
D)  None of the statements are untrue,i.e.all are true statements

Question 10

The criteria that normally need to be recognised for a non-cancellable lease to be capitalised by a lessee IAS 17/AASB 117)is:

Accepted Answer

A)  The lease term is for the major part of the economic life of the asset
B)  At the inception of the lease,the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset
C)  Both A and B
D)  Either A or B

Question 11

The use of a current value model for intangible assets is:

Accepted Answer

A)  Common
B)  Mandatory
C)  Rare
D)  Prohibited

Question 12

"Under the IASB standards all wholly executory contracts are recognised as assets." Explain why you agree or disagree with this statement.

Accepted Answer

The answer of "Under the IASB standards all wholly executory...

Question 13

Explain and discuss the arguments for and against the use of historical cost for the measurement of tangible assets.

Accepted Answer

The answer of Explain and discuss the arguments for and...

Question 14

To fulfil the IASB (AASB)Framework criteria that an asset must have 'future economic benefits' which of the following criteria must be met?
i.It must be scarce
ii.It must have utility
iii.It must be capable of generating cash inflows to the entity

Accepted Answer

A)  i,ii,
B)  i,iii
C)  i,ii,ii
D)  iii

Question 15

An asset must have future cash generating abilities according to the IASB (AASB)Framework definition.

Accepted Answer

A) True 
 B)False

Question 16

Using fair values for assets could appear less attractive to management (and more risky for auditors)during periods of rising asset values.

Accepted Answer

A) True 
 B)False

Question 17

Under the IASB standards all wholly executory contracts are recognised as assets.

Accepted Answer

A) True 
 B)False

Question 18

The IASB (AASB)Framework does refer to the conservatism (prudence)principle.

Accepted Answer

A) True 
 B)False

Question 19

The statement concerning the measurement of financial instruments that is not true is:

Accepted Answer

A)  The decision usefulness objective is an argument for valuation at fair value
B)  Since the 1980's the FASB has required fair value measurement
C)  The FASB has followed the IASB's lead in standard setting for financial instruments
D)  IAS 39 is the standard on financial instruments

Question 20

Barth and Kasznik reported that,between 1983 and 1995,in the United Kingdom,20% of firms recorded an asset revaluation reserve.

Accepted Answer

A) True 
 B)False

Exam 7: Assets

Explain and discuss some of the issues that arise for auditors from the IASB's move to incorporate more fair value measurements into accounting standards.

The FASB and IASB have concluded that derivatives should be measured at:

Which of these items would meet the asset criteria of 'having future economic benefits' for a local council?

The statement in relation to conservatism (prudence) that is true is:

The statement concerning auditing and fair value that is true is:

IAS 39 created a separate category of assets and liabilities,financial assets and liabilities,and introduced associated measurement rules.

Which approach does the FASB's SFAS 157 'Fair value measurements' recommend to be used in determining fair value?

Cairns argues that under the IASB standards fair value is used to measure assets on initial recognition but subsequent measurement at fair value is more rare.

The statement concerning the measurement of tangible assets that is not true is:

The criteria that normally need to be recognised for a non-cancellable lease to be capitalised by a lessee IAS 17/AASB 117) is:

The use of a current value model for intangible assets is:

"Under the IASB standards all wholly executory contracts are recognised as assets." Explain why you agree or disagree with this statement.

Explain and discuss the arguments for and against the use of historical cost for the measurement of tangible assets.

To fulfil the IASB (AASB) Framework criteria that an asset must have 'future economic benefits' which of the following criteria must be met? i.It must be scarce ii.It must have utility iii.It must be capable of generating cash inflows to the entity

An asset must have future cash generating abilities according to the IASB (AASB)Framework definition.

Using fair values for assets could appear less attractive to management (and more risky for auditors)during periods of rising asset values.

Under the IASB standards all wholly executory contracts are recognised as assets.

The IASB (AASB)Framework does refer to the conservatism (prudence)principle.

The statement concerning the measurement of financial instruments that is not true is:

Barth and Kasznik reported that,between 1983 and 1995,in the United Kingdom,20% of firms recorded an asset revaluation reserve.