Best Practices for Conducting Audit Procedures for Share-Based Payments

Under International Financial Reporting Standards (IFRS), share-based payments are required to be recognized as an expense in the income statement based on their fair value at the grant date. 

The fair value of share-based payments is determined using an appropriate pricing model. Measurement of the expense is adjusted over the vesting period to reflect any changes in the fair value of the instrument.

Disclosure requirements under IFRS include:

  • The fair value of the share-based payments.
  • The number of share-based payments granted.
  • The terms and conditions of the grant.

Audit Risks:

  1. Incorrect valuation of the share-based payments
  2. Incomplete or inaccurate disclosure of share-based payments
  3. Misstatement of the expense recognition timing or method
  4. Lack of understanding of the share-based payment plans and terms
  5. Non-compliance with applicable accounting standards
  6. Inadequate documentation of the valuation and assumptions used
  7. Incomplete or inaccurate presentation of the share-based payments in financial statements
  8. Overstatement or understatement of the share-based payment expense
  9. Inadequate segregation of duties over the share-based payment process
  10. Non-compliance with legal and regulatory requirements.

Audit Assertions:

  1. Occurrence – Share-based payment transactions occur and relate to the entity being audited.
  2. Completeness – All share-based payment transactions are recorded and disclosed in the financial statements.
  3. Accuracy – Share-based payment transactions are recorded at the correct value in accordance with IFRS standards.
  4. Classification – Share-based payment transactions are correctly classified and presented in the financial statements.
  5. Cut-off – Share-based payment transactions are recorded in the correct accounting period.
  6. Existence – The share-based payment transactions are valid and exist at the balance sheet date.
  7. Rights and Obligations – The entity has the legal rights to share-based payment transactions and the obligation to settle them.
  8. Valuation – Share-based payment transactions are accurately valued based on the instrument’s fair value.
  9. Presentation and Disclosure – Share-based payment transactions are appropriately presented and disclosed in the financial statements by IFRS standards.
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Walkthrough Testing:

  1. Obtaining an understanding of the entity’s control environment, risk assessment process, and monitoring activities related to share-based payment transactions.
  2. Identifying the key controls over share-based payment transactions and documenting them in the walkthrough document.
  3. Selecting a sample of share-based payment transactions and tracing them from initiation to financial reporting.
  4. Performing inquiries with the responsible personnel to ensure that the walkthrough is accurate and complete.
  5. Evaluating the design and implementation of controls over share-based payment transactions based on the walkthrough results.

Test of Control:

  1. Obtaining an understanding of the entity’s control environment, risk assessment process, and monitoring activities related to share-based payment transactions.
  2. Identifying the key controls over share-based payment transactions and testing their design effectiveness.
  3. Performing a sample of the control activities related to share-based payment transactions and assessing their operating effectiveness.
  4. Documenting the results of the testing and evaluating the effectiveness of the entity’s control environment over share-based payment transactions.

Substantive Audit Procedures:

  1. Review and test the design and implementation of controls over the share-based payment process.
  2. Verify the accuracy of the share-based payment expense’s accuracy by testing the fair value calculation and the assumptions used.
  3. Review and test the disclosure requirements for share-based payments in the financial statements.
  4. Confirm the terms of the share-based payment plans with third-party service providers and legal counsel.
  5. Evaluate the internal controls related to the issuance of shares and exercise of options.
  6. Perform analytical procedures to identify any unusual trends or fluctuations in the share-based payment expense.
  7. Evaluate the effectiveness of the board and management oversight over the share-based payment process.
  8. Review the terms and conditions of the share-based payment agreements to identify any unusual or complex features.
  9. Obtain evidence on the proper valuation of share-based payments by reviewing and testing the inputs and assumptions used in the valuation model.
  10. Evaluate the overall compliance with applicable accounting standards and legal and regulatory requirements.
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