Intangible assets and the role of auditor

Published:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

According to Deegan (2010) intangible assets non-financial assets that have no physical substance. Common form of intangible assets include patents, goodwill, mastheads, brandnames, copyrihghts, research and development, and trademarks (Deegan, 2010)

Paragraph 54 of the AASB on the presentation of financial statements, intangible assets as a category must be separately disclosed in a corporation's statement of financial position. (Deegan, 2010).

According to AASB 138 intangible assets- many internally generated intangible assets are specially precluded from being carried forward as assets regardless of the future economic benefits that might be expected to be generated (deegan, 2010)

Furthermore intangible assets with the exception of goodwill are considered to have a limited useful life are required to be amortised over their useful live (deegan, 2010).

In the current scenario Krispy Kreme Doughnuts Corporation was engaged in buying up the franchise that had been financially disturbed. KKD paid it more boosting earnings and on the other side not affecting the earnings of the company.

Contrasting form the other operators with the similar business Krispy Kreme did not amortise its intangible asset which resulted in overstatement of the company's revenue and the profits (Krispy Kreme franchise buybacks are questioned). Had Krispy Kreme considered the amortisation, it would have resulted in lower earning and would have cut the company's profit by almost 30%. Here one thing is to be noted that Krispy Kreme had been engaged in these kinds of tactics for considerable period and once acquired franchise rights were treated as an intangible asset not subject to amortization (lessons from Krispy Kreme).

Above mentioned were the tactics that became the main reasons for SEC carrying out an investigation against the accounting treatment used by the Krispy Kreme Doughnuts.

Part 2:

There are several incentives for public listed corporations to engage in practices that lead to an overstatement of their periodic revenue and profits for example, it gives probable disguised image to the stakeholders of the corporation that corporation is working efficiently (even if it is not) in generating the revenue and the profit. This overstatement of profit will result in investors being more and more attracted to the company and would want to have the shares for the company; this will lead to the high demand of the company's shares and hence the price of the shares will go high giving an overall disguised overall impression of the company to all the stakeholders of the company.

However there are possible disincentives as well for example, overstatement of revenue and profit will result in high charge of tax on the given profit, furthermore it will result in more liability for the company.

Part 3:

External auditor

A professional who performs an audit on the financial statements of a company, government, individual, or any other legal entity or organization, and who is independent of the entity being audited is called an external auditor. They are suppose to come up with an unbiased and fair evaluation of the entities they are doing audit to and come up with the report that could be useful for the stakeholders such as general public, investors, and government (External auditor. Available from: http://en.wikipedia.org/wiki/External_auditor [Accessed: April 26, 2010]

Role of external auditor:

The primary role of external auditors is to express an opinion on whether an entity's financial statements are free of material misstatements; external auditors do is by clearly analysing the financial records of the entity.

Apart from that play an important part in making sure the quality of internal controls through their audit (Roles and Responsibilities of External Auditors. Available from: http://riskinstitute.ch/143300.htm [Accessed: April 26, 2010]

Presents essential advice on usefulness of the internal control system.

An auditor assesses the accounting principles used and significant estimates made by management and evaluates the overall financial statement presentation (Roles and Responsibilities of External Auditors. Available from: http://riskinstitute.ch/143300.htm [Accessed: April 26, 2010]

Question 2

Revenue

"The amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the "top line" or "gross income" figure from which costs are subtracted to determine net income" (Revenue. Available from: http://www.investopedia.com/terms/r/revenue.asp [Accessed: April 16, 2010]. 

Requirements of AASB 118:

This standard applies to revenue arising from the sale of goods, the rendering of services and interest, royalties and dividends. It does not deal with revenue arising from:

Lease agreements (see AASB 117 Leases)

 

Dividends arising from investments accounted for under the equity method

 

Insurance contracts within the scope of AASB 4 Insurance Contracts

 

Changes in the fair value of financial assets and financial liabilities or their disposal 

Changes in value of other current assets

 

Initial recognition and from changes in fair value of biological assets related to agricultural activity (see AASB 141)

 

Extraction of mineral ores (2008), AASB 118 - Revenue. Available from: http://www.charteredaccountants.com.au [Accessed: April 26, 2010]

According to the AASB 118 about the recognition of the revenue, revenue can only be recognised when the revenue is incurred but in this case revenue is being recognised at the time the house levy charge appears on members accounts at 1st December, hence option one seems inappropriate.

According to GAAP on accruals the revenue should be recognised when the transaction is completed or when the cost is incurred rather than the date when the payment has been received. In the current scenario revenue is being considered to be recognised on receipt of cash in full settlement of the House Levy charges. Hence again this option in accordance to GAAP seems inappropriate.

Committee is considering recognising revenue in full on 1 January as the date of commencement of the club's financial year. Here it is noted that the levy that is collected is for whole financial year and further according to the requirements of the AASB 118 revenue and expenses should be matched. But looking at the present situation there is no cost incurred that could be expenses; therefore revenue will not match the expenses. Therefore this option too seems not suitable.

In this option committee considers to recognise revenue in 12 equal instalments during the financial year commencing on 1 January. This option partly fulfil the requirement of AASB 118 as the liability will be monthly transferred to the members of the club, however there is no cost incurred and therefore it could be a situation again that where revenue would not meet expenses. This option therefore seems not appropriate.

According to the option 5 Club says to recognise revenue as service are used by the members on being charged for such services, thereby reducing the respective balances in their House Levy accounts. According to the AASB 118 the revenue should be recognised immediately when the service is performed or in other words when the service has been used up by the related party in this case members of the club. This option is most suitable as it matches the requirements put up by the AASB 118.

This option is of recognising revenue in full at the end of the next financial year-31 December- when all unspent levy amounts, if any, are transferred under the club's rules to its sundry revenue account. There is no way provided how to account for the sundry expenses and further it has dilemma similar to that of option 3 that is revenue would not match the expenses, collecting money in advance is considered as unearned revenue and it cannot be put into the revenue account. Hence this is option is not suitable.

Conclusion:

Analysing all the options provided by the club's committee it is suggested that option 5 seems most fitted as mentioned above it meets all the requirements and therefore option 5 of the revenue recognition should be opted.

Writing Services

Essay Writing
Service

Find out how the very best essay writing service can help you accomplish more and achieve higher marks today.

Assignment Writing Service

From complicated assignments to tricky tasks, our experts can tackle virtually any question thrown at them.

Dissertation Writing Service

A dissertation (also known as a thesis or research project) is probably the most important piece of work for any student! From full dissertations to individual chapters, we’re on hand to support you.

Coursework Writing Service

Our expert qualified writers can help you get your coursework right first time, every time.

Dissertation Proposal Service

The first step to completing a dissertation is to create a proposal that talks about what you wish to do. Our experts can design suitable methodologies - perfect to help you get started with a dissertation.

Report Writing
Service

Reports for any audience. Perfectly structured, professionally written, and tailored to suit your exact requirements.

Essay Skeleton Answer Service

If you’re just looking for some help to get started on an essay, our outline service provides you with a perfect essay plan.

Marking & Proofreading Service

Not sure if your work is hitting the mark? Struggling to get feedback from your lecturer? Our premium marking service was created just for you - get the feedback you deserve now.

Exam Revision
Service

Exams can be one of the most stressful experiences you’ll ever have! Revision is key, and we’re here to help. With custom created revision notes and exam answers, you’ll never feel underprepared again.