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STUDENT ACCOUNTANT ESSENTIAL EXAM GUIDE 04/2012 35

Whynot

thinkaboutyourpracticalexperiencewhileyourewaitingforresults?

Earlyexamentryfo

r

December

2012

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to succeed at the Diploma inAccounting and Business level andis strongly advised to enter at theIntroductory Certificate in Financialand Management Accounting level.To underline this point, it should alsobe recognised that the Diploma levelis equivalent to the first level of anundergraduate degree programmeand students should only enter at that

level with the requisite underpinningknowledge and/or experience.

Someone with adequate experienceof working in a bookkeeping oraccounting environment may be able toenter at the Diploma level, dependingon the level of experience gained,but if that experience is only limited,they are strongly advised to enter ateither the Introductory or Intermediate

Certificate level, depending on thatlevel of experience.

Those possessing only academic orvocational qualifications, but having norelevant experience, should enter at theappropriate point, depending on the overallintellectual level of those qualifications.

Table 3 below gives a quick guide tosuitable entry points for students withdifferent backgrounds:

Qualiication ExpEriEncE and/or acadEmic/vocational Qualiications

i cefe mgee ag

ne e e ne* GcsE -ee be e

ieee cefe mgee ag

u e e eg, beeg g

GcsE eqe e qf

d ag Be oe e e g e w g e g

a-ee eqe e qf

cefe a Wg g w

a-ee eqe e qf

cefe t Wg g w

a-ee eqe e qf

cefe mgee

Wg g w f gee

a-ee eqe e qf

cefe ag te Wg e beeg, g fe e e

ne* eeee e ge, ba-ee eqe e qf egeg e dee w eeee

taBlE 3: Entry point critEria or oundations in accountancy

EnGlish and maths sEl-chEckmodulEsOther key factors that must beconsidered when deciding the level atwhich to register is your level of Englishlanguage and numeracy skills.

To help you with this assessment,ACCA has developed online selfcheckmodules that you can take free of chargeand which allow you to check your levelsof ability in maths and English. Theseare intended as resources for you to

check and improve your knowledgeor proficiency levels and can help youassess if you are ready to enter for ACCAqualifications at any level. These areavailable on the ACCA website.

typical joB rolEs associatEd WithEach QualiicationThe qualifications within Foundationsin Accountancy are suitable for a range

of students and it is important that youmake your study choices based on thelevel you are at, building up to the levelyou aspire to reach.

Table 1 shows the main purposes ofthese qualifications and the types ofroles that you could undertake.

summaryIf you enter Foundations in Accountancyat a point or level beyond your academicor technical capability, or experience,

you are more likely to fail, you willtake much longer to complete yourqualifications, you will pay more in examfees and find yourself less well preparedfor later studies.

You will also miss out on theopportunity to gain valuable certificationto validate your accountancy knowledgeand skills at different levels asyou progress.

Therefore, to significantly increase yourchances of success, you must ensure thatyou enter Foundations in Accountancyat the right level for you, reflectingyour general academic or vocationalbackground, your level of accountancyknowledge, experience and taking intoaccount your English language andnumeracy skills. Having considered thesefactors carefully, your decision shouldalso be made taking into account whereyou are currently employed or where you

want to work, as your experience or workreadiness is also a key factor.

Always prepare adequately and takeexams only when you are ready to andprogress steadily rather than take toomany too quickly. Also, leave sufficient(but not too much) time between examattempts to ensure that any gaps in yourknowledge have been properly addressed,through focused learning or revision.

* Check local country rules in Malaysia and Singapore

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FPER

As part of the ACCA Foundations inAccountancy suite of qualifications, theTechnician Training Record (TTR) forCertified Accounting Technicians (CAT)has been replaced by a new updatedpractical experience requirement

known as Foundations in PracticalExperience Requirements (FPER).The practical experience requirement

aligns the Technician work experiencerequirements more closely with ACCAspractical experience requirement(PER) and introduces some of the bestfeatures of PER into the new technicianrequirements. In addition, as the FPERarticulates more closely with the PER,those who attain CAT status will havefewer practical experience requirementsto complete, should they choose to goand study for the ACCA Qualification.

HOW FPER WORKSTo complete the FPER, students mustobtain at least 12 months supervisedwork experience in a relevant accountingor finance role and demonstrate aminimum number of new competencerequirements for the new CATQualification. They must also provideevidence that they have fulfilled the newpractical experience requirements bycompleting the FPER Record.

WHY IS PRACTICAL

EXPERIENCE IMPORTANT?

To work effectively in an accountingtechnician role, it is very importantthat students are able to demonstratecompetences in a wide range of bothpersonal effectiveness and technicalskills. These will enable them tosupport professional accounting staffin a range of business areas, includingbookkeeping, financial administration,cost accounting and in other roles withinfinancial accounting, managementaccounting, treasury, and finance. Theseroles may be within the private or publicsector or within financial shared servicecentres. The CAT exams provide them

with the knowledge and understandingwhich underpins competent performancein the workplace, but to be fully effective

at work, the knowledge and skillsacquired through study should beapplied and demonstrated practically.

WHAT ARE COMPETENCES AND HOW

ARE THEY DEMONSTRATED?

ACCA has identified 26 competencesthat broadly cover a range of personaleffectiveness and technical skills. Thecompetences describe functions thatare carried out by individuals withinan accounting environment. Thecompetences are made up of elements(challenge questions or specific tasks)which contain a description of what anindividual must experience or achieve sothat they can demonstrate competenceat work.

HOW IS FPER ACHIEVED?

To qualify as a Certified Accounting

Technician, a student mustcomplete the FPER by achieving 10competences, including: all four Essentials competences a minimum of six Technical

competences linked with all threelevels of the CAT Qualification.

They must also gain at least 12 monthspractical experience in a relevant role,but that can be in any financialrelated role and can be achievedon a full-time, part-time, orvoluntary basis.

To demonstrate anygiven competence,a student mustobtain sufficientwork experience inthe roles or tasksdescribed withineach competence.

Competence is theability to perform anactivity to a set standardwithin the workplace.A student can achieve acompetence if they can meetthe requirement described

in the elements without closesupervision or regular instructionfrom their workplace mentor.

Wherever possible the workplacementor should be a line manager orpartner who is at least qualified toCertified Accounting Technician level.

The workplace mentor shouldregularly review the work to check that

the practical experience requirementsare being met. They can also help planhow to gain the required experience.They are also responsible for judgingwhether the competence hasbeen achieved.

Note that for the demonstration of theEssentials competences, which counttowards the ACCA practical experiencerequirement (PER), the person whosigns off a students FPER competencesmust be a fully qualified accountant.The FPER Essentials competences must,therefore, be signed off by someonewho is both familiar with the students

work and a fully qualified accountant.Access further information, resourcesand guides about the Foundations inPractical Experience Requirementsthrough your myACCA account.

Gareth Owen is ACCA qualificationsdevelopment manager

STRONGER FOUNDATIONS FOR CAT WORK EXPERIENCE

FOUNDATIONS IN PRACTICAL EXPERIENCE REQUIREMENTS

AS PART OF THE ACCA FOUNDATIONS IN ACCOUNTANCY SUITE OF QUALIFICATIONS,

THE TECHNICIAN TRAINING RECORD FOR CERTIFIED ACCOUNTING TECHNICIANS

HAS BEEN REPLACED BY A NEW UPDATED PRACTICAL EXPERIENCE REQUIREMENT

KNOWN AS FOUNDATIONS IN PRACTICAL EXPERIENCE REQUIREMENTS.

38 PRACTICAL EXPERIENCE

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student accountant essential exam guide 04/2012 39

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exam feedbackPaPeR fa1

RecoRding financial

tRansactions

Feedback for this exam is available onthe ACCA website.

PaPeR ma1

management infoRmation

The exam paper the first underthe new syllabus consisted of 50multiple-choice questions each worth

two marks. The first sitting of a newpaper is always difficult for candidatesespecially as, in the case of Paper MA1,the syllabus has changed significantlyfrom the previous equivalent paper.For example, spreadsheets are nowa significant aspect of the syllabus.Overall, the questions on spreadsheetswere relatively poorly answered.

The four questions below, taken fromthe December 2011 paper and coveringdifferent aspects of the syllabus, areexamples of questions that candidatesfound particularly difficult. This report willseek to explain, in each case, the basis

for the correct answer and the incorrectoptions selected by many candidates.

sample questions for discussion

example 1

Which of the following values would beobtainable from the cost accounts in aninterlocking accounting system?1Trade payables2Trade receivables3Sales revenue4 Inventory of finished goods

A 1 and 2 only

B 3 onlyC 3 and 4D 1, 2 and 4

This question tested Section A1f in theStudy Guide. While the correct answer,Option C, was the most popular, only36% of candidates selected it. OptionsA and D were also very popular.

An interlocking accounting system isone where separate ledgers are kept forthe cost accounting function (the costledger) and the financial function (thefinancial ledger). Within the cost ledgerthere is a control account to provide a

place to record all of the items that areof a financial accounting nature. Forexample, when materials are boughtand an invoice is received the materialscontrol account will be debited, butinstead of crediting the trade payablesaccount the credit is to the cost ledgercontrol account. This means that the costledger does not keep a separate record ofthe payables. The same applies with trade

receivables which also go to the costledger control account (debit).

Option A includes values that are onlyobtainable from the financial ledger.Option D is option A with the additionof finished goods inventory, the valueof which will be obtainable from bothledgers. Option B includes only one ofthe values in the list obtainable from thecost accounts.

example 2No inventory of material M60 isheld. During a period, the followingtransactions relating to M60 occurred:Day 5 160 units bought at $3.50 per

unit and usedDay 10 300 units bought at $3.40

per unit and usedDay 15 90 units bought at $3.70 per

unit and used

Using the periodic weighted averagepricing method, what was the value ofthe usage on day 15?A $309

B $313C $318D $333

This question tested Section D1d ofthe Study Guide. Option B is the correctanswer but option D was by far the mostpopular answer (chosen by nearly 60%of candidates).

The periodic weighted average pricingmethod is a means of evening out anyfluctuations in the buying prices of a rawmaterial for a period so that all productsthat use the material are charged the

same price. This is provided by option B,which is the result of dividing the totalcost of the purchases in the period bythe total quantity purchased to determinethe weighted average price which is thenapplied to the usage of 90 units on day15. Option D simply uses the price paidon day 15.

example 3

In order to meet the general productionrequirements in a factory, direct workersmay work overtime, which is paid at apremium over the normal hourly rate.

Which account(s) would be debited

to transfer the overtime wages of directworkers from the wages control account?A Work-in-progress onlyB Production overheads onlyC Work-in-progress and bankD Work-in-progress and production

overhead

This question tested Section D2a of theStudy Guide. The correct answer is option

D but the most popular answer wasoption B. Option A was also selected bya significant number of candidates.

The basic wages of direct workers willnormally be charged as direct labour ie directly to work-in-progress. Whereovertime is worked, at a premium cost,the charging of the overtime premiums,paid to the direct workers over andabove the basic wage rate will dependon the circumstances. Where overtime

is worked to meet general productionrequirements, the premiums paid tothe direct workers for the overtimehours would be treated as productionoverhead so that the premium can beshared over all production whether innormal working hours or in overtimehours. That is the situation described inthe question and, therefore, option D iscorrect (the cost of hours worked at thebasic rate directly to work-in-progressand the overtime premiums indirectlyvia production overheads).

Where overtime is instead workedto meet the urgent demands of a

particular customer, then the whole ofthe cost of the direct workers pay willbe charged to work-in-progress. Thiswould be option A but is not correct forthe situation described in the question.Charging to production overheads only(option B) would only be correct if thequestion only referred to the cost ofthe overtime premium over and abovethe basic rate rather than the overtimewages of the direct workers.

example 4

During a period, 1,600 units of material

were input to a process. Outputcompleted was 1,400 units. Closingwork-in-progress was 100% completewith respect to material and 60%complete with respect to conversioncosts. There was no work-in-progressat the start of the period and no lossesduring the period.

What were the equivalent units ofproduction?

Materials Conversion costsA 1,400 80B 1,400 120C 1,600 640D 1,600 1,520

This question tested Section D4ciiiof the Study Guide. While the correctanswer, option D, was the mostpopular, it was selected by only 36% ofcandidates. Options B and C were alsovery popular.

The question requires the calculationof equivalent units for conversion costs inthe 200 units of closing work-in-progress.

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Option B does this (200 units 0.6 =120) but then omits to add the 1,400completed units. However, for materials,it includes the 1,400 completed unitsbut then fails to add the 200 units ofworkinprogress that are in fact completefor material content. Option C is correctfor materials but is completely wrong forconversion costs. Option A is completelywrong, failing to include the closingworkinprogress for materials, failing to

include the completed units for conversioncosts and calculating the incomplete(40%), rather than the complete (60%),element of conversion costs in theclosing workinprogress. Option D iscorrect because it combines the requiredelements described above.

PaPeR fa2

maintaining financial

RecoRds

The following three questions werethose with the lowest pass rates on thepaper. The questions are reviewed inthis report to provide future candidates

with an indication of the types ofquestions asked and guidance ondealing with exam questions.

sample questions for discussion

example 1

When completing her extended trialbalance for the year to 30 November2011, which is in an eightcolumnformat, Emma recorded the followingposttrial balance adjustments:depreciation charge $8,350accruals $1,854prepayments $1,120

What is the total value of thedebit column for post trial balanceadjustments?A $5,376B $11,324 keyC $7,616D $9,084

This question tested one of the mostfundamental aspects of the syllabus

the application of the principle ofdouble entry. The reference to post trialbalance adjustments meant that toobtain the correct answer, candidates

had to remember that any adjustmentto the trial balance required both a debitentry and a credit entry. Therefore, boththe debit column and the credit columnwill have the same total value. Thiswas found by simply adding the valueof each entry. The correct answer wastherefore $11,324 (option B). It was aconsiderable surprise that this answerwas selected by only 15% of candidates.

All of the other options arose fromcombinations of entries that did notapply the double entry rule. Option D,which was selected by 38% ofcandidates, was the value of the chargesto the income statement which arosefrom the adjustments (the depreciationcharge, plus the accrual, less theprepayment).

Option C most was the most popularchoice, and was selected by 42% of

candidates. This was very disappointing,as this answer contained two errors: (1)attempting to calculate the charge to theincome statement; and (2) treating theaccrual and prepayment incorrectly.

example 2

Malik and Vasha are in partnership.The partnership agreement provides forinterest on capital to be paid at a rate of11% per annum. You have the followinginformation: Malik Vasha

$ $Capital balance at

1 November 2010 38,500 47,800

Capital introducedon 1 April 2011 6,000 3,000

What is the total value of interest oncapital for the year to 31 October 2011?A $9,905.50B $10,483.00C $9,493.00D $10,070.50 key

This question was a straightforwardtest of arithmetic. However, as with all

questions, it was essential to read thequestion carefully. As the additionalcapital was introduced on 1 April 2011,interest would only be paid for the sevenmonths of the financial year from thatdate. The correct answer was therefore:

Total value of opening capital $86,300

Interest for 1 year @ 11%:$86,300 x 11% = $9,493.00Total additional capital $9,000

Interest for 7 months @11%:

$9,000 x 11% x 7.5 = $577.50

Total interest $10,070.50

As only 20% of candidates selected thecorrect answer (option D), it would appearthat the vast majority did not read thequestion carefully enough, and omittedthe date on which the additional capitalwas introduced from their calculations.

This view is supported by the fact that54% of candidates included interest onthe additional capital for the whole year,and this selected option B.

Candidates who selected optionA (8%) had at least recognised thatinterest was only due for part of theyear. However, this answer only includedinterest on the additional capital forfive months.

The most surprising observation is

that 18% of candidates did not includeany interest at all in respect of theadditional capital, and thus selectedoption C.

example 3

Avak and Mila have been in partnership,sharing profits and losses equally. Theyhave agreed to admit Pavao to thepartnership with effect from 1 November2011. At that date, goodwill is valued at$21,000. Future profits and losses willcontinue to be shared equally betweenthe partners, and goodwill will not bemaintained in the partnership accounts.

Avak and Mila had the followingcapital account balances at31 October 2011: Avak Mila

$24,000 credit $18,000 credit

On the commencement of the newpartnership, what is the balance onAvaks capital account?A $34,500B $27,500 keyC $20,500D $17,000

The December 2011 exam was thefirst exam under the new Paper FA2syllabus. The major addition to thesyllabus in comparison to CAT Paper 3(change in partnership) was the subjectof this question. If two key pointsabout the treatment of goodwill areunderstood, this topic should not posetoo much difficulty:Goodwill is created with a debit entry

in the goodwill account. The value isshared between the original partnersin the old profit sharing ratio, and thedouble entry is completed with creditentries in their capital accounts.

Goodwill is then charged to the newpartners in the new profit sharingratio, leading to debit entries in theircapital accounts and a credit entryin the goodwill account. The goodwillaccount will thus have a nil balance.

As with any question, it is essential toread carefully and think about what hasbeen asked. In this case the balance

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on the capital account for one of thepartners, after adjusting for goodwill,must be calculated.

The value of the goodwill is statedas $21,000. Profits are to be sharedequally between the partners, bothbefore (two partners) and after (threepartners) the change. Therefore, theentries in the capital account are:

Credit $10,500 ($21,000 x 1/2)

Debit $ 7,000 ($21,000 x 1/3)resulting in a net credit of $3,500.

As Avaks balance, prior to the change,was $24,000, the balance after thechange is $27,500.

The correct answer (option B) wasselected by 18% of candidates. In28% of answers, the value of thecredit entry was reversed and noadjustment was made for the debitentry. This led to option D ($17,000)being selected. Option C was selectedby 14% of candidates who applied bothadjustments, but reversed the debit and

credit entries, giving a result of $20,500(option C). The most common mistake,which was made by 40% of candidates,was to omit the debit entry, leading tooption A ($34,500) being selected.

ConClusion

There appeared to be two key reasonswhy candidates selected incorrectanswers. The first is a lack of clarityabout the key points of the topic, whilethe second is not reading the questionwith sufficient care. These points havebeen made in previous examiners'

reports, so candidates preparing forfuture sittings are reminded that carefulattention to these points will increasetheir chances of success.

PAPER MA2

MAnAging Costs AnD FinAnCE

The exam paper, the first underthe new syllabus, consisted of 50multiple-choice questions each worthtwo marks. The first sitting of a newpaper is always difficult for candidates,especially as, in the case of PaperMA2, both the syllabus and the exampaper format have changed significantly

from the previous equivalent paper.For example, spreadsheets are nowa significant aspect of the syllabus.Overall, the questions on spreadsheetswere relatively poorly answered.

The four questions below, taken fromthe December 2011 paper and coveringdifferent aspects of the syllabus, areexamples of questions that candidatesfound particularly difficult. This report will

seek to explain, in each case, the basisfor the correct answer and the incorrectoptions selected by many candidates.

sample questions for disCussion

example 1

What will result in under-absorption offixed production overhead?A Absorption based on actual

expenditure and actual volume ofactivity which are both below budget

B Actual expenditure below budgetand actual volume of activity sameas budget

C Actual volume of activity above budgetand actual expenditure below budget

D Actual volume of activity belowbudget and actual expenditure sameas budget

This question tested Section C1h inthe Study Guide. The correct answer isOption D. However, options A and C wereby far the most popular answers withover 70% of candidates selecting theseincorrect options.

Over-absorption or under-absorptionoccurs when the absorption rate is apre-determined rate based on budgeteddata. Option D is correct becauseabsorption using a pre-determined rateon below budget activity would fail tofully absorb the on-budget expenditure.Option C would lead to over-absorption(not under-absorption) because ofthe above budgeted activity absorbingmore overhead at the pre-determinedrate. Option B would also lead toover-absorption because of the belowbudget expenditure. Option A would

not lead to under-absorption, or toover-absorption, because actual costsand actual activity are used to absorbthe overhead, ie a pre-determined rate isnot used.

example 2

The budgeted financial results (in $000)for a companys three divisions for aperiod are summarised below:

Division X Y ZSalesrevenue 210 270 320

Costs:Variable 140 180 100Fixed 80 220 90

270 130 230

Profit/(loss) (10) 0 90

The senior management committee isconsidering whether all three divisions

should continue to operate. Budgetedfixed costs would total $280,000 if onlyone or two divisions were operating.

What decision should seniormanagement make?A Operate division Z onlyB Operate divisions X and Z onlyC Operate divisions Y and Z onlyD Operate all three divisions

This question tested Section D2f in the

Study Guide. The correct answer is optionD. However, options A and C were by farthe most popular answers, with 74% ofcandidates incorrectly selecting thesetwo options. This would seem to havebeen based on the profit/(loss) figuresin the question scenario.

The key to answering the questionis to recognise the changes in bothcontribution and fixed costs if onlyone or two divisions were operating. Ifdivisions X and Y are both discontinued(option A) then fixed costs of $20,000would be saved [(80 + 90 + 130) 280]but contribution of $160,000 would

be lost [(210 + 270) (140 + 180)],an incremental loss of $140,000.If division X only is discontinued(option C) then fixed costs of $20,000would be saved but contribution of$70,000 would be lost (210 140), anincremental loss of $50,000. Option Bwould result in an incremental loss of$70,000. Option D should be seen to bethe correct answer because the smallestloss of contribution from discontinuinga division (division X $70,000) is greaterthan the fixed cost saving ($20,000).

example 3A capital investment project has aninitial cash outflow followed by a seriesof cash inflows. NPV results are:Negative when discounted at 18%Negative when discounted at 15%Negative when discounted at 12%

What will the IRR be?A Below 12%B Between 12% and 15%C Between 15% and 18%D Above 18%

This question tested Section D3d in

the Study Guide. While the correctanswer, option A, was the most popular,candidates selections were fairlyevenly spread across the four options.This demonstrates a widespread lackof understanding of the discountingprocess and/or of the meaning of theIRR (internal rate of return).

The IRR is the percentage discountrate which, when applied to the cash

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flows from a capital investment project,results in a zero NPV (net presentvalue). The total of the non-discountedcash inflows from a project must exceedthe initial cash outflow for the projectto have any chance of being financiallyviable. As the percentage discount rateis increased, the positive NPV is reduceduntil at some point it becomes negative.In the question scenario the calculatedNPVs for the project are negative at 12%

and, therefore, are even more negativeat 15% and 18% or above 18%. Inother words, the point at which the NPVturned negative (the IRR) must be at adiscount rate below 12% (option A).

ExamplE 4

Productivity data are listed in aspreadsheet in cells B2 to B8. The dataneeds to be ranked in descending orderin column C.

Which formula will achieve this?A = RANK (B2,B2:B8,1)B = RANK (C2,C2:C8,0)

C = RANK (B2,$B$2:$B$8,0)D = RANK (B2,$C$2:$C$8,1)

This question tested Section F3a inthe Study Guide. As with the previousexample, while the correct answer,option C, was the most popular answer,candidates selections were fairly evenlyspread over the four options.

The rank function uses the syntax RANK(number,reference,order). Consideringorder first, entering zero at the end ofthe bracket in the RANK formula meansthat the ranking goes from highest to

lowest value (ie descending order).Knowing this would enable options Aand D to be eliminated. Number andreference relate respectively to the cellof the number to be ranked and therange of cells containing the numbersto be ranked. They do not relate to thecells where the ranking numbers are tobe displayed. Thus, in this question, thenumber and reference must be to cells incolumn B not column C. Thus, option C isthe correct answer.

PaPer F1/FaB

accountant in Business

This exam was the first to be examinedunder the new syllabus and includedquestions on topics such as moneylaundering, micro-economics andbusiness ethics that were previously notexaminable. There was a much widerdivergence in performance across the50 questions than in previous sessions.However, this was not entirely due tothe new material.

Candidates generally dealt withquestions on ethics very well, exceptfor a scenario question on conflictof interest, which had a pass rate of34%. By contrast, a scenario askingcandidates what actions an individualshould take when she discovers that hermanager is acting inappropriately had apass rate of 78%.

There was one question onmicro-economics and one question on

money laundering, and most candidatesstruggled with these.Of the topics that carry over from

Paper F1, there was a very mixedperformance. Most candidates answeredquestions on Tuckmans theory,organisational structure, training andperformance appraisal successfully.

Surprisingly, a relativelystraightforward question on budgetarycontrol caused difficulties, as didquestions on Elton Mayos Hawthorneexperiments, communications,Mendelows stakeholder grid,organisational culture and leadership,

However, it cannot be concludedthat candidates find theories moredifficult across the board, as therewere strong performances on othertheoretical questions.

Candidates performed slightlybetter on scenario-based questionsthan shorter questions. However, thereis evidence that spending longer onthe former may affect the ability ofcandidates to complete all 50 questions,as a significant number of candidatesdid not answer all of the questions onthe paper.

SamplE quEStionS for diScuSSion

quEStion 22

Question 22 required knowledge of thebudgetary control process:

VTP Company has introduced a newbudgetary control system. Managershave been asked to prepare budgetsfor their areas of responsibility andhave agreed these formally with seniorexecutives. What is the next stage ofthe process?A Reviewing outcomes in order to plan

for the next period

B Measurement of actual businessoutcomes

C Analysis of variances between actualand budgeted performance

D Agreement on action to be taken onsignificant variances

The correct answer is B. The distractorsare all key stages of the budgetaryprocess, which starts with setting

objectives and moves through asequence of preparation, action andreview. Having prepared budgets foreach area of responsibility, managershave to measure the outcomes in orderfor proper analysis and review to takeplace. It is not possible to analysevariances until actual outcomes areknown, nor is it possible to review theoutcomes and plan appropriate actions.

Only 24% of candidates selected the

correct answer.

quEStion 25

Question 25 was a scenario questionthat asked candidates to apply theirknowledge of macro-economic policy toidentify the most appropriate policy toachieve long-term objectives:

A recent report commissioned by thegovernment of Arkana has concludedthat the national birth rate has fallenfrom an average of 2.1 childrenper household to 1.7 children perhousehold. This decline is expected to

continue, as families face a period ofprolonged financial pressure. The reportalso found that the life expectancy ofthe citizens of Arkana has increasedfrom an average of 74 years to 79years. Again, this trend is expected tocontinue as citizens choose healthierlifestyles. Numerous policy measureshave been proposed by ministers toreduce the long-term pressure onnational finances.

Which of the following measures ismost appropriate in order to achieve thisobjective?

A A reduction in income tax rates andan increase in personal tax-freeallowances

B The provision of targeted support forelderly low income families

C The introduction of tax incentivesto invest in personal pensionarrangements

D Maintenance of low interest rates inorder to increase the money supply

The correct answer is C. The governmentin Arkana is faced with a situationin which a greater proportion of thepopulation will be in older age groups in

the future, which is a real life problemcurrently affecting many nations.

A reduction in income tax rates andan increase in personal allowanceswill increase disposable income in theshort-term, which may in turn encouragecitizens to invest more for the future.Maintenance of low interest rates wouldhave a similar effect to the fiscal policychanges, though with a slightly longer

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time lag. However, such expansionarymeasures are not guaranteed to achievethe long-term objective of reducingpressure on national finances.

Targeted support for elderlylow-income families increases thepressure on national finances inthe short-term. In the long-term,such changes could be changed bysuccessive governments.

Tax incentives to invest in personal

pension arrangements have the effectof freeing up disposable income butonly for the purpose of investment inretirement benefit schemes, which mayhelp to reduce long-term dependence onstate pensions as a source of income,thereby reducing the public pressureto maintain or enhance state personalpension provision.

The pass rate for this questionwas 30%.

Question 49

Question 49 required knowledge of bestpractices in corporate governance:

The remuneration committee of RDCCompany has prepared a report to theboard proposing major changes to thestructure of executive remunerationpackages. The recommendations includethe following:1. Enhanced bonuses linked to

performance over one to two years willbe paid, linked to performance, with theresult that bonuses will now compriseabout 80% of on target earnings.

2. As the output of individual directorsis impossible to measure, the

fairest system of remuneration isto reward executive directors withacross-the-board increases on anannual basis.

3. A significant proportion of executivepay will be made up of shares in thecompany, which will be allotted subjectto the achievement of objectives over arolling five-year period.

4. Acknowledging the contribution ofall board members, share options willbe made available to all executive andnon-executive directors.

5. As the company pays its executives lessthan its main competitors, basic pay

and fringe benefits will be increasedwith immediate effect, which meansthat the average directors remunerationwill be made up of approximately 50%on target earnings.

Which of the above recommendationsare consistent with best practices incorporate governance in respect ofremuneration of directors?

A 1 and 4

B 2 and 3

C 3 and 4D 3 and 5

The correct answer is D. Remunerationhas several roles, and different elementsof remuneration packages should betargeted at fulfilling these roles. Aneffective remuneration package shouldreward excellent long-term performance,

which can be achieved by buildingin rewards such as shares, shareoptions and pension benefits linkedto performance. The package shouldalso provide a competitive basic salaryand fringe benefits, without which theorganisation will not attract and retainpersons of the right calibre.

Directors should focus theirefforts on promoting the success ofthe organisation in the medium tolong-term, which for many companieswill be regarded as a period of threeto five years. If incentives are providedfor short-term performance, those who

formulate policies could implementmeasures that will provide lucrativerewards in the short-term, but harmthe company in the more distant future.By offering attractive bonus-drivenpackages, assessed over one to two-yearperiods, such a consequence becomesmore likely.

Most experts on corporategovernance agree that across-the-boardpay and incentives awards areentirely inappropriate, as they failto acknowledge differentials in theperformance of individual directors.

It is also generally acknowledged thatwhile executive directors remunerationshould be made up of both basic payand incentives, non-executive directorsshould be remunerated by fees only.

The pass rate for this questionwas 20%.

ConCLusions

This paper should be regarded as apredominantly knowledge-based. Itcovers a wide range of topics, but thereis no expectation that individual topicswill be examined in depth. A strategyfor success should, therefore, be based

on acquiring a basic knowledge andunderstanding of as many subjects aspossible, without focusing too heavilyon any one topic or group of topics. Assuch, the paper is a gateway to applyingknowledge gained in greater depth inpapers positioned at higher levels in theACCA Qualification.

The platform for study should be theSyllabus and Study Guide. Put simply,

if a topic is in the Study Guide it maybe examined. As the syllabus is broad,the learning outcomes are deliberatelyfocused. Where theories are cited, itis generally only necessary to knowthe content of the theory and verybasic applications.

Candidates should avoid the temptationto regard some of the subjects in thesyllabus as common sense and thereforenot deserving of formal study. Although

topics such as time management andcommunications are practised on a dailybasis by everyone, there is little prospectof questions appearing that can beanswered without some study of the topic.

Scenario questions do not seem topose greater difficulty than shorterquestions, though they may take moretime to answer on average. This has animplication for time management inthe exam. Candidates should read theprecise requirement very carefully beforetaking information from the question toselect the correct response.

To maximise the prospect of success,

it is important to attempt all questionson the paper. It is clearly impossible toknow everything about every subject,but even on weaker topics, it is oftenpossible to eliminate distractors,thereby reducing the time spent onthese and improving the probability ofchoosing the correct answer.

PaPer F2/FMa

ManageMent accounting

The two-hour paper contained 50multiple-choice questions each worthtwo marks. The mix of questions across

syllabus areas was exactly in line withthe Pilot Paper.The general performance of

candidates was a little disappointing.This is only partially explained by theintroduction of new topics; only 40% ofthe poorly attempted questions relatedto new topic areas. The remaining 60%of poorly attempted questions relatedto areas common to both of the oldsyllabuses. The change in examinationformat was most significant for thePaper FMA candidates and, overall,they performed worse than their PaperF2 counterparts. Most, but not all, of

the poorly attempted questions werecalculation-based.

The following questions taken fromthe December 2011 exam are oneswhere the performance of candidateswas weak in each case, less than30% of the candidates selected thecorrect answer. Each of these questionscarried two marks and each related to amainstream topic in the Study Guide.

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Sample queStionS for diScuSSion

example 1

The following shows the total overheadcosts for given levels of a companystotal output.

Cost Output$ units

4,000 1,0007,000 2,00010,000 3,0009,500 4,000

A step up in fixed costs of $500 occursat an output level of 3,500 units.

What would be the variable overheadcost per unit (to the nearest $0.01)using the high-low technique?A $1.67 per unitB $1.83 per unitC $2.75 per unitD $3.00 per unit

This question relates to Study Guidereference A3h. The high-low techniqueestimates variable cost per unit bylooking at the change in costs between

the highest and lowest levels of output.The correct answer is A. This can

be calculated by finding the change incost between the highest and lowestoutput levels not explained by the stepin fixed costs ($9,500 $4,000 $500= $5,000), and dividing by the change inoutput between the highest and lowestoutput levels. ($5,000/(4,000 units 1,000 units) = $1.67 per unit.

Many candidates incorrectly basedtheir calculations on the change in costsbetween the highest and lowest levels ofcost, and selected option D (($10,000

$4,000)/(3,000 units 1,000 units) orC (($10,000 $4,000 $500)/(3,000units 1,000 units). This mistakesuggests some confusion between theindependent variable, output, and thedependent variable, cost.

example 2

A company calculates the followingunder a standard absorption costingsystem.(i) The sales volume margin variance(ii) The total fixed overhead variance(iii) The total variable overhead variance

If a company changed to a standardmarginal costing system, whichvariances could change in value?A (i) onlyB (ii) onlyC (i) and (ii) onlyD (i), (ii) and (iii)

This question relates to Study Guideheading D1b.

The correct answer is C. In a standardabsorption costing system the salesvolume margin variance is basedupon profit per unit, whereas undera marginal costing system it is basedupon contribution per unit. In a standardabsorption costing system the total fixedoverhead variance includes expenditureand volume variances. Under marginalcosting only the expenditure varianceis included. Variable cost variances are

the same under both systems. Only15% of candidates selected the correctalternative. The most frequent answerswere A (37% of candidates) and B (30%of candidates). This is essentially aknowledge-based question, and the poorresults suggest that candidates need todo more work in this area.

example 3

A company has current assets of $1.8m,including inventory of $0.5m, andcurrent liabilities of $1.0m. What wouldbe the effect on the value of the currentand acid test ratios if the company

bought more raw material inventory onthree-months credit?

Current ratio Acid testA Increase IncreaseB Decrease IncreaseC Increase DecreaseD Decrease Decrease

This question relates to Study Guidereference E2a.

The correct answer is D, both ratioswill decrease. The opening current ratio(current assets/current liabilities) is$1.8m/$1.0m = 1.8, and the opening

acid test (current assets less stock/current liabilities) is $1.3m/$1.0m =1.3.Purchasing (say) $1.0m of inventoryon short-term credit will decrease thecurrent ratio to ($1.8m + $1m)/($1.0m+ $1.0m) = 1.4. The acid test would alsodecrease to $1.8m/($1.0m + $1.0m) =0.9. Only 23% of candidates selected thisalternative. The most frequently chosenalternative was D (41% of candidates).On this type of question, if the answer isnot immediately clear, candidates shouldsubstitute in some simple numbers to testout the effects of a transaction.

Inevitably, examiners reports focus

on the more difficult questions thatwere badly attempted. The exam alsocontained a number of questions thatwere very well answered. In the exam,candidates should ensure that theyattempt the easier questions first toensure they gain the easy marks.They can then go on to attempt themore difficult, or time-consuming,questions last.

Future candidates are advised to: study the whole syllabus practise as many questions as

possible in preparing for the exam read questions very carefully in

the exam attempt all questions in the exam

(there are no negative marks forincorrect answers)

try to attempt the easy examquestions first

not to spend too much time onapparently difficult questions read previous examiner reports.

PaPer F3/FFa

Financial accounting

This paper was the first to test someof the new areas introduced into thesyllabus from the December 2011sitting onwards. These main newsyllabus areas include: duties and responsibilities of those

charged with governance disclosure notes preparing simple consolidated

financial statements interpretation of financial statements.

All of these new syllabus areas, with theexception of interpretation of financialstatements, featured in the questionswith the lowest pass rates on the paper.However, it was pleasing to see that theinterpretation of financial statementsquestions, despite being a new additionto this paper, were answered very well.In fact, some of the questions with thehighest pass rates on this paper were onthis topic.

The following three questions havebeen taken from the International paperand were three of the questions withthe lowest pass rates on the paper. Theaim of reviewing these questions is togive future candidates an indicationof the types of questions askedand guidance on dealing with examquestions, as well as a technical debriefon the topics covered by the specificquestions selected.

Sample queStionS for diScuSSion

example 1

Venus Co acquired 75% of Mercury Cos

100,000 $1 ordinary share capital on1 November 2011. The considerationconsisted of $2 cash per share and1 share in Venus Co for every 1 shareacquired in Mercury Co. Venus Coshares have a nominal value of $1 anda fair value of $1.75. The fair value ofthe non-controlling interest was $82,000and the fair value of net assets acquiredwas $215,500.

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What should be recorded as goodwillon acquisition of Venus Co in theconsolidated financial statements?A $16,500B $147,750C $91,500D $63,375

The correct answer is B. Only 20%of candidates answered this questioncorrectly with the most popular incorrect

answer being C.This is a typical consolidationquestion which can be expected at thislevel. It is testing a candidates ability tocalculate goodwill, using the full goodwillmethod only.

A well-prepared candidateshould learn and understand thegoodwill calculation, which is a keyconsolidation adjustment, and be ableto think through each of the differentcomponents of the question, slotting inthe relevant information to be able toanswer the requirement.

The correct answer B is calculated

as follows:

Fair value of consideration transferred:

Cash paid: 75% x 100,000 = $75,000acquired x $2 $150,000

Shares issued in Venus:

75% x $100,000 = $75,000$75,000 x 1/1 x $1.75 $131,250

$281,250

Plus: Fair value of the non-controllinginterest at acquisition (given in question)

$82,000

$363,250

Less: Fair value of net assets atacquisition (given in question)

($215,500)

Goodwill $147,750

If we consider each component inturn, the first thing to identify is howmuch the parent company has paid toacquire control over the subsidiary. Inthis question Venus Co acquires controlby two forms of consideration: by payingcash and by issuing shares.

We must remember that thecalculation of goodwill mustbe based on fair values of theconsideration transferred.

For the cash element this isstraightforward as the fair value ofcash paid of $2 per share is given. Aslong as a candidate remembers thatonly 75% of the shares are acquired, atotal of cash paid of $150,000 is easily

calculated (as shown in the correctcalculation above).

The most challenging part of thequestion is valuing the shares issuedas consideration. A common mistake,made by the majority who hadincorrectly chosen C as their answer,was to incorrectly value the shareconsideration at the nominal value of$1. The fair value of shares is theirmarket price on the date of acquisition,

and therefore would be calculatedusing $1.75 (as shown in the correctcalculation above).

Second, the fair value of thenon-controlling interest needs to beidentified. In this question the fair valueof the non-controlling interest is given,so in our calculation we just need to addit to the consideration transferred.

This is because, even though weonly own 75% of the share capital, theconsolidated accounts must show 100%of the goodwill, which is consistent withthe treatment of other assets and theconcept of control.

In the final part of the calculation,it is also necessary to look at all(100%) of the fair value of net assetsat acquisition. Again, this figure isgiven in this question and just needsto be slotted into the goodwill working.Goodwill is finally found by comparingthe consideration transferred, plus thenon-controlling interest to the net assetsacquired. The $147,750 representsthe excess that Venus Co has paidover and above the fair value of theassets acquired.

ExamplE 2Which of the following investments ofCoffee Co should be equity accounted inthe consolidated financial statements?1. 40% of the non-voting preference

share capital in Tea Co2. 18% of the ordinary share capital in

Caf Co with two of the five directorsof Coffee Co on the board of Caf Co

3. 50% of the ordinary share capitalof Choc Co, with five of the sevendirectors of Coffee Co on the board ofChoc Co

A 1 and 2B 2 only

C 1 and 3 onlyD 2 and 3 only

The correct answer is B. Only 18% ofcandidates answered this correctly,while 45% of candidates chose themost popular incorrect option D. Thekey to answering this type of questionis to first read the requirement tosee what type of relationship we are

trying to identify. In this question itis identifying whether an associateexists, as this type of relationshipwould lead to equity accounting beingused within the consolidated financialstatements. (In other questions itmay be identifying the existence ofsubsidiaries, which would lead tothe preparation of consolidated orgroup accounts)

An associate is often identified

where between 20%50% of the equityshares are held in another company,as this is presumed to give significantinfluence over that entity. However, foran associate to exist, it is not a caseof just a matter of the percentage ofequity shares held; it also depends onwhether the investing company canexercise significant influence, whichcan be evidenced through the numberof directors who can be appointedon the board and participation indecision making.

Once we know we are looking forsignificant influence to be present in

the relationship, each statement isconsidered in turn to determine if equityaccounted would be required.

Statement (1): although a 40%holding is within the 2050% range, it isa 40% holding in non-voting preferenceshare capital. These do not give CoffeeCo significant influence over Tea Co.Candidates must remember that onlyequity shares (shares with voting rights)give influence, and therefore Tea Cois not an associate and would not beequity accounted for.

Statement (2): candidates may have

dismissed this option as soon as theysaw that only 18% of the ordinaryshare capital was held by Coffee Co,as this falls outside the presumedinfluence range of 2050%. However,as discussed, we do not just considerthe percentage of equity shares held,but also look at whether significantinfluence can be exercised. Having twoout of the five directors effectively givesCoffee Co 40% influence over decisionmaking in the company, so Caf Cois an associate and would be equityaccounted for.

Statement (3): candidates may have

again spotted the 50% and presumedinfluence, as it is within the 2050%range and incorrectly concluded thatit is an associate. However, looking atthe ability to appoint directors showsthat Coffee Co has five of the sevendirectors, effectively giving themcontrol over the decision making in thecompany. Having control should makecandidates spot that, actually, Choc

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Co is a subsidiary and therefore wouldbe fully consolidated line by line inthe group accounts and would not beequity accounted for.

ExamplE 3Which of the following items should bedisclosed in the notes to the financialstatements?1. Reconciliation of carrying amounts of

non-current assets at the beginning

and end of period2. Useful lives of assets or depreciationrates used

3. Increases in asset values as a resultof revaluations in the period

4. Depreciation expense for the periodA 1 and 2 onlyB 1 and 3 onlyC 2, 3 and 4 onlyD 1, 2, 3 and 4

The correct answer is D. Only 33% ofcandidates answered this questioncorrectly with the most popularincorrect answer being C.

The syllabus change now means thatcandidates need to be able to explainthe purpose of disclosure notes andshould also be able to identify whichitems would be included in a draftdisclosure note for non-current assets(as this question tests), provisions,events after the reporting dateand inventory.

It was surprising that the majority ofincorrect answers chose C, as item 1is the basis of how a non-current assetdisclosure note would look.

An example of a non-current asset

disclosure note can be seen at thetop of the next column. This shoulddemonstrate why items 1, 3 and 4 areall correct in this question as they wouldbe disclosed within this note.

So to answer these questionson disclosure notes accurately, awell-prepared candidate needs to havea picture of how the disclosure notewould look and understand/learn whatdisclosures are included. Dont forgetthat disclosures can be numericaland narrative.

Hence item 2, which is an exampleof a narrative note that would also

be included, describing in myexample note what the useful life ordepreciation rates for land and buildingsand plant and equipment would be.

conclusionIn this exam, the worst answeredquestions mainly dealt with thenew syllabus areas of consolidationand disclosure notes. These will be

tested regularly in future exams andrequire candidates to have a goodunderstanding of identifying subsidiaryrelationships and being able to describeand apply the process of consolidationin the preparation of extracts from theconsolidated income statement andconsolidated statement of financialposition. In respect of associates,the Study Guide is limited to testingthe definition of an associate and anunderstanding of equity accounting.The style of question that has beenset, and that is likely to continue to be

set, shows that careful consideration isrequired of whether significant influenceis exercised.

More work is needed on some ofthe longer-established topics too, asquestions involving statements ofcash flows, suspense accounts andprovisions and contingencies continuedto feature in this exam and achieved lowpass rates.

PaPer FaU

FoUndations in aUdit

The exam paper comprised twosections. Section A contained 10multiple-choice questions, each worthtwo marks, on topical areas fromacross the syllabus. Section B (worth80 marks) contained four compulsoryquestions, two of which were worth 25marks each with the other two beingworth 15 marks each. This is the final

session of exams for which the paperwill be formatted in this way.A significant majority of candidates

answered Section A to a satisfactorystandard by answering at least five ofthe 10 questions correctly. A number ofthese candidates scored very highly byanswering at least eight of the questionscorrectly. As one might expect, therewas a strong correlation between marksachieved in Section A and Section Bby individual candidates, with strongor weak performance in one beingreflected by strong or weak performancein the other. A number of candidates

performed to a satisfactory standard.However, a sizeable minority performedinadequately in both sections, with theiroverall mark falling a long way short.In general, the reason for inadequateperformance is inadequate learningtechnique combined with a lack ofsatisfactory exam technique. This wasparticularly apparent for Section B,where many answers submitted wereof an extremely poor standard oftenbeing far too brief, containing irrelevantpoints, being muddled or totallyincorrect. Again, it seems that a very

significant number of candidates werenot properly prepared for the exam.Virtually all candidates attempted

all of the questions in Section A. Mostattempted all questions in Section B,with some answering in the order setand others seemingly answering inorder of easiest to hardest questionsas seen by them. It was noted thatcandidates who adopted for the latterstrategy often achieved a satisfactorymark for Section B indicating use ofsound exam technique. In Section B, interms of marks achieved, candidatesfound Question 2 to be the most

challenging followed by Questions 4,1 and 3 in that order. It is of someconcern that a sizeable numberencountered particular difficultywith Question 2 given that it testedknowledge of core areas of the syllabus.

This paper is set at a level which istesting but very passable for those whoare reasonably well prepared. The mainreason for a candidate achieving a low

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mark is simply due to lack of properpreparation. The key to success issimilar to that for any exam. Namely,a timely and structured approach to acourse of study, ensuring that sufficientemphasis is placed on revision, questionpractice and exam technique.

Specific commentS

QueStion 1

The majority of candidates answered

this section to a satisfactory standard.However, a significant minoritysubmitted correct answers to onlya few of the questions. In line withprevious sessions the questions testedcandidates knowledge across the rangeof topics included in the syllabus,and an in-depth knowledge of these isrequired if candidates are to ensurea satisfactory mark for the section.Candidates are reminded that the besttechnique to adopt when answeringSection A questions is to work throughthem methodically in order, leaving anyquestions out which you are unsure

and returning to them after you haveattempted the later questions in thesection.

Section B

QueStion 1

For a total of 25 marks over five parts,the question tested knowledge aboutinternal control, control activities,auditor objectivity and the audit oftangible non-current assets.

In Part (a), candidates were requiredto state five objectives that should beexercised over tangible non-current

assets. In my examiners reports forprevious sessions, I have frequentlymentioned that candidates do notappear to know the difference betweencontrol objectives and controlactivities often muddling the two.Regrettably, a sizeable minority ofcandidates at this sitting indicatedthat they do not know the difference,with many providing a list of fiveexamples of control objectives all,or the majority, of which were in factcontrol activities. It was noticeablethat relatively few candidates wereable to state five control objectives and

therefore obtain all of the five marksavailable for this part of the question.

Part (b) offered two marks fordefining the term control activities.Only a minority of candidates seemedto appreciate that for two marksthey would be expected to write onlya succinct definition for example,Control activities are the policiesand procedures that help ensure that

management directives are carried out(as contained in ISA 315 ), or similar.A relatively large number of candidatessubmitted long explanations of theterm many of which were whollyinaccurate, while others were just plainlywrong and were not awarded any of themarks available.

Part (c) asked for descriptions ofsix control activities that should beestablished over tangible non-current

assets by the subject company. Asignificant number of candidatesprovided satisfactory answers here,but a large minority did not withsome confusing control activitieswith control objectives and othersproviding examples of auditsubstantive procedures.

I have previously flagged mycontinuing concern that manycandidates display weak anddisjointed knowledge in the areasof internal control objectives andcontrol activities. Despite this, andthe inclusion of articles in Student

Accountant, candidates performancein these topical areas continues tobe unsatisfactory.

Part (d) tested candidates knowledgeon the self-review threat to an auditorsobjectivity involved in the design of animproved internal control system. Fewcandidates obtained all of the threemarks available with many obtainingonly one mark or less by adding verylittle, if anything, to the point mentionedin the requirement. A small minority ofcandidates clearly did not understand asto the meaning of the term self review

this was of particular concern.The use of an assets register plays animportant part in the control and auditof tangible non-current assets, and thesix-mark requirement at Part (e) testedcandidates knowledge of these. Mostcandidates were able to list six pieces ofinformation that should be included inthe register for each individual asset (forexample, date of purchase or disposal,cost, depreciation method), to obtainthe full three marks for the first part ofthe question. Conversely, in the secondpart, few seemed to be aware as tohow the register should be used by the

auditor to verify both the existence andcompletion assertions.

QueStion 2

The total mark available for the questionwas 25, over four discrete parts.

Part (a) required candidates toidentify and explain four matters, eachfor two marks, to be considered in thecourse of carrying out client screening

procedures in respect of a potentialaudit client company. Candidates werespecifically requested not to refer tothe need to communicate with thecompanys previous auditor; however,a significant number did obtainingno marks for commenting on thisspecific issue. A relatively high numberincluded specific planning issues intheir answers and, again, were notawarded marks for these. There is clear

demarcation between screening andplanning matters, and the fact thatso many candidates were unclear asto the distinguishing features of eachsuggests that additional learning timeneeds to be focused on these areas.Some of the most important screeningconsiderations relate specifically toethical matters for example, threats tothe auditors objectivity (independence)and management integrity but onlya relative few candidates actuallyreferred to ethical issues, and lost theopportunity to obtain marks.

In Part (b)(i), a majority of candidates

scored at least half of the five marksavailable for explaining the reason thatstaffing issues would represent animportant part of the planning processof the audit of the subject company.However, reflecting the apparentgeneral weakness of candidates atthis level to competently answerquestions specifically about the auditof computer-based accounting systems,a large number of candidates wereunable to provide anything more thanan unsatisfactory solution to Part (b)(ii) to explain why the existence of such

a system would need to be consideredat the audit planning stage. Candidatesreviewing the model answers to thePart (b) requirements may note thatthey each extend to more than 150words. While there is no real expectationfor answers submitted to be socomprehensive, generally for a five-markrequirement candidates cannotrealistically expect to obtain anythingmore than one or two marks when theiranswers are very short.

Part (c) of the question was answeredto an unsatisfactory standard by asignificantly high number of candidates,

which was unexpected given that thesubject matter (ICQs and ICEQs) areimportant topics. For five marks therewas a requirement to explain thepurpose of each and clearly distinguishbetween the two. From the answerssubmitted it is apparent that a very largeminority of candidates have only verysuperficial knowledge as to the use ofthese, in that they appreciate both are

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used by the auditor at the ascertaining,recording and evaluation of the systemsstage of an audit but do not know howthey are actually used by auditors. Manyanswers amounted to little more thanstating assertions that ICQs are used torecord systems while ICEQs are use toevaluate systems. A minority confusedthe use of each by asserting that theformer is used to evaluate and thelatter is used to record (systems).

The purpose of Part (d), for twomarks, was to test candidates' abilityto identify the inherent risk factorspresented in the financial statementsof a retail company with a widegeographical spread of stores. Manycandidates were not able to do this anddid not score any of the two marks. Amajority obtained just one mark or lessbecause they were clearly confused asto what is meant by inherent risk ascompared to control risk and detectionrisk. This is unsatisfactory giventhat auditors must adopt the risk-based approach when carrying out an

audit engagement.

Question 3

The question tested candidatesknowledge of the sufficiency and,appropriateness of audit evidence andwhile there were some sound answerssubmitted, there were also someinadequate and incorrect answerswhich scored very low marks. A totalof 15 marks were available overthree parts.

Part (a) offered three marks foraccurate definitions of the terms

sufficiency and appropriateness' ofaudit evidence. A relatively high numberof candidates obtained all three of themarks available, but the large majorityoffered rather imprecise definitions andobtained fewer marks.

ISA 500 sets out the variousgeneralisations about the reliabilityof audit evidence. One of these wasprovided as an example in the lead upto the requirement of Part (b), whichrequired candidates to state three (ofthe four) other generalisations. Twomarks were available for each onecorrectly stated. A large number of

candidates correctly stated three ofthe other generalisations; however,some wasted time and effort by statingall four. Conversely some candidateswasted time and effort by simplyincluding the example generalisationprovided in the question along withtwo others. Unfortunately, manycandidates did not score any of the sixmarks available.

The standard of answers submittedto Part (c) for six marks were mixed.The question required two practicalexamples of documents preparedoutside the company, two documentsprepared inside the company and twoexamples of recalculations performedby the auditor. As included in themodel answer a purchase invoice isan example of a document preparedoutside the company and a purchase

order is an example of a documentprepared inside the company. Similarly,when auditors check the arithmeticalaccuracy of a purchase invoice or ofdepreciation calculations they do thisby recalculating. A significant minorityof candidates ignored the requirementsof the question or were unjustifiablyconfused by it. This was evidencedby the fact that they named auditworking papers and other incorrectpapers as documents prepared insideor outside of the company, and wereof the opinion that reperformanceprocedures carried out by auditors (such

as checking the quantities countedat an inventory count) are, in fact,recalculation procedures.

Question 4

The question was in two distinct partswith each examining different parts ofthe syllabus auditors expert andaudit working papers. Fifteen markswere available in total.

At Part (a)(i), the requirement wasto identify four fields in which anauditors expert may have expertise.Most candidates managed to identify

at least two fields the most populartwo being in the valuation of landand buildings and in the valuation ofspecialist plant and machinery. A highnumber of candidates clearly did nothave a proper appreciation of whyauditors employ their own experts andproceeded to identify fields of expertisethat have no discernible relevance tothe inherent risks presented in a set offinancial statements. No marks wereawarded for these. Part (a)(ii) requiredcandidates to identify four sourcesfrom which information regarding thecompetence, capabilities and objectivity

of an auditors expert may be obtained.This caused few problems for reasonablywell-prepared candidates this factbeing reflected in the marks awarded forthe part.

Part (b)(i) offered four marks forstating four factors other than the sizeand complexity of the company, onwhich the form of audit documentation(working papers) depend. The standard

of answers submitted was, in the main,unsatisfactory with very few candidatesmanaging to identify four relevantfactors such as the nature of theaudit procedures to be performed, theidentified risks of material misstatementand the audit methodology and toolsused (for example, CAATs). Part (b)(ii)for three marks, tested understandingof the quite differing functions of ahot review and a cold review of audit

documentation. It was apparent thatwhile a significant number of candidatesdid appreciate that the former is carriedout prior to the signing of the auditorsreport, and the latter is carried outafter, the vast majority have only a verysuperficial knowledge of what eachreview actually entails and the purposeof them.

PaPer FTXFoundaTions in TaXaTion (uK)This exam was the last underthis format and consisted of 10multiplechoice questions of two marks

each and four longform questions forthe remaining 80% of the marks.

This report is based on the fourlong-form questions in Section B ofthe paper. Section B consisted of fourcompulsory questions Question 1 for24 marks, Questions 2 and 3 for 21marks each and Question 4 for 14 marks.

The majority of candidates attemptedall four questions but often sub-partsof questions were not attempted. Inparticular, one or more of the threeparts of Question 4 were not attempted(discussed later in further detail).

Many scripts were very poor anddemonstrated that candidates had verylittle knowledge of the areas covered bythis paper, despite the fact that mostof these areas have been frequentlyexamined in the past.

There were, however, some excellentscripts and these candidates are to becongratulated.

One worrying point noticed was somecandidates saying see workings despitesearching the marker could not findany. Candidates are requested to clearlyindicate their workings.

specific comments

Question 1

This was a three-part question coveringthree commonly examined areas ofthe syllabus.

Part (a) examined five differentemployee benefits. The questiononly required the calculation of theactual benefits but several candidateswasted time calculating the tax on

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these benefits candidates must learnto read what is required and only dowhat is asked and no more. The fivebenefits were:Medical insurance this is assessed

as the cost to the employer not theamount saved by the employee. Mostcandidates knew this.

The provision of a van this shouldhave been a flat charge of 3,000for the use of the van and 550 for

the provision of private fuel; theactual proportion of private use isirrelevant. The flat rate amounts coverall the costs of providing the van and,therefore, the actual running costs(2,900) should not have been usedin the calculation. However, somecandidates said that there was nobenefit as the van was used privately benefits are only assessed if there issome private use.

A company loan because some ofthe loan was repaid during the year itis necessary to calculate the benefitin two ways, the average and the strict

methods. Most candidates knew thisand did two calculations but manyappeared not to be able to countthe correct number of months or dosimple maths. More care is required iffull marks are to be earned.

The use of an asset this wasgenerally well done. The benefit issimply 20% of the market value ofthe asset provided, time apportionedfor the period of use. Severalcandidates, incorrectly, stated thatbecause this was used for entertainingit was therefore exempt.

Part (b) was a straightforward incometax assessment similar to thoseexamined several times before; however,many candidates made the same errorsthat those before had made.

National savings investment accountinterest and national savings certificateinterest were confused. The former isreceived gross and is taxable where asthe later is exempt from income tax.

Contributions to an occupationalpension plan should have been deductedfrom employment income manycandidates still insist in grossing them

up and extending the bands. Thiserror is reported on in most examinerreports the different treatment ofcontributions to occupational pensionsand private pensions plans mustbe learnt.

The calculation of the restrictedpersonal allowance was known by most;however, some should think about thecalculations they produce. In one case a

candidate had a personal allowance ofover 70,000. The rest of the questionwas well attempted.

Part (c) required the calculationof the amount to be deducted fromtrading profit in respect of a shop leasepremium. The calculation of the taxableproperty business income was known bythe majority of candidates, but only afew knew that this figure had then to bedivided by the number of years of the

lease to get the amount deductible fromthe trading profits of the trader.

Question 2

This was another three-part question,which covered areas of corporation tax.

Part (a) tested capital allowances fora nine-month period. This was generallywell attempted with several candidatesearning full marks. There were a fewcandidates who did not know how toattempt this and calculated gains onthe disposal of assets or simply addedeverything up and multiplied the total byany percentage thankfully this was not

a frequent occurrence.The main points covered by the

question were:Annual investment allowance of 100%

was available for the first 75,000(nine months only) of purchases(excluding cars).

Disposal proceeds should be the lowerof actual proceeds or original costand should be deducted from therelevant pool many deducted themall from the main pool.

Writing-down allowance (WDA) shouldhave been restricted to 9/12ths.

Small pool allowance this rule wasnot known by many. When either themain pool or the special rate poolbalance falls below 1,000, then theentire balance can be claimed asan allowance.

Balancing charge when an expensivecar is sold, then any remainingbalance is either an allowance or acharge a charge in this case.

Part (b) was a basic corporation taxassessment. The areas which causedproblems were:Trade losses brought forward must

be deducted from the first availabletrading profits not from the totalincome.

The disposal of a building thisshould have been calculated bydeducting the original cost and allcosts of purchase and sale from theproceeds. Indexation allowance thenfurther reduces this to give the finalgain. The most common error was to

index the gain rather than the cost, orto index the actual cost only insteadof the total of the cost plus expensesof purchase. A few candidates stillpersist in reducing company gains bythe annual exempt amount this isonly available to individuals.

Non-trade interest paid and receivedmust be netted together.

Gift aid deductions are paid grossand, therefore, the amount given must

not be grossed up.The taxable total income should be

taxed not the augmented profit figure.

Part (c) required candidates to statethe payment dates and amount ofpayment for a large company. Themost common mistakes were thatcandidates either mistook the figuregiven in the question for profits (whereasthe question clearly states it is the taxliability) or applied the rules for soletraders instead of companies.

The answer should have shown thetotal tax being divided by four to give

instalments of 126,000 payable on the14th of months 7, 10, 13 and 16 fromthe start of the relevant period.

Finally in this area candidates mustremember where dates are asked for,then they must say what year as well asthe actual day.

Question 3

This was a two-part question on capitalgains tax. As usual Part (a) requiredthe calculation of capital gains on thedisposal of assets and Part (b) wasa question on capital gains reliefs

rollover relief in this case.Part (a) was generally well done,although the inclusion of VAT in someof the figures caused problems. If anindividual is not registered for VAT,or the asset concerned is not usedin a business, then VAT paid is a realcost and cannot be claimed back and,therefore, the VAT inclusive figuresshould be included in the calculations.

The first three disposals covered threedifferent chattel rules.

A chattel costing less than 6,000 andsold for less than 6,000 is an exemptasset there is no need to calculate the

gain first.A chattel sold for marginally above

6,000 requires two calculations thenormal proceeds less cost and the5/3rds rule. The lower of the two is thentaken. It should be remember that the5/3rds rule uses the gross proceeds notthe net proceeds.

A chattel which cost more than6,000 and sold for less than 6,000

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requires that the loss be restricted bydeeming the actual gross proceeds tobe 6,000.

The final disposal of shares was donereasonably well. The bonus issue simplyincreases the number of shares heldbut does not alter the cost. The gain ondisposal should then have been basedon a proportion of the total shares heldafter the bonus issue.

Part (b) was not done well.

Candidates were first asked to state therelief available on the disposal of anasset and the subsequent reinvestmentof the proceeds into another asset andto state the conditions that have to bemet for the relief to be available. Therelief available is rollover relief andthe four conditions are: both assetsmust be qualifying business assets, thereinvestment must take place withinone year before and three years afterthe original sale, the full proceeds mustbe reinvested for full relief and a claimmust be made within four years of theend of the tax year of sale.

Most candidates did not knowthe relief or were confused with theconditions by using statements such asreinvest the gain or purchase withinone year.

When calculating the gain to bedeferred the gain on the sale mustbe restricted by any proceeds notreinvested. The amount of the proceedskept is then taxed in the year of sale.The gain deferred reduces the cost ofthe replacement to give the revisedbase cost. The actual gain taxable isthen multiplied by the relevant rate of

tax (28%) to give the amount due on31 January 2013.

Question 4

This was a three-part question involvingaspects of a sole trader.

Part (a) required the calculation ofopening year assessments and theresulting overlap profits. In general thiswas well done but many candidatessimply did not attempt it. There werealso several careless calculations, inparticular with the counting of months.

When a sole trader starts a businesshis first year of assessment is always

the tax year containing his first day oftrading, and the calculation is then theactual profit earned in that tax year ieday one to the following 5 April.

The second year depends on theparticular accounting periods. In thiscase there was a seven-month periodending in the second tax year, thereforethe assessment for the second tax yearis the first 12 months of trading ie day

one plus 12 months (1 November 2008to 31 October 2009 in this question).

The third year is normally the currentyear basis ie the 12-month periodending in that tax year (31 May 2010 inthis question).

It should also be noted that if thequestion asks for the basis periods (ashere) then they must be stated to earnfull marks.

Part (b) required the calculation of

National Insurance contributions fora sole trader. The classes involved areClass 2 and Class 4. Many candidatesstill do not use the right classes despitethe clue in the tax tables given in theexam that states Class 1 (employee) therefore indicating that these classesdo not apply for sole traders. Thispart was done reasonably well withcarelessness being the main problem.

Part (c) required candidates to statethe relevant notification and registrationdates regarding VAT. Most candidatesdid not perform well here, with manyincorrect dates given.

Traders are required to notify HMRCof their need to register for VAT whentheir cumulative turnover over a periodnot exceeding 12 months exceeds theVAT threshold (70,000 for this exam).They must do this within 30 days (notthe end of the following month asmany suggested) and then they will beregistered from the start of the followingmonth (or earlier if the trader requests).

ConClusion

This was the last exam in the currentformat and, although the percentage

of candidates passing was aroundthe same as the last exams, it wasdisappointing to see so many candidateswith such poor results.

Whereas the format of future examschanges, it should be stressed that thesyllabus remains predominately thesame and, therefore, the same areas willcontinue to be examined.

Future candidates are strongly urgedto look at the Pilot Paperfor the newsyllabus to give them an indication ofthe standard of questions that will beset in the future.

PaPer FFMFoundations in Financial

ManageMent

Although the name of the paper hadchanged this sitting, the syllabusand format of the exam had not. Thesyllabus and format will change at thenext sitting in June 2012.

As in previous sittings, Section Aconsisted of 10 objective testing

questions, worth 20 marks overall,and Section B comprised four20-mark questions.

The majority of candidates attemptedall of the questions in Section B,suggesting that candidates did notappear to suffer from time pressure inthis exam. Where parts of questionswere left unanswered, this appeared tobe due to a lack of knowledge ratherthan time pressure. In general, the

numerical aspects were answeredbetter than the written aspects inSection B.

Many candidates provided adequateworkings for the numerical partsof Section B. It is imperative thatcandidates show clear workings in theiranswers, otherwise if the final answeris incorrect, it is impossible to awardmethod marks.

seCtion A

The majority of candidates attemptedthis section, with about 55% passingit. This section is worth 20% of the

final marks, and a good mark here is asound springboard for Section B. It isimperative that candidates spend timepractising the multiple-choice questionstyle in preparation for the real exam.

speCifiC Comments

seCtion B

Question 1

This question asked candidatesto prepare two net present valuecalculations and then tested theirknowledge of the written aspect ofinvestment appraisal.

Candidates generally had a reasonableattempt at Part (a). Few candidatestook the incremental approach; forexample, many candidates includedrevenue of $58,000 ($40,000 x 1.45)rather than including the incrementalrevenue of moving to the n