RECOMMENDED SOLUTION
Artemis Lunar Mission – Step-by-Step Solution Guide (30 Marks)
SECTION 1 – Trade Receivables and Insurance Recovery (8 Marks)
Requirement (a)
Explain the substantive audit procedures relevant to the receivable balance and related insurance recovery. (4 marks)
Step-by-Step Audit Approach
The auditor's objective is to determine whether:
The receivable exists,
it is recoverable,
Impairment has been correctly assessed under IFRS 9,
And any insurance recovery has been aopriately recognised.
Model Answer
1. Review aged receivables listing
The audit team should inspect the receivables ageing report to confirm the balance is 210 days overdue. This indicates increased credit risk and possible impairment.
Assertion tested: Valuation
✅ Marks: 1
2. Inspect post year-end cash receipts
The auditor should review whether any cash has been received from Orbit Frontier after year end.
If no payments have been received, this supports the need for an expected credit loss provision.
Assertion tested: Recoverability
✅ Marks: 1
3. Review legal and financial correspondence
The audit team should inspect legal correspondence, restructuring discussions, and publicly available financial information concerning Orbit Frontier's financial distress.
This provides evidence regarding probability of recovery.
Assertion tested: Valuation and completeness
✅ Marks: 1
4. Inspect insurance policy documentation
The auditors should review the trade credit insurance contract to verify:
level of coverage,
conditions for reimbursement,
whether year-end recognition criteria are satisfied.
Assertion tested: Accuracy and valuation
✅ Marks: 1
Examiner Notes – Common Student Errors
❌ Writing generic procedures such as "check invoices" without linking them to the audit risk.
❌ Forgetting to explain WHY the procedure is performed.
❌ Not linking procedures to recoverability or IFRS 9 impairment.
❌ Ignoring insurance documentation entirely.
Requirement (b)
Calculate and explain the required year-end adjustment under IFRS 9. (4 marks)
Step 1 – Identify Gross Receivable
Receivable balance: = $42
✅ Easy professional mark if clearly stated.
Step 2 – Calculate Expected Recovery from Customer
Legal advisers estimate only 35% recoverable: 35% X 42m = 14.7m
Expected unrecoverable amount: 42m - 14.7m = 27,3m
✅ Marks: 1
Step 3 – Calculate Insurance Recovery
Insurance covers 60% of losses: 60% x 27.3m = 16.38m
✅ Marks: 1
Step 4 – Calculate Net Expected Credit Loss
27.3m - 16.38m = 10.92m
Required impairment: = 10.92m
✅ Marks: 1
Step 5 – Journal Entries
Impairment recognition
Dr Impairment loss (P/L) = $10.92m
Cr Expected credit loss allowance = $10.92m
Insurance receivable
Dr Insurance receivable = $16.38m
Cr Other income / impairment recovery = $16.38m
✅ Marks: 1
Examiner Notes – Common Errors
❌ Students often deduct insurance BEFORE calculating impairment.
Correct approach:
Calculate gross loss first.
Then separately recognise insurance recovery.
❌ Students frequently ignore IFRS 9 expected credit loss principles.
❌ Some students incorrectly leave receivable at full value because insurance exists.
Insurance does NOT eliminate impairment risk.
SECTION 1 MARKING SCHEME
| Requirement | Marks |
| Audit procedures | 4 |
| Recoverable amount | 1 |
| Insurance calculation | 1 |
| Net impairment | 1 |
| Journal entries/explanation | 1 |
| Total | 8 |
SECTION 2 – Inventory Valuation and NRV (9 Marks)
Requirement (a)
Explain audit risks and substantive procedures. (4 marks)
Step-by-Step Audit Analysis
The major risk is inventory overstatement.
IAS 2 requires inventory to be valued at:
Lower of Const and NRV
Inventory value = min(Cost, NRV)
Model Audit Risks
1. Obsolete inventory risk
The previous-generation batteries are no longer approved for Artemis missions.
Inventory may therefore be materially overstated.
✅ 1 mark
2. NRV may be below cost
The batteries can only be sold as scrap.
IAS 2 requires write-down to NRV.
✅ 1 mark
3. Incorrect absorption costing
AES included abnormal idle-capacity overheads in inventory.
IAS 2 prohibits abnormal production costs from being capitalised.
✅ 1 mark
4. Management bias
Management may intentionally avoid write-downs to maintain profitability ahead of government funding discussions.
✅ 1 mark
Examiner Notes – Common Errors
❌ Students describe "inventory count risks" only.
The question specifically asks about:
valuation,
NRV,
slow-moving inventory,
absorption costing.
❌ Many students forget IAS 2 treatment of abnormal overheads.
Requirement (b)
Calculate inventory valuation adjustments. (5 marks)
Part 1 – Obsolete Batteries
Step 1 – Cost 1200 X 7200 = 8.64m
Step 2 – NRV
NRV per unit:
1900 - 200 = 1700
NRV = Selling Price - Selling Costs
Total NRV: 1700 X 1200 =2.04m
Step 3 – Write-down: 8.64-2.04 =6.60 m
✅ Marks: 2
Part 2 – Insulation Panels
Step 1 – Cost
600 X 18000 = 10.8m
Step 2 – NRV
Per unit: 17200-300 =16900
Total NRV: 16900 X 600 = 10.14m
Step 3 – Write-down: 10.8m -10.14 m =0.66m
✅ Marks: 1
Part 3 – Excess Overhead Absorption
Actual overhead incurred: 18m
Allowed normal absorption: 13.5m
Excess overhead wrongly capitalised: 18m -13,5m = 4.5m
Required adjustment:
Dr Cost of sales = $4.5m
Cr Inventory = $4.5m
✅ Marks: 1
Total Inventory Adjustment
| Item | Adjustment |
| Obsolete batteries | $6.60m |
| Insulation panels | $0.66m |
| Excess overhead | $4.50m |
| Total | $11.76m |
✅ IAS 2 explanation = 1 mark
Examiner Notes – Common Errors
❌ Forgetting disposal costs when calculating NRV.
❌ Using selling price instead of NRV.
❌ Students often include ALL overheads in inventory.
IAS 2 only allows NORMAL production overheads.
❌ Many candidates fail to explain WHY low production causes abnormal costs.
SECTION 2 MARKING SCHEME
| Requirement | Marks |
| Audit risks/procedures | 4 |
| Obsolete inventory calculation | 2 |
| NRV adjustment | 1 |
| Overhead adjustment | 1 |
| IAS 2 explanation | 1 |
| Total | 9 |
SECTION 3 – Legal Claims and Provisions (7 Marks)
Requirement (a)
Audit procedures relevant to legal claim. (3 marks)
Model Procedures
1. Obtain legal confirmation
The auditor should obtain written confirmation from external legal advisers regarding:
likely outcome,
probability,
estimated settlement.
✅ 1 mark
2. Inspect legal documentation
Review court filings, correspondence, and settlement discussions.
✅ 1 mark
3. Assess IAS 37 treatment
The auditor should determine whether:
a present obligation exists,
outflow is probable,
reliable estimate can be made.
✅ 1 mark
Examiner Notes – Common Errors
❌ Students confuse contingent liabilities and provisions.
❌ Many candidates fail to mention lawyer confirmation letters.
Requirement (b)
Determine accounting treatment. (4 marks)
Step 1 – Determine Whether Provision Required
IAS 37 requires provision when:
present obligation exists,
outflow probable,
estimate reliable.
All conditions are met.
Step 2 – Probability Assessment
Probability of payment: 50% +30% = 80%
Outflow is probable.
Therefore:
✅ Provision required.
Step 3 – Expected Value Calculation
(50% x 38m) + (30%x (95m)=
= 19m +29.5m
= 47.5 m
Expected Value = Sum(Probablity X Outcome)
✅ Marks: 1
Step 4 – Journal Entry
Dr Legal expense = $47.5m
Cr Provision = $47.5m
✅ Marks: 1
Step 5 – Conclusion
Management's current treatment understates:
liabilities,
expenses.
Profit is overstated by $47.5m.
✅ Marks: 2
Examiner Notes – Common Errors
❌ Students often use:
most likely outcome, instead of:
expected value.
❌ Candidates frequently conclude "contingent liability only."
But IAS 37 requires provision where outflow is probable.
SECTION 3 MARKING SCHEME
| Requirement | Marks |
| Audit procedures | 3 |
| IAS 37 discussion | 1 |
| Probability assessment | 1 |
| Expected value | 1 |
| Accounting treatment | 1 |
| Total | 7 |
SECTION 4 – Impairment of Space Toilet System (6 Marks)
Requirement (a)
Substantive procedures relevant to impairment. (3 marks)
Model Procedures
1. Review engineering reports
Inspect technical failure reports confirming operational problems.
✅ 1 mark
2. Assess cash flow assumptions
Review management forecasts supporting value in use calculations.
✅ 1 mark
3. Recalculate impairment model
The auditor should independently verify:
recoverable amount,
discount assumptions,
asset carrying amount.
✅ 1 mark
Examiner Notes – Common Errors
❌ Students discuss depreciation instead of impairment.
❌ Some candidates fail to mention external evidence supporting impairment indicators.
Requirement (b)
Calculate impairment adjustment. (3 marks)
Step 1 – Carrying Amount = 64m
Step 2 – Recoverable Amount
IAS 36 uses HIGHER of:
value in use,
fair value less costs to sell.
Value in use: 36m
Fair value less costs: 31 m
Recoverable amount: 36 m
Recoverable Amount= max( Values in Use, Fair Value Less Costs of Disposal)
✅ 1 mark
Step 3 – Impairment Loss
Required impairment: 64m - 36m = 28m
✅ 1 mark
Step 4 – Journal Entry
Dr Impairment loss = $28m
Cr Development asset = $28m
✅ 1 mark
Examiner Notes – Common Errors
❌ Students incorrectly choose LOWER value instead of HIGHER recoverable amount.
❌ Many candidates forget that impairment indicators already clearly exist:
failed testing,
redesign requirement,
reduced future cash flows.
SUMMARY OF AUDIT DIFFERENCES
| Issue | Financial Statement Impact | Amount |
| Receivable impairment omitted | Assets overstated | $10.92m |
| Insurance receivable omitted | Assets understated | $16.38m |
| Obsolete battery write-down omitted | Inventory overstated | $6.60m |
| Insulation NRV adjustment omitted | Inventory overstated | $0.66m |
| Excess overhead capitalised | Inventory overstated | $4.50m |
| Legal provision omitted | Liabilities understated | $47.5m |
| Legal expense omitted | Profit overstated | $47.5m |
| Impairment not recognised | Non-current assets overstated | $28m |
| Impairment expense omitted | Profit overstated | $28m |
FINAL EXAMINER GUIDANCE
What High-Scoring Students Do
✅ Apply IFRS rules precisely.
✅ Show calculations clearly and sequentially.
✅ Explain accounting logic, not just numbers.
✅ Link audit procedures directly to risks.
✅ Use professional terminology:
NRV,
recoverable amount,
expected credit loss,
probable outflow,
abnormal overheads.
What Causes Students to Lose Marks
❌ Generic audit procedures.
❌ Missing workings.
❌ Incorrect IFRS standard application.