EXAM PREP

closing balance of retained profits =

opening retained profits + net profit - dividends

link between balance sheet and income statement

net profit in IS is used to calculate retained profits, which goes into the equity section of the BS

Prepayments recorded as expense for

the amount which is actually used up

net book value

original purchase cost - accumulated depreciation

max deviation

(higehst ratio - average)/avererage

market value equity (MVE) =

share price x number of shares

ROE =

profit margin x asset turnover x leverage

ROE shows

operating efficiency, asset use efficiency, risk profile

Purpose of tax

Raise revenue to fund provision of public goods and services, and prevent market failure

• manage economy, reduce inequality by redistributing income

Tax definition

compulsory contribution to support the government, levid on persons, propery, income, commodities, transactions. In return, we get public services.

tax policy objectives

SEESC

Simple

Equitable

Efficient

Sustainable consistent

Simple tax

easy to understand and comply with; low compliance and admin costs

compliance cost

to comply with tax obligations eg. accountant, time

Equitable

burden should be borne fairly

vertical equity

taxpayers with greater ability to pay (higher income) should contribute more

horizontal equity

taxpayers with similar income should pay the same amount of tax

how does equity ensure burden is fair

protects people in the same economic position from unfair advantages

ensures that those who are more capable can pay more, doesn’t put undue pressure on people with lower incomes

Efficient

Should not distort decision-making in economy

Sustainable tax

principal objective is to raise revenue to fund government programs

durable and flexible to deal with changes

Consistent tax

rules in one part of system should not contradict those in another part of the system

3 sources of tax law

common law, statute law, ATO (de facto)

statute law/legislation

made by Parliament, dominant source, detailed and complex

case law/common law

from the decisions of courts, accumulates over time, to fill legislative vacuum, statutory interpretation

ATO as source of law

ATO’s assessment procedures, day-to day decisions in dealings with the public, other rulings, objection and review

informal law, not technically law

ATO public rulings

binding on ATO (no appeal)

ATO private rulings (to specific taxpayer)

binding on ATO (taxpayer can appeal)

types of taxpayers

individual

sole trader

partnership

trust

company

individual taxes

employment income, investment income, deductions

sole trader

individual conducting business in their own name, individual and sole trader income and legal status is the same

partnership

two or more people conducting business together as partners

conduit - income flows to each partner

not separate taxable entity

trust

not seprate legal entity

conduit: income flows to beneficaries

relationship where trustee manages asset for beneficiaries

company

separate legal entity

direct tax

income tax, property tax

indirect tax

GST, payroll, land tax

indirect tax

falls on different person, inditectly influences them, less equitable

Tax evasion

not paying tax using illegitimate means eg. not declaring income

Tax avoidance

minimising tax liabilities through using loopholes eg. profit shifting

Tax planning/minimisation

Maximise tax efficiency by reducing liabilities eg. R&D incentives

Consequences of tax evasion

• reputational damage

• imprisonment

• tax repayment + interest

• fines

• doesn’t abide by social contract

internal control

policies within organisation to oproviding physical security and management control over assets, inventory, cash

5 components of internal control system

control environment

risk assessment

controla ctivities

information and communication

monitoring

control environment

Attitude, awareness and actions of organisation towards establishing and maintaining effective control measures, integrity, ethical behaviour and accountability

risk assessment

Identify risks, assess likelihood, evaluate impact, prioritise risks that require immediate action

control activities

Actions taken by orgnaisation to mitigate effects of key risks idneitfied during risk assessment

segregation of duties

dividing responsibilities among different individuals to prevent any single person from having too much control or ability to commit fraud without detection (reimbursemenet for conference will be approved by head of school, finance team, and then when someone accepts payment)

Authorisation and approval:

for transactions, activities or access to resources so only authorised individuals perform specific actions or have access to sensitive information or assets

information and communication

Ensuring right info,r eaches right people at the right time, enabling effective communication and decision-making within the organisation

• How management communicate risk management policies to staff

• How management seek feedback from staff on concerns and issues that require attention

monitoring

Checking and reviewing the effectiveness of the control activities and processes that have been implemented within an organisation

• Internal audit team/department

audit

verification of financial statements

unmodified opinion

true and fair view, follows standards GAAP, and Corporation Act 2001

qualified opinion

specific part contains a material misstatement or cannot be proved through evidence but the rest is fine

adverse opinion

pervasive misstatements that FS don’t present true fair view and not in accordance with GAAP

audit threats

self interest

self review

familiarity

intimidation

self interest

• a financial or other interest will inappropriately influence the judgment or behaviour of auditors

  a loan to or from a client

self review

• the auditor audits work that they have previously done for the client

  auditing systems on reports that you had been involved in the design or development of

familiarity

• due to a long or close relationship with a client, an auditor will be too sympathetic to the client’s interests or too accepting of the client’s work

  having a close or immediate family relationship with a director or officer of a client

initmidation

an auditor will be deterred from acting objectively because of actual or perceived pressures from the client

• being threatened with dismissal

mitigate self interest

dislcose financial connections

reviewing High Paying clients audit quality

manage self review

auditors shouldnt perform non-aduit work

to perform non-audit work, they should check with client lead to ensure independence isn’t at risk

manage intimidation

• Whistleblower Policies for Staff → Staff are protected if they report pressure, threats, or unethical practices.

• Training and Awareness Programs → Teach auditors how to handle pressure and stand firm on ethics.

• Reporting to Senior Audit Team Members → Junior staff can escalate problems directly to seniors without fear.

manage familiarity threats

• Periodic Rotation of Audit Team/Partner → so they don’t get “too friendly” with the client.

• Professional Development Training → Ongoing training to remind staff about professional skepticism.

• External Quality Reviews of Longstanding Clients → Independent reviewers check the work to make sure auditors aren’t going easy on clients they’ve worked with for years.

CSR

business going beyond legal compliance to consider people, community/society and the broader environment

integrating social, environmental to their business operations

CSR relation to financial management

CSR sets an expectation that businesses assess the social and environmental impacts of their economic activities

financial performance of company is effected when it fails to identify and manage social/environmental risks

every company holds a “license to operate” or “social contract” - how accepting society is

sustainability report

voluntary document which provides disclosure on organisation’s impact on environment, society, and the economy

GRI stands (gloabl reporting initiative)

creates a universal standard for how businesses should report on sustainability

3 components of report

economic, environmental, social

assurance on sustainability reports

voluntary, adds credibility