Accounting interview questions

Accrual accounting vs cash accounting. Which one do you recommend?

The main difference between accrual accounting and cash accounting is the timing when the revenue and expenses are recognized.

Accrual accounting focuses on the anticipated revenue and expenses while cash accounting recognises the immediate revenue and expenses.

The choice of method depends on the

1. size of the business,

2. reporting needs and l

3. legal requirements

Walk me through the 3 financial statements

The 3 major financial statements are the income statement, balance sheet and cash flow statement.

income sheet shows companys revenue and expenses over a period of time and goes down to net income.

The balance sheet shows the companys assets such as cash, inventory and PPE as well as liabilities like Debt and accounts payable and shareholders equity at a specific point in time. Assets always equal liabilities plus shareholder equity

Cash dlow statement begins with net income, adjusts for non-cash expenses and changes in operating assets and liabilities (working captial) and then shows how company has spent cash or received cash from investing or financing activities with the net change in cash at the end

What is the difference between IRR and NPV?

They are both discounted cash flow techniques used in investment appraisal however NPV calculates the present value of futur

what is the purpose of assurance

to increase confidence of user in the subject matter being relied upon

what is the 5 elements of assurance engagement?

1. Three parties

2. subject matter (any data which is being evaluated for assurance = f/s)

3. criteria ( standards/parameters against which subject matter is being evaluated = IFRS)

4. Evidence ( all info and explanation collected by applying suitable procedures on subject matter)

5. assurance report = (written report containing assurance/opinion on subject matter for intended user)

Who are the three parties involved in an assurance?

Practitioner - ex. auditor = performs examination against suitable critera and provides written assurance report

Intended user - ex. shareholders = users of subject matter (info being examined ex. F/S)/ need assurance

Responsible party - ex. directors = preparer of subject matter / party whose work is being assessed by practicioner

What is reasonable assurance engagement?

• High level of assurance

• practitioner evaluates subject matter in great detail with maximum procedures

• gives report in form of positive statement of opinion "“in our opinion, subject matter does/ does not give true and fair view)

• tests of control and substantive procedures are done

What is limited/moderate assurance engagement?

• low level of assurance

• practitioner evaluates subject matter in less details with limited procedures

• gives report in form of negative statement of conclusion (“nothing has come to our attention”)

what is a misstatement?

Difference between accounting standards and accounting adopted by company

what are the audit procedures?

1. C = Confirmation (external confirmation ex. bank, supplier, customer)

2. A = Analytical procedure ( compare and investigate unusual things)

3. I = Inquiry (ask for further info from staff of company)

   = Inspection of assets ( physically inspect NCA and CA)

   = Inspection of documents (invoice, purchase orders etc)

4. R = Recalculate

   R = Re-perform (auditor perform activity and compare with original work)

5. Observe ( observe system, culture, office environment, controls etc.)

Are auditors reponsible for detection of fraud?

In reality, auditor should ensure F/S are free from material misstatements due to fraud or error

What is agency, stewardship and accountability?

agency = principal employs another party (the agent) to perform a task on their behalf (ex. directors are agents of shareholders)

Stewardship = responsibility to take good care of resources (ex. directors are stewards of the company)

Accountability = answerable to other party ( directors are accountable to the shareholders for decisions they make related to the company)

what is the audit cycle?

1. auditor is appointed/ reappointed

2. Audit engagement letter (contract between auditor and client co.)

3. planning stage of audit

4. performing the audit (test of controls, substantive procedures)

5. review stage

6. auditor gives opinion on F/S but DOES NOT GUARANTEE

What is modified and unmodified opinion of an auditor?

Unmodified = clean opinion = F/S are true and fair

Modified opinion:

1. Qualified opion: Except for__ F/S are true and fair

2. Adverse opinion: F/S are NOT true and fair

3. Disclaimer opinion: Auditor is not expressing any opinion (could be due to lack of evidence)

What is audit risk? and what are the three types?

Audit risk = risk of issuing an inappropriate audit opinion

1. Inherent risk = susceptibility of misstatement before consideration of controls (ex. complex accounting treatment)

2. Control risk = risk that client’s controls fail to prevent and detect misstatement (old/ineffective softwares)

3. Detection risk = risk that auditor fails to detect material misstatements (using inappropriate procedures)

What is materiality?

Information is material if its omission or misstatement could (either individually or in aggregate) influence the decisions of users

What is quantitative materiality? and what are the two types?

Quantitative materiality = monetary amount of materiality, set by auditors

Overall materiality = materiality for F/S as a whole

Performance materiality = materiality of individual transactions

What is the difference between an internal audit and an external audit

The objective of an internal audit is to report to the company’s audit committee and BOD

The objective of an external audit is to report to company’s investors or shareholders

The internal auditor reviews controls and financial statements and risk management procedures

The external auditor provides professional opinion on the truthfulness and fairness of the company’s f/s

The work of an internal auditor is usually ongoing and integral part of co’s day to day life

the work of an external auditor is periodic in nature or as required by regulators

What is the risk assessment procedure

1. enquire with management and others within the entity

2. analytical procedures (calculating ratios, trends, making comparisons)

3. observation (ex. of control procedures) and inspection (ex of key strategic documents and manuals)

what are substantive procedures?

it is an audit procedure designed to detect material misstatements at an assertion level (level at which statements are presented as completely true)

Procedure (CAIRO) + Source (of evidence) + purpose (verify f/s accuracy and assertion)

what is the tests of controls

Help auditors determine how well a co’s internal control system is working and the design of the controls.

(ex. counting staff has counting sheets where inventory quantity balance is not shown = good control)

what does the internal control system consist of?

1. Control environment: attitude of management with regard to control

2. Risk assessment process

3. Information system and communication

4. control activities: authorisation, reconciliation, verification etc.

5. monitoring of controls: monitor to ensure controls are operating and are effective

what are adjusting and non adjusting events

Subsequent events are events that occur between period end and date financial statements are authorized for issue

adjusting events: provide additional evidence about conditions existing at sofp date

non-adjusting events: provide evidence about conditions arising after sofp date

what are the types of audit opinions?

material but not pervasive = misstatements do not represent substantial proportion of F/S

Material and pervasive = misstatements represent a substantial proportion of FS making them unreliable as a whole

What is the definition of an asset?

A present economic resource controlled by the entity as a result of past events

What is the definition of a liability?

A present obligation of the entity to transfer an economic resource as a result of past events

What is the definition of Equity?

The residual interest in assets after deducting all liabilities from the total assets.

What is the double entry for purchase of inventory on credit?

Dr. Purchases (not inventory)

Cr. Trade payable

what is the definition of income?

Increases in assets or decreases in liabilities that result in an increase to equity

What is the definition of Expense?

Decreases in assets or increases in liabilities that result in decreases to equity.

IFRS 5 NCA HFS and discontinued operations — What is the criteria to be classified as “assets held for sale”

1. asset must be available for immediate sale in its present condition

2. sale must be highly probably

3. sale should be expected to take place within one year from date of classficiation

IAS 8 — How are changes in accounting policy applied?

Changes in accounting policy are applied retrospectively by adjusting opening balances of equity

IAS 8 —- How is changes in accounting estimates applied?

Applied on prospective basis by including it in the SPL for the current period and any future periods that are affected

IAS 8 — How is prior period errors corrected?

Corrected retrospectively. They are adjusted through retained earnings

IFRS 15 Revenue — What are the 5 steps in recognizing revenue?

1. Identify the contract

2. Identify the seperate performance obligations within a contract

3. determine the transaction price

4. allocate the transaction price to the performance obligations in the contract

5. recognize revenue when a performance obligation is satisfied

IFRS 15 Revenue — what is a performance obligation and how do you identify it?

Performance obligations are promises to transfer distinct goods or services to a customer

A promised good/ service is distinct if:

1. can benefit from good/service on its own

2. promise to provide good/service is separately identifiable

How do you determine whether to recognize revenue at a point in time or over time?

Performance obligation is satisfied over time if:

customer simultaneously receives and consumes benefit provided by entity’s performance as the entity performs

Performance obligation is satisfied at a point in time when customer obtains control of asset ( direct its use and obtain most of the remaining benefit)

IAS 16 NCA — What is the difference between cost model and revaluation model?

Under cost model, PPE is held at cost - acc dep - impairment losses

Under revaluation model, PPE is held at FV- acc dep - impairment losses

IAS 16 NCA — In which F/S does revaluation of assets go into?

If revaluation increases value of asset = increase presented as OCI

Held in revaluation surplus within OCE

If revaluation decreases value of asset = decrease recognized in P/L unless revaluation surplus already exists on existing asset

IAS 16 NCA — How are assets derecognized.

Asset should be derecognized when disposal occurs or if no further economic benefits are expected from asset use or disposal

Gain/loss on derecognition = net disposal proceeds - carrying amount of asset

revaluation surplus can be transferred to retained earnings

IAS 23 Borrowing costs — How are borrowing costs recognized?

Borrowing costs should be capitalised as part of cost of asset

IF they relate to acquisition, construction or production of a qualifying asset.

IAS 40 Investment property — How is investment property recognized?

On recognition it is recognised at cost. after recognition it can be recognized at cost model or fair value model

IAS 40 Investment property — How is an investment property recognised in fair value model?

Entity remeasures investment properties to fair value each year —> no depreciation is charged

All gains/losses on revluation are reported in SPL

IAS 38 Intangible Assets — What is the definition of an intangible asset?

An intangible asset is an identifiable non-monetary asset without physical substance

IAS 38 Intangible Assets — How is an intangible asset amortized?

An asset with a FINITE useful life = amortised on a systematic basis over that life

An asset with an INDEFINITE useful life = not amortized instead it is subjected to an annual impairment review