Chapter 12 to 16 extract from our ExPress notes
for use with the current video.
A full set of F1 ExPress notes can be downloaded
free of charge at www.theexpgroup.com. Notes
CIMA Paper F1
Financial Operations
For exams in 2011
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations
Contents
Page |2
About ExPress Notes
3
1.
The Conceptual Framework
7
2.
IAS 1: Presentation of Financial Statements
11
3.
Substance and IAS 18 Revenue
14
4.
Construction Contracts
16
5.
Predictive Value
19
6.
IAS 16, 23, 38 Non-Current Assets
25
7.
IAS 36: Impairment of Assets
32
8.
IAS 37: Provisions, Contingent Liabilities and
Contingent Assets
36
9.
IAS 17: Leases
40
10.
IAS 12: Taxation
43
11.
Group Financial Statements
47
12.
Associates
51
13.
Statement of Cash Flows
53
14.
Principles of Business Taxation
58
15.
CIMA Code of Ethics
64
16.
External Audit
66
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations
Chapter 12
Associates
START
The Big Picture
There are three possible levels of investment that one company may have in another:
Type of investment
Level of influence
Available for sale asset (i.e. Little or none
trade investment)
Subsidiary
Accounting treatment in
group financial
statements
Historical cost or market
value in accordance with IAS
39 / IFRS 9.
Control, normally by holding Line-by-line consolidation of
>50% of the voting shares
all items under parent’s
control, plus goodwill.
We now introduce a third category that sits between the two above:
Page |51
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations
Associate
Significant influence,
normally by holding between
20% and 50% of the voting
shares
“Equity accounting”, which is
a simplified form of
consolidation.
Significant influence
This fairly self-explanatory concept means that the parent cannot consolidate each item of
the investee’s assets, liabilities, income and gains, since the parent does not have control of
them.
However, there is a close relationship between the parent and the associate of significant
influence.
Normally, this is obtained by holding 20% to 50% of the voting shares in the investee
company, but other factors may be taken into account, such as:

Representation on the investee’s board of directors

Evidence that the investee company is used to accepting the investor as having
significant influence

Whether the investee is part of the supply chain of the investor

Sharing key personnel

Sharing key information.
Accounting treatment in the group financial statements
In the SOFP, the investee (called “associate”) is automatically revalued each year, allowing
for post-acquisition growth in the associate’s assets.
There are two ways to calculate this, though the former is probably to be preferred, since it
follows the disclosure notes required by IAS 28.
Page |52
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations
Chapter 14
Statement of Cash Flows
START
The Big Picture
Statements of cash flows are a primary financial statement, meaning that they have to be
shown with equal prominence as the statements of financial position and comprehensive
income. They provide important additional information to investors and investment analysts.
Key benefits of presenting a statement of cash flows include:
Information on the entity's ability to generate net cash from its operating activities and how
such net cash is used in investing and/or financing activities.
Perceived objectivity of cash, i.e. less open to manipulation than profit.
Cash flow is vital to going concern and commercial success, regardless of profitability.
Very useful in discounted cash flow valuation of a business.
Page |53
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations
The statement of cash flow pro-forma has three sections, corresponding to the three types
of activities that any entity undertakes, though in reality it may be easier to think of this as
five, as two are presented in a mezzanine presentation between cash flow from operations
and investing.
Operating: Cash flow from trading activities
Financing: Cash paid on interest
Taxation:
Actual cash paid during the year
Investing: Cash flows on purchase or sale of non-current assets
Financing: Cash flows on raising or redeeming long-term finance such as shares or
debentures.
What is cash?
Cash comprises both cash and bank deposits payable on demand and also cash equivalents
which are defined as “short-term, highly liquid investments that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of changes in value”.
Short-term is not defined, though three months is a typical benchmark.
Direct or Indirect?
There are two alternative presentations of the operating section of the statement of cash
flows: the direct method and the indirect method.
Under the indirect method (the most frequent method of preparing and presenting the cash
flows from operating activities, and the examinable one), you calculate the net cash flows
from operating activities by reconciling the profit before tax figure to the operating cash flow
figure.
Any item that appears in operating profit (i.e. profit before interest and taxation) but which
is not a cash flow, and vice versa, will appear in this reconciliation.
Page |54
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations
The direct method omits this reconciliation, instead presenting operating cash flow as
simply:
Cash received from customers
X
Cash paid to suppliers
X
Other cash payments
X
Operating cash flow
X
Proforma statement of cash flows
This is a proforma under the indirect method.
Knowing this proforma is the way to start a question in the exam, since lots of figures can
be added in there straight away.
Operating cash flows
Profit before tax
X
Add back: Finance costs
X
Less: Finance income
(X)
Profit before interest and taxation
X
Adjustments for:
Page |55
Depreciation
X
Amortisation of intangibles
X
Impairment losses
X
Gain/ (loss) on disposal of non-current assets
(X)/X
Gain/(loss) on revaluation of investment property
(X)/X
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations
Operating profit/ (loss) before working capital changes
X/(X)
(Increase)/decrease in inventories
(X)/X
(Increase)/decrease in receivables
(X)/X
Increase/ (decrease) in payables
X/(X)
Cash generated from operations
X/(X)
Interest paid
(X)
Tax paid
(X)
Net operating cash flows
X/(X)
Investing cash flows
Payments to acquire non-current assets
(X)
Proceeds from sale of non-current assets
X
Net investing cash flows
X/(X)
Financing cash flows
New share capital issued
X
Dividends paid
(X)
New loans raised
X
Repayments of borrowings
(X)
Government grants received
X
Net financing cash flows
X/(X)
Net increase/ (decrease) in cash & cash equivalents
X/(X)
Cash & cash equivalents at beginning of the period
X
Cash & cash equivalents at end of the period
X
Note that we have slightly amended the proforma in IAS 7 to include a separate section that
reconciles profit before tax to profit before interest and tax.
This is not required by IAS 7, but it makes it easier to take a structured approach to the
exam question.
Start the reconciliation with the depreciation figure.
Page |56
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations
This will be in the exam question and is the easiest to remember.
If you get the direction of this right, i.e. add it instead of take away, you are likely to get the
direction of all the other adjustments right.
Cash operating profits (operating cash flow) – depreciation = Accounting operating profits (PBIT)
Therefore:
PBIT + depreciation = Operating cash flow.
We are working back from profit to operating cash flow, so the direction of these
adjustments is often the opposite way to what you would think.


Page |57
Any adjustment which decreases net assets will be added back.
Any adjustment which increases net assets will be deducted.
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations
Chapter 14:
Principles of Business Taxation
START
The Big Picture
Paper F1 introduces candidates to the core principles of taxation.
Taxation can get very complicated with a number of detailed calculations and lots of
intricate rules to remember. However, paper F1 is more concerned with the general
principles of taxation and does not examine the detailed legislation that can be found in tax
law.
A successful candidate must therefore have a good understanding of the core areas of
taxation. The main taxes are:





Page |58
Income tax – payable by individuals
Corporation tax – payable by companies
Capital Gains tax – payable by individuals (companies generally pay corporation
tax on their capital gains)
VAT – payable by both companies and unincorporated businesses
Social Security Contributions – not strictly a tax but payable by individuals and
employers.
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations
Direct taxes are imposed directly on the tax payer. Examples include income tax and
corporation tax.
Indirect taxes are generally taxes imposed on goods or services which are ultimately paid
by consumers. Examples include VAT.
There are 3 main tax structures:
1. Progressive – take a higher proportion as income increases. eg UK income tax
takes 20%, 40% or 50% the higher the income.
2. Regressive – take a lower proportion of taxes as income rises.
3. Proportional – take the proportion of tax as income rises.
KEY KNOWLEDGE
Adjustment of the accounting profit
A company’s accounts must be adjusted to obtain the tax adjusted trading profit. This
normally involves increasing the accounting profits for disallowable items and then reducing
the figure for capital allowances purposes.
Example - Tax adjusted trading profit
Net profit per accounts
Add:
28,000
Disallowed expenditure
9,250
9,250
37,250
Less:
Income included within the accounts but not taxable as
trading income
Capital allowances
1,250
3,000
(4,250)
33,000
Tax adjusted trading profit
Disallowable expenditure
General rule – Only expenditure incurred wholly and exclusively for the purposes of the
trade is allowable.
Some of the more common forms of disallowable expenditure generally include:
Page |59
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations

Capital expenditure

Depreciation or amortization charges

The write off of a non-trade debt

Subscriptions that are not related to the trade
Example of corporation tax computation
Adjusted Trading profits
150,000
Property income
30,000
Interest income
5,000
Chargeable gains
15,000
Taxable Profits
200,000
If the corporation tax rate is, for example, 28% the corporation tax payable would be
[£200,000 x 28%] = £56,000
KEY KNOWLEDGE
Trading Losses
If a company makes a trading tax loss then:
1. In most countries the loss can be carried forward and used to offset future trading
profits.
2. In some countries (for example, the UK) the trading loss can be offset against other
income in the year of the loss and carried back to certain earlier years.
3. In some countries (for example, the UK) the trading loss can be given to an eligible
group company to offset against its trading profit.
Page |60
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations
KEY KNOWLEDGE
Capital Items
Companies are generally taxed on gains on disposals of capital items such as land, buildings
and shares.
The calculation will typically be:
Proceeds from disposal of asset
500,000
Less: cost of disposal of asset
(10,000)
Net proceeds
490,000
Less: cost of original purchase of asset
(190,000)
Less: cost of any enhancement to asset
(50,000)
Less: indexation (inflation) allowance
(25,000)
Capital gain
225,000
Capital losses can generally only be offset against capital gains.
KEY KNOWLEDGE
VAT (Value Added Tax)
VAT is an indirect tax which is ultimately borne by the final customer.
VAT occurs when a taxable person makes a taxable supply.
Taxable person: an individual or company that is or should be registered for VAT.
Taxable supply: sales and purchases of goods or services which are not VAT exempt or
outside the scope of VAT.
Input VAT
Taxable person
Output VAT
Input VAT: A taxable person pays input VAT on its purchases of goods or services.
Page |61
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations
Output VAT: A taxable person charges output VAT on its sales of goods or services.
At the end of each tax period the input and output VAT is netted off and an excess of output
VAT is paid to the tax authorities whilst an excess of input VAT is recovered from the tax
authorities.
Standard rated supplies: 20% (from 4 January 2011) in the UK but the examiner will say the
rate of VAT in the exam. Most goods and services are standard rated.
Zero rated supplies: 0% VAT rate (but importantly still within the scope of VAT so can claim
input VAT).
Examples of zero rated include children’s clothes and books.
Exempt supplies: no VAT is charged and input VAT cannot be reclaimed.
Examples of exempt supplies include:



Land
Financial services
Education
VAT Registration Requirements
Compulsory registration is required when taxable supplies exceed a certain limit.
Voluntary registration is also possible. Advantages include being able to recover relevant
input VAT as well as providing an impression of a business being bigger than it really is.
Disadvantages include the increased administrative burden.
KEY KNOWLEDGE
Overseas Aspects
If a company receives foreign income such as overseas branch income, it will be included
within taxable profits.
It will therefore be liable to both home country tax and foreign tax. The company will be
eligible for double tax relief.
Page |62
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations
Double Tax Relief (DTR)
Deduct from the UK tax liability the lower of:
1. UK on foreign income, and
2. Overseas tax suffered.
KEY KNOWLEDGE
Employee Taxation
An employee is taxed on all income and benefits he or she receives from their employment
including:




Wages and salaries
Wages
Bonuses
Benefits such as the provision of a car or accommodation.
When the employer pays the salary to the employee, income tax is normally withheld
from the payment and is then paid to the tax authorities. In the UK, this procedure is
called PAYE (Pay As You Earn).
Page |63
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations
Chapter 15
CIMA Code of Ethics
KEY KNOWLEDGE
CIMA Code of ethics Fundamentals Integrity
Professional Behaviour
Confidentiality
Page |64
Objectivity
Professional competence & due care
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations
The code of ethics can be found at http://www.cimaglobal.com/Professionalethics/CIMAs-code-at-a-glance/ and states:
Integrity: being straightforward, honest and truthful in all professional and business
relationships. You should not be associated with any information that you believe contains a
materially false or misleading statement, or which is misleading by omission.
Objectivity: not allowing bias, conflict of interest or the influence of other people to
override your professional judgement.
Professional competence and due care: an ongoing commitment to your level of
professional knowledge and skill. Base this on current developments in practice, legislation
and techniques. Those working under your authority must also have the appropriate training
and supervision.
Confidentiality: You should not disclose professional information unless you have specific
permission or a legal or professional duty to do so.
Professional behaviour: comply with relevant laws and regulations. You must also avoid
any action that could negatively affect the reputation of the profession.
Section 220 of CIMA Code of Ethics is of particular relevance to paper F1 and it refers to the
conflict of interest. Please visit this link
http://www.cimaglobal.com/Documents/Professional%20ethics%20docs/code%20FINAL.pdf
Page |65
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations
Chapter 17
External Audit
START
Big Picture
The one thing all statutory audits of limited liability companies have in common is that at the
end of the day an independent auditor has to issue a report to the shareholders as the
owners of the company.
The auditors must report their opinion in respect of two main issues:
1. Whether the financial statements give a ‘true and fair view’ (or present fairly in all
material respects) the company’s financial position and performance, and
2. Whether the financial statements have been ‘properly prepared’ in accordance with
any relevant professional recommendations and/or statutory provisions.
Although the auditor’s report is produced after all the detailed field work has been
completed, it is perhaps important to give it consideration at a fairly early stage in your
Page |66
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations
studies. After all, if you know exactly what you are aiming at, it is perhaps that much easier
to hit the target!
KEY TERMINOLOGY
ISA 700 The Auditors Report on Financial Statements identifies the key elements of the
auditor’s report:
1. Title
2. Addressee
3. Introductory paragraph
4. Statement of responsibilities of management
5. Statement of responsibilities of the auditors
6. Scope paragraph
7. Opinion
8. Auditor’s signature
9. Date of report
10. Auditor’s address
KEY KNOWLEDGE
Modified Audit Reports
The standard audit report may be modified, such modification may or may not result in the
auditors giving a qualified opinion. It is important to remember that modification of the
audit report will only be required if there is some material issue.
With the practical type of question always make sure that you use any information available
in the scenario to help you assess materiality in a sensible way, vague references to the fact
that you would ‘consider materiality’ will NOT impress the examiner.
For example, let us say you are given the information that a company’s profit before tax
(PBT) is $1,000,000 and that the company has failed to make provision for a known bad
debt of $150,000. State the obvious by saying that at 15% of PBT the bad debt is material,
in that a standard benchmark would be to consider an item impacting on PBT as being
material if it is in the range of 5% to 10% of such PBT.
Page |67
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations
It is also important when assessing materiality to remember that this must be considered so
far as the user and not the preparer of financial statements is concerned. A useful working
definition of materiality may be taken as
‘transactions and other events are likely to be seen as material in the context of a company’s
financial statements if their omission, misstatement or non-disclosure would matter to a
proper understanding of such financial statements on the part of a potential user.’
KEY KNOWLEDGE
Modified Audit Reports with Unqualified Opinion
Sometimes there may be matters relating to the financial statements which, whilst fully and
adequately disclosed within the financial statements, the auditor considers worthy of
bringing to the particular attention of users.
The auditor achieves this by including in the audit report an additional paragraph known as
an ‘emphasis of matter’ paragraph. This paragraph will be ‘self-contained’ and will NOT
otherwise impact on the standard wording of an unmodified report.
Key points to remember in relation to the use of such paragraph are:



it should have a separate heading
it should be positioned AFTER the opinion paragraph
it must be made clear that the audit opinion is not qualified and so this paragraph
should start with words such as ‘Without qualifying our opinion we draw attention to
....’
Past examiners’ reports have indicated that many candidates have been unclear as to how
and when to make proper use of an emphasis of matter paragraph. It is important,
therefore, that you are totally happy with this aspect of audit reports.
Examples of where the use of such paragraph would be appropriate include:
Page |68

where there the financial statements have been prepared on a going concern basis,
but this is dependent upon some significant uncertainty which is fully and adequately
disclosed in the notes to the financial statements

where there is a material inconsistency between the financial statements and the
Directors’ Report and the adjustment required to remove the inconsistency would
need to be made in the Director’s Report but the directors are not prepared to make
such adjustment.
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations
KEY KNOWLEDGE
Modified Audit Reports with Qualified Opinion
According to ISA 700, there are two main circumstances which might give rise to the
auditors deciding that is necessary for them to qualify their audit opinion:
1. Limitation on scope which arises where the auditor has been unable to carry out
some audit work which normally they would have expected to perform and/or where
the circumstances are such that audit evidence which the auditor would normally
expect to be available for some reason does not exist.
2. Disagreement exists between the auditors and client management in relation to
some aspect of the financial statements.
The type of qualified opinion to be given will depend not just on the circumstances as
indicated above, but also on how serious the limitation on scope or disagreement is namely
is it:
1. Material but not pervasive, that is to say that the limitation on scope or disagreement
is confined to one particular aspect of the financial statements, such that the auditor
is able to say that ‘except for’ this matter the financial statements give ‘a true and
fair view etc’.
2. Material and pervasive, that is to say that the nature of the limitation on scope or
disagreement is such that it will impact on the overall view given by the financial
statements. In such situation if it is caused by limitation on scope, the auditor should
give a Disclaimer of Opinion, whereas if it is because of disagreement, they should
give an Adverse Opinion.
The circumstances giving rise to a qualified audit opinion should be described in a separate
paragraph which appears BEFORE the opinion paragraph. Wherever possible, the auditor
should quantify the qualification circumstances as this should make it easier for the reader
to appreciate its significance.
Page |69
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com
ExPress Notes
CIMA F1 Financial Operations
SUMMARY DIAGRAM OF APPROACH TO PRACTICAL AUDIT REPORT QUESTIONS
(end of ExPress notes)
Page |70
© 2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for
any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.
Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of
these notes will be accepted by the ExP Group.
theexpgroup.com