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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA NOVEMBER 2010 PROFESSIONAL EXAMINATION I Question Papers Suggested Solutions Plus Examiners’ Reports

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

NOVEMBER 2010 PROFESSIONAL EXAMINATION I

Question Papers

Suggested Solutions

Plus

Examiners’ Reports

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PATHFINDER

PROFESSIONAL EXAMINATION I – NOVEMBER 2010

1

FOREWORD

This issue of the PATHFINDER is published principally, in response to a growing demand for an aid to: (i) Candidates preparing to write future examinations of the Institute of

Chartered Accountants of Nigeria (ICAN); (ii) Unsuccessful candidates in the identification of those areas in which they

lost marks and need to improve their knowledge and presentation; (iii) Lecturers and students interested in acquisition of knowledge in the relevant

subjects contained herein; and (iv) The profession; in improving pre-examinations and screening processes, and

thus the professional performance of candidates. The answers provided in this publication do not exhaust all possible alternative approaches to solving these questions. Efforts had been made to use the methods, which will save much of the scarce examination time. Also, in order to facilitate teaching, questions may be altered slightly so that some principles or application of them may be more clearly demonstrated. It is hoped that the suggested answers will prove to be of tremendous assistance to students and those who assist them in their preparations for the Institute’s Examinations.

NOTES

Although these suggested solutions have been published under the Institute’s name, they do not represent the views of the Council of the Institute. The suggested solutions are entirely the responsibility of their authors and the Institute will not enter into any correspondence on them.

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PROFESSIONAL EXAMINATION I – NOVEMBER 2010

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TABLE OF CONTENTS

SUBJECT PAGES

FINANCIAL ACCOUNTING 4 – 40

INFORMATION TECHNOLOGY 41 – 64

MANAGEMENT ACCOUNTING

ADVANCED AUDIT AND ASSURANCE

65 – 95

96 - 118

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PROFESSIONAL EXAMINATION I – NOVEMBER 2010

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ICAN/ EXAMINATION NO...................................

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

PROFESSIONAL EXAMINATION 1– NOVEMBER 2010 FINANCIAL ACCOUNTING

Time allowed – 3 hours

SECTION A: Attempt All Questions PART I - MULTIPLE-CHOICE QUESTIONS – (20 Marks) Use the following information to answer questions 1 and 2

Microsoft Excel package is an accounting package that manipulates rows and columns; the table below depicts extracts of a group account consolidation schedule taken from the package.

Microsoft Excel Sheet

A B C D E

1

TOTAL COST OF CONTROL

POST- ACQUISITION

NCI

2 Equity in XYZ Plc N’000 N’000 N’000

N’000

3 Ordinary Shares 50,000 ? 10,000 4 Revenue Reserve 30,000 8,000 ? 6,000 5 Total Acquisition ? 6 Cost of Shares

acquired 79,000

7 Goodwill ? Note: NCI = Non controlling interest XYZ Plc is a subsidiary company 1. What is the value of C5?

A. N50,000 B. N38,000 C. N48,000 D. N80,000 A N44,000

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PROFESSIONAL EXAMINATION I – NOVEMBER 2010

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2. To derive Goodwill in the consolidation schedule, the Excel equation is

A. C6 – C5 B. C6+ C5 C. C7 – C5 D. B5– B6 E. A6– A5

3. Adanna Insurance company was incorporated on 31 December 2009 to carry out non-life business. State the minimum share capital required for its registration.

A. N150Million B. N500Million C. N10Billion D N2Billion E. N3Billion

4. A final debit balance in a Voyage account is referred to as

A. Loss on Voyage B. Capital on Voyage C. Reserve on Voyage D. Profit on Voyage E. Commission on Voyage

Use the following information to answer questions 5 and 6

Bobo- Keke LTD. Statement of Affairs N’000 N’000 Preference Shares of N1 each fully paid 2,500 Bank balance 2,420 Ordinary Shares of N1 each fully paid 4,200 Deficiency 5,580 Ordinary Shares of N1 each 65 kobo paid 1,300 8,000 8,000

5. What is the deficiency per ordinary share?

A. 69.75 Kobo B. 101.50 Kobo C. 65.00 Kobo D. 90.00 Kobo E. 92.00 Kobo

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6. Calculate the amount of call on the partly paid ordinary shares.

A. N 95,000 B. N500,000 C. N540,000 D. N730,000 E. N700,000

Use the following information to answer questions 7 and 8. Chelsea Plc acquired 80% and 30% interest in the Ordinary Shares and Preference Shares of Mikel Plc for N440,000 and N36,000 respectively on 31 December 2007. On that date, the Profit and Loss Account and General Reserve balances were N28,000 debit and N20,000 credit respectively. Balance Sheet extract as at 31December 2008: Chelsea Plc Mikel Plc N N Ordinary Share Capital 900,000 300,000 10% Preference Share Capital 250,000 100,000 Profit and Loss Account 296,500 148,000 General Reserves 350,000 205,000 7. What is the Goodwill on acquisition?

A. N212,400 positive goodwill B. N163,600 positive goodwill C. N212,400 Negative goodwill D. N163,600 Negative goodwill E. N242,400 Negative goodwill

8. What is the Profit and Loss Account balance that will appear in the Consolidated Balance Sheet as at 31 December 2008? A. N118,400 B. N437,300 C. N414,900 D. N392,500 E. N140,800

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9. What is the product of Price Earnings Ratio and Earning Yield?

A. Infinite B. Zero C. >1 D. <1 E. Unity

10. Which of these accounting ratios will NOT be useful in determining the long-

term stability of a Company?

A. Gearing ratio B. Proprietary ratio

C. Debt ratio D. Fixed interest cover E. Price Earning Ratio

11. Which of the following features is NOT true of Microsoft Excel application package?

A. Large number of rows and columns B. Chart to draw data C. Microsoft excel saving is automatic D. Auto correct formula E. Data validation

12. Which of the following control keys in Excel Package moves the cell pointer

to the previous work sheet?

A. Ctrl + page up B. Ctrl + page down C. Alt + page up D. Alt + page down E. Shift + Tab

13. In relation to Stock and Shares, how else can Par Value be described?

A. Market value B. Stated value C. Ex-rights price D. Earnings Per Share E. Net Book Value

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PROFESSIONAL EXAMINATION I – NOVEMBER 2010

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14. How can the cost associated with developing a computerized

accounting system be classified? A. Revenue and expenditure cost B. Accounting package and system cost C. One off and on going cost D. Installation and development cost E. Software and Hardware maintenance cost

15. Rotimi Nigeria Plc purchased 70% interest in Ewedu – Ewa Nigeria Ltd and

60% interest in Mensa Ghana Plc – a commercial company on the same date. In relation to Rotimi Nigeria Plc group, Mensa Ghana Plc is a ……………. A. commercial company. B. fellow subsidiary. C. foreign associate. D. foreign subsidiary. E. foreign joint venture.

16. A parent company transferred a motor van costing N 10 million to its subsidiary. The transfer was made at cost plus 25%. It is the Group’s policy to depreciate fixed assets at a flat rate of 10% per annum on straight line basis. Which one of the following represents the excess or under depreciation for consolidation adjustment purposes? A. N250,000 excess depreciation B. N200,000 under depreciation C. N200,000 excess depreciation D. N250,000 under depreciation E. N2 million excess depreciation

17. The Earnings Yield for a company with Earnings Per Share of 28kobo is 16%. If the total number of shares is 100,000, what is the Market Value of the shares?

A. N57,143 B. N175,000 C. N100,000 D. N2,800,000 E. N1,600,000

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18. A company is said to be highly geared when the company has………

A. more of equity capital in relation to fixed interest capital fixed. B. more of fixed interest capital in relation to equity capital. C. no fixed interest capital. D. more overdraft facility. E. negative shareholders’ fund.

19. Which of the following is NOT authorized as a liquid asset for banks in Nigeria? A. Treasury Bills B. Shares issued by the Federal Government C. Bonds by the State Government D. Coins and naira notes as legal tender E. Balances with Discount Houses

20. The following are the reasons for exclusion of subsidiary from Consolidation EXCEPT A. the two companies are unrelated. B. the accounting year-ends of the two companies are three months

apart. C. a subsidiary company acquires an associated company. D. circumstances prevent exercise of control. E. the two companies operate in different countries.

SHORT ANSWER-QUESTIONS (20 MARKS) 1. State two reports generated from a computerized payroll system.

2. Give two examples of Spread sheet application packages.

3. Mention two situations under which a discharged bankrupt can be called

upon to answer charges.

Use the following information to answer Questions 4 to 6. Mallam Sule Plc acquired 75% of the ordinary share capital of Chukwu Plc on 1 April 2009.

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The Balance Sheets of the two companies as at 31 December 2009 were as follows: Mallam Sule plc Chukwu plc N ’000 N ’000 Fixed Assets 200,000 50,000 Investment in Chukwu

80,000 -

Current Assets 250,000 80,000 530,000 130,000 Ordinary Shares of N1 each 300,000 60,000 Capital Reserves 50,000 8,000 Profit and Loss Accounts 80,000 12,000 Current Liabilities 100,000 50,000 530,000 130,000 Chukwu Plc commenced business on 1 January 2009 (profit accrued evenly throughout the year). Calculate the following: 4. The non-controlling interest to be disclosed in the Consolidated Balance

Sheet 5. The Goodwill on consolidation, and 6. Pre-acquisition profit.

Use the following information to answer Questions 7 and 8. Favour Plc acquired 80% interest in the equity capital of Bola Plc on 31 December 2005. On 31 March 2006, Favour Plc sold 20% of its holdings at a profit of N48,000,000. An extract of the Profit and Loss Account of Favour Plc and Bola Plc for the year ended 31 December 2006 showed:

Favour Plc Bola Plc N ‘000 N ‘000 Profit before tax 980,000 710,000 Taxation (360,000) (288,000) Profit after tax 620,000 422,000

No adjustments have been made in respect of shares sold.

7. Calculate the non-controlling interest for the year ended 31 December 2006.

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PROFESSIONAL EXAMINATION I – NOVEMBER 2010

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8. Determine the profit attributable to the group for the year ended 31 December

2006. 9. Which of the two main classes of lease is non-cancellable? 10. The combination of two or more international companies of equal size and market power to form an entirely new company is called……………… 11. In bankruptcy, the convener of a meeting of creditors is……………….. 12. Identify the two parties involved in winding-up of a company. 13. State any risk that is inherent in on-line entry of transactions in an

accounting system. 14. Accounting application packages designed in-house to carry out particular

tasks or centered towards a particular organization or group is referred to as……………..

15. In a group cashflow statement, a payment for the acquisition of the net assets

of subsidiary less any cash and cash equivalent, acquired is classified as………….

16. Where a subsidiary company issues bonus shares from its post acquisition

reserves, the cost of investment incurred by the parent company will be adjusted during consolidation. State the accounting entries to effect the adjustment.

17. What is the method of accounting for business combinations? 18. Which of the methods of accounting for contract recognizes profits as actual? Use the following information to answer Questions 19 and 20. Balance Sheet and Profit and Loss extracts of Eko-Onibaje Insurance Plc as at 31 March 2010 are as follows: Life Non- Life Total N billion N billion N billion Authorized Share Capital 500 350 850 Issued and fully paid Share Capital 45 30 75 Tangible Fixed Assets 90 60 150 Gross Premium 120 200 320 Net Profit 87 45 132

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19. What is the life contingency reserves of the insurance company?

20. What is the non-life contingency reserves of the insurance company?

SECTION B Answer Question 1 and any other three Questions (60 Marks) QUESTION 1 CASE STUDY Chief Nwachukwu has been operating as a sole trader in Aba, Abia State, dealing in general merchandise. Over the years, his business activities expanded so much that he could not cope with its management. Based on the advice of his friend and business associate, he registered the business as a limited liability company Nwachukwu and Sons Nigeria Ltd. His first son who graduated in Business Administration from Bakassi Polytechnic was made the General Manager. In year 2001, Chief Nwachukwu developed interest in the manufacturing industry and was prepared to sacrifice everything he had to get involved. He sought for advice from a consultant on whether to convert his existing merchandise company into a manufacturing company or to float a new one for that purpose. The Consultant, Olawale Associates, advised that Chief Nwachukwu should rather study some products in the industry before venturing into manufacturing. Chief Nwachukwu was convinced to start acquiring shares in a manufacturing company of his choice. On 20 September 2006, the Secretary of Benbella Manufacturing Company Plc, sent a letter to Chief Nwachukwu as the Chairman of Nwachukwu and Sons Nigeria Ltd, requesting him to nominate four out of the seven board members of Benbella Manufacturing Company Plc. A review of the financial books of Nwachukwu and Sons Nigeria Ltd. revealed the following details in respect of share acquisition in Benbella Manufacturing Company Plc. Date of Acquisition

Number of shares acquired

Benbella’s Reserve Balance

N 2001 100,000 80,000 2002 180,000 110,000 2003 200,000 240,000 2005 120,000 320,000 2006 200,000 460,000

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The Issued Share Capital of Benbella Manufacturing Company Plc is N1million divided into Ordinary Shares of N 1 each. In 2008, Chief Nwachukwu proposed to sell 400,000 ordinary shares in Benbella Manufacturing Company Plc in order to raise funds for the expansion of the warehouse of Nwachukwu and Sons Nigeria Ltd. His son, the General Manager, disagreed with the proposal to sell the shares commenting that such a sale will change the status of Benbella Manufacturing Company Plc from a subsidiary company to an associated company. On 30 September 2008, a total of 200,000 Ordinary Shares of Benbella Manufacturing Company Plc was sold for N526,400. The reserve balance of Benbella Manufacturing Company Plc on 1 January 2008 was N 500,000. The Company made a Profit Before Tax of N90,000, out of which, an interim dividend of N20,000 was paid on 30 June 2008. The average cost per share acquired in Benbella Manufacturing Company Plc was N1.85. The Federal Government fiscal policies for 2009 banned the production of a major product of Benbella Manufacturing Company Plc in Nigeria with effect from 1 January 2009. The latest Balance Sheet of the company as at 31 December 2008 is summarized below:

Benbella Manufacturing Company Plc Balance Sheet as at December 31, 2008

N‘000 N‘000 N‘000 Fixed Assets:

Freehold Land and Building 18,000 Plant and Machinery 8,600 Motor Vehicles 3,300 Current Assets: Stocks 4,620 Debtors 6,915 Cash in hand 255 11,790 Current Liabilities: Creditors 7,650 Bank Overdraft 5,060 (12,710) (920)

28,980 Financed by:

N ‘000 Ordinary Shares of N 1 each 12,000 6% Preference Shares of N 1 each 8,000 Revenue Reserves 1,980 10% Debentures (with floating charge) 7,000 28,980

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The Board of Benbella Manufacturing Company Plc considered voluntary liquidation as one of the options available to the company because of the ban on its major product. In the event of a liquidation, however, the assets of Benbella Manufacturing Company Plc are expected to realize as follows: N ‘000 Freehold Land and Building 18,490 Plant and Machinery 5,065 Motor Vehicles 2,310 Stocks 3,099 Out of the debtors, 25% are not recoverable while N2,780,000 of the creditors have preferential claims. The remaining creditors will be settled at an interest of 10 kobo in the Naira. The Preference Shareholders are to receive a premium of 5 kobo per share in liquidation. The estimated cost and expenses of liquidation was N2,140,000.

Required: a) Compute the Pre – acquisition reserve for consolidation purposes. (3Marks) b) Compute the Group’s profit on disposal of shares in Benbella Manufacturing

Company Plc. (Assume Company tax rate of 30%). (6 Marks) c) Prepare the Deficiency Account, if the Company is eventually liquidated.

(6 marks) (Total 15 Marks)

QUESTION 2 The Consolidated Profit and Loss Account of Large – Joe Plc Group for the year ended 31 December 2008 are as detailed below: N ‘000 N ‘000 Turnover Gross profit before interest 960,420 Interest 77,336 (35,607) Group share of associated company’s profit 41,729 992 42,721 Exceptional charge (5,627) Profit before taxation 37,094 Taxation 11,914 Group share of associated company’s tax 468 (12,382) Profit after taxation 24,712

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Non-controlling interest (1,293) 23,419 Extra ordinary gain 1,166 24,585 Dividends (7,076) Retained profit 17,509 Other relevant information: a) Gross profit before interest is stated After charging: N’000 Depreciation 21,121 Audit fees and expenses 2,413 Rent and insurance 6,276 Direct allowance 685 And after crediting: Property rents received 1,262 Exchange surplus realised 669 b) Interest comprises: N’000 Interest on 6% loan stock 18,244 Interest on short term loan 14,647 Bank interest 7,861 Bank interest receivable (5,145) 35,607 c) Taxation: N’000 Income tax on profit for the year 10,107 Education tax 1,806 Deferred tax provision 2,750 14,663 Adjustment for prior year (2,749) 11,914 d) Dividends: N’000 Ordinary 6,084 Preference 992 7,076 e) The exceptional charge of N5,627,000 represents a provision for contingent

losses resulting from obsolete inventory discovered in the warehouse.

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f) Dividend received and receivable from the associated company for the year

amounted to N290,000 while dividend paid and payable to non-controlling shareholders for same period amounted to N666,000.

g) The total amount distributed on behalf of employees, including directors

during the accounting year is as detailed below: N ‘000

Wages, salaries and commissions 106,662 Retirement plan costs 7,106 Other benefits 3,062 116,830

Required: Prepare a Value Added Statement of Large – Joe Plc Group for the year ended 31 December 2008, showing clearly the contribution of the non-controlling interest towards the expansion of assets. (15 Marks) QUESTION 3 (a) Bale Plc has granted 50 share appreciation rights to each of its 1000

employees on 1 January 2005. The rights are due to vest on 31 December 2008, with payment being made on 31 December 2009. Assume that 75% of the awards vest. Shares prices were:

N 1/1/2005 22 31/12/2005 27

31/12/2008 31 31/12/2009 28 In accordance with IFRS 2, Share Based Payment; (i) What liability would be recorded on 31 December 2008 for the share

appreciation rights? (2 Marks)

(ii) How would the settlement of the transaction be accounted for on 31

December 2009. (3 Marks)

(b). Companies are required to record the substance of transactions rather than their legal form, in situations where the legal forms are different from their substance.

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Explain with examples why it is important to record the substance rather the

legal forms of the transaction. (5 Marks) (c). SURA Plc owns 80% of the share capital of MEGA Plc. The following

information were extracted from the individual Balance Sheet of the two companies on 31 December 2009.

SURA Plc MEGA Plc N’000 N’000

Current Assets 640,000 560,000 Current Liabilities 400,000 160,000

The debtors of SURA Plc include N64m from MEGA Plc while the creditors of MEGA Plc include N40m payable to SURA Plc. The difference is accounted for by cash-in-transit. There are no other inter – company balances.

You are required to calculate the Net Current Assets in the Consolidated Financial Statements of SURA Plc. (5 Marks) (Total 15 Marks) QUESTION 4 Akhatar Nigeria Limited issued N3.75million 8% Debentures at 105 on 1 January 2003. The term under which the debentures were issued provided that a Sinking Fund be set up for the redemption of the debentures, 5 years later. The sum to be set aside every year should be such that when invested annually at a compound interest rate of 12% per annum will amount to N4.5million at the due date of redemption of the debentures. Interest is paid on the debentures on 31 March and 30 September every year. The debentures were redeemed on 31 December 2007 at a premium of 10%. To provide cash for the redemption, the Sinking Fund investment was sold for N4,312,500. You are required to show the following accounts: a. Sinking Fund Account, (5 Marks) b. Sinking Fund Investment Account, and (5 Marks) c. Sinking Fund Investment Disposal Account. (5 Marks)

(Total 15 Marks)

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QUESTION 5 Caronik Enterprises acquired a machine under a hire purchase agreement on 1 January 2005, from MOA Industries Ltd. The cash price of the machine was N168million. The details of the hire purchase agreement were as follows: a) Hire Purchase interest was N30.24million which was assumed to accrue

evenly over the period of the agreement. b) 10% of the cash price must be paid by hirer before taking possession. c) The balance of the amount due to MOA Industries Ltd. was to be settled by 4

yearly instalments, with each instalment payable on 31 December.

The machine was to be depreciated at the rate of 20% on cost annually. You are required to prepare the relevant accounts from the inception of the hire purchase contract to 31 December 2008 in the books of the hirer and show how these accounts would be reflected in the balance sheet on each accounting year end. ( 15 Marks) QUESTION 6 Peachtree, an off-the-shelf accounting package is increasingly becoming popular in Nigeria. Required: (a) Define Chart of Accounts as used in a Peachtree program. (2Marks) (b) Itemize FIVE Peachtree Wizards necessary to create accounts of a new

company. (5 Marks) (c) Explain briefly the two (2) posting options in a Peachtree program. (2 Marks) (d) A plant cost N1.5m with a life span of three years and the residual value of

N579,600. For the purpose of replacement, N240,000 is to be set aside for the first year and N300,000 for each of the remaining two years. These amounts were invested at 10% per annum. Assume the replacement cost is equal to the original cost. (6 Marks) Prepare the Sinking Fund Investment Account. (Total 15 Marks)

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SOLUTIONS TO SECTION A PART 1 – MULTIPLE CHOICE QUESTIONS

1. C

2. A

3. E

4. A

5. D

6. B

7. A

8. B

9. E

10. E

11. C

12 B

13. B

14. C

15. D

16. A

17. B

18. B

19. C

20. D

Tutorial Notes QUESTION 1 NCI % = 10/50 x 100%/1 = 20% Cost of control = 80% ;. C5 = C3 + C4 where C3 = 80% x N50m

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C5 = N40m + N8m = N48m QUESTION 2 Goodwill is the excess of the cost of acquisition over the total net assets acquired i.e C6-C5 QUESTION 3 The national Insurance Commission Act (NAICOM) specifies the minimum paid-up capital of insurance companies as follows: Life = N2billion Non-Life = N3billion Composite = N3 billion Re-insurance = N10 billion QUESTION 5 Deficiency per ordinary shares = Total deficiency Nominal value of ordinary shares = . 5,580 . 4,200 + 1,300 0.65 = . 5.580 . 4,200+2,000 = 90 kobo QUESTION 6 Amount of call on partly paid ordinary shares (90k- 65k) X 2,000,000 shares = N500,000

QUESTION 7

N N Cost of acquisition (Ord shares) 440,000 Less Net assets acquired: Ord Share capital 300,000 Pre-acquisition profit (28,000) Pre acquisition general reserves 20,000 292,000 Net assets acquired – 80% x 292,000

(233,600)

Goodwill on preference shares 6,000

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(36,000 – 30,000) Total Goodwill (positive) 212,400

QUESTION 8 Profit and loss account balance that will appear in the consolidated balance sheet :

N Profit and loss account balance of Chelsea

296,500

Add post acquisition retained profit of Chelsea in Mikel. = 80% x (148,000 + 28,000) -

140,800

437,300 QUESTION 9

Price earning ratio x earnings yield = 1 MPS x EPS

EPS MPS = 1 QUESTION 10 The ratios measuring a company’s long-term stability are: Gearing, Debt/equity, Debt ratio and fixed interest cover while price earning ratio is an investment ratio which measure the relationship between earnings per share and the market price per share. QUESTION 11 Par value is the amount stated in the Memorandum of Association as the value of each share. It is also called nominal value. QUESTION 12

Mensah Ciliana is foreign company in which Rotimi could exercise control over its operating and financial policies. QUESTION 16 25/100 x 10/100 x 10,000,000 = N250,000 excess depreciation

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QUESTION 17 EY = EPS/MPS MPS = EPS/EY = 28/0.16 = 175k Total Market value = 100,000 shares x N1.75k = N175,000 QUESTION 18 The capital structure of a company comprises capital, reserves and loan capital. Where the total loan capital is higher than the sum of share capital and reserves, a company is said to be highly geared. Loan capital bears fixed interest. EXAMINERS’ REPORT The multiple choice questions are well structured and adequately covered the syllabus. The options provided in the solution are close enough to avoid the correct answer from standing out. The candidates’ performance on the whole is average.

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SHORT ANSWER-QUESTION SOLUTIONS 1. i Pay slips ii Payroll iii Payroll analysis iv Cash analysis v Payment details for dispatch to the Bank 2. Lotus 1,2,3, Microsoft Excel, V calc, Multi Calc and Super Calc.

a. a. Debts to the State e.g. amount due from him to the Federal, State or Local govt.

b. Debt incurred through fraud or through a fraudulent breach of trust c. Judgment debt in an action for seduction.

3. Calculation of non controlling interest: Share Capital 25%XN60m = N15m

Profit and Loss 25%x N12m = N3m Capital Reserves 25% x N8m = N 2m N20m 4. Goodwill on Consolidation. N’000 N’000

Cost of Investment 80,000 Share Capital 60,000 Capital Reserves 3/12 x 8,000 2,000

Profit and Loss 3/12 x 12,000 3,000 65,000 x 75% (48,750) Goodwill 31,250 5. Pre-acquisition Profit: N’000

Period 3 months ( 1/1/09 – 31/3/09) Capital Reserves 2,000 Profit and Loss Accounts 3,000 5,000

6. Non-controlling interest: N’000 20% x 3/12 x 422,000 21,100 36% x 9/12 x 422,000 113,940

135,040

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7. Profit attributable to the group: N’000

Total group profit after tax 1,042,000 Add Profit on shares sold 48,000 Less non-controlling interest (135,040) 954,960 9. Finance Lease or Capital lease

10. Amalgamation/Merger.

11. The Official Receiver.

12. The creditor; Shareholders/Contributories.

13. The risks are: (i) Transactions may not be entered into the terminal

(ii) Data entered into the terminal may be inaccurate (iii) Transactions may be entered in the wrong accounting period

(iv) Data entered into the terminal may be improperly valued (v) System failure and data loss

(vi) Invalid transactions may be entered into the terminal or inserted during transmission. (vii) Virus attack. 14. User defined or customized application software, bespoke, tailor made. 15. Cash flow from Investing activities. 16. Debit – cost of investment A/C; Credit – Capital Reserve 17. Purchase / acquisition method 18. Completed Contract Method. 19. The higher of 1% of gross premium and 10% of net profit

= 1% X 120,000,000,000 and 10% of 87,000,000,000 = 1,200,000,000 and 8,700,000,000

= N8,700,000,000

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20. The higher of 3% of total premium and 20% of net profit

N’b 3% x N200b 6 And 20% x N45b 9 = 9

EXAMINERS REPORT The questions covered the entire syllabus of the paper and the solutions are really short requiring just one or two words and short accounting computations. Some candidates could not provide correct solutions to the short accounting computations. However, on the overall, candidates’ performance was fair.

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SOLUTIONS (SECTION B) QUESTION 1 (a) Calculation of Pre-acquisition Reserve: Date of Acquisition Number of shares

Acquired percentage Amount

Reserve Pre-

acquisition Reserve

N N 2001 100,000 10% 80,000 - 2002 180,000 18% 110,000 x 28% 30,800 2003 200,000 20% 240,000 x 20% 48,000 2005 120,000 12% 320,000 x 12% 38,400 2006 200,000 20% 460,000 x 20% 92,000 209,200 b) Calculation of Group’s Profit on Disposal

N Proceed on disposal 526,400 Less: Cost of Shares sold ( N200,000 x N 1.85) 370,000 Holding company profit on disposal 156,400 Less: Post acquisition reserves attributable to Shares sold and no longer consolidated (wk) 63,610 Groups profit on Disposal N 92,790 Workings: Post acquisition Reserve: N N Post acquisition Reserve b/f 1/1/2008 (N500,000 – 209,200) 290,800 Reserves 1/1/2008 – 30/9/2008: Profit before tax for the year to disposal date (9/12 x N 90,000) = 67,500 Less company income tax at 30% 20,250 47,250 Less Interim dividend 20,000 27,250 Post acquisition Reserve to date of Disposal 318,050 Amount attributable to Shares sold 20% 63,610

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(c) Benbella Manufacturing Company

Deficiency Account

N ‘000 N ‘000 Items increasing deficiency: Loss written of assets: Plant and machinery 3,535 Motor vehicle 990 Stock 1,521 Debtors 1,729 7,775 Other cost and expenses Cost and expenses of liquidation 2,140 Interest paid to creditors 487 Preference premium 400 3,027 10,802 Items reducing deficiency: Land and building 490 Deficiency as per Statement of Affairs N 10,312

EXAMINERS’ REPORT The case study tests candidates’ knowledge of the theory and application of piecemeal acquisition, companies’ liquidation and disposal of a subsidiary. Candidates’ performance was below average in piecemeal acquisition and disposal of subsidiaries but above average in liquidation of companies. The commonest pitfalls were the candidates’ inability to:

a. Determine the percentage interest in each lot of the acquisitions which is necessary for computing the required pre-acquisition reserves.

b. Understand the basic parameters steps required to calculate the profit or loss on disposal of a subsidiary.

Candidates are advised to study the basic principles and procedures required to prepare group accounts.

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QUESTION 2 Large - Joe Plc

Statement of Value Added for the Year ended December 31, 2008 N ‘000 N ‘000 Turnover 960,420 Bought in materials and services (Wk1) 749,780 Value added by the group 210,640 Non-trading income: Property rent received 1,262 Realized exchange surplus 669 Exceptional loss (5,627) Extra ordinary gain 1,166 Share of profit from associated company 992 (1,538) 209,102 100% Applied as follows: To pay employees: Wages, salaries and commission 106,662 Retirement plan costs 7,106 Other benefits 3,062 116,830 55.9% To pay Government: Taxation 12,382 5.9% To pay providers of capital: Interest on money borrowed 32,891 Dividends – to other shareholders 7,076 - to non-controlling interest 666 40,633 19.4% Retained in the Business for Expansion: Depreciation 21,121 Profit re-invested: by minority interest 627 By other shareholders 17,509 39,257 18.8% N209,102 100% Working (Wk.1): Calculation of Bought in material and services: N ‘000 N ‘000 Turnover 960,420 Less Gross profit before interest 77,336 883,084 Less:

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Depreciation 21,121 Wages, salaries and commission 106,662 Other benefits 3,062 Retirement plan costs 7,106 (137,951) Add back Property rents received 1,262 Realized exchange surplus 669 1,931 Add Net Bank interest (7861 - 5145) 2,716 N749,780 EXAMINERS’ REPORT This question tests candidates understanding of the principles required for the preparation of group Value Added Statement. Candidates’ performance was poor. The major pitfall was the candidates inability to understand the elements of profit and loss account that constitute the components of the value added applied to the different groups or stakeholders. Candidates are advised to study the different classes of stakeholders and the elements of the financial statements that are of particular interests to them. QUESTION 3 (a) i. Liability as at 31 December 2008:

Appreciation in price between 1/1/05 – 31/12/08 N31 – N22 = N9 No of employees on which rights vest = 75% x 1000 = 750 No of rights granted per employee = 50 Liability N9 X 750 X 50 = N337,500

ii. Gain between 1/1/05 – 31/12/09 (N28 – N22) X 750 X 50 = N225,000

Payment to employees N112,500

Comment: The transaction would be accounted for as a cash settled share base payment if the entity has incurred a liability to settle in cash or other asset.

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(b) The substance of a transaction is reported rather than its legal form in order to

report the true and fair view of the performance of the entity. The substance of a transaction represents the commercial intention as against the legal form.

In instances where the risks and reward of a transaction do not rest with the owners, control lies with the person that bears the risks and the rewards, hence, the substance. Examples are in Finance Lease, Consignment of goods where the seller retains the risks and rewards until the goods are paid for or returned by the Consignee. Other cases are sales and purchases agreements, factoring of debtors and securitized assets and loan transfers.

We may also consider the commercial substance of a transaction where assets are sold above or below their fair value. Reporting the substance of a transaction, guides against Creative Accounting.

(c) Consolidated current assets: N’000

SURA Plc 640,000

MEGA Plc 560,000 Cash in transit (N64m – N40m) 24,000 Inter-company balance (64,000)

1,160,000 Less consolidated current liabilities: SURA Plc 400,000 MEGA Plc 160,000 Inter- company creditors (40,000) 520,000 Net current assets 640,000

EXAMINERS’ REPORT

This question tests candidates understanding of the provisions of IFRS 2 – Share based payment, substance of transactions over legal form and cancellation of inter company balances in consolidated accounts. Performance was below average. Candidates’ pitfalls were:

a. Inadequate knowledge of the provisions of IFRS 2, b. Inability to explain the commercial substance of a transaction and

differentiate it from the legal form, and c. Inability of how to eliminate inter-company balances.

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Candidates are required to pay great attention to accounting standards particularly the IFRS now that companies in Nigeria are required to adopt IFRS in the preparation of financial statements. QUESTION 4 Akhatar Nigeria Limited

(i) Sinking Fund Accounts

N N 31/12/03 Balance c/d( wk 1) 708,383 31/12/03 P & L 708,383 31/12/04 Balance c/d 1,501,772 01/01/04 Balance b/f 708,383 P & L 708,383 Sinking Fund Invt 85,006 1,501,772 1,501,772 31/12/05 Balance c/d 2,390,368 01/01/05 Balance b/f 1,501,772 P & L 708,383 Sinking Fund Invt 180,213 2,390,368 2,390,368 31/12/06 Balance c/d 3,385,595 01/01/06 Balance b/f 2,390,368 P & L 708,383 Sinking Fund Invt 286,844 3,385,595 3,385,595 31/12/07 Balance c/d: 01/01/07 Balance b/f 3,385,595 On Redemption 375,000 Deb. Interest 75,000 P & L 708,383 Sinking Fund Invt Loss 187,500 General Reserve 3,862,500 Sinking Fund Invt 406,022 4,500,000 4,500,000

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(i) Sinking Fund Investment Account N’000 N’000 31/12/03 Bank 708,383 31/12/03 Bal c/d 708,383 1/1/04 Bal.b/d 708,383 31/12/04 Bal c/d 1,501,772 Bank 708,383 Sinkg fund 85,006 - 1,501,772 1,501,772 1/1/05 Bal, b/d 1,501,772 31/12/05 Bal c/d 2,390,368 Bank 708,383 Sinkg fund 180,213 -

2,390,368 2,390,368 1/1/06 Bal b/d 2,390,368 31/12/06 Bal c/d 3,385,595 Bank 708,383 Sinkg fund 286,844 - . 3,385,595 3,383,595 1/1/07 Bal b/d 3,385,595 31/12/07 Disposal 4,500,000 Bank 708,383 Sinkg fund 406,022 - 4,500,000 4,500,000

(ii) Sinking Fund Investment Disposal Account N’000 N’000

31/12/07 Sinkg fund Inv 4,500,000 31/12/07 Bank 4,312,500 Sinkg fund - (Loss on disposal) 187,500 4,500,000 4,500,000

Working S = A ((1+r)n-1) r = N4,500,000( (1+0.12)5 -1 0.12 = N4,500,000 X0.12 = N540,000 = N540,000/0.7623 = N708,382.50

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EXAMINERS’ REPORT The question tests candidates’ understanding on how to prepare sinking fund investment accounts. The candidates’ ability to calculate the amount to be invested annually and the attributable interests is a key to answering the question correctly. Candidates’ performance was generally poor. The major pitfall was the inability of candidates to apply the annuity formula correctly. Candidates are advised to pay more attention to specialised accounts. QUESTION 5 CARONIK ENTERPRISES

Machinery Account N'000 N'000

01/01/2005 MOA Motors Ltd 168,000 31/12/2005 168,000

1/12006 Balance b/d 168,000 31/12/2006 Bal c/d 168,000

1/1/207 Balance B/d 168,000 31/12/2007 Bal c/d 168,000

01/01/2008 Balance b/d 168,000 31/12/2008 Bal c/d 168,000

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MOA Machinery Ltd Account N'000 N'000

01/01/2005 Bank deposit 16,800 01/01/2005 Machine a/c 168,000

31/12/2005 Bank HP Interest

1st Instalment (w1) 45,360

Suspense a/c 30,240

Bal c/d 136,080 198,240 198,240 31/12/2006 Bank 01/01/2006 Bal b/d 136,080 2nd Instalment 45,360 Bal c/d 90,720 136,080 136,080 03/12/2007 Bank 01/01/2007 Bal b/d 90,720 3rd Instalment 45,360 Bal c/d 45,360 90,720 90,720 31/12/2007 Bank 01/01/2008 Bal b/d 4th Installment 45,360 45,360

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H.P INTEREST SUSPENSE ACCOUNT

N'000 N'000 01/01/2005 MOA Machiney Ltd 30,240 31/12/2005 P & L 7560

Bal c/d 22,680 30,240 30,240

01/01/2006 Ba/ b/d 22,680 31/12/2006 P & L 7,560 Bal c/d 15,120 22,680 22,680

01/01/2007 Bal B/d 15,120 31/12/2007 P & L 7560 Bal c/d 7560 15,120 15,120

01/01/2008 Bal b/d 7,560 31/12/2008 P & L 7,560 Bal c/d 7,560 15,120 15,120

01/01/2008 Bal b/d 7,560 31/12/2008 P & L 7,560

PROVISION FOR DEPRECIATION ON MACHINERY ACCOUNT N'000 N'000 31/12/2005 Bal c/d 33,600 31/12/2005 P&L a/c P & L a/c 33,600

31/12/2006 Bal c/d 67,200 01/01/2006 Bal b/d 33,600

31/12/2006 P & L a/c 33,600 67,200 67,200

31/1/2/2007 Bal c/d 100,800 01/01/2007 Bal b/d 67,200 31/12/2007 P & L a/c 33,600 100,800 100,800

31/1/2/2008 Bal c/d 134,400 01/01/2008 Bal b/d 100,800 31/12/2008 P & L a/c 33,600

134,400 134,400

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BALANCE SHEET EXTRACT AS AT 31ST DECEMBER

2005 2006 2007 2008 N'000 N'000 N'000 N'000 Fixed Assets 168,000 168,000 168,000 168,000 Depreciation 33,600 67,200 100,000 134,400 WDV 134,400 100,800 67,200 33,600 Long Term Liabilities HP Creditors Due after 90,720 45,360 12 months 15,120 7560 Less HP Interest 75,600 37,800 Current Liabilities HP Creditors due within 12 months 45,360 45,360 45,360 45,360 Less HP Interest 7560 7560 7560 7560 37,800 37,800 37,800 37,800 Workings Calculation of Annual Instalments N'000 Cash Price 168,000 Total HP Interest 30,240 198,240 Less Deposit 16,800 Balance to be settled by 4 Instalments 181,440 Each Instalment N181,440 4 = N45,360

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ALTERNATIVE SOLUTION TO QUESTION 5 Dr HP Machine Account Cr N’000 N’000 1/1/05 HP Creditor 168,000 31/12/05 Bal c/d 168,000 1/1/06 Bal b/d 168,000 31/12/06 Bal c/d 168,000 1/1/07 Bal b/d 168,000 31/12/07 Bal c/d 168,000 1/1/07 Bal b/d 168,000 31/12/08 Bal c/d 168,000 Dr Provision For Depreciation Account Cr N’000 N’000 31/12/05 Bal c/d 33,600 31/12/05 P&L A/C 33,600 31/12/06 Bal c/d 67,200 1/1/06 Bal b/d 33,600 31/12/06 P&L A/C 33,600 67,200 67,200 31/12/07 Bal c/d 100,800 1/1/07 Bal b/d 67,200 31/12/07 P&L A/C 33,600

100,800 100,800 31/12/08 Bal c/d 134,400 1/1/08 Bal b/d 100,800 31/12/08 P&L A/C 33,600 134,400 134,400 Dr Hp Creditor’s Account Cr N’000 N’000 1/1/05 Bank (initial deposit) 16,800 1/1/05 HP machine 168,500 31/12/05 Bank (1st Installment)

45,360 31/12/05 Hp Int 7,560

31/12/05 Bal c/d 113,400 175,560 175,560 31/12/06 Bank (2nd Installment)

45,360 1/1/06 Bal b/d 113,400

31/12/06 Bal c/d 75,600 1/1/06 Hp Int 7,560 120,960 120,960 31/12/06 Bank (3rd Installment)

45,360 1/1/07 Bal b/d 75,600

31/12/07 Bal c/d 37,800 31/12/07 Hp int 7,560 83,160 83,160 1/1/08 Bal b/d 37,800 31/12/08 Bank (4th installment)

45,360 31/12/08 Hp int 7,560

45,360 45,360

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Dr HP Interest Expenses Account Cr N’000 N’000 31/12/05 Hp Creditor 7,560 31/12/05 P&l A/C 7,560 31/12/06 Hp Creditor 7,560 31/12/06 P&l A/C 7560 31/12/07 Hp Creditor 7,560 31/12/07 P&l A/C 7,560 31/12/08 Hp Creditor 7,560 31/12/08 P&l A/C 7,560 Dr Profit & Loss A/C Extract for the year ended Cr N’000 N’000 31/12/05 7,500 31/12/06 7,500 31/12/07 7,500 31/12/08 7,500

Balance Sheet Extract as at Fixed Asset: 31/12/05

N000 31/12/06 N 000

31/12/07 N 000

31/12/08 N 000

HP Machine 168,000 168,000 168,000 168,000 Less Acc Depr (42,000) (84,000) (126,000) (168,000) Net Book Value 126,000 84,000 42,000 NIL Current Liability

Hp Creditor 37,800 37,800 37,800 ------ Long term Liability

Hp Creditor 75,600 37,800 ------- ------ WORKINGS

(1) Determination Of Annual Hp Interest Annual Hp Interest= Total Hp Interest

4 years = N 30,240,000 4 years = N 7,560,000

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(2) Determination Of Annual Installment N

Cash Price 168,000,000 Add Total Hp Interest 30,240,000 Total Hp Price 198,240,000 Less Initial deposit (10% 0f cash price) 16,800,000 Total installments 181,440,000

Annual installment = Total installment

4 years = N 181,440,000

4 years

= N 45,360 EXAMINERS’ REPORT The question tests candidates understanding of the preparation of hire purchase contract accounts. Candidates’ performance was above average. Candidates displayed good knowledge of the two methods applicable. However, some candidates did not know the relevant accounts to open. QUESTION 6

a. An accounting chart in a Peachtree program means a list of all account names used in general ledger and this is usually associated with an Identification code, which would help to locate it when recording data. OR Chart of account is a list of account codes and description for all assets, capital, liabilities, incomes and expenses.

b. Peachtree wizard to register a new company: Posting Method

- Company’s name - Company’s address - Business type - Accounting method - Accounting period - Fiscal year

c. - batch posting - real time posting In batch posting ,the transactions entered are saved to a temporary holding areas, where they can be reviewed before they are posted to general ledger.

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In real time posting, transactions entered and posted to general ledger instantly and they are also saved immediately.

d. Sinking Fund Investment Accounts

N N Year 1 Cash 240,000 Balance c/d 240,000 Year 2 Balance b/f 240,000 Cash 300,000 Balance c/d 564,000 Cash interest 24,000 564,000 564,000 Year 1 Cash 240,000 Balance c/d 240,000 Year 2 Balance b/f 240,000 Balance c/d 564,000 Cash 300,000 Cash interest 24,000 564,000 564,000 Year 3 b/f 564,000 Balance c/d 920,400 Cash 300,000 Cash interest 56,400 920,400 920,400 Year 4 Balance b/d 920,400

The investment will be sold for N920,400 which will be added to the scrapped value of N579,600 to provide N1,500,000 for the replacement of the new plant. EXAMINERS’ REPORT The question tests candidates’ understanding of the application of peachtree package in preparing accounting reports of a company. Candidates’ performance was below average. The pitfalls identified included the following:

a. Candidates could not define charts of account: and b. Candidates did not understand how to create the account of a company

using peachtree package.

Candidates are advised to update their understanding and skills of the various accounting packages.

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ICAN/102/Q/1 EXAMINATION NO………………………...

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA PROFESSIONAL EXAMINATION 1 - NOVEMBER 2010

INFORMATION TECHNOLOGY Time allowed – 3 hours

SECTION A: Attempt All Questions PART I MULTIPLE CHOICE QUESTIONS (20 Marks) 1. A difference between a Decision Support System (DSS) and an Expert System

(ES) is that

A. DSS does not make a decision but guides the decision makers, while an ES makes a decision.

B. ES does not make a decision but guides the decision maker, while a DSS makes a decision.

C. DSS supports Management, while ES supports non-management personnel.

D. DSS is internet based, while ES is not. E. ES is internet based, while DSS is not. 2. Authorization and Authentication software makes use of the following for

securing user access EXCEPT:

A. user name. B. password. C. pass code. D. wireless protocol. E. access Rights.

3. Which of the following does NOT make use of Bluetooth application?

A. Mobile phone B. Digital Television C. Laptop system D. Car E. Grinder

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4. Bill payment systems will enquire the use of the following devices EXCEPT

A. computer B. loudspeaker C. modem D. printer E. bar code reader

5. The following are features of Human Resource Management software EXCEPT A. employment module. B. staff audit module. C. networking module. D. career planning module. E. loan processing Module.

6. Which of the following is an internet-based application? A. Accounting application B. Web Portal C. Web lion D. Manual Bulletin Board E. Operating system

7. Why is it important to make regular back-ups of computer data?

A. To prevent loss of data B. To comply with the law C. To protect the computer storage D. To increase the storage capacity E. To increase the computer storage

8. Which type of system would use Bar code as an input device?

A. Payroll. B. Invoicing. C. Training. D. Supermarket. E. Testing.

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9. Where should backup copies of data be stored?

A. Near the computer B. In a different location C. In a car D. In an off-site fire proof store E. In a study.

10. Which device is used to enter sales data into a supermarket computer system?

A. Mouse B. Keyboard C. Bar code scanner D. Mark reader E. UPS

11. The telecommunication technology that has the potentials to replace a

number of existing telecommunication infrastructure is the

A. Intranet. B. Wi-Fi. C. GPRS. D. WIMAX. E. EDGE.

12. GPRS is an acronym for

A. General Packet Radio Signal. B. General Packet Radio Service. C. General Parcel Radio Signal. D. General Parcel Radio Server. E. General Packet Radar Service.

13. Which ONE of following is NOT an attribute of a Computer?

A. Security B. Versatility C. Speed D. Frequency E. Reliability

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14. Which ONE of the following is an attribute of File Transfer Protocol (FTP)?

A. The most popular way to transmit whole files from one computer to another

B. The most popular way to transmit files from one person to another C. The most popular way to delete files between two computers D. The most popular way to generate files in a computer system E. It allows files to be stored

15. Which of these applications of computers would store information about which course a student is enrolled for?

A. Computer based training. B. Timetabling C. Students record D. Fees database E. Employees’ wages

16. The Data Protection Act is designed to

A. make personal data freely available. B. create a permanent store for personal data. C. regulate the use of personal data. D. enforce deletion of personal data. E. carry out audit trail.

17. What is controlled by software copyright regulations?

A. Making backups of the software B. Number of copies sold C. Type of computer used for the software D. Illegal distribution of software E. Word processing

18. Which type of software would you use to maintain information about account holders in a Bank or Building Society?

A. Spreadsheet B. Word processor C. Database software D. Stock control E. Accounts ledger

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19. A company whose website provides a variety of portals exhibiting interactive

pages for visitors, customers and vendors is likely to attract hackers. To provide a diversion of attention against hackers, the company should deploy

A. demilitarized Zone firewall. B. statesful Inspection. C. circuit level firewall. D. a honey net. E. router screening firewall.

20. Which one of the following is NOT a technique for handling input errors in a computer processing environment?

A. Rejecting only transactions with errors B. Rejecting the whole batch of transactions C. Holding the batch in suspense D. Accepting the batch and flagging error transaction E. Accepting the transactions without flags

PART II SHORT-ANSWER QUESTIONS (20 Marks) 1. An abstraction layer that decouples the physical hardware from the Operating

System to deliver greater IT resource utilization and flexibility is called …………

2. Integrated Test Facility (ITF) is a tool for ………………online auditing 3. An internet-based application where users can chat with each other online is

known as………………….

4. SQL Server, DB2, Microsoft Access are examples of ………………systems 5. An internet-based application used to search for information from any web

site on the internet is known as ......………. 6. A small piece of text stored on a user’s computer by a Web browser to capture

user’s details is known as………………. 7. The computer-to-computer transfer of information in a standard format,

exchanged between trading partners is called………………… 8. Business-to-business buying and selling of goods and services on the internet

is one of the forms of ………………………

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9. COBIT is an acronym for …………………. 10. A way for government to use the new information technology to provide

more convenient access to government information and services is called….……….

11. A project will usually have three closely linked objectives. These include

main, ………………..and non-objective 12. The three dimensions of a project usually referred to as Triple Constraints are

Deliverables, Cost and Resources and ……………………. 13. Segregation of duties is ONE of the controls used to check overlapping in the

……………… of IS staff. 14. A computer software that mediates between two separate previously existing

applications is known as …………………. 15. A system software used to analyse, configure, optimize and maintain

computers to keep them running, and ensure data security is called ………………..

16. A computing technology where one computer system renders services to

other computer systems is known as………………………… 17. The type of user interface that allows people to interact with programs

using different devices like mouse, rather than typing is known as…………………

18. An operating system that allows concurrent access is known as

………………… 19. The facility that creates a fictitious entry in a database to process a test

transaction simultaneously with the live inputs is called…………………. 20. As a component of web trust, online merchants must address issues of

complaints and …………….. as soon as possible

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SECTION B ATTEMPT QUESTION 1 AND ANY OTHER THREE QUESTIONS QUESTION 1 CASE STUDY ABC CONSULTANTS You are the team leader of a Consulting team handling the computerization of operations of a major client in the Foods and Beverage industry. Your team has just concluded the design of a new organization structure. The process manual, developed by your team members was handed over to you for review. On reviewing the proposed process manual, you observed many gaps, ranging from input processes, operations and output processes. A major observed gap is the software acquisition process. The manual did not indicate the standard processes for acquisition of their software. In order to resolve this challenge, you are required to (a)(i) state THREE challenges which the organization will likely face, should it go

ahead without establishing a standard software selection and acquisition process. (3 Marks)

(ii) explain THREE steps in the software selection process to be adopted by the organization. (3 Marks)

(b) Another assumption of the process manual is the outsourcing

of the Information Technology tasks of the client. You are required to explain six benefits of outsourcing and THREE risks of outsourcing to the organization. (9 Marks)

(Total 15 Marks)

QUESTION 2

(a) Explain the following terms:

i Internet ii Intranet iii Extranet (6 Marks)

(b) i. What is a Text Editor? (2 Marks)

ii. Give TWO examples of Text Editor . (1 Mark) iii. Give THREE differences between a plain text file and a

word processor file (6 Marks) (Total 15 Marks)

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QUESTION 3 (a) Define the term “Systems Specification” (3 marks) (b) List and explain SIX tasks undertaken during System

Implementation. (12 marks) (Total 15 marks) QUESTION 4 (a) What is computer forensic? (2 Marks) (b) List and describe the four key elements of computer forensic

investigation. (10 Marks)

(c) Outline three activities involved in computer forensic investigation. (3Marks)

(Total 15Marks) QUESTION 5 (a) Describe FIVE features of a standard e-government application. (5 Marks) (b) Explain FIVE benefits of e-government applications. (5Marks) (c) Explain FIVE challenges of e-government applications. (5Marks)

Total15Marks) QUESTION 6 (a) Describe briefly: i. any FIVE Direct Input Devices (5 marks) ii. any FOUR Output Devices (4 marks) (b) List TWO main technologies used for storage devices and give FOUR

examples of each. (6marks) (Total 15 Marks)

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SOLUTIONS TO SECTION A

PART I MULTIPLE CHOICE QUESTIONS

1. A 2. D 3. E 4. B 5. C 6. B 7. A 8. D 9. D 10. C 11. D 12. B 13. D 14. A 15. C 16. C 17. D 18. C 19. D 20. E

EXAMINERS’ REPORT The MCQ questions test candidates’ knowledge on the major part of the syllabus.

All candidates attempted the questions.

Performance was very good as over 60% of candidates scored 50% and above.

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PART II - SHORT-ANSWER QUESTIONS 1. virtualization 2. continuous 3. bulletin board 4. database management 5. search engine 6. Cookie 7. Electronic Data Interchange (EDI) 8. E-Commerce 9. Control Objectives for Information and Related Technology

10. E-Government 11. additional 12. Time 13. responsibilities 14. middleware 15. Utility software

16. Client/Server Technology

17. Graphical User Interface (GUI)

18. Multi- user

19. Integrated Test facility

20. disputes

EXAMINERS’ REPORT The questions cover a substantial part of the syllabus. All candidates attempted the questions. Performance of candidates in these questions was fair as 40% of candidates scored 50% and above. Some candidates could not proffer appropriate solutions to some of the questions. Candidates are therefore advised to read widely and be abreast with changes in Information Technology.

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SOLUTION TO SECTION B – CASE STUDY QUESTION 1 ABC CONSULTANTS (a)i. Challenges of not establishing a standard software selection process

include:

• Unstandardized software selection process may lead the organization into buying software that will not meet her needs especially in the future.

• Unstandardized software selection process may make the organization to buy popular software without considering all options. This will lead to wastage of company’s resources.

• Unstandardized software selection process may cause the organization to buy software using input from an elite group without getting input from the

organization at large.

• The risk of buying software without proper consideration of the software company. Organizations have bought software only to discover that the manufacturer is bankrupt and there is no source code escrow

• The risk is that of buying software with low initial costs but significantly higher ongoing costs e.g. Maintenance costs

(a)ii. Standard Software Selection Process include:

• Internal Process: The first step to an effective software selection

process is the design and documentation of an internal process

• Establishment of requirements: A requirement analysis establishes what is required by the new application. This step helps to identify the key requirements that a package must have in order to make the short list.

• Identify both industry-specific and general ERP packages. Based on

the business requirements and budgetary needs, this will probably eliminate most vendors.

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• Request for Proposal: Send out Request for Proposals (REP) to the Vendors, informing them of the IT environment.

• In parallel with the functional assessments, assess the technical

capabilities of the short-listed vendors. This should include areas such as scalability, ability to integrate with legacy systems, openness of the architecture, licensing requirements, escrow facilities, and references.

• Select Software, gather the inputs received from the various

assessments prioritize the vendors' strengths and weaknesses, weighting ranking and evaluating each of the packages according to the environment.

(b)i. Benefits of Outsourcing include the following: • It helps the organization to minimize capital expenditure for

acquisition of software and hardware

• The company will give up non-core functions. Being a manufacturing company, IT service is a non-core function, so outsourcing will enable her focus on her core manufacturing functions.

• It enables the organization to focus scarce resources on mission-critical projects

• The organisation will to save money on manpower and training costs.

• Outsourcing to a professional service company will help the organization to establish long-term, strategic relationships with world-class service providers to gain a competitive edge.

• If the IT service is outsourced, the company will benefit from the provider's expertise in solving problems for a variety of clients with similar requirements.

• Risk spreading: With outsourcing, the company spreads her risks

• Outsourcing the IT function will enable the organization leverage the provider's extensive investments in technology, methodologies and people

• It will help the organization to reduce the risk of technological

obsolescence

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(b)ii. Risks of outsourcing

• Outsourcing may expose the organisation to risks of losing confidential company information to outsiders

• There is the risk of not getting the full benefits of outsourcing if the company fails to establish an effective internal baseline to measure the providers against costs, service and value added.

• Outsourcing may limit the capability of the organisation to be flexible in the future.

• Poor planning and implementation with respect to timing of transition to service provider and demands on the organization.

• The service provider may not understand the business of his client well enough to provide efficient outsource service

EXAMINERS’ REPORT

The question tests candidates’ knowledge of outsourcing and the challenges that may arise should a wrong software selection process procedure be used in the acquisition. Candidates are also expected to suggest the various ways of software selection procedure as well as benefits and challenges of outsourcing. All candidates attempted this question. The performance was very poor as about 30% of the candidates scored the 50% and above. The common pitfall was that most candidates did not understand this question hence, their inability to interpret correctly. Candidates are therefore advised to read widely on software selection and outsourcing of software.

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QUESTION 2 a) i. Internet: This is a global system of interconnected computers that use a

standard protocol suite (TCP/IP) for communication. Internet provides such facilities like e-mail; file transfers; remote access, online bulletin boards, chat fora etc.

ii. Intranet: Intranet is an application having all the features of the internet,

but made available only to members of an organization. In other words, Intranet is a private Internet for an organization.

iii. Extranet: Sometimes, organizations may enable a few external users to

have access to their intranet. When this is done, the intranet is known as extranet. Hence, an extranet is an Intranet that allows access to some external users.

b) i. A text editor is a type of program used for editing plain text file. This is

often provided with the operating system or software development packages. A text editor is normally used for typing on the computer.

ii. Examples of text editors include: Notepad Word pad Edlin Edit iii. A plain text file is represented and edited by showing all and edited by

showing all the characteristics as they are present in the file and the word processing file characters can be modified

Document created by the word processor generally contains file format specific control characterers beyond what is delivered in the character set, such as BOLD, underscore, etc while these are not possible with text editor Word processor can usually edit plain text file and save in the plain text format The same cannot be done for text editor

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EXAMINERS’ REPORT This question tests candidates’ understanding of the differences among the major data transmission networks. The question also requires candidates to state the differences between text editor and word processor Over 70% of the candidates attempted this question. Their performance was good in the first part of the question, but poor in the second part. Overall, about 45% of the candidates scored 50% and above. Most candidates could not differentiate between a text editor and word processor, and could not also give appropriate examples of each. Candidates are therefore advised to familiarise themselves with various software editors. QUESTION 3 (a) Systems specification is a document prepared by the Systems Analyst after

the design of a system which specifies the requirement of the system in terms of inputs, processing, outputs, costs, hardware and software.

(b) The following tasks are undertaken during System Implementation:

i. Programming: This is the writing of individual algorithms in a particular language that may be needed.

ii. System testing: The individual programs and the entire system are tested.

iii. Documentation: Accurate documentation is kept on the system with respect to analysis, design, control, communication, training and learning.

iv. Staff Training: Users are trained on how to man the system. v. Changeover: This is the changeover from the old to the new systems. vi. Master File Conversion: Old files are converted into new computer files. Vii. Hardware acquisition and installation: The computer hardware is acquired, installed and tested.

viii. Site Preparation: Space for the computer is provided, wiring is done, and air-conditioners, carpets, furniture and fittings are provided.

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EXAMINERS’ REPORT The question tests candidates’ knowledge on the various information requirements in systems specification as well as the activities that may be performed on systems implementation. Less than 60% of the candidates attempted this question. The performance was fair. Over 60% of the candidates scored 50% and above. Some candidates that attempted this question were writing on feasibility study instead of systems specifications. Candidates are therefore expected to devote more time to study the aspect of systems development.

QUESTION 4 (a) Computer forensic is an emerging discipline that combines elements of law

and computer science to collect and analyse data from computer system networks, wireless communication and storage devices in a way that is admissible as evidence in a court of Law.

(b) Key elements of computer forensic Investigation include the following:

(i) The identification of digital evidence. This is the first step in the forensic process. Knowing what evidence is present, where it is stored, and how it is stored is vital to determining which processes are to be employed to facilitate recovery

(ii) The preservation of digital evidence. This is a critical element in the forensic process. Given the likelihood of judicial scrutiny in a court of law, it is imperative that any examination of the electronically stored data be carried out in the least intrusive manner.

(iii) The analysis of digital evidence: The extraction, processing and interpretation of digital data are generally regarded as the main elements of forensic investigation. Once extracted, digital evidence usually requires processing before it can be read by people.

(iv) The presentation of digital evidence. This involves the actual presentation in a court of law. It includes the manner of presentation, the expertise and qualifications of the presenter and credibility of the processes employed to produce the evidence being tendered

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(c) Activities involved in computer forensic investigation include the following:

(i) Media and electronic device analysis. This relates to the examination

of various types of storage media such as harddisks, removable storage media like floppy disks CD ROMs, DVD. Hashdrivers e.t.c.

(ii) Data communication. This involves Ø Network intrusion or misuse Ø Data interception

Network intrusion deals with internet based analysis which consists of Ø Intrusion defection Ø Evidence capture and presentation Ø Event or activity reconstruction

(iii) Research and Development. These involve probing into, and the

development of new techniques and the growth of new methodologies tools, which are vital in keeping abreast of changes in the technology.

EXAMINERS’ REPORT This question tests candidates’ knowledge of the activities involved in the use of computer system, and computing devices in order to produce criminal evidence for courts of law. Over 60% of the candidates attempted this question. The performance was good as over 70% of the candidates who attempted the question scored 50% and above. Candidates still need to read more literature on this topic in order to improve their information technology knowledge-based.

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QUESTION 5

(a) Features of e-government applications are as follows: i) Two-Way communication between government agencies and her

citizens.

ii) Content management facility: This is used to remotely upload information unto the government portals.

iii) Online bulletin boards: This is used to present information and receive feedback from stakeholders.

iv) FAQ (Frequently Asked Questions). This is where frequently asked questions and their answers are made available. Citizens can visit this Webpage, use the search engine to pick their questions and already documented answers.

v) Online Bill Payment facility: e-government applications will have a facility for citizens to pay their tax and other levies online, and receive acknowledgement of payments.

vi) Constituent Relationship Management: This is used to track interactions between citizens and government officials. This includes e-mail facility, chat facility and blogs.

vii) Electronic voting facilities.

viii) E-payment facilities: This is how government pays service providers directly.

(b) Benefits of e-government applications include:

i) It helps to simplify processes and makes access to government information more easily accessible for public sector agencies and citizens.

ii) It eliminates bureaucracy.

iii) It aids efficiency, improves services, better accessibility to public services, and greater transparency and accountability.

iv) Elimination of fraud and ghost workers.

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v) Provision of opportunity for citizens to have easy access to government officials without protocols. This helps government officials to have direct information about the impact of their decisions on the citizens.

(c) Challenges of e-Government applications include:

i) Cyber attacks: Every e-government application with online payment facility will be a target of cyber criminals.

ii) Implementation of the application to meet the requirements of government agencies.

iii) Audit: Auditing e-government systems may pose more challenge as audit trails may be lost.

iv) Cost: Most e-government applications are rather very costly. Another area of cost is the implementation of the applications.

v) Hardware Infrastructure: Necessary hardware and communication systems to run applications may not be available or provided.

EXAMINERS’ REPORT This question tests candidates’ understanding of e-government, features, benefits and challenges of its application. Over 70% of the candidates attempted this question. The performance was good as over 60% scored over 50% and above. Candidates are still expected to read widely in order to broaden their knowledge of this subject matter.

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QUESTION 6

Input Device is a hardware component that allows a computer user to input data into the computer. They are classified into Direct and Indirect input devices. Examples of direct input devices include: Keyboard Pointing Devices:

Ø Mouse Ø Trackball Ø Touch paid Ø Track point Ø Graphics tablet Ø Joystick Ø Touch Screen

Scanner Microphone Digital camera

• Keyboard

The computer keyboard is used to enter text information into the computer; The keyboard can also be used to type commands directing the computer to perform certain actions.

• Pointing Devices The graphical user interfaces (GUIs) in use today require some kind of device for positioning the on-screen cursor. Typical pointing devices are mouse, trackball, touch pad, trackpoint, graphics tablet, joystick, and touch screen.

• Mouse The mouse pointing device sits on the work surface and is moved with the hand. In older mice, a ball in the bottom of the mouse rolls on the surface as the mouse is moved and internal rollers sense the ball movement and transmit the information to the computer via the cord of the mouse.

• Touch pad Most laptop computers today have a touch pad pointing device. It moves the on-screen cursor by sliding ones finger along the surface of the touch pad. The buttons are located below the pad, but most touch pads allow the user to perform “mouse clicks” by tapping on the pad itself.

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• Trackball The trackball is a sort of an upside-down mouse, with the ball located on top. The user places fingers to roll the trackball and internal rollers (similar to what’s inside a mouse) sense the motion which is transmitted to the computer.

• Joysticks

Joysticks and other game controllers can also be connected to a computer as pointing devices. They are generally used for playing games, and not for controlling the on-screen cursor in productivity software.

• Touch screen Some computers, especially small hand-held Personal Digital Assistants (PDAs), have touch sensitive display screens. The user can make choices and press button images on the screen. They are often used with a stylus, which can be held like a pen, to “write” on the surface of a small touch screen.

• Graphic tablets A graphic tablet consists of an electronic writing area and a special “pen” that works with it. A graphic tablet allows artists to create graphical images with motions and actions similar to using more traditional drawing tools.

• Scanners A scanner is a device that forms images on a printed page or graphic by digitizing it, producing an image made of tiny pixels of different brightness and color values which are represented numerically and sent to the computer.

• Microphone A microphone can be attached to a computer to record sound (usually through a

sound card input or circuitry built into the motherboard). The sound is digitized—turned into numbers that represent the original analog sound waves—and stored in the computer for later processing and playback.

• Digital Camera:

A digital camera takes pictures by converting the light passing through the lens at the front into a digital image.

A (ii) Output Devices

Output devices are hardware components that allow a computer user to produce information from the computer, that is the devices that enable a user to get some information out of a computer system.

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Examples include:

Cathode Ray Tube (CRT) Monitor Flat Panel Display Ink Jet Printer Laser Printer Dot matrix Loud Speaker Modem

Multimedia

• Explanations

• CRT Monitor The traditional output device of a personal computer has been the CRT (Cathode Ray Tube) monitor. Just like a television set (an older one, anyway) the CRT monitor contains a large cathode ray tube that uses an electron beam of varying strength to “paint” a picture onto the color phosphorescent dots on the inside of the screen.

• Flat Panel Monitor

A flat panel display usually uses an LCD (Liquid Crystal Display) screen to display output from the computer.

• InkJet Printer

The most common type of printer for home systems is the color ink jet printer. These printers form the image on the page by spraying tiny droplets of ink from the print head. Laser Printer.

• Laser Printer

A laser printer produces good quality images by the same technology that photocopiers use. Laser printers are faster than ink jet printers.

• Dot matrix printers use small electromagnetically activated pins in the print head, and an inked ribbon, to produce images by impact. These printers are slow and noisy, and are not commonly used for personal computers anymore (but they can print multi-layer forms, which neither ink jet or laser printers can).They have directional operation capabilities.

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• Sound Output / Loudspeaker

Computers also produce sound output, ranging from simple beeps alerting the user, to impressive game sound effects, to produce quality music.

Multimedia is a term describing computer output that includes sound, text, graphics, movies, and animation.

MODEM (Modulator demodulator)

It converts digital signals into analog signals. It is a terminal device that is used in the connection of two systems. Signal from a PC is digital but is transmitted in the cable as an analog signal. This conversion is done by the Modem

(b) Types of Storage Devices

Two main categories of storage technology used today are magnetic storage and optical storage. Physical components or materials on which data is stored are called storage media. Hardware components that read/ write to storage media are called storage devices.

Magnetic storage Includes:

• Hard disks (both fixed and removable) • High capacity floppy disks • Disk cartridges • Magnetic tape

Optical storage includes:

• Compact Disk Read Only Memory (CD ROM) • Digital Video Disk Read Only Memory (DVD ROM) • CD Recordable (CD R) • CD Rewritable (CD RW) • Photo CD • Flush

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EXAMINERS’ REPORT

This question tests candidates’ knowledge of direct input, output, and storage devices. Over 70% of the candidates attempted this question. The performance was good. About 70% of the candidates who attempted this question scored 50% and above. Candidates still need to read widely on input, output and storage devices.

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ICAN/102/Q/2 EXAMINATION NO...................................

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA PROFESSIONAL EXAMINATION I – NOVEMBER 2010

MANAGEMENT ACCOUNTING Time allowed – 3 hours

SECTION A: Attempt All Questions PART I : MULTIPLE-CHOICE QUESTIONS (20 Marks) 1. Which of the following represents a decision that rests upon the judgement

of managers because there is no formal mechanism for predicting likely outcomes?

A. Symbolic Decision B. Executive Decision C. Managerial Decision D. Non-Programmed Decision E. Programmed Decision

2. Which of the following techniques represents the period usually expressed in

years, which makes the cash flows from a capital investments appraisal of project to equal the initial outflow?

A. Internal Rate of Return B. Accounting Rate of Return C. Pay Back Period D. Net Present Value E. Profitability Index

3. Which costs and revenue, appropriate to a specific management decision,

that are represented by future cash flows whose magnitude will vary depending upon the outcome of management decision?

A. Relevant Cost B. Differential Cost C. Marginal Cost D. Incremental Cost E. Opportunity Cost

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Use the information below to answer Questions 4 and 5 Bijabi Limited has determined its activity level and is now budgeting for its costs for the quarter ended 31 May, 2010. It has made the following predictions: Variable Costs Probability Fixed Costs Probability N240,000 0.35 N175,000 0.25 N305,000 0.25 N182,000 0.30 N501,000 0.40 N201,000 0.45

4. What is the Expected Value of the Total Variable Costs? A. N351,500 B. N358,500 C. N359,600 D. N360,500 E. N360,650 5. What is the Expected Value of the Total Fixed Cost?

A. N187,500 B. N188,800 C. N201,500 D. N281,500 E. N361,500

6. A systematic interdisciplinary examination of factors affecting the cost of a

product or service, in order to devise means of achieving the specified purpose most economically at the required standard of quality or reliability is

A. value engineering. B. value analysis. C. cost reduction. D. cost objective. E. cost implication.

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7. Which of the following quick ratios is considered acceptable as a general rule?

A. 4 to 1 B. 3 to 1 C. 2 to 1 D. 1 to 1 E. 1 to 3

8. What is capital budgeting?

A. A budget for long term expenditure B. A budget for obtaining investments of capital in the firm. C. A budget for investments of short-term funds in the capital markets D. Budget for business capital E. Budget for business formation

9. Which of the following methods uses income instead of cash flow in

investment appraisal?

A. Payback Period B. Accounting Rate of Return C. Internal Rate of Return D. Net Present Value E. Profitability Index

Use the following data to answer Questions 10 and 11.

Unit selling price N500 Variable cost per unit N260

Fixed cost N52,000 Tax rate 40%

10. What is the break-even point in units?

A. 214 units B. 215 units C. 217 units D. 218 units E. 250 units

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11. How many units should be produced to achieve a target income of N12,000 after tax?

A. 300 units B. 320 units C. 370 units D. 410 units E. 420 units

12. Costs incurred if products or services fail to meet requirements after delivery to customer are called

A. appraisal costs. B. internal failure costs. C. running costs. D. prevention costs. E. external failure costs.

13. Adamu Limited sells a product which has N8 per unit as variable cost. Sales

demand at N14 current rate, is 6,000 units. It is estimated by marketers that sales volume would fall by 200 units for each addition of 25k to the sales price. What is the optimal price that maximizes contribution?

A. N14.25 B. N14.50 C. N14.75 D. N15.25 E. N15.50 14. Using the data in Question13, at what level of sales will contribution be

maximized? A. 5,000 units B. 5,200 units C. 5,400 units D. 5,600 units E. 5,800 units

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15. Budgeted hours worked in a factory for a month was 220. Actual hours 200

and Standard hour produced 210. What is the efficiency ratio?

A. 91% B. 95% C. 97% D. 100% E. 105%

16. Using the data in Question 15, what is the production volume ratio?

A. 91% B. 95%

C. 97% D. 100% E. 105%

17. Residue from manufacturing operations that has measurable but relatively

minor recovery value is

A. obsolete. B. scrap. C. defective. D. spoilage.

E. expired. 18. A product has a standard direct material cost of N10 (5 kg of material M at

N2 per kg). During April 2009, 600kg of M were purchased at N1,140, 100 units of product A were manufactured using 520kg of material M. What is direct material price variance?

A. N40 (F) B. N40 (A) C. N50 (F) D. N50 (A) E. N60 (F) 19. Using the details in Question 18, what is direct material usage variance? A. 40 (F) B. 40 (A) C. 50 (F) D. 50 (A) E. 60 (F)

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20. A budget that perpetually adds a month in the future as the month just

ended is dropped is called

A. continuous budget. B. static budget. C. current budget. D. fixed budget E. incremental budget.

PART II: SHORT ANSWER QUESTIONS (20 MARKS) 1. A budget that adjusts for changes in sales volume and other cost drivers is

known as………………… 2. The difference between the standard yield of the actual material input and

the actual yield, both valued at standard material cost is known as…………………………..

3. The difference between the fixed overhead recovered on the budgeted hours

and the fixed overhead recovered on the actual hours worked is called ……………..

4. If initial cash outflow is N100,000, yearly constant cash inflow is N20,000

while the working life is 7 years and cost of capital is 15%, determine the Net Present Value.

5. The ratio of the present value of series of future cash benefits at the required

rate of return to the present value of the cash outflows is known as ……………………….

6. The establishment, through data gathering, of targets and comparators,

through which use relative levels of performance, and particularly, areas of underperformance can be identified, is called………………………

7. An emerging discipline that combines elements of law and computer science

to collect and analyze data as evidence in a court of law is called ……………………

8. The sets of standards dealing with human conduct in relation to what is

morally good and bad is…………………………..

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Use the following information to answer Questions 9 and 10 Carbon-Copy Company Ltd sells a product for N10. Budgeted sales for the first quarter of year 2010 are given below:

Budgeted sales N

January 400,000 February 600,000 March 700,000

The company collects 70% in the month of sales and 25% in the following month. Five per cent (5%) of all sales are uncollectible and written off.

9. Calculate the budgeted cash receipts for February. 10. Determine the budgeted cash receipts in March. 11. A sub-unit in an organization whose manager is held accountable for

specified sub-unit activities is called…………………….. 12. When preparing a production budget, the quantity to be produced can be determined by the model………………… 13. The result of dividing the total direct labour cost by the total number of units

produced is………………..

14. A period when machines and accessory equipment are made ready before the commencement of operation is called ………….

15. The discount rate that makes the net present value of a project equal to zero

is ………………….

16. When an organization has idle capacity, it resorts to low pricing. This method of pricing is called …………………..

17. Company X makes and sells 100 units of a product each month. The prime

cost per unit is N6.00 and unit selling price is N10. Production overhead cost N200 per week and other overhead N150 per week. Determine the production cost of sales using absorption costing method.

18. Use the data in Question 17 and variable costing method to determine the

production cost of sales.

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19. The measure of the scatter of the actual observation about the regression

line is termed …………….

20. Salaw Limited budgets fixed cost at N40,000. The variable cost of its single product is N4 and capital employed is N100,000. The company wants to earn a return on capital employed of 20% and estimated sale of 10,000 units in the year. What is the selling price per unit?

SECTION B: ATTEMPT QUESTION 1 AND ANY OTHER THREE (60 MARKS) QUESTION 1 CASE STUDY Fountain Limited, a car hire firm, is considering its future cash flows. The Directors of the company are interested in the period from the end of January 2010 to the end of 2015. In particular, they wish to decide on the optimal replacement cycle for the fleet of thirty hire cars. On 31 January 2010, the company purchased its existing fleet at a cost of N300,000,000. The vehicles are to be depreciated in the accounts over a three-year life, on a straight line basis. The resale value of a one-year old car, of the type used in the fleet, is at present N7,000,000. Inflation is at the rate of 10% per annum, and it is thought that it will continue at this rate in the foreseable future. New car prices will increase in line with inflation but second hand values are expected to remain at the present level for a number of years. The resale value of a two-year old fleet car is at present N4,000,000 and the scrap value of a three-year old car is N500,000. The revenue from operating the fleet is expected to be N250,000,000 in 2010.This annual revenue is expected to increase at a rate of 10% per annum irrespective of the age of vehicles. The operating and maintenance costs for 2010 are estimated to be: N70,000,000 for cars in the first year of their life N100,000,000 for cars in the second year of their life N160, 000,000 for cars in the third year of their life The operating and maintenance costs are expected to increase at the rate of 10% per annum in line with inflation. The cars are not worth keeping for longer than three years. The company’s cost of capital is 15%

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You are required to: Advise the company on the optimal replacement policy for its fleet of cars for the periods 1 February, 2010 to 31 December, 2015. Assume that the cash flows relating to revenue and operating costs arise on the last day of the respective years. (15 Marks) QUESTION 2 POLYTECH Aluminum Manufacturing Company has three autonomous divisions: Cutting, Filling and Finishing. Cutting division is responsible for manufacturing aluminum flat sheet which becomes the raw materials for Filling division. The Filling division makes aluminum windows and doors. Finishing division is responsible for marketing the entire company’s final products. The company’s management feels that the divisions should be evaluated as separate profit centres and that each centre should be credited with an equitable share of contribution. The company’s transfer pricing stipulates that proportionate efforts are to be measured by the ratio of the division’s variable cost to the total variable cost of the centres. Budgeted sales for 2012 is N25,000,000 with total variable costs of N15,000,000 for the centres. The details of the variable and period costs by divisions are given below: Cutting Filling Finishing N N N Variable costs 4,500,000 3,000,000 7,500,000 Period costs 2,500,000 1,500,000 2,000,000 Total 7,000,000 4,500,000 9,500,000 Required:

a) Determine budgeted transfer values using the agreed transfer pricing method (5marks)

b) Filling division is considering a cost saving device which will reduce its

variable cost by 20%. What effect will this have on other costs or budgeted sales. (5marks)

c) Compare the divisional contributions and profits in (a) and (b) above and comment briefly on the possible divisional managerial attitudes to the changes in divisional performances. (5marks)

(Total 15 marks)

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QUESTION 3 The Directors of “No Farmer, No Nation” Agro-allied Company Limited are considering undertaking the manufacturing of a new product. The company’s current cost of capital is 20% in money terms. Construction of the plant required to produce the new product would take one year; that is, production would commence on 1 January 2012. The plant would cost N500,000 of which N300,000 is payable immediately and N200,000 on 31 December 2011. The construction cost is fixed by contract. 100,000 units of the new product would be produced and sold each year from 1 January 2012 until 31 December 2015. Revenues and costs expected, expressed in terms of 1 January 2010 price level, are as follow: Per unit Probability N Selling price 5.00 - Variable cost (excluding labour) 1.125 0.80 Labour 3.00 0.20 Additional overhead costs are N60,000 per annum. Selling price, variable costs (excluding labour) and additional overhead costs are expected to increase in line with the general price index. For a number of years, this index has increased at the annual compound rate of 10% and it is generally expected to continue increasing at the same rate in the future. Labour costs are expected to increase in line with the wage rate index, which has been increasing at an annual compound rate of 20%. The same rate increase is expected in the future. All revenues and costs would be received or paid on the last day of the year in which they arise. Ignore taxation. You are required to: Advise the Directors of “No Farmer, No Nation” Agro-allied Company Limited whether the manufacture of the new product is worthwhile. (15marks)

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QUESTION 4

You have just resumed for duty in your office as the Management Accountant after attending a training course for one week at the Elkana Hotel, Kano. The theme of the training was “New Contemporary Issues Bothering on Information and Communication Technology and Benchmarking”.

Write a report to your Managing Director who had been against your attending the course, with focus on: (a) The challenges computers provide to the practice of management accounting

(7marks)

(b) The steps involved in ensuring a successful implementation of benchmarking in organization. (8 marks) (Total 15 marks)

QUESTION 5

ALL WELL LIMITED is experiencing shortage of raw materials as a result of the economic recession in the country. The directors are considering whether or not to close down until the recession is over. A flexible budget has been compiled, as follows:

Fixed Costs Production Capacity 40% 60% 80% 100% Close

down Normal T o t a l C o s t s

N N N N N N Factory Overhead 6,000 8,000 10,000 11,000 12,000 3,000 Admin Overhead 4,000 6,000 6,500 7,000 7,500 8,000 Selling and Distribution 4,000 6,000 7,000 8,000 9,000 10,000 Miscellaneous 1,000 1,000 1,500 2,000 2,500 3,000 Direct Labour - 10,000 15,000 20,000 25,000 Direct Material - 12,000 18,000 24,000 32,000 15,000 21,000 47,000 61,000 75,000 91,000

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Additional Information:

(a) Present sales at 50% capacity are estimated at N30,000 per annum (b) Estimated costs of closing down are N4,500. In addition, maintenance of plant

and machinery is expected to amount to N800 per annum. (c) Cost of re-opening after closing down would be approximately N2,000 for

overhauling the machines and N1,400 for training of personnel.

(d) Investigation made by a market research unit has indicated that sales should take an upward swing to around 70% capacity at prices which will produce revenue of N100,000 approximately in twelve months’ time.

You are required to present the information in a manner which will show what decision to be taken. (15marks) QUESTION 6 Amina, Yomi & Co, a medium-sized firm of architects, is about to absorb Chika, Tunde & Co, a similar sized firm. They have engaged you as Management Accountant. Part of your duties will be to review the cost and management accounting functions of the combined practice and to recruit an assistant. You have an appointment with the Principal Partner to discuss these issues. Required: Write a memo to the Principal Partner on the following: (a) The functions of cost and management accounting.

(6 marks)

(b) The personal attributes you would expect the Assistant Management Accountant to possess. (9 marks)

(Total 15 Marks)

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SUGGESTED SOLUTIONS TO SECTION A PART 1 MULTIPLE-CHOICE QUESTIONS 1. D 2. C 3. A 4. E 5. B 6. B 7. D 8. A 9. B 10. C 11. A 12. E 13. C 14. C 15. E 16. B 17. B 18. E 19. B

20. A

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WORKINGS QUESTION 4 VARIABLE COST PROBABILITY EXPECTED VALUE N N 240,000 0.35 84,000 305,000 0.25 76,250 501,000 0.40 200,400 360,650 QUESTION 5

FIXED COST PROBABILITY EXPECTED VALUE N N 175,000 0.25 43,750 182,000 0.30 54,600 201,000 0.45 90,450 188,800 10. BEP = Fixed Cost = N52,000 = 216.67 units Contribution margin N500 – N260

11. Level of Sales in unit = Fixed Cost + PBT Contribution Margin

= N52,000 + 12,000(1 – 0.4) 240 = 300 units

13. Sales Variable Unit Sales Total Price Cost Contribution Volume Contribution N N N N N 14.00 8.00 6.00 6,000 36,000 14.25 8.00 6.25 5,800 36,250 14.50 8.00 6.50 5,600 36,400 14.75 8.00 6.75 5,400 36,450** 15.00 8.00 7.00 5,200 36,400 15.25 8.00 7.25 5,000 36,250

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Optimal price is N14.75 ** means Optimal Price Point 14. Level of Sales is 5,400 units 15. Efficiency Ratio = Standard Hour Worked Actual Hour

= 210 x 100 200 = 105%

16. Production Volume = Standard Hour = 210 x 100 Budgeted Hour 220 = 95% 18. Computation of Direct Material Price Variance 600kg of M should cost (xN2) 1,200 Actual 1,140 Material Price Variance 60F 19. Computation of Direct Material Usage Variance 100 units of Product A should use (x5) 500kg Actual 520kg 20kg (A) @ standard price per kg of M N2 Material usage variance N40 (A) EXAMINERS’ REPORT The questions test various sections of the syllabus. Performance was good as candidates generally understood the questions.

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PART II SHORT-ANSWER QUESTIONS 1. Flexible Budget 2. Direct Material Yield Variance 3. Under/Over absorption 4. NPV = N16,792 5. Profitability Index (PI) 6. Benchmarking 7. Computer Forensic

8. Ethics

9. N520,000

10. N640,000

11. Responsibility center

12. Sales quantity – Opening inventory + Closing inventory

13. Direct labour cost per unit

14. Set up time.

15. Internal Rate of Return (IRR)

16. Minimum pricing

17. N1,400 18. N600

19. Standard Deviation.

20. N10.00 per unit

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WORKINGS 4 Year Cash flow DCF 15% PV N N 0 100,000 1.0000 (100,000) 1-7 20,000 4.1604 83,208 NPV ( 16,792) 9. February cash receipt;

N520,000 (N600,000 x70%+N400,000x25%) = N520,000

10. Cash receipt in March

=N700,000 x 70%+N600,000 x 25% = N640,000

13. Labour cost/unit = N80,000 3,000 = N26.67 N

17. Prime cost per unit 6.00 Production overhead (N800 for 100 units) 8.00 14.00 Total production cost (N14 x 100) = N1,400 18. Total production cost (N6 x 100) = N600

20. Target profit is 20% of N100,000 N20,000 Expected cost: N Fixed 40,000 Variable 40,000 80,000

Required profit mark up on cost 20,000 80,000 = 25%

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Cost per unit based on budgeted sales 80,000 10,000 = N8.00 Selling price per unit 125% of N8 = N10.00

EXAMINERS’ REPORT The questions test a wide spectrum of the syllabus. Candidates’ performance was fair as they showed fair understanding of the questions. Candidates are advised to familiarize themselves with current developments in the subject.

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QUESTION 1 CASE STUDY Since the period involved is 6 years, the replacement cycles would be factors of 6, that is, replace every year; replace every two and replace every three years. Calculation of cash flows associated with the different replacement cycles. One-year replacement cycle Fleet O&M Resale’s Revenue Net DCF Present Year Cost Cost Value Cash @15% Value N’m N’m N’m N’m N’m N’m 2010 (330) (70) 210 250 60 0.870 52.20 2011 (363) (77) 210 275 45 0.756 34.00 2012 (399) (85) 210 303 29 0.658 19.10 2013 (439) (94) 210 333 10 0.572 5.72 2014 (483) (103) 210 366 (10) 0.497 (4.97) 2015 - (113) 210 403 500 0.432 216.00 322.05 Two-year replacement cycle Fleet O&M Resale’s Revenue Net DCF Present Year Cost Cost Value Cash @15% Value N’m N’m N’m N’m N’m N’m 2010 (70) 250 180 0.870 156.60 2011 (363) (110) 120 275 (78) 0.756 (58.97) 2012 (85) 303 218 0.658 143.44 2013 (439) (133) 120 333 (119) 0.572 (68.07) 2014 (103) 366 263 0.497 130.71 2015 - 161 120 403 362 0.432 156.38 460.09 Three-year replacement cycle Fleet O&M Resale’s Revenue Net DCF Present Year Cost Cost Value Cash @15% Value N’m N’m N’m N’m N’m N’m 2010 (70) 250 180 0.870 156.60 2011 (110) 275 165 0.756 124.74 2012 (399) (194) 15 303 (275) 0.658 (180.95) 2013 (93) 333 240 0.572 137.28 2014 (146) 366 220 0.497 109.34 2015 - (258) 403 160 0.432 69.12

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416.13 Calculation of O & M Costs Year 1 70 2 100 (1.10) 3 160 (1.10)2

4 70 (1.10)3

5 100 (1.10)4

6 160 (1.10)5

Decision: The 2 year replacement cycle shows the highest NPV of N460.09 million and hence it is advisable to replace the fleet every two years.

EXAMINERS’ REPORT The question tests candidates understanding of the optimal replacement policy to be adopted for a fleet of cars in a company. Candidates are expected to determine the Total Fleet Cost, Annual Operating and Maintenance Cost, apply the discounting factor and determine the Net Present Value of the vehicle. Performance was poor. Many candidates did not clearly understand the requirements of the question. Notwithstanding the fact that this is a compulsory question many candidates did not attempt it. Candidates that attempted it made poor presentations, and incorrect data were used in a number of cases. Candidates are advised to thoroughly digest this topic and practice with questions on similar topics.

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QUESTION 2 POLYTECH ALUMINIUM MANUFACTURING COMPANY

(a) The transfer values using the agreed transfer pricing method:

Division Cutting Filling Finishing Total

N N N N

Variable cost 4,500,000 3,000,000 7,500,000 15,000,000

Sharing of contribution 3,000,000 2,000,000 5,000,000 10,000,000

Transfer value/Sales 7,500,000 5,000,000 12,000,000 25,000,000

Cutting’s share 4.5m x N10,000,000 = N3,000,000 15m Filling’s share 3.0m x N10,000,000 = N2,000,000 15m Finishing’s share 7.5m x N10,000,000 = N5,000,000 15m

(b) The revised transfer values:

Division Cutting Filling Finishing Total

N N N N

Variable cost 4,500,000 2,400,000 7,500,000 14,400,000

Sharing of contribution 3,180,000 2,120,000 5,300,000 10,600,000

Transfer value/Sales 7,680,000 4,520,000 12,800,000 25,000,000

Sharing of contribution:

Total Contribution = N25,000,000 - N14,400,000 = N10,600,000

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Cutting’s share 4.5m x N10,600,000 = N3,180,000 15m Filling’s share 3.0m x N10,600,000 = N2,120,000 15m Finishing’s share 7.5m x N10,600,000 = N5,300,000 15m (c) Comparison of the divisional contribution in (a) and (b):

Division Cutting Filling Finishing

N N N

Contribution in (a) 3,000,000 2,000,000 5,000,000

Contribution in (b) 3,180,000 2,120,000 5,300,000

Difference 180,000 120,000 300,000

Profit in (a) N10,000,000 – N6,000,000 = N4,000,000

Profit in (b) N10,600,000 – N6,000,000 = N4,600,000

The method used above is a good performance evaluation method as the increase

in efficiency in Filling division led to overall profitability in the company by

N600,000 while individual divisional performance contribution percentage remains

at 6%.

EXAMINERS’ REPORT The question tests candidates’ knowledge of the principles of transfer pricing. They are required in part (a) to determine the budgeted transfer values; in part (b) to evaluate the effect of a 20% reduction in variable cost, and in part (c) compare and comment on the divisional contributions in (a) and (b). The performance was poor.

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The commonest pitfall was the inability of candidates to determine the contributions of the three departments and adjust for reductions in variable cost. Candidates are advised to improve on their analytical skills to enable them to tackle related questions. They should also learn the effect of variation of one input vis-à-vis the overall effect on sales, contribution, fixed cost and profit. SOLUTION 3

With annual output of 100,000 units

2012 2013 2014 2015

N N N N

Contribution 442,000 476,000 511,000 547,000

Add. Overhead 79,860 87,846 96,631 106,294

Cash flow 362,140 388,154 414,369 440,706

Evaluation of new product project

Year Capital Cash 20% PV Outlay flow Disc. N N N 1/1/2011 (300,000) 1.00 (300,000)

31/12/2011 (200,000) 0.833 (166,600)

31/12/2012 362,140 0.694 251,325

31/12/2013 388,154 0.579 224,741

31/12/2014 414,369 0.482 199,726

31/12/2015 440,706 0.4019 177,120

NPV 386,312

Advice

In view of the positive NPV, the manufacture of the new product is worthwhile.

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Workings:

Computation of cash flows

Selling Prices Variable Costs

1/1/2010 = N 5.00 = N0.90**

31/12/2010 5(1.1) = 5.50 0.90 (1.1) = 0.99

31/12/2011 5.5(1.1) = 6.05 0.99 (1.1) = 1.089

31/12/2012 6.05(1.1) = 6.655 1.089 (1.1) = 1.1979

31/12/2013 6.655(1.1) = 7.321 1.1979 (1.1) = 1.31769

31/12/2014 7.321(1.1) = 8.053 1.31769(1.1) = 1.44946

31/12/2015 8.053(1.1) = 8.85 1.44946 (1.1) = 1.59440

** Note: Variable cost (excluding Labour cost) = N1.125 x 0.80 = N0.90

Labour Additional overhead

1/1/2010 = N0.60 = N60,000

31/12/2010 0.60(1.2) = 0.72 60,000 (1.1) = 66,000

31/12/2011 0.72(1.2) = 0.864 66,000 (1.1) = 72,600

31/12/2012 0.864(1.2) = 1.0368 72,600 (1.1) = 79,860

31/12/2013 1.0368(1.2) = 1.24416 79,860 (1.1) = 87,846

31/12/2014 1.24416(1.2) = 1.492992 87,846 (1.1) = 96,631

31/12/2015 1.492992(1.2) = 1.79159 96,631 (1.1) = N106,294

Computation of Unit cost

2012 2013 2014 2015

Sales/ unit 6.66 7.32 8.05 8.85

Variable cost/unit (1.20) (1.32) (1.45) (1.59)

Labour per unit (1.04) (1.24) (1.49) (1.79)

Contribution/unit N 4.42 N 4.76 N5.11 N 5.47

Total Contribution N 442,000 N 476,000 N 511,000 N 547,000

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EXAMINERS’ REPORT

The question tests candidates’ understanding of the principles underlying relevant cost and the application of Net Present Value techniques for evaluating the production of a new product. Candidates are expected to determine the Variable Costs, Contribution and Net Present Value of the product. Candidates’ understanding of the question was poor and performance was also poor. Candidates were unable to establish all relevant costs, the cash inflows and outflows, and could not also compute the Net Present Value. The commencement dates of inflows and outflows were also not clearly understood. Candidates are advised to clearly understand the requirements of a question before proffering solutions. They are also advised to practice with questions on related topics. QUESTION 4

INTERNAL MEMO Date: 12th October, 2010

To: Managing Director

From: Management Accountant INFORMATION AND COMMUNICATION TECHNOLOGY AND BENCHMARKING: IMPLICATIONS FOR ACCOUNTANTS IN NIGERIA. With reference to my recent training course on the above subject matter in Elkana Hotel, Kano, I hereby submit the report as below. (a) Computers provide a challenge to the practice of management accounting in

the following ways:

(i) The Management Accountant is obliged to reconsider the contents of his management report, and should investigate precisely what information is needed by the various managers in the business. This analysis must be done without any pre-conceptions and could best be handled by someone other than the Management Accountant.

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One aspect of this investment will be, to ensure that a computer may be capable of providing information in greater volume and in greater details than would be available in a manual system. There should be editing of the output to ensure that managers are not subjected to information overload.

(ii) The Management Accountant should review the procedure by which

data are currently handled and simplify the handling of data, if possible. It is not prudent to computerize an existing inefficient system. A System Analyst may be needed.

(iii) He should review the source documentation used. Under a manual

system, errors in documentation can be identified and corrected before processing is commenced. In a computerized system, incorrect source data may have been processed in various ways before an error is highlighted.

(iv) A computer can be programmed to carry out complex mathematical

calculations not previously used. Therefore, the Management Accountant will be obliged to familiarize himself with new techniques and be able to explain them to his manager.

(v) Managers receiving computer print-out may feel the lack of personal

communication inherent in a less mechanized system. The Management Accountant will be under pressure to ensure that personal contacts are re-enforced, so that managers do not feel that their performance against budget is being appraised in a purely automatic manner.

(b) Benchmarking is an established standard governing operations, with which

improvement can be made in furthering the performance of an organisation.

Steps towards the successful program of Benchmarking are:

* Review and assess current practices; * Define measurable targets; * Consider Cost/Benefit Analysis; * Identify company or department against which to benchmark; * Manpower development and training; * Improvement in staff welfare; * Use of Information and Communication Technology (ICT).

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I hope you will find this report useful. Thank you. Management Accountant EXAMINERS’ REPORT The question tests candidates’ knowledge on report writing, challenges posed by computers to the practice of management accounting and imperatives for a successful implementation of benchmarking in an organization. Candidates are expected to itemize clearly and discuss briefly, the challenges of computers to management accounting; describe benchmarking; and list the steps required for its successful implementation. Candidates’ performance was poor. Many candidates who attempted the question hardly understood it. They concentrated on benefits of computer to Management Accounting instead of “challenges”. Their understanding of benchmarking was superficial. Candidates are advised to update their knowledge of current trends in Management Accounting and Information Technology related topics. QUESTION 5 Closing Down Costs N Closing down cost 4,500 Maintenance of plant 800 Overhauling 2,000 Training 1,400 8,700

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Calculation of variable cost at 50% capacity Capacity Cost N 40% 47,000 60% 61,000 Difference 20% 14,000 Variable cost of 10% capacity = N7,000 Hence, total cost at 50% capacity level = N47,000 + N7,000 = 54,000 Fixed cost (normal) 21,000 Variable cost 33,000 Calculation of variable cost at 70% capacity Capacity Cost N 80% 75,000 60% 61,000 Difference 20% 14,000 Variable cost of 10% capacity 7,000 Hence total cost at 60% capacity level 61,000 Total cost at 70% 68,000 Total cost (normal) 21,000 Variable cost 47,000 Statement of Profit and Loss at Expected levels of operation Level of operation 0% 50% 70% N N N Sales Nil 30,000 100,000 Variable costs Nil 33,000 47,000 Contribution Nil (3,000) 53,000 Fixed Costs (15,000) (21,000) (21,000) Closing down cost ( 8,700) - - Profit/loss (23,700) (24,000) 32,000

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Decision It is better for the company to close down and re-open in 12 months’ time EXAMINERS’ REPORT The question tests candidates understanding of the application of flexible budgeting techniques in determining costs at given activity levels for decision making. Candidates are required to determine closing down costs, variable costs at 50% and 70% activity levels and also stating contribution and profits at those levels of activity. The performance was poor. Candidates did not seem to understand the requirements of the question. They were unable to sift the desired data to use for the determination of closing down from fixed costs at given activity levels. They were unable to properly separate the variable cost from total costs. Correct presentation formats were also lacking. Candidates are advised to study extensively and to adequately cover the syllabus. Various decision making techniques should also be mastered.

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QUESTION 6

INTERNAL MEMO Date: 15TH OCTOBER, 2010

To: PRINCIPAL PARTNER

From: MANAGEMENT ACCOUNTANT COST AND MANAGEMENT ACCOUNTING FUNCTIONS AND ATTRIBUTES OF AN

ASSISTANT MANAGEMENT ACCOUNTANT In response to your request, I hereby state as follows: (a) Cost and management accounting involves providing and interpreting

internal accounting information for managers’ use for the following purposes: (i) Planning the organisation’s activities in the short, medium and long

term;

(ii) design suitable cost collection and reporting system to assist in management and control of costs;

(iii) recruit and train costing staff;

(iv) investigate, acquire and install suitable software to operate the cost

collection and reporting system;

(v) decision making;

(vi) collect, analyse and report information to monitor the profitability and efficiency of the firm;

(vii) performance appraisal of both financial and non-financial;

(viii) liaise with the financial accountants to optimize the organisation

information, collection and reporting;

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(ix) report to the company partners;

(x) carry out such other duties as may be required. (b) Some of the personal attributes expected of an Assistant Management

Accountant include:

(i) He/she must have been trained or already possessed a professional qualification in management accounting;

(ii) be highly numerate;

(iii) have excellent knowledge of the cost and management accounting

information requirements of a large architect’s business;

(iv) be able to critically appraise the existing systems and provide information to ensure their relevance to the future;

(v) have excellent communication skills;

(vi) be computer literate;

(vii) be flexible and self-motivated;

(viii) possess management perspective as well as being technically

competent;

(ix) be able to work on own initiative;

(x) be able to spend time with partners on site;

(xi) be a good team player;

(xii) be conversant with new development in Management Accounting and Information Technology;

(xiii) have at least 2 years’ experience in a medium sized firm of architects.

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Submitted for your further consideration. Thank you. EXAMINER’S REPORT The question tests candidates’ knowledge of the cost and management accounting functions of a medium sized firm of architects. Candidates are expected to adopt the format of a memo in their presentation of the management accounting functions of the firm. They are also expected to state the personal attributes of the Assistant Management Accountant proposed for recruitment. The performance was fair. Candidates’ understanding was also fair. A few candidates presented functions as attributes, and many presented a Formal letter instead of a memo. Many demonstrated a shallow knowledge of the management accounting function. Candidates are advised to master the skills of presentation of reports. They are also advised to understand the requirements of a question before attempting them.

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ICAN/102/Q/4 EXAMINATION NO...................................

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA PROFESSIONAL EXAMINATION I – NOVEMBER 2010

ADVANCED AUDIT AND ASSURANCE Time allowed – 3 hours

SECTION A Attempt All Questions PART I MULTIPLE-CHOICE QUESTIONS (20 Marks) 1. Control may NOT be achieved if as a result of a business combination, an

entity gained power

A. over more than one half of the voting rights of the other entity. B. to govern the financial policies of the other entity. C. to govern the operating policies of the other entity.

D. to appoint or remove only a minority of the members of the board of directors or equivalent governing body of the other entity.

E. to cast the majority of votes at meetings of the board of directors or equivalent governing body of the other entity.

2. Which of the underlisted objectives is NOT for profit forecast engagement?

A. To give an opinion whether the profit forecast complies with generally accepted accounting principles

B. To give an opinion on the reasonableness on management’s assumptions and judgement on the profit forecast

C. To give an opinion whether the profit forecast is presented on a basis consistent with the accounting practice normally adopted by the company

D. To give an opinion whether the profit forecast has been prepared on the basis of management’s assumptions and judgement

E. To give an opinion whether the profit forecast agrees with underlying records

3. Due diligence review includes the following aspects EXCEPT A. audit fee due diligence. B. financial due diligence. C. operation and IT due diligence. D. regulatory due diligence. E. environmental due diligence.

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4. A present obligation that arises from past events but not recognised because

the amount of the obligation cannot be measured with sufficient reliability is a A. contingent asset. B. contingent liability. C. profit forecast. D. contingent consideration. E. contingent liquidation.

5. Which of the following is NOT true of publishing an audit report

electronically on the web?

A. The directors should obtain the consent of the auditors to publish the audit report on the web

B. The auditors should always consent to the directors’ request C. The auditor should review the process for deriving the electronic

information from the financial statements D. The auditors should check that the electronic copy is identical to the

hard copy of the published accounts E. The auditors should check to ensure that certain items have not been

distorted or given greater emphasis in the new presentation

6. According to Money Laundering (Prohibition) Act, 2004, a financial institution which fails to comply with drawing up a written report on suspicious transactions shall, on conviction, be liable to a fine of A. N1,000,000. B. not less than N1,000,000. C. not more than N1,000,000. D. not less than N250,000 and not more than N1,000,000. E. not less than N500,000 and not more than N1,000,000.

7. To arouse awareness among its employees, every financial institution shall

perform all of the following EXCEPT

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A. designate compliance officers at management level at its

headquarters and at every branch and local office. B. centralize all the information collected. C. establish an internal audit unit to ensure compliance with the

provisions of Money Laundering (Prohibition) Act. D. carry out regular training programme for its employees. E. establish an internal audit unit to ensure the effectiveness of the

measures taken to enforce the provisions of the Act.

8. Social audits involve the following EXCEPT

A. determining the amount of fine a client will pay for non-compliance with environmental laws and regulations.

B. identifying that all current social programmes are congruent with the mission of the company.

C. establishing whether the firm has a rationale for engaging in socially responsible activity.

D. assessing objectives and priorities related to social programmes. E. evaluating company involvement in social programmes in the past,

present and for the future.

9. Database software routines that are used to gather information about transactions or events that auditors deem to be material within the system are

A. extended audit modules. B. embedded audit modules. C. implanted audit modules. D. expansive audit modules. E. extensive audit modules.

10. The auditor’s independent execution of procedures or controls that were

originally performed as part of the entity’s internal controls either manually or through the use of Computer Assisted Audit Techniques (CAATs), is known as

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A. re-appraisal. B. re-evaluation. C. re-performance. D. restructure E. recalculation.

11. Reports that are designed to create an audit trail for each on-line

transaction which often document the sources of a transaction details (terminal, time and user) are known as

A. terminal logs. B. events logs. C. disclosure logs. D. transaction logs. E. user logs.

12. The audit procedures performed to obtain an understanding of the client’s business and its environment, including its internal control in assessing the risks of material misstatement at the financial statement and assertion levels are known as A. risk-based assessments. B. risk assessment procedures. C. review procedures. D. substantive procedures. E. analytical procedures.

13. In the audit of groups, the group’s financial statements auditors

consider the following matters EXCEPT A. the group’s structure. B. components’ business activities including the industry,

regulatory, economic and political environments in which these activities take place.

C. whether the group’s engagement team will have unrestricted access to those charged with governance of the group.

D. a description of group wide controls. E. the subsidiary auditors that are from the group auditor’s firm

auditing the financial information of any of the subsidiaries.

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14. The process of transforming programs and information into a form that

cannot be understood without access to specific decoding algorithms is known as A. cryption. B. encrytograph. C. encrytography. D. encryption. E. encryptation.

15. Which of the following is NOT a characteristic of batch process computer

system? A. The collection of like transactions that are sorted and processed

sequentially against a master file B. Keyboard input of transactions, followed by machine processing C. The production of numerous print outs D. The posting of a transaction as it occurs, to several files, without

Intermediate print outs E. The collection of different transactions that are sorted and

processed sequentially against a master file

16. In an audit sampling application, an auditor verifies

A. all the items in a balance sheet and makes a conclusion about the whole balance sheet.

B. less than 100 percent of the items in a balance sheet and formulates a conclusion about the whole balance sheet.

C. less than 100 percent of the items in a class of transactions for the purpose of becoming familiar with client’s accounting system.

D. the client’s unaudited financial statements when planning the audit.

E. the client’s financial statements when assigning the staff.

17. Which of the following is NOT usually performed when the auditors are carrying out a review of a client’s financial statements? A. Analytical procedures applied to financial data B. Inquiries about subsequent events C. Confirmation of accounts receivable

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D. Obtaining an understanding of accounting principles followed in

the client’s industry E. Confirmation of accounts payable

18. Which of the following elements in the audit risk model is a product of the auditors’ professional judgment? A. Control risk B. Analytical procedures risk C. Test of detailed risk of incorrect acceptance D. Process risk E. Business risk

19. An auditor would most likely use generalized audit software to

A. make copies of a client’s data files for controlled reprocessing. B. construct a parallel simulation to test the client’s computer

control. C. perform tests of a client’s hardware controls. D. test the operative effectiveness of a client’s password access

control. E. perform tests of a client’s program control.

20. In a computerized information system, automated equipment controls are designed to A. arrange data in a logical and sequential manner for processing

purposes. B. correct errors in the computer programs. C. monitor and detect errors in source documents. D. detect and control errors arising from use of equipment. E. monitor and detect errors in application document.

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PART II SHORT-ANSWER QUESTIONS 1. An auditor who, at the request of the group engagement team, performs

work on a financial information related to a component for the group account is a ................

2. The purpose of COBIT is to provide management and business process

owners with...............that helps in understanding and managing risk.

3. A peer review carried out before an audit report is signed is a .............

4. The objective of the auditor is to implement ............ procedures at the engagement level that provide him/her with reasonable assurance that the audit complies with standards.

5. Audit risk is also known as ...................

6. An environmental audit that is concerned with ensuring that hazardous

materials are properly stored and disposed by tracing the life cycle of these materials from origin to disposal is called a................ storage and .............audit.

7. Audit matters of governance interest are those that arise from the audit of

financial statements which, in the opinion of the auditor, are both .......... and .........to those charged in governance in overseeing the financial reporting and disclosure process.

8. The specific procedures which a forensic auditor will follow depend on the

specific ......... of the investigation.

9. An audit of financial statements which may be relied upon outside the jurisdiction of the audited entity for the purpose of significant lending, investment or regulatory decisions is.......................

10. An assurance offered in the absence of any evidence arising to the contrary

is called .............

11. A review carried out after an audit report is signed is referred to as........ 12. The practice of undercutting tender for audit engagements is called........

13. A risk inherent to the company in its operation at all levels is called..........

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14. In related services, the accountant’s use of accounting expertise, as opposed

to auditing expertise, to collect, classify and summarise financial information is carried out in...........engagement

15. Internal controls in computerized systems are in two categories: (squares)--------------and ------------------

16. In audit of Government accounts, the objectives are divided into two namely--------------------------- and ---------------------------

17. One of the main input controls in the computer system is -----------------------of transactions prior to data entry.

18. Computer applications are frequently implemented by personnel within user departments using -------------------- packages

19. The risk that a material misstatement will not be prevented or detected on a timely basis by the client’s internal control is referred to as --------------------

20. The risk that the auditors will fail to detect the misstatement with their audit procedures is called -------------------------

SECTION B ATTEMPT QUESITON 1 AND ANY OTHER THREE (60 MARKS)

QUESTION 1 CASE STUDY

Roamlade Associates Ltd sells electrical appliances. It began trading on Jan. 1, 2008. Its draft accounts for the year ended 31st December 2009 showed profit before tax of N3,000,000, total assets of N45,600,000 and a deferred taxation balance of N2,874,000

(i) No deferred tax adjustment has been made for the current period.

(ii) At the year end, Roamlade Associates Ltd has plant & equipment with a carrying amount of N15,600,000 and a tax base at that date of N7,200,000.

(iii) You are required to (a) identify the issues an auditor should consider regarding this case. (8 Marks) (b) state the procedures the auditor would undertake in respect of deferred

taxation in the financial statements of Roamlade Associates Ltd (7 Marks) (Total 15 Marks)

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QUESTION 2 (a) State the major issues an auditor should consider in deciding whether or

not to use interrogation software in a computerized accounting system. (10 Marks) (b) Describe the relationship between audit risk and business risk. (5 Marks) (Total 15Marks) QUESTION 3 In accordance with Audit Act, 1958, it is the function of the office of the Auditor-General for the Federation to audit the accounts of the Accounting Officers and all persons entrusted with the collection, receipt, custody, and issue or payment of the Federal Public moneys or with the receipt, collection, issue, sale, transfer or delivery of any stamps, securities, stores or other property of the Government of the Federation and for the certification of the Annual Accounts of the Government. In the light of the above, state the audit objectives of (a) Treasury Accounts (5 Marks) (b) Agency Accounts (5 Marks) (c) Government Enterprises Accounts (5 Marks) (Total15 Marks) QUESTION 4 Your firm is the auditor of Rupaz Group which has some of its subsidiaries being audited by other accounting firms. Part of your work is to ensure that inter-company transactions and balances are correctly treated in the group accounts.

Required:

(a) Why should inter-company balances within the group agree? (2 Marks)

(b) What are the consequences of inter-company balances not agreeing (4 Marks)

(c) What audit work will you perform to ensure inter-company balances agree? (9 Marks) (Total 15 Marks)

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QUESTION 5 You are the audit manager responsible for the audit of Ediae Company The draft financial statements for the year ended 31st December, 2009 showed turnover of N20 million, profit before tax of N850,000 and total assets of N16.2 million. The Board has announced plans to discontinue one of its production lines. The revenue from the production line amounted to N280,000 for the year to 31st December, 2009. A provision of N98,000 has been made at 31st December, 2009 for the compensation of redundant employees Required: (a) Comment on the materiality of the issues raised above, namely:

discontinuance and redundancy. (6 Marks) (b) State the criteria an auditor may use to determine material (6 Marks) (c) What is the risk of using prescriptive rules as materiality criteria? (3 Marks)

(Total 15 Marks) QUESTION 6 The auditor of a company who operates in a particular industry may sometimes have to consult specialists in that industry to enable him overcome his lack of technical knowledge and expertise in the industry. (a) You are required to discuss the problems and responsibilities that an auditor faces when having to rely on such specialists. (10 Marks) (b) Criteria are the standards or benchmarks used to evaluate or measure the subject matter of an assurance engagement. You are required to state the characteristics of suitable criteria in assurance

engagement. (5 Marks) (Total 15 Marks)

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SOLUTIONS TO SECTION A

PART I MULTIPLE CHOICE QUESTIONS

1. D

2. E

3. A

4. B

5. B

6. A

7. B

8. A

9. B

10. B

11. D

12. B

13. E

14. D

15. D

16. B

17. B

18. A

19. B

20. A

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Examiners’ Report The questions cover most part of the syllabus. All the candidates attempted this section and displayed a fair understanding of the questions. Performance was fair as 50% of the candidates scored 50% and above. Candidates need to cover the syllabus more thoroughly to be able to perform better. PART II SHORT-ANSWER QUESTIONS 1. Component auditor 2. IT governance model 3. Hot Review 4. quality control 5. assignment or engagement risk 6. treatment, disposal facility 7. important, relevant 8. purpose 9. transnational audit 10. negative assurance 11. cold review 12. lowballing 13. business risk 14. compilation/accounting 15. general controls and application controls

16. compliance with directives and detection of errors and frauds

17. authorization

18. application

19. control risk

20. detection risk

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Examiners’ Report The questions cover virtually the whole syllabus. All the candidates attempted this section and displayed poor understanding of the requirements of the questions. Overall performance was poor as only about 10% of candidates scored 30% and above. Candidates have to study harder and cover the whole syllabus to perform better. SOLUTIONS TO SECITON B QUESTION 1 CASE STUDY ROAMLADE ASSOCIATES LTD

(a) Issues to be considered by the auditor should include whether or not (i) there is a need to adjust for deferred tax in the financial

statements. (ii) correct calculations are done on the deferred tax account and

properly reflected in the accounts. (iii) the change in liability is material to both the profit and loss

account and the balance sheet. (12% and 2% respectively). (iv) the correctness of the net book values and tax written down

values are provided. (v) the existence of additional taxable temporary differences or

deductible temporary difference have been taken care of. (vi) there is adequate disclosure in compliance with accounting

standards.

(b) Audit Procedures to be undertaken include: (i) Discussing with management why no adjustment was made on

deferred taxation in the current year and request that they do so.

(ii) Agreeing brought forward balance with previous year’s working papers.

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(iii) Obtaining a schedule of temporary differences relating to the

plant and equipment and agree with tax computation and assets register

(iv) Ensuring that the rate applied is appropriate (v) Enquiring from managements, and review tax computation to

establish whether other differences which need to be adjusted exist.

(vi) Ensuring there is adequate disclosure which should include disclosure of: - Deferred tax liability - Change in the liability - The major components of the income tax expense

Examiners’ Report

The question tests candidates understanding of deferred taxation and its treatment in financial statements. Virtually all candidates attempted the question. Candidates did not understand the question and performance was generally poor. Only about 10% of the candidates scored 50% and above. Their greatest pitfall was that they could not state the procedures which the auditor will consider in dealing with deferred tax in the financial statements. Candidates are expected to read extensively and more rigorously for the examinations. They should cover the syllabus, read more of SASs and the recommended texts.

QUESTION 2

(a) Interrogation software may be used for tests of controls. Major

considerations when deciding whether or not to use interrogation software are as follows:-

i) Whether the auditor has a basic understanding of data

processing and the client’s computer application as well as a detailed knowledge of the audit software and the computer files to be used.

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ii) Whether the auditor has a sound appreciation of systems

analysis, operating systems, and where program code is used, an understanding of the programming language to be utilized.

iii) The ease of transferring the client’s data onto the auditor’s personal computer (PC).

iv) The possibility of lack of full knowledge of the computer system by client, and its inability to explain fully all the information the system produces.

v) The risk involved, such as loss of data. vi) Impact on effectiveness and efficiency e.g. it may be more

efficient to extract data from the entity’s records using a software than to do so manually.

vii) Disaster recovery controls in the client’s system

(b) Relationship between audit risk and business risk.

Audit risk is the risk that an auditor may give an inappropriate opinion on the financial statements when the financial statements are materially misstated. Audit risk is made up of inherent risk, Control risk and Detection risk. Business risk is the risk inherent in the company’s’ operations. It is made up of financial risk, Operational risk, Inherent risk, Compliance risk etc. The difference between audit risk and business risk is that while audit risk exists only in relation to an opinion given by auditors and is focused on the financial statements of the business, business risk arises in the operations of the business. Audit risk and business risk are also related. Inherent risk pertains to financial statements and business risk includes all risks facing the business. Inherent audit risk may therefore include business risk, and vice versa. In response to business risks, management and those charged with governance institute a system of controls mitigating against financial risks which are the controls that audit control risk incorporate, that is, the risk that a misstatement would not be detected by the internal control system.

Examiners’ Report Part (a) of the question tests candidates knowledge of IT packages for audit, while part (b) tests the understanding and relationship of audit risk and business risk. About 40% of the candidates attempted the question and their performance was poor. Only 10% of them scored 30% and above.

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Candidates showed lack of knowledge on key areas of information technology as a vital tool for the modern day auditors. As regards part (b) of the question, candidates were writing on differences and similarities rather than describing the relationship between audit risk and business risk. Candidates need to understand the question thoroughly before attempting to answer it. They also need to prepare well for the examinations. QUESTION 3 (a) Treasury Accounts

The objectives of Treasury Accounts Audit are to assess whether: (i) The executive is carrying out only those functions, programmes,

activities and operations for which budgetary approval was given by the legislature and that these are in compliance with the requirements of the enabling financial and other laws and regulations governing the receipts, custody, disbursement and use of funds.

(ii) The executive controls and accounts are adequate for its funds, properties and other assets, as well as liabilities.

(iii) All revenues and other receipts due to the various funds are identified, collected and properly accounted for.

(iv) The accounting system in operation provides financial information that is reliable and free from significant errors to facilitate the preparation of the accounting and financial statements required by law.

(v) The accounting and financial statements so prepared show fully and fairly the federation’s financial condition, changes in its financial condition, its revenues and expenditure, and provide reliable information to various users, both internally and externally for their respective needs.

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(b) Agency Audit

The audit objectives of the Agency Audit are to assess whether

(i) the agency is expending government funds approved for it only on programmes, activities, and operations for which they are intended and in compliance with the requirements of the laws and regulations governing the receipt and disbursement of public funds.

(ii) proper accounting records have been kept. (iii) adequate controls exist to assure the safety and proper use of funds,

property and other assets. (iv) all revenues and receipts are duly collected and properly accounted for. (v) all payments are properly applied in accordance with laid down rules and

regulations.

(c) Enterprises Audit The objectives of enterprises Audit include assessing whether

(i) proper accounts have been prepared in accordance with the financial and

accounting clauses in the respective legal instruments setting up the enterprise.

(ii) the accounts are in agreement with accounting records. (iii) proper accounting records have been kept. (iv) the balance sheet shows a true and fair view of the enterprise’s state of

affairs as at the end of the financial year and the profit and loss account or income and expenditure accounts show a true and fair view of the results of operations for the period.

(v) the enterprise’s management conforms adequately to the general level of probity and public accountability expected of public servants.

(vi) management carry out only those functions and operations for which the enterprise is established.

Examiners’ Report The question tests candidates’ knowledge of audit objectives for

- Treasury Accounts

- Agency Accounts, and

- Government Enterprises Accounts

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90% of the candidate’s attempted the question and their performance was generally good. 75% of them who attempted the question scored 50% and above. Few candidates rather than writing audit objectives, wrote on the operations in each segment. Their communication skill was also poor. Students are advised to write in lucid and good English to enable them score more marks. QUESTION 4

(a) Inter – Company balances in a group should agree because the

consolidation process entails that these balances be complete and eliminated.

(b) Consequences of Inter –Company balances not agreeing: Where inter – company balances do not agree, the group accounts might display items that have no value outside the group and consequently result in over or understatement of profits, assets or liabilities.

(c) Audit procedures to ensure that inter –company balances agree include: (i) Ensuring that procedures for reconciliation and agreement of

year end inter – company balances are reviewed with a copy of the parent company’s instructions (or manuals) to all group members.

(ii) Ensuring that items in –transit are reviewed to ensure proper cut –off.

(iii) Check details of all schedules of inter – company balances obtained from all subsidiary companies to the summary prepared by the parent company.

(iv) Obtaining an independent confirmation of the inter – company balances in writing, from the other auditors involved.

(v) Agreeing details of schedules of inter –company balances with the details of financial statements of the individual companies in the group submitted to the parent company for consolidation purposes.

Examiners’ Report The question tests candidates’ knowledge concerning the treatment of inter-company balances in Group accounts and auditors responsibilities.

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90% of the candidates attempted the question but did not have good understanding of the requirements of the question. As a result, only about 20% of them scored 40% and above. The poor performance was mainly due to:

- Their inability to explain why inter-company balances should agree. - Due to their inability to state work to be performed by the auditor to

ensure inter-company balances agree. Candidates need to read wide and cover the syllabus to enhance their performance in examination. QUESTION 5 (a) In the case of Ediae Company the issues on materiality to be discussed are: (i) Discontinuance of production line (ii) Provision for redundancy

(i) Discontinuance of production line An appropriate indicator of materiality with regard to the cessation of production line is revenue. In the case of Ediae Company, the percentage of revenue from the proposed discontinued production line to total turnover is

280,000 x100 % = 1.4%

20,000,000

This might not be deemed significant as the percentage of revenue to the total turnover is small. The impact of the discontinuance of the production line on the overall performance as well as the future prospects of the company should be considered. The size of the production line in relation to all the production lines of which it forms a part should be considered.

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(ii) Provision for redundancy

The appropriate indicators of materiality is determined by its relationship to total assets and profits. This provision has impact both on the balance sheet (as a liability) as well as the profit and loss account (as a charge against profit). In this case, the percentage of the provision to total assets is 98,000 x 100 % = 0.6%

16,200,000 The percentage of the provision to profit is

98,000 x 100 % = 11% 850,000 The percentage of the provision to the profit is significant, therefore the auditor should ensure there is proper disclosure. Considering the risk of prescriptive rules, other qualitative factors such as social responsibility, economic impact and political implications should be addressed.

(b) Criteria for assessing materiality

(i) The nature of the item may have significance though the monetary value may not be as much as the auditor would typically consider material. Some items by their nature affect the users of financial information because though they may be immaterial in size, they have an effect on the financial statements.

(ii) The omission of an item with a high monetary value from the

financial statement is generally considered material. Size is usually considered in relative terms as a percentage of a relative base.

(iii) The materiality of an error depends on the circumstances of its

occurrence, such as, the economic decision making process of the users of accounting information and the context of the accounting information in which an item or error occurs.

(iv) The possibility of not fully disclosing a breach to regulatory

requirements when it is possible that consequent sanctions will significantly impair operating capability

(v) The impact of statutory provision on the items

(vi) The impact of accounting standards on the item.

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(c) Information is material if its omission or misstatement could influence the

economic decision of users on the basis of the financial statements. The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. The assessment of what is material is a matter of professional judgment. Significant risk of prescriptive rules is that a significant matter which falls outside the boundary of the rules could be overlooked and thereby lead to a material misstatement in the financial statements.

Examiners’ Report The question tests candidates’ understanding of materiality, its determination and underlying risks in financial statements. About 70% of the candidates attempted this question and displayed shallow understanding of the question. About 20% of them scored 30% and above. The pitfalls could be described as follows:

∗ Inability to relate materiality to discontinuance and redundancy. ∗ Inability to determine criteria an auditor will use to ascertain materiality. ∗ Inability to interprete the term prescriptive rules and relating it to

materiality.

Candidates should prepare adequately for the examinations and read widely not relying only on few examination materials. QUESTION 6 (a) Every business entity is subject to its own technical environment and there

are many occasions when items in financial statements are affected by technical considerations. An auditor cannot be expected to be an expert in all fields in which his clients operate and may have to consult specialists in that industry to enable him overcome his lack of technical knowledge.

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It should be noted that such evidence is extremely valuable to the auditor. If the specialists involved are employees of the client company they may be aware of particular facts affecting the company’s position. If the specialists are independent of the company their wider experience combined with their relative independence provides evidence which is usually both reliable and relevant to the auditor.

The problems faced by the auditor when consulting such specialists include the following:

i. The need in most cases to gain prior permission of the management of the client company to use such specialists.

ii. The difficulty of verifying the technical conclusions reached by that specialist.

iii. The difficulty of ensuring that the specialist is aware of the purpose of the auditors enquiries.

iv. The danger of over – estimating the independence of the specialist from the directors, particularly in cases where the specialist is either directly employed by the company or receives fees from the company.

v. Maintenance of the confidentiality of the experts’ work.

The responsibilities of the auditor when relying upon such assistance are that he or she should:

i. Notify management of his intention to consult such specialists.

The management are likely to be contacted by the specialist before he can carry out detailed work.

ii. Meet the specialist and explain to him the requirements from the auditor’s view point. They may then agree the basis of the specialist’s work, for example, the valuation method to be used by the specialist.

iii. Review the qualifications of the valuer both in practical terms and for membership of professional or trade associations.

iv. As far as possible, ascertain that no relationship exists between the expert and the company or its management which might adversely affect the independence of the expert and his opinion.

v. Review the work carried out by the expert. vi. Obtain a copy of the written report of the expert. If that report

is to form part of the financial statements, a letter of consent should also be obtained by the company.

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(b) Characteristics of suitable criteria for assurance engagement include:

i Relevance: Suitable criteria must contribute to conclusions that assist decision making by intended users to be relevant.

ii Completeness: Complete criteria include, where relevant, benchmarks for presentation and disclosure. Completeness is the inclusion of all relevant factors that could affect the conclusion in the context of the engagement circumstances.

iii Reliability: Criteria will be reliable where reasonable and consistent evaluation of subject matter is achievable when used in similar circumstances by similarly qualified practitioner.

iv Neutrality: Suitable criteria should contribute to conclusions that are free from bias.

v Understandability: Suitable criteria should contribute to conclusions that are clear, comprehensive and not subject to significant different interpretations.

Examiners’ Report Part (a) of the question tests candidates’ understanding of problems and responsibilities of relying on work of specialists while part (b) tests assurance engagement characteristics and criteria. About 80% of the candidates attempted this question but displayed poor understanding of its requirements. Performance was very poor as 90% of the candidates who attempted the question scored an average of 15%. Candidates should study widely and interact with those in practice to enable them answer practical questions like this one in future.