THE INSTITUTE OF CHARTERED

ACCOUNTANTS OF NIGERIA

PATHFINDER
MAY 2021 DIET
SKILLS LEVEL EXAMINATIONS
Question Papers

Suggested Solutions

Marking Guides

and

Examiner‟s Reports

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 FOREWARD

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

subject contained herein; and

(iv) The professional; 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 edited so that some principles or their application 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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 TABLE OF CONTENTS

FOREWARD PAGE

FINANCIAL REPORTING 3 - 32

33 - 54
AUDIT AND ASSURANCE

55 - 86
PERFORMANCE MANAGEMENT

PUBLIC SECTOR ACCOUNTING & FINANCE 87 - 116

CORPORATE STRATEGIC MANAGEMENT & ETHICS 117 – 137

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 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

SKILLS LEVEL EXAMINATION – MAY 2021

FINANCIAL REPORTING
Time Allowed: 31/4 hours (including 15 minutes reading time)

INSTRUCTION: YOU ARE REQUIRED TO ANSWER FOUR OUT OF SIX QUESTIONS IN

THIS PAPER

SECTION A: COMPULSORY QUESTION (40 MARKS)

QUESTION 1

The following is the trial balance of Almajiri Nigeria Limited as at September 30, 2018

N‟m N‟m
Revenue 60,000
Cost of sales 40,800
Distribution costs 2,900
Administrative expenses 4,440
Interest on bank borrowings 40
Research and development costs 1,720
Leasehold property (at valuation Oct. 1, 2017) 10,000
Plant and equipment (at cost) 15,320
Plant and equipment (accum. depr. at Oct. 1, 2017) 4,920
Capitalised development expenditure (Oct. 1, 2017) 4,000
Development expenditure (accum. amortiz. at Oct. 1, 2017) 1,200
Closing inventory (30 Sept. 2018) 4,000
Trade receivables 8,620
Bank 260
Trade payables & provisions 4,760
Preference dividend paid 160
Dividend paid on ordinary shares 1,200
Ordinary shares at 25k each 10,000
8% Redeemable preference shares at N1 each (year 2020) 4,000
Retained earnings brought forward 4,900
Deferred tax 1,160
Leasehold property revaluation reserve -- 2,000
93,200 93,200

The following information were extracted from the records of Almajiri Nigeria Limited.

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Additional information:
(i) One of the reputable customers of Almajiri Nigeria Limited sued the company for
N400 million for breach of contract over a cancelled order. Almajiri Nigeria
Limited obtained a legal opinion that there is 20% chance that Almajiri will lose the
case.

Accordingly, it has provided for N80 million (N400 million x 20%) included in
administrative expenses in respect of the claim. The unrecoverable legal cost of
defending the action was estimated at N20 million and these have not been
provided for as the legal action will not go to court until next year.

(ii) The directors of the Company have estimated the provision for income tax for the
year ended September 30, 2018 at N2,280 million. The required deferred tax
provision at September 30, is N1,200 million.

(iii) The redeemable preference shares were issued on April 1, 2018 at par. They are
redeemable at a large premium which gives them an effective finance cost of 12%
per annum.

(iv) The leasehold property had a remaining life of 20 years at October 1, 2017. The
company‟s policy is to revalue its property at each year end and as at September
30, 2018 it was revalued at N8,600 million.

(v) On October 1, 2017 an item of plant and equipment was disposed of for N500
million cash. The proceeds have been treated as revenue by the company. The
plant is still included in the company‟s trial balance figure at the cost of N1,600
million and accumulated depreciation of N800 million (to date of disposal). All
plants and equipment are depreciated at 20% per annum using reducing balance
method. Depreciation and amortisation of all non-current assets are charged to
cost of sales.

(vi) In addition to capitalised development expenditure of N4,000 million further

research and development cost were incurred on a new project which commenced
on October 1, 2017. The research stage of the new project lasted until December
31, 2017 and incurred N280 million costs, from that date the project incurred
development cost of N160 million per month. On April 1, 2018 the directors
became confident that the project would be successful and yield a profit well in
excess of its costs. The project is still in development as at September 30, 2018.

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 Capitalised development expenditure is amortised at 20% per annum using straight
line method. All expensed research and development expenditure is charged to
cost of sales.

You are required to prepare:

a. Statement of profit or loss and other comprehensive income for the year ended
September 30, 2018. (13 Marks)

b. Statement of changes in equity for the year ended September 30, 2018.
(6 Marks)
c. Statement of movement in property, plant and equipment to be included in
published financial statements. (7 Marks)

d. Statement of financial position as at September 30, 2018. (14 Marks)

(Total 40 Marks)

SECTION B: OPEN-ENDED QUESTIONS (60 MARKS)

INSTRUCTION: YOU ARE REQUIRED TO ANSWER ANY THREE OUT OF FIVE
QUESTIONS IN THIS SECTION
QUESTION 2
As a result of privatisation and commercialisation exercise currently going on in the
country, the Ministry of Transport sold the assets and liabilities of the newly constructed
standard gauge railway to a private company known as Stalus Rail Limited (SRL) to
ensure smooth operations of the railway services by freeing it from government
bureaucracy.

The summarised extracts of the statement of financial position at fair value of SRL on
January 1, 2019 reflecting the terms and conditions of the sales agreement of the
Transport Ministry are as follows:
N’m
Assets
Goodwill 150,000
Operating licence 900,000
Property – Train stations and land 225,000
Rail tracks and coaches 225,000
Two (2) train engines 750,000

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 Purchase consideration 2,250,000
Liabilities
Sundry liabilities Nil

The operating licence is for a ten-year period which was issued on January 1, 2019 by
the Transport Ministry and it is stated at cost.
The carrying value of the property and rail track and coaches are based on value in use.
The engines are valued at their net selling prices.

On February 1, 2019 one of the train engines got damaged due to a technical fault from
the manufacturer and the engine was completely destroyed. The sale of the assets to
SRL was without recourse to the Transport Ministry and the manufacturer of the engines.

In view of this, it was estimated that there would be reduced passenger capacity,
therefore, the estimated value in use of the whole train service business of SRL was
assessed at N1,500 billion.

The number of passengers after one of the engines of the train got damaged was below
expectation, even allowing for the reduced capacity. In the light of this, the value in use
of SRL rail services was re-assessed on March 31, 2019 at N1,350 billion. On this date
the SRL received an offer of N675 billion from another company called Papaya Railway
Services Limited (PRSL) for the operating licence (since it is transferable). The realisable
value of the other assets has not changed significantly.

Required:
a. Draft a memo addressed to the MD of Stalus Rail Limited (SRL) explaining the basis
of allocating an impairment loss to the assets of a cash generating unit in
accordance with IAS 36 on impairment of assets.
(6 Marks)
b. Calculate the carrying amount of the assets of SRL Limited as at February 1, 2019
and March 1, 2019. (10 Marks)

c. Explain TWO conditions that must exist before an impairment loss can be reversed.
(4 Marks)
(Total 20 Marks)

QUESTION 3

a. International Financial Reporting Standards (IFRS 5) on Non-Current Assets held

for Sale and Discontinued Operations specifies the accounting treatment for assets
held for sale and disclosure of discontinued operations.

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 Required:
Discuss the conditions which must exist in order to classify a Non-Current Asset as
being held for sale and explain the accounting treatments that apply when such
classification is deemed appropriate. (7 Marks)

b. Wizkid Bottling Company Plc specialises in the production of alcoholic wine known
as Blue Bull and soft drink called “Wiz-Cola”, hence the company operates two
divisions i.e. Blue Bull and Wiz-Cola division. Due to high cost of labour and
shortage of raw materials for the production of the wine, the Blue Bull division has
incurred significant operating losses.

Management decided to close down the Blue Bull division and draw up a plan to
discontinue operations of the division.

On February 1, 2019 the Board of Directors of Wizkid Bottling Company

Plc approved and immediately announced the formal plan.

The following figures are available for the current and prior year ending
March 31.
2019 2018
Blue Bull Wiz-Cola Blue Bull Wiz-Cola

N‟000 N‟000 N‟000 N‟000

Revenue 235,000 1,570,000 250,000 1,250,000
Cost of sales 175,000 505,000 200,000 450,000
Admin. expenses 35,000 311,000 25,000 255,000
Distribution costs 20,000 186,500 10,000 157,500
Other operating expenditure 15,000 124,500 10,000 102,500
Taxation expense /(credit) (3,000) 130,500 1,500 85,000

Additional Information:

The following additional costs are directly related to the decision to discontinue
operation, and are yet to be accounted for.

Severance pay of N42.5 million was incurred between February 1, 2019 and March 31,
2019.

A proper evaluation of the recoverability of the assets in the „Blue Bull Division‟ in terms
of IAS 36 led to the recognition of an impairment loss of N9.5 million which is included
in other operating expenses above.

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Required:

i. Draft the statement of profit or loss for Wizkid Bottling Company Plc for the year
ended March 31, 2019 together with the comparative figures for year 2018.
(10 Marks)
ii. The Director of finance of Wizkid Bottling Company Plc stated that there should be
some additional disclosure about the discontinued operations which should be
shown in notes to the financial statements of the company.

5. Identify THREE of such disclosure requirements in accordance with IFRS

(3 Marks)
(Total 20 Marks)

QUESTION 4
Bottle Nigeria Plc acquired 80% of Glass Limited‟s equity share since its incorporation
about 10 years ago.

The two companies‟ draft financial statements as at December 31, 2019 are as
follows:

Statements of profit or loss for the year ended December 31, 2019.

Bottle Glass
Nig. Plc Limited
N’000 N’000
Revenue 225,000 45,000
Cost of sales (130,500) (27,000)
Gross profit 94,500 18,000
Other expenses (76,500) (14,400)
Profit before taxation 18,000 3,600
Income tax expense (5,850) (1,125)
Profit for the year 12,150 2,475

Statement of financial position as at December 31, 2019

Bottle Glass
Nig. Plc Limited
Assets N‟000 N‟000
Non-Current Assets:
Property, plant and equipment 86,400 9,000
Investment in Glass Limited 3,600 --
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 90,000 9,000
Current Assets
Inventories 22,500 5,400
Trade receivables 29,250 1,800
Cash and cash equivalents 17,550 1,575
69,300 8,775
Total assets 159,300 17,775

Equity and liabilities

Equity
Ordinary share capital 90,000 4,500
Retained earnings 22,500 10,800
112,500 15,300
Current liabilities
Trade payables 40,950 1,350
Current tax liabilities 5,850 1,125
46,800 2,475
159,300 17,775

Additional Information:
(i) On December 31, 2019 Bottle Nigeria Plc dispatched goods which cost
N3,600,000 to Glass Limited at an invoice price of N4,500,000. Glass Limited
received the goods on January 2, 2020 and recorded the transaction on that date.

(ii) It is the group‟s policy to value non-controlling interest at acquisition at its

proportionate share of the fair value of the subsidiary‟s identifiable net assets.

Required:
Prepare Bottle Group draft consolidated statement of:
i. Profit or loss for the year ended December 31, 2019. (8 Marks)
ii. Statement of financial position as at December 31, 2019. (10 Marks)
iii. Explain the term “cash and cash equivalent” under IAS 7 Statement
of Cash Flows. (2 Marks)
(Total 20 Marks)

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QUESTION 5

You are the Chief Accountant of Jolmarg Nigeria Limited, Pepeyoyo Limited is a
competitor in the same industry as Jolmarg and has been operating for the past 20
years.
The following is the result of Pepeyoyo Limited for the last three years ended December
31.
Ratios 2016 2017 2018
Gross profit margin % 34 34.4 35.4
ROCE % 21.1 21.5 17.8
Net profit margin % 11.9 12.4 11.4
Asset turnover times 1.78 1.73 1.56
Gearing ratio % 15.6 24.3 23.6
Debt ratio % 18.5 32.0 30.9
Interest cover times 16.7 8.1 5.5
Current ratio ratio 3:1 2.8:1 2.7:1
Quick ratio ratio 1.2:1 1.1:1 1.1:1
Receivable collection period (days) 46 52 64
Inventory turnover period (days) 158 171 182
Payable payment period (days) 35 42 46

Required:
Write a report to the finance director of Jolmarg Nigeria Limited analysing:

a. Performance (profitability, liquidity and long term financial stability) of Pepeyoyo

Limited based on the information available. (10 Marks)

b. Identify FIVE areas which require further investigation, including references to

other pieces of information which would compliment your analysis of the
performance of Pepeyoyo Limited. (10 Marks)
(Total 20 Marks)

QUESTION 6

a. The qualitative characteristics of relevance, faithful representation and

comparability identified in the IASB‟s framework for the preparation and
presentation of financial statements are some of the attributes that make financial
information useful to various users of financial statements.

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 Required:
Explain what is meant by:
i. Relevance
ii. Faithful representation
iii. Comparability and how they make financial information useful. (6 Marks)

b. The following transactions and events took place in Jaye Investment Nigeria
Limited during the year ended March 31, 2019.

(i) The company entered into a lease to rent an asset paying N150,000 a year for
5 years out of its useful economic life of 15 years. Assume a rate of interest
implicit in the lease to be 10%. (6 Marks)
(ii) The company‟s statement of profit or loss prepared using historical cost
method showed a loss from operating its hotels but the company is aware
that the increase in value of its properties during the year far outweigh the
operating loss. (4 Marks)
(iii) A decision was made by Jaye Investment Nigeria Limited‟s board of directors
to change the company‟s accounting policy from one of expensing the finance
cost on building new retail outlets to one of capitalising such costs. (4 Marks)

Required:
Explain how you would treat the items in (i) to (iii) above in Jaye Investment Nigeria
Limited‟s financial statements and indicate on which of the qualitative characteristic
framework your treatment is based. (Total 20 Marks)

SOLUTION 1

(a) Almajiri Nigeria Limited

Statement of Profit or Loss and Other Comprehensive Income for the Year Ended
September 30, 2018
N‟m
Revenue (60,000 – 500) 59,500
Cost of sales (w1) (45,080)
Gross profit 14,420
Distribution cost (w1) (2,900)
Admin expenses (w1) (4,380)
Finance costs (280)
Profit before taxation 6,860
Income tax expense (w3) (2,320)
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 Profit for the year 4,540
Other Comprehensive Income:
Loss on revaluation of leasehold property (900)

Total comprehensive income 3,640

(b) Almajiri Nigeria Limited

Statement of Changes in Equity for the Year Ended Sept. 30, 2018

Ord. Share Retained Revaluation Total

capital earnings reserve
N‟m N‟m N‟m N‟m
Oct. 1, 2017 10,000 4,900 2,000 16,900
Dividend paid -- (1,200) -- (1,200)
Total comp. income -- 4,540 (900) 3,640
Sept. 30, 2018 10,000 8,240 1,100 19,340
(c) Property Plant and Equipment
Leasehold Plant and Total
property equipment
Cost/Valuation: N‟m N‟m N‟m
Oct. 1, 2017 10,000 15,320 25,320
Disposal -- (1,600) (1,600)
Revaluation (900) -- (900)
Sept. 30, 2018 9,100 13,720 22,820
Depreciation/amortization:
Oct. 1, 2017 -- 4,920 4,920
Charged in year (w1) 500 1,920 2,420
Disposal -- (800) (800)
Revaluation -- -- ---
Sept. 30, 2018 500 6,040 6,540
Carrying amount:
Sept. 30, 2018 8,600 7,680 16,280
Oct. 1, 2017 10,000 10,400 20,400

(d) Almajiri Nigeria Limited

Statement of Financial Position as at September 30, 2018
Assets N‟m N‟m
Property plant & equipment 16,280
Development expenditure (w5) 2,960

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 Current assets:
Inventory 4,000
Trade receivables 8,620
12,620
Total assets: 31,860
Equity and liabilities:
Ordinary shares at 25k each 10,000
Retained earnings 8,240
Revaluation reserve 1,100
19,340
Non-current liabilities:
8% Redeemable preference shares (w6) 4,080
Deferred tax liability (1,160 + 40) 1,200 5,280

Current liabilities:
Trade payable and provisions (4,760 – 60) 4,700
Tax payable (current) 2,280
Bank overdraft 260 7,240
31,860
Workings

W1 Expenses

Cost of sales Distribution Admin.

expenses expenses
N‟m N‟m N‟m
Per trial balance 40,800 2,900 4,440
Depreciation:
 
Property 10,000 20 500
Plant and Equip. 1,920
Loss on disposal 500  1,600  800 300
Amortisation 800
Research and development 280 480 760
Legal claim 80  20 -- -- 60
45,080 2,900 4,380

W2 Finance cost
N‟m N‟m
Interest on borrowing 40
Finance cost of preference shares (redeemable)
240
280
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W3 Income tax expense
N‟m
Current tax 2,280
Deferred tax 1,200  1,160 40
2,320

W4 Loss on property revaluation

N‟m N‟m
Leasehold property at Oct. 1, 2017 10,000
Less depreciation 10,000 ÷ 20 (500) 9,500
Value at Sept. 30, 2018 (8,600)
Loss on revaluation 900

W5 Development expenditure
N‟m
Cost – Oct. 1, 2017 4,000
Less: Accum. Depreciation (1,200)
Carrying amount 2,800
Additional expenditure capitalised (160 x 6) 960
Charged to Cost of Sales (i.e. amortised cost (4,000 x 20%) (800)
Balance as at Sept.30, 2018 2,960

W6 8% Redeemable preference shares – (Year 2020)

N‟m
Balance as at Oct. 1, 2017 4,000
Premium: Effective interest rate (4,000 x 12%) x 6/12 240
12% of 4000 = 480 x 6/12
Interest rate (4,000 x 8% x 6/12) (160)
4,080

W7 Litigation
The company is being sued by a customer for N400 million for breach of contract over a
cancelled order and according to legal opinion that there is a 20% chance that Almajiri
Nigeria Limited will lose the case. Hence, no recognition is required in line with IAS 37.

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Examiner’s Report
The question tests candidates‟ knowledge of preparation of final accounts which
includes statement of profit or loss, statement of changes in equity, statement of
movement in property, plant and equipment and statement of financial position.

Majority of the candidates attempted the question and performance was average.

The commonest pitfall was the inability of the candidates to correctly make necessary
adjustments for the additional information provided and this led to loss of marks.

Candidates are advised to pay more attention to the principles and provisions of
accounting standards as the additional information requires the applications of such
principles and provisions.

Marking Guide
Marks Marks
a. Statement of profit or loss and other comprehensive income
 Presentation of statement of profit or loss
 Determination of cost of sales 4
 Workings for admin. expenses and distribution expenses 4
 Working for finance cost and income tax 2
3 13
b. Statement of changes in equity
 Presenting of statement in changes in equity 6 6
c. Statement of movement in PPE
 Determination of carrying amount of property 2
 Determination of carrying amount of plant and
equipment 2
 Determination of total carrying amount of PPE 2
 Workings for loss on revaluation 1 7
d. Statement of financial position
 Presentation of statement of financial position 8
 Determination of development expenditure 4
 Workings for 8% reedemable preference shares 2 14
Total 40

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SOLUTION 2

(a) Stalus Rail Limited

MEMO

From: The Accountant

To: The Managing Director
Subject: The basis of allocating an Impairment loss to the assets of a cash
generating unit.
Dear Sir,

The above subject refers.

Cash generating unit is the smallest identifiable group of assets for which independent
cash flows can be identified and measured.

Allocation of Impairment Loss of a Cash Generating Unit

i. Any identified impairment loss on a specific asset should be used to reduce

the carrying amount of that specific asset.

ii. The remaining impairment losses after the above treatment, if any,
should be charged against goodwill.

iii. After goodwill has been reduced to nil, any other impairment losses
remaining should be allocated or charged to non-monetary assets on pro-rata
basis of their carrying amount.

iv. Please note that the monetary assets such as trade receivables should not be
exempted from the allocation of the impairment loss.

v. the carrying amount of an asset cannot be reduced below the highest of:

 Its fair value less cost of disposal (if determinable).

 Its value in use (if determinable); and
 Zero

Thank you.

Mr. XYZ
Accountant
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(b) The impairment losses are allocated as required by IAS 36 as calculated below:-

Assets Jan. 1 First Impairment Carrying amount

2019 loss Feb. 1 2019
N‟m N‟m N‟m
Goodwill 150,000 (150,000) Nil
Operating licence 900,000 (150,000) (W1) 750,000
Property Stations/Land 225,000 (37,500) (W2) 187,500
Rail Tracks/Coaches 225,000 (37,500) (W3) 187,500
Train Engines 750,000 (375,000) 375,000
2,250,000 (750,000) 1,500,000

Carrying Second Carrying amount

amount @ Feb.1 impairment Loss March 1, 2019
2019
N‟m N‟m N‟m
Operating licence 750,000 (75,000) 675,000
Property – Station/land 187,500 (37,500) (w4) 150,000
Rail track/coaches 187,500 (37,500) (w5) 150,000
Train engine 375,000 - 375,000
1,500,000 150,000 1,350,000

(w1) – Operating licence =

900
x
750  150  375
225  225  900 1

900 225
x  N150 billion
1,350 1

225 225
(w2) – Property-Station/land = x  N37.5 billion
1,350 1

225 225
(w3) – Rail track/coaches = x  N37.5 billion
1,350 1

187,500 75,000
W(4) - Property – Station/land = x  N37.50 billion
187,500  187,500 1

17
 187,500 75,000
W(5) - Rail trust/coaches = x  N37.50 billion
187,500  187,500 1
Note: The operating licence value cannot be reduced below net selling price.

The engine cannot be reduced below its selling price.

(c) Conditions that must exist before impairment loss can be reversed

Any impairment loss may be reversed when there is evidence that these had
happened.
(i) There is an improvement in the indicator of the impairment; and
(ii) The reversal should not lead to carrying amount in excess of what the
carrying amount of the assets would have been without the recognition of
the original impairment loss.

Examiner’s Report
The question tests the principles and application of IAS 36 on Impairment of Assets.

Most of the candidates did not attempt the question and the few that did, performed
poorly.

The commonest pitfalls were as follows:

i. Inability to explain the basis of allocating impairment loss to assets of a cash

generating unit;
ii. Incorrect calculation of impairment loss due to inability to apply (i) above; and
iii. Only few were able to explain the conditions that must exist before an impairment
loss can be reversed.

Candidates are advised to pay more attention to all relevant accounting standards at the
skills level of the Institute‟s examination for better performance in future.

Marking Guide
Marks Marks

(a) Memo on basis of allocation of impairment loss:

 Opening memo format ½
 Explanation of cash generating unit 1
 four correct points on basis of allocation of impairment
loss 4
 Closing memo format ½ 6

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(b) Calculation of carrying amount of assets after allocation of
impairment loss:
 Determination of carrying amount at Feb. 1, 2019 4½
 Workings for allocation of impairment loss at Feb 1, 2019 ½
 Determination of carrying amount at March 1, 2019 4½
 Workings for allocation of impairment loss March 1, 2019 ½ 10
(c) Conditions for reversal of impairment loss:
 Correct explanation of two conditions 4 4
Total 20

SOLUTION 3

Conditions that Must Exist before Classifying a Non-Current Asset as Being held for Sale

(a) (i). A non-current asset is classified as held for sale, if its carrying amount will be
recovered principally through a sales transaction rather than through
continuing use. For this to be the case, the following criteria must be met:

The asset must be available for immediate sale in its present condition; and
the sale must be highly probable.
 IFRS 5 lists the following conditions which must be met if a sale is to be
considered as highly probable:
 The management is committed to a plan to sell the asset;
 An active programme has been initiated to locate a buyer and complete
the plan;
 The asset is being actively marketed at a sale price that is reasonable in
relation to its current value;
 A complete sale is expected within one year from the date of classification
(may be extended if any delay is caused by circumstance beyond the
entity‟s control);
 It is unlikely that there will be any significant changes to the plan or that
the plan will be withdrawn;
 If these criteria are not satisfied at the end of the reporting period, the
assets should not be classified as held for sale; and
 If the criteria are satisfied after the reporting period but before the
financial statements are authorised for issue, the fact that the assets are
not classified as held for sale should be disclosed in the notes to the
financial statements.

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 (ii) The Accounting Treatment for Non-Current Assets Held for Sale

 A non-current asset or disposal group that is held for sale is measured at the
lower of its carrying amount and net realisable value (fair value less costs to
sell).
 Where net realisable value is lower than carrying value, this represents an
impairment loss which should be recognized immediately.
 Non-current assets held for sale should not be subjected to annual
depreciation even where the asset is still being used by the entity in ordinary
course of business.
 IFRS 5 requires that assets held for sale to be presented separately on the face
of the statement of financial position and information concerning
discontinued operation should be disclosed in the financial statements.

(b) (i) Wizkid Bottling Company Plc

Statement of profit or loss for the year ended March 31, 2019

2019 2018
N‟000 N‟000
Continuing operations:
Revenue 1,570,000 1,250,000
Cost of sales (505,000) (450,000)
Gross profit 1,065,000 800,000
Distribution cost (186,500) (157,500)
Admin. Expenses (311,000) (255,000)
Other operating expenses (124,500) (102,500)
Profit before tax 443,000 285,000

Income tax expense (130,500) (85,000)

Period for the period 312,500 200,000
Discontinued operations (Blue Bull) (49,500) 3,500
(w1)
Profit for the Period 263,000 203,500

Workings: N‟000 N‟000

(wi) Discontinued operation revenue 235,000 250,000
Cost of sales (175,000) (200,000)
Gross profit 60,000 50,000
Distribution cost (20,000) (10,000)
Admin exp. (35,000) (25,000)
Other operating exp. (15,000 – 9,500) (5,500) (10,000)
20
 Impairment loss (9,500) --
Severance pay (42,500) --
Profit/(Loss) before taxation (52,500) 5,000
Tax (expense)/credit 3,000 (1,500)
Profit/(loss) for the period (49,500) 3,500

(ii) Additional disclosure as requested by finance director

 A description of the division of the company to be disposed.
 A description of the facts and circumstances that led to discontinuance
of operations/ and subsequent close down of the Blue Bull division of
the company.
 A description of the facts and circumstances leading to the expected
disposal and the expected manner and timing of the disposal.
 Where some adjustments are classified separately in the discontinued
operation, the nature and amount of the adjustments must be
disclosed.

Examiner’s Report
The question tests candidates‟ knowledge of the provisions and application of
International Financial Reporting Standard (IFRS 5) on Non-Current Assets Held for
Sales and Discontinued operations.

Most of the candidates attempted the question, but, performance was below average.

Some candidates could not correctly prepare draft statement of profit or loss, disclosing
continuing and discontinuing operations as required by IFRS 5.

Candidates are advised to pay more attention to all relevant accounting standards at the
skills level of the Institute‟s examination for better performance in future.

Marking Guide
Marks Marks
Conditions which must exist to classify non-current assets as
(a)i
held for sale
 Five correct conditions
5
Accounting treatment of non-current assets held for sales
ii
 Two correct accounting treatment.
2 7

21
 Draft statement of profit or loss:
(b)i Continuing operations (year 2019 and 2018):
Determination of gross profit
1¾
Determination of profit for the period
2¾
Discontinuing operations (year 2019 and 2018): 10
Calculation of discontinuing operating profit
5 3
Entity‟s profit
½
Additional disclosure in notes form in the financial
ii statements for discontinuing operations:
Three disclosures 3
Total 20

SOLUTION 4

(i) BOTTLE NIGERIA PLC

Consolidated statement of profit or loss for the year ended December 31, 2019
N‟000
Revenue (225 + 45 – 4.5) 265,500
Cost of sales (130.5 + 27 - 4.5 + 0.9) (153,900)
Gross profit 111,600
Other expenses (76.5 + 14.4) (90,900)
Profit before tax 20,700
Income tax expenses (5.85 + 1.125) (6,975)
Profit for the year 13,725
Profit attributable to:
Owner of patent 13,230
Non-controlling interest (20% x 2,475) 495
13,725
(ii) Bottle Nigeria Plc
Consolidated statement of financial position as at December 31, 2019

N‟000 N‟000
Non-current assets
Property plants and equipments (86.4 + 9) 95,400
Current assets:
Inventories (22.5 + 5.4 + 3.6) 31,500
22
Trade receivables (29.25 + 1.8 – 4.5) 26,550
Cash and cash equivalents (17.55 + 1.575) 19,125 77,175
172,575
Equity and liabilities:
Equity attributable to owners of parent:
Share capital 90,000
Retained earnings (W5) 30,240
120,240
Non-controlling interest (W4) 3,060
Total equity 123,300
Current liabilities:
Trade payables (40.95 + 1.350) 42,300
Current tax liabilities (5.850 + 1.125) 6,975 49,275
172,575

Working Notes
Wk 1: Group structure
Bottle Nig Plc ……………………. 80% ………………….. Glass Ltd
NC1 = 20%

At Rep. At Acq.
Wk 2: Net asset of subsidiary Date Date Post-Acq
N‟000 N‟000 N‟000
Ordinary share 4,500 4,500 ---
Retained earnings 10,800 --- 10,800
15,300 4,500 10,800

Wk 3: Determination of goodwill on acquisition

N‟000
Consideration transferred by parent 3,600
NCI (20% x 4.5) 900
4,500
Less: Net assets of subsidiary at acquisition (4,500)
Goodwill Nil

Wk 4: Valuation of NCI N‟000

NCI at acquisition (Wk 3) 900
Add: Share of post-acquisition profit (20% x
10,800) 2,160
3,060
23
 Wk 5: Consolidated retained earnings N‟000
Bottle Nigeria Plc 22,500
Add: Share of post-acquisition profit (80% x
10,800) 8,640
Less: Unrealised profit on inventory (4.5 – 3.6) (900)
Consolidated retained earnings 30,240

Wk 6: Consolidated inventories N’000

Bottle Nigeria Plc 22,500
Glass Limited 5,400
Goods in transit 4,500
Unrealised profit (900)
Consolidated inventories 31,500

(iii) Cash and cash equivalents

 Cash – comprises cash in hand and demand deposits.
 Cash equivalents are short-term, highly liquid investments that are
readily convertible to known amounts of cash and which are subject to
an insignificant risk of changes in value.
 For the purpose of statement of cash flows, cash and cash
equivalent are treated as being the same thing.
 Cash and cash equivalents are held in order to meet short-
term cash commitment, rather than for investment purposes
or other purposes. Examples of Cash and Cash Equivalents
 A bank deposit where some notice of withdrawal is required.
 Short term investments with maturity of three months or less from the
date of acquisition.

Examiner’s Report
The question tests candidates‟ knowledge of preparation of consolidated financial
statements and explanation of cash and cash equivalents.
Majority of the candidates attempted the question and performance was above average.
The commonest pitfall was the inability of the candidates to show the calculations of
how a NIL goodwill balance was arrived at.
Candidates are advised to ensure that they cover all sections of the syllabus for better
performance in future examinations of the Institute.

24
Marking Guide
Marks Marks

(a)i Consolidated statement of profit or loss:

 Presentation of consolidated statement of profit or loss 5
for the year ended December 1, 2019 2
 Determination of revenue and cost of sales 1
 Workings for other expenses and income tax expense 8
Consolidated statement of financial position:
ii  Presentation of consolidated statement of financial
position as at December 31, 2019 5
 Determination of goodwill on acquisition 2
 Calculation of non-controlling interests 1
 Calculation of consolidated retained earnings 1
 Calculation of consolidated inventories 1
Cash and cash equivalents: 10
 Correct definition/explanation of cash and cash 1
iii equivalents 1 2
 Correct examples of cash and cash equivalent
Total 20

SOLUTION 5

To: Finance Director

From: Chief Accountant
Subject: Analysis of performance of Pepeyoyo Ltd for years 2016 to 2018.

Introduction:
Based on the information provided which shows the ratios calculated; the performance
of our competitor is as follows:

(a) Performance of Pepeyoyo Ltd.

(i) Profitability
 The gross profit margin has remained relatively static over
the three years period, although it has increased by
approximately 1% in year 2018.
 Return on capital employed, while improving very slightly in
year 2017 to 21.5%, dropped drastically to 17.8% in year
2018.
 The profit margin also fell in year 2018 in spite of the
25
 improvement in gross profit margin. This might be due to a
rise in the company‟s overheads which suggests that it was
not well controlled.
 The utilisation of assets compared to turnover generated has
declined reflecting a drop in trading activities between years
2017 and 2018.
 It is apparent that there was a dramatic increase in the
ading/operational activities of Pepeyoyo limited between years 2017
and 2018, but then, there was a significant fall in year 2018. The
reason for this fluctuation is not clear. It may be the effect of some
kind of one-off events or it may be the effect of a change in product
mix.
 Whatever the reason, it appeared the improved credit terms
granted to customers (receivable collection period of 46 days to 64
days) did not result significantly improvement in the profit
performance of the company.

(ii) Liquidity
 Both the current and quick ratios demonstrate an adequate working
capital situation for the company.
 There has been an increased investment in inventories over
the period which has been partly financed by long payment
period to trade payables.
 The company‟s collection period has consistently been longer
than the payment period. This is not a good situation which
shows that its working capital management is poor and it
seems that the company is experiencing liquidity challenges.
Although, this also requires further investigation.

(iii) Financial Stability

 The debt/equity ratios of the company increased substantially
from 18.5% in year 2016 to 32% in year 2017 and slightly
declined to 30.9% in year 2018.
 However, poor performance of the company in terms of
profitability led to the inability of the profit to adequately
cover the interest on
debt, despite the decline in the debt/equity ratios.

Conclusion: There are some areas that require further investigation on the
company‟s performance in terms of the profitability, liquidity and financial
stability.

26
 Thanks.

Mr. XYZ

Chief Accountant

(b) Areas that require further investigation

Loan notes
 There is no indication as to why the company Pepeyoyo Ltd., raised
more Loans than required and how it was used to finance their
business operations.
 There could be need to obtain further details on interest rate(s),
security given and repayment dates.

Trading activities
Level of fluctuations in the net profit margin and asset turnover may Imply that the
revenue has also fluctuated in quite an unusual manner, hence we may need
information on their pricing policy, product mix and market share.

Accounting policies and financial statements

Accounting policies may have significant effect on certain items such as Overheads,
depreciation, etc., therefore, we may need their statement of profit or loss, statement of
cash flows and statement of financial position to have a better explanation for the ratios
provided.

Dividend policy
We need dividend and retention policies of the company, to determine if they are
reasonable, which could have assisted in moderating the company‟s debt/equity ratios.

Further information
It would be useful to breakdown some information in the financial statements when
provided such as:

 Revenue by segment, marketers by geographical coverage areas etc.

 Expenses – showing depreciation, administration expenses and
distribution costs, etc.
 Inventory with breakdown of raw materials, Work in Progress (WIP) and
finished goods.

27
Average industry ratios
 Average industry ratios is also necessary to determine if Pepeyoyo
Ltd Performance is above or below the industry average.

Examiner’s Report
The question tests the ability of the candidates to interpret financial statements from
relevant financial ratios.

Most of the candidates attempted the question, but performance was below average.

Some of the candidates were able to give correct interpretation to the performance of
the company using the relevant financial ratios provided, while others could not.

The second part of the question which requires identification of areas to be investigated
were poorly attempted, as candidates could not precisely identify the information that
could complement the analysis made in part (a) of the question.

Candidates are advised to pay more attention to interpretation of financial ratios rather
than emphasising ratio computations.

Marking Guide
Marks Marks
Drafting a report on performance of the Pepeyoyo Ltd:
(a)
 Presentation in memo format
1
 Introduction and conclusion of report
1
 Four correct interpretation of profitability situation of the
company
4
 Two correct interpretation of liquidity position
2
 Two correct interpretation of financial stability
2 10
Areas which require further investigation:
(b)
 Five areas identified
5
 Explanations of the five areas identified.
5 10
Total 20

28
SOLUTION 6

Qualitative characteristics for preparation and preparation of financial statements as

specified by IASB‟s framework are:

(a)(i) Relevance
 Information must be relevant to the decision-making needs of users.
 Information is relevant if it can be used for predictive and/or confirmatory
purposes.
 It has predictive value if it helps users to predict what might happen in the
future.
 It has confirmatory value if it helps users to confirm the assessment and
prediction they have made in the past.
 The relevance of information is affected by its materiality.
 Information is relevant if omitting it or misstating it could influence decisions
that users make on the basis of the financial information about a specific
reporting entity.

(ii) Faithful representation

 Financial reports represent economic phenomena (economic resources, claims
against the reporting entity and the effects of transactions and other events
and conditions that change those resources and claims) by depicting them in
words and numbers.
 To be useful, financial information must not only represent relevant
phenomena but it must also faithfully represent the phenomena that it
purports to represent.

A perfectly faithful representation would have three characteristics. It would

be:
 Complete:- the depiction includes all information necessary for a user to
understand the phenomena being depicted, including all necessary
description and explanation.
 Neutral:- the depiction is without bias in selection or presentation of
financial information.
 Free from error:- where there are no errors or omission in the description of
the phenomenon, and the process used to produce the reported
information has been selected and applied with no errors in the process.

(iii) Comparability
 Comparability is the qualitative characteristic that enables users to identify
and understand similarities and differences among items.

29
  Information about reporting entity is more useful if it can be compared with
similar information about other entities and with similar information about
the same entity for another period or another date.
 Consistency is related to comparability, but it is not the same. Consistency
refers to the use of the same method for the same items, either from period to
period within a reporting entity or in a single period across entities.
 Consistency helps to achieve the goal of comparability.


(b)(i) These item involves the characteristic of faithful representation and specifically
reporting the substance of the transaction.
 As the lease agreement is not for the whole of the asset‟s useful economic life,
Jaye Investment Nigeria Ltd. will experience the same risks and rewards as if
it owned the asset, hence, it should recognise the right-of-used asset.

 Although the legal form of this transaction is rental, its substance is

equivalent to acquiring the assets and raising a loan, in order for the financial
statement to be reliable and faithfully presented. The transaction should be
shown as an asset in Jaye Investment Nig. Ltd‟s statement of financial position
with corresponding liability for the future lease rental payments. The
statement of profit or loss should be charged with depreciation on the asset
and a finance charge on the loan.
 This is an operating lease because the lease period of five (5) years doesn‟t
cover substantially the useful economic life of the asset of fifteen (15) years.
In line with IFRS 16 on lease, either operating lease or finance lease should be
accounted for same way. The right to use the asset should be capitalised and
the obligation to lease should also be recognised. The amount to be
recognised is the present value (PV) of the annual amount payment of
N150,000, which equals N750,000.
 This right to use the asset to be recognised is the PV of N750,000 at DCF of
10% for five (5) years is N568,618. This will be written down on yearly basis to
income statement for the next five years. Yearly finance cost will be
recognised as stated above and obligation to lease an amount N568,618 as
liability will also be recognised at beginning of the year and will be written
down at the implicit rate of interest on yearly basis as the payments are made,
which recognised both finance cost and capital repayment.

(ii) This item involves the characteristic of relevance

 This situation questions whether historical cost accounting is more relevant to
users than current value information, Jaye Investment Nig. Ltd‟s current
method of reporting these events using purely historical cost based
information (i.e showing an operating loss but not reporting the increase in

30
 property values) is perfectly acceptable. However, the company could choose
to revalue its hotel properties (which would subject it to other requirements).
 This option would still report an operating loss (probably an even larger loss
than under historical costs if there are increased depreciation charges on the
hotels) but the increase in value would be reported (in equity) arguably
giving a more complete picture of performance.

(iii) This item involves the characteristics of comparability. Changes in accounting

policy
 should generally be avoided in order to preserve comparability,
presumably, the directors have good reasons to believe the new policy presents a
more reliable and relevant view.

 In order to minimise the adverse effect a change in accounting policy has on

comparability, the financial statements (including the corresponding amount)
should be prepared on the basis that the new accounting policy had always been
in place (i.e. retrospective application). Thus, the assets (retail outlets) should
include the previously expensed finance costs and the statement of profit or loss
will no longer show a finance cost. Any finance costs relating to periods prior to
the policy change (i.e. for two or more years before) should be adjusted for by
increasing retained earnings brought forward in the statement of changes in
equity. This would be in compliance with IAS 8 on Accounting Policies, Changes
in Accounting Estimates and Correction of Errors.

Examiner’s Report
The question tests candidates‟ knowledge of qualitative characteristic of financial
information in accordance with IASB‟s framework as well as application of such
characteristics to specific financial transactions.
Most of the candidates attempted the question and performance was average.
Majority of the candidates were able to explain the qualitative characteristics of
financial information in part (a) of the question, but could not apply the qualitative
characteristics to specific transactions in part (b) and this led to loss of marks.

Candidates are advised to note that the examiners at the skills level of the Institute‟s
examination will emphasise application of principles and theories to financial
transactions and events.

31
Marking Guide
Marks Marks
Explanation of qualitative characteristics
(a)
 Explanation of relevance
2
 Explanation of faithful representation
2
 Explanation of comparability
2 6
Treatment of events that took place in Jaye Investment
Nigeria Limited:
 Identification of correct qualitative characteristic
applicable to each of the three events
(b)  Two correct relevant points for event (i) 3
 Two correct relevant points for event (ii) 5
 Two correct relevant points for event (iii) 3
3 14
Total 20

32
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

SKILLS LEVEL EXAMINATION – MAY 2021

AUDIT AND ASSURANCE

Time Allowed: 31/4 hours (including 15 minutes reading time)

INSTRUCTION: YOU ARE REQUIRED TO ANSWER FOUR OUT OF SIX IN THIS

QUESTIONS PAPER

SECTION A: COMPULSORY QUESTION (40 MARKS)

QUESTION 1

Chukwuemeka & Co. (Chartered Accountants) has been auditors to GED Manufacturing
Nigeria Plc. There have been some regulatory and compliance issues for which the
company was sanctioned and paid penalties to the Financial Reporting Council of
Nigeria.

At the board of directors meeting to consider the last annual report audited by the firm,
some of the previous problems caused by the auditors were raised and discussed.
Following the reoccurrence of such issues, it was proposed that another audit firm be
engaged in addition to the present firm.

To achieve their objective, a bigger firm that has international affiliation was considered
to take a leading role in a joint audit arrangement and to ensure appropriate
compliance. Your firm has been approached for the appointment. A meeting was
scheduled between your firm, Chukwuemeka & Co. and the executive management of
GED Manufacturing Nigeria Plc.

After the meeting, your firm was subsequently appointed and the necessary formalities
were properly followed. Your partner has directed that you liaise with Chukwuemeka &
Co, to obtain the necessary materials for the preparation of the audit and that you
review the prior year working papers to obtain an understanding of the issues. Your
assessment of the documents obtained from the other auditor revealed the following,
amongst others:

(i) The work done on the process of dispatch of goods and invoicing was not
considered sufficient and appropriate; and

33
(ii) The IT operations of the company had weak controls such that it was possible for
some staff to over-ride some of the existing controls

Required:

a. Explain the risks inherent in the dispatch of goods and invoicing.

(10 Marks)
b. Discuss the control objectives and principal controls that are relevant to the process of
dispatch of goods and invoicing (10 Marks)
c. Explain the limitations of a joint audit (5 Marks)
d. Discuss the benefits of audit carried out by an international affiliated audit firm
(10 Marks)
e. Explain briefly the importance of audit working papers (5 Marks)
(Total 40 Marks)

SECTION B: OPEN-ENDED QUESTIONS (60 MARKS)

INSTRUCTION: YOU ARE REQUIRED TO ANSWER ANY THREE OUT OF FIVE

QUESTIONS IN THIS SECTION

QUESTION 2

Your partner invited you and other colleagues to a pre-audit meeting and informed you
that the audit of Why Worry Agro Chemical Company Limited will soon commence. He
stated that based on experience, the internal control system is not reliable. Therefore, it
will be a transaction-based audit approach which will involve high level of substantive
testing.

He further informed the engagement team that arrangements will be made for a
brainstorming session on risk assessment and how to address the risk, using relevant
audit assertions. The internal specialists on information technology and tax were invited
to the meeting and you have two new audit trainees attached to you on the audit.

As the proposed audit senior personnel on the audit team,

You are required to explain:

a. Substantive audit procedures (2 Marks)
b. Purpose of risk assessment (6 Marks)
34
c. Categories of financial statements audit assertions (6 Marks)
d. Examples of substantive testing (6 Marks)
(Total 20 Marks)

QUESTION 3
The partners of Integrity Professional Services have just obtained their practicing
licenses from the Institute. The professional service firm has decided to engage in audit,
taxation and consulting services. The firm has secured the approval of shareholders of
some companies to be their auditors.

In view of the development, interested candidates have been invited to submit

applications for appointment as audit seniors in the firm. You were shortlisted for an
interview:
Required:
Explain the following:
a. Factors to be considered before accepting the audit of a company (4 Marks)
b. Stages in an audit of a company (6 Marks)
c. The different roles of the Institute of Chartered Accountants of Nigeria and
Federal Government of Nigeria in the regulation of external audit (10 Marks)
(Total 20 Marks)

QUESTION 4

A regulatory review was conducted on SINAPE Microfinance Bank Limited in September,

2018. During the course of the review, numerous findings and recommendations were
made in respect of the bank‟s ongoing compliance with various internal and external
regulations, policies and guidelines.

It was noted from the reports generated that processing systems, internal controls over
financial accounting and financial reporting were not in order. The review of the bank‟s
process and procedures for transaction recognition was far from satisfactory.
Furthermore, there were instances of management‟s override of controls in the financial
reporting process.
The regulator required the bank to appoint a reputable firm of chartered accountants to
perform a review of the internal control system and make a comprehensive
recommendation.
Your firm has been appointed by the bank to perform the internal control reviews and as
part of the exercise, a brainstorming forum has been arranged.
You have been nominated to make a presentation at the brainstorming forum.

35
Required:
Discuss the following:
a. Principal methods available to record internal control systems (6 Marks)
b. Categories of control activities (6 Marks)
c. General information technology controls and application controls
(8 Marks)
(Total 20 Marks)

QUESTION 5

JAK Professional Services is a member firm of James Candle International in Cayman

Islands. The member firm‟s practice review exercise has just been concluded. As part of
the global firm, practice reviews are done yearly on selected engagement files where
member firms review one another. Some of the issues included in the review notes
raised on JAK Professional Services audit files are as follows:

(i) Lack of sufficient and appropriate audit evidence regarding audit of cash and
bank as well as inventory balances. This was partly due to the fact that no
evidence existed in the file regarding physical cash and inventory count which
were material;
(ii) No proper documentation of confirmation replies received from banks,
receivables and solicitors;
(iii) No cash flow working documentation to show how the figures on the cash flow
statements in the financial statements were arrived at;
(iv) Improper documentation of how expected credit loss on financial instruments in
the financial statements were arrived at; and
(v) Figures in the financial statements could not be traced to the respective working
papers.

As an experienced auditor, some of the trainees were not impressed about the report
and have approached you for clarification.

You are required to explain:

a. Meaning of „sufficient and appropriate audit evidence‟ (5 Marks)
b. Factors to be considered when deciding amount of audit evidence
needed (4 Marks)
c. What auditors should do in case of inadequate audit evidence (5 Marks)
d. Reasons for sufficient and appropriate audit documentation (6 Marks)
(Total 20 Marks)

36
QUESTION 6

Wakaso Nigeria Limited has experienced serious labour turnover which has affected the
business of the company in the last twelve months. The most frustrating issue was the
resignation of a well-tested Financial Controller of the company close to year-end.
Wakaso management is noted for timely financial reporting and rendering of tax returns
due to the efficiency and effectiveness of the Financial Controller who was also involved
in the preparation of tax computations. The company has been finding it difficult to
quickly recruit a new Financial Controller that will match the technical ability of the
former accountant. The Managing Director of the company has invited the company‟s
external auditors to a meeting, intimating them of the plan to employ their services to
complete the write-up of the books of accounts and management account pending when
they employ a good chartered accountant to handle the financial operations of the
company.

The company‟s management, in order to ensure timely reporting, has also informed the
auditors that to save time and meet cost of operations, the firm‟s staff will be
accommodated in a five star hotel with mouth-watering offer of payment in lieu of
feeding as recommended by the audit partner. In addition, the previous year‟s audit fee
will be doubled and an additional twenty percent payment made if the management
accounts and audit work could be completed within three weeks.

The partner of the firm has rejected the offers on the grounds of possible threat to
independence. The Managing Director complained to you, as his brother, lamenting that
accountants are not good business men and uncooperative.

Required:
Discuss the following:
a. Meaning of threats to independence (2 Marks)

b. In relation to independence of auditors:

i. Fees and pricing (4 Marks)
ii. Financial interest (4 Marks)
iii. Contingent fees (2 Marks)
iv. Family and personal relationship (4 Marks)

c. The reasons why the preparation of accounting records and management

accounts constitute a threat to the independence of the auditors.
(4 Marks)
(Total 20 Marks)

37
SECTION A
SOLUTION 1
a) The risks inherent in the dispatch of goods and invoicing include:
i. Goods may not be dispatched for some customers‟ orders;
ii. Goods may be dispatched twice for some customers‟ orders;
iii. Goods may be dispatched to customers without sufficient credits
either because no credit terms have been agreed in the case of a
new customer or because the order takes an existing customer above his
credit limit;
iv. Goods not ordered at all may be packaged and dispatched;
v. Invoices may not be produced for goods that have been dispatched to some
customers;
vi. Customers may claim that they did not receive the goods that have actually
been delivered to them; and
vii. Returns from customers are not properly recorded, so that the
client company does not know the correct figure for sales, net of
sales returns.

b) The control objectives and principal controls that are relevant to the process of
dispatch of goods and invoicing

Control objectives include:

i. Goods should be dispatched for every authorised customer or
ii. Goods should not be dispatched twice for the same sales order;
iii. Customers should acknowledge the receipt of goods supplied to
them and confirm agreement with their orders;
i. There must be an invoice for every dispatch note;
ii. Invoices should be raised for the correct amounts; and
iii. There must be authorised credit notes for all the goods returned
by customers.

The principal controls that are relevant to the process of dispatch of goods and
invoicing include:

i. Dispatch notes or goods delivery notes (GDN) should be numbered

sequentially and should be attached to a copy of a specific customer order.
The GDN should be signed by an authorised member of the dispatch party
staff. The sequential numbering of GDNs allows a check to be made that all
deliveries can be accounted for;
ii. Customers should sign a delivery note for the receipt of goods as
confirmation of receipt of the goods supplied;

38
 iii. The signed copy of the delivery note should be attached to a copy of the
dispatch note and customer order. Copies of these documents should be
transferred to the accounts department after dispatch so that a sales
invoice can be produced;
iv. Each sales invoice should be linked to a copy of the dispatch note and
customer order or produced automatically from them;
v. Sales invoices should be sequentially numbered or the system should
allocate sequential numbers to the documents;
vi. There should be segregation of duties and the individuals who are
involved in the goods dispatch process should not be the same as those
who prepare sales invoices or process the customer orders;
vii. Credit notes should be sequentially numbered and authorized; and
viii. There should be periodic checks by someone in the accounts department
on the accuracy of invoices or strong IT controls to ensure the accuracy of
invoices.

c. Limitations of a joint audit include:

i. Shared legal responsibility: Liability for co-auditors‟ negligence may
arise;
ii. Lack of control: Another firm may have dissimilar audit procedures that
may be unsatisfactory to the other firms, thereby requiring higher standard
of supervision and control;
iii. Personality clash: Any shared work or task may lead to personality clashes
or difficulty in agreeing on a joint approach;
iv. Cost: Joint audit may be more expensive to the client; and
v. Fee sharing: Problems may exist in fee sharing.

d. Benefits of audit by an international affiliated audit firm include:

i. Audit risk may reduce as a result of the technical competence and
exposure of the international affiliated audit firm;
ii. Synergy of affiliation with international audit firm may enhance robust
and consistent quality control;
iii. International affiliated audit firms give opportunity to audit clients and
create international presence or recognition;
iv. It ensures better training for audit staff and gives them international
exposure; and
v. Probability of audit failure is reduced and consequently, damages in case
of negligence will be reduced.

39
e. Importance of audit working papers can be briefly explained as
follows:
i. Quality of audit: It enhances quality of the audit;
ii. Audit evidence: It facilitates the effective review and evaluation
of the audit evidence obtained and conclusions reached before
the audit report is finalized. Documentation prepared at the time
the work is performed is likely to be more accurate than
documentations prepared later;
iii. Planning of audit: It assists the audit team to plan and perform
the audit;
iv. Supervision: It assists supervisors in directing and supervising
audit work;
v. Accountability: It ensures members of the audit team are
accountable for their work;
vi. Record of important matters: It helps in keeping record of
matters of continuing significance to future audits; and
vii. Training: It enables an experienced auditor with no previous
connection with that audit to conduct quality control reviews or
other inspections of the audit work.

Examiner’s Report
The question, a compulsory one, is in five parts. It tests candidates‟ knowledge on
dispatch of goods and invoices, related control objectives and principal controls thereto.
It also tests their knowledge on joint audit, international audit firm and audit working
papers.

All the candidates attempted the question. Candidates‟ understanding of the question
was generally poor for parts (a) to (d) and fair for part (e), hence the marks earned were
generally poor.

The pitfalls observed were the inability of the candidates to relate their studies in
internal control to practical scenarios and their lack of knowledge on a joint audit and
the benefits of audit by an international affiliated audit firm.

Candidates are advised to make use of the Institute‟s Study Text properly and endeavour
to apply their knowledge to practical scenarios and circumstances.

40
Marking Guide
Marks Marks
(a) 1 mark each for any of the 10 risks 10
(b) 1 mark each for any 5 control objectives 5
1 mark each for any 5 principal controls 5 10
(c) 1 mark each for 5 limitations stated 5
(d) 1 mark each for any 5 benefits stated 10
(e) 1 mark each for any 5 points stated on importance of
working papers 5
Total 40

41
SECTION B
SOLUTION 2
a) Substantive audit procedures: Substantive audit approach involves testing
and vouching to supporting documents of every item in the financial statements.
The approach is still sometimes used for small entities with weak internal
controls, some specialised audits and if there are few transactions that are subject
to audit tests.

Substantive procedures are audit procedures performed to detect material

misstatements in the presentation and disclosures of the figures reported in the
financial statements.

Substantive audit procedures seek to obtain direct audit evidence of the correct
treatment of a transaction, a balance, an asset, a liability or any other item in the
books of accounts and records of an entity.

b) Purpose of risk assessment: The risk assessment process will provide a basis for
designing and implementing responses to assessed risks of misstatement whether
due to fraud or error, through understanding the entity and its environment
including its internal controls.

Issues to consider in risk assessment include the following:

i. The areas where risk of misstatement appear to exist and the nature of the
risk;
ii. When an error should be considered material and when it may be
ignored;
iii. What aspects of the audit will be the most difficult to plan because of the
high risk of misstatement;
iv. Assessment of inherent risks and control risks and the identification of
significant audit areas;
v. Setting materiality levels;
vi. The possibility of material misstatements including those arising because
of fraud rather than unintentional error; and
vii. The identification of complex accounting areas particularly those involving
accounting estimates that can be difficult to audit.

42
c) Categories of audit assertions: These include the following:

Assertions about class of transactions and events and related

disclosures:

i. Occurrence: Transactions and events that have been recorded or disclosed

have occurred and such transactions and events relate to the entity;
ii. Completeness: All transactions and events that should have been recorded
have been included in the financial statements have been included;
iii. Accuracy: Amounts and other data relating to recorded transactions
and events have been recorded appropriately and all related disclosures
have been appropriately measured and described;
iv. Cut-Off: Transactions and events have been recorded in the
correct accounting period;
v. Classification: Transactions and events have been classified and recorded
in the proper accounts; and
vi. Presentation: Transactions and events are appropriately aggregated or
disaggregated and clearly described; and related disclosures are relevant
and understandable in the context of the requirements of the applicable
financial reporting framework.

Assertions about account balances and related disclosures

i. Existence: Assertion to confirm existence of assets, liabilities and equity

interests;
ii. Rights and obligations: The entity holds or controls the rights to assets and
liabilities are those of the entity;
iii. Completeness: All assets, liabilities and equity interests that should have
been recorded have been recorded and all related disclosures that should
have been included in the financial statements have been included;
iv. Accuracy, valuation and allocation: Assets, liabilities and equity interests
have been included in the financial statements at appropriate amounts
and any resulting valuation or allocation adjustments are appropriately
recorded and related disclosures have been appropriately measured and
described;
v. Classification: Assets, liabilities and equity interests have been classified
and recorded in the proper accounts; and
vi. Presentation: Assets, liabilities and equity interests are appropriately
aggregated or disaggregated and clearly described and related disclosures
are relevant and understandable in the context of the requirements of the
applicable financial reporting framework.

43
d. Examples of substantive testing include the following:
i. Bank confirmation;
ii. Accounts receivables confirmation;
iii. Account payable confirmation;
iv. Inquire of management regarding the collectability of customer accounts;
v. Matching customer orders to invoices billed;
vi. Matching collected funds to invoices billed;
vii. Observing a physical inventory count;
viii. Confirming with experts that the fair values assigned to assets obtained
through a business combination are reasonable;
ix. Confirmation of inventories held by third parties; and
x. Analytical procedures.

Examiner’s Report
The question tests candidates‟ knowledge on substantive audit procedure, risk
assessment and audit assertions.

About 80% of the candidates attempted the question. The candidates performed below
average.

The commonest pitfall was their exhibiting lack of knowledge on part (a) – risk
assessment and part (c) audit assertions.

Candidates are advised to prepare well for future examinations by making use of the
Institute‟s Study Text and Pathfinder.

Marking Guide
Marks Marks
(a) 2 marks for definition of substantive procedures 2
(b) 2 marks for purpose of risk assessment 2
1 mark each for any 4 issues in risk assessment 4 6
(c) 1 mark each for any 3 points about transaction assertion 3
1 mark each for any 3 points on balances assertion 3 6
(d) 1 mark for any 6 examples of substantive testing 6
Total 20

44
SOLUTION 3
a) Factors to be considered before accepting an audit
Auditors should consider the following factors:

i. Before accepting a new client relationship, the auditor should consider

whether acceptance would create any threats to compliance with the
fundamental principles. Potential threats to integrity or professional
behaviour may be created from questionable issues associated with the
client (its owners, management and activities). Client‟s issues that, if
known, could threaten compliance with the fundamental principles
include:
- Client involvement in illegal activities, that is, money laundering,
dealing in illegal drugs, etc.
- Lack of integrity in the way business transactions are being
- carried out, for example, dishonesty; and questionable financial
reporting practices.
ii. Auditors should agree to provide only those services that they are certified
and competent to perform. Before accepting a specific client engagement,
an auditor should consider whether acceptance of the audit would create
any threats to compliance with fundamental principles for example, a self-
interest threat to professional competence and due care is created if the
engagement team does not possess or cannot acquire the competencies
necessary to properly carry out the engagement;

iii. The auditor should take permission from the client to communicate with
the former auditor (if there is any) to establish if there are any matters that
he should be aware of when deciding whether or not to accept the
appointment; and

iv. An auditor in public practice should evaluate the significance of identified

self interest threat and if found significant, must apply the following
safeguards before accepting the engagement:
 Acquiring an appropriate understanding of the nature of client
business, the complexity of the operation, the specific requirement
of the engagement and the purpose, the nature and the scope of
work to be done;
 Acquiring the knowledge of relevant industries or subject matters;
 Assigning sufficient staff with necessary competencies;
 Using experts where necessary;
 Agreeing on a realistic time frame for the performance of the
engagement; and
 Complying with quality control policies and procedures

45
 designed to provide assurances that specific engagement is
accepted, only when they are performed competently.

b) Stages in an audit: An audit usually has four main stages which are:
i. Planning stage: This is a stage when the audit planning
memorandum is prepared. An audit plan should be prepared as a
means of achieving audit objectives efficiently and effectively. The
plan should contain details on staffing, timing and scope of the
audit among other things. Audit plan will set out the procedures to
be used in order to assess the risk of misstatement in the entity‟s
accounting records/financial statements and plan further audit
procedures for each material audit area;

ii. Internal control review: Modern auditing is, whenever possible,

based on a systems-based approach where the auditor relies on the
accounting systems and the related controls to ensure that
transactions are properly recorded.
Before he can rely on the systems and controls that are in place, he
must establish what those systems and attendant controls are and
carry out an evaluation of the effectiveness of the controls;

iii. Internal control testing: The systems-based audit

approach is based on the premise that accounting systems and other
related controls are sufficient to record transactions properly. The
auditor must, therefore, test the controls in order to satisfy himself
that his approach to the audit is valid. The degree of effectiveness of
an internal control system will depend on whether the control
system is able to prevent material misstatements or is able to detect
and correct material misstatements if they occur; and whether the
controls are being operated properly by the client‟s management
and other employees;
If the auditor concludes that the system of controls is weak and the
controls cannot be relied on, he will carry out substantive
procedures which is a form of transactions- based audit test
approach; and

iv. Reporting: This is the stage that the auditor will

communicate in writing all matters of non-compliance of material
importance to those charged with governance. The auditor will
express his opinion which could either be in form of unmodified or
modified report. The modified /qualified opinion can be “except for”,
“disclaimer” or “adverse”.
46
c. Roles of ICAN and Federal Government of Nigeria (FGN) in regulating external
audit:

External audit is regulated by both the Institute of Chartered Accountants of

Nigeria (ICAN) and the (FGN).

i. Regulation by ICAN (self regulation)

Eligibility to act as an external auditor is usually determined by
membership of an appropriate regulatory body such as ICAN. The roles of
such regulatory body include the following:

 Offering professional qualifications for auditors to provide evidence

that auditors possess a minimum level of technical competence; and
 Establishing procedures to ensure that the professional competence
of auditors is maintained by ensuring that audits are performed only
by fit and proper persons, members carry out their audit work in
accordance with appropriate technical and ethical standards,
members remain technically competent and up to date with modern
auditing practice. The body provides procedures for monitoring and
enforcing compliance by its members with its rules and regulations.

ii. Regulation by Federal Government of Nigeria (FGN)

 FGN may appoint a public body with similar responsibilities to a
self-regulating professional body. The public body may establish
rules and procedures for:
- Approving/authorising individuals to perform audit
work;
- Ensuring that authorised auditors have the necessary
minimum skills and knowledge to carry out their audit work
to a proper standard; and
- Handling complaints and taking disciplinary measures
against auditors where appropriate.

 The FGN may enact statutes or laws to establish that certain

individuals are ineligible to act as an external auditor in the context
of a given company or entity.
 The FGN establishes relevant statutory department or agency that
regulates audit practice especially in public interest entities.

47
Examiner’s report

The question tests candidates‟ knowledge on audit acceptance, stages in an audit and
regulatory issues of external audit.

About 60% of the candidates attempted the question. Their understanding of the
question was fair in parts (a) and (b) but poor in part (c), hence, the low marks obtained
in part (c).

The commonest pitfall was the candidates‟ lack of deep knowledge on the regulatory
roles of the Institute of Chartered Accountants of Nigeria (ICAN) and Federal Government
of Nigeria which caused switching of the solutions for each other.

Candidates are advised to study well for subsequent examinations before attempting
them.

Marking guide
Mark Total
(a) 2 marks each for any 2 factors of audit acceptance 4
(b) 2 marks each for any 3 stages in an audit 6
(c) 2 ½ marks each for any 2 key roles of ICAN 5
(d) 2 ½ marks each for any 2 roles of FGN 5 10
20

SOLUTION 4

a) Principal methods of recording internal control systems include the following:

i) Narrative notes: Narrative notes are a written description of the control
system and the controls that are in place. They are used mainly to make a
record of the control activities involved in processing transactions.
Narrative notes are simple to prepare but may become lengthy and time
consuming to prepare initially;

ii) Systems flowchart: Systems flowcharts provide a representation of

accounting systems in the form of a diagram. For each type of transaction,
they show the documents generated, the processes applied to the
documents and the flow of the documents between the various
departments involved. Flowcharts, therefore, show the flow of work by
showing how documents are transferred within a system and how they are
used; and

48
 iii) Questionnaire: Questionnaire is widely used by auditors to
document systems. This can be prepared in advance as standard
documents. They are also ideally suited for use by an auditor in an
electronic form which means that a standard questionnaire is available
and ready for use on the auditor‟s laptop computer. A questionnaire is a
list of questions about controls in a particular aspect of operations or
accounting. The two main types of questionnaire are internal control
questionnaire and internal control evaluation questionnaire and both of
them have different objectives.

b. Categories of control activities:- ISA 315 categorises internal controls into

the following types:

i) Performance review: These include reviews and analysis of actual

performance against budgets, forecasts and prior period performance. Most
of these control activities will be performed by management and are often
referred to as management controls. They include supervision. by
management of the work of subordinates, management review of
performance and control reporting;

ii) Information processing: A variety of controls are used to check the accuracy,
completeness and authorisation of transactions. These controls are split into
two broad groupings which are application controls and general IT controls;
iii) Physical controls: These include controls over the physical security
of assets and records to prevent unauthorised use, theft or
damage. Examples include limiting access to inventory areas to a
restricted number of authorised personnel and requiring
authorisation for access to computer programs and data files; and

iv) Segregation of duties: This control involves assigning different

People the responsibilities of authorising and recording transactions and
maintaining the custody of assets. This reduces the likelihood of an
employee being able to both carry out and
conceal errors or fraud.

c) i) General information technology (IT) controls: General IT controls policies and

procedures that relate to many different applications. They support the
effective functioning of application controls by ensuring the continued
proper operations of IT systems. If the general IT Controls are weak, it is
unlikely that processing undertaken by the system will be complete and
accurate because the IT controls apply to most of the IT applications.

49
 The main categories of general controls that an auditor would expect to find
in a computer based information systems are:
 Controls over the development of new computer information systems
and applications;
 Controls over the documentation and testing of changes to
programs;
 The prevention or detection of unauthorised changes to programs (for
example by an employee committing fraud or by a hacker accessing the
system);
 Controls to prevent use of incorrect data files or programs;
 Controls to prevent unauthorised amendments to data files;
and
 Controls to ensure that there will be continuity in computer operations
and that the system will not “breakdown” or cease to be operational.

ii) Application Controls: These apply to the processing of individual

applications (such as revenue, purchases or payroll). These controls help to
ensure that transactions are authorised and are completely and accurately
recorded and processed. These controls could be manual or computerised
depending on the system in question.

In IT systems, application controls share a number of common features

regardless of the particular application involved. This common features are
categorised as:
 Input controls (controls over input data);
 Processing controls;
 Data file controls; and
 Controls over the output from the system (Output controls).

Examiner’s report
The question is in three parts. It tests candidates‟ knowledge on internal control.

Most candidates avoided this question as about 20% attempted it. Their performance
was generally poor, especially in part (c).

The commonest pitfall was candidates‟ inability to proffer correct solution to general
information technology controls and application controls.

Candidates are advised to adequately cover all areas of the syllabus noting that the
information technology is an important area of modern auditing.

50
Marking guide
Marks
(a) 2 points each for the 3 methods of recording internal
control 6
(b) 2 points each for any 3 categories of control activities 6
(c) 2 points each for any 4 controls of IT 8
Total 20

SOLUTION 5

a) Sufficient relates to the quantity of evidence while appropriate relates to the

quality (relevance and reliability) of the evidence. The auditor will need to
exercise professional judgment on both aspects: the quantity and the quality of
evidence, for example:
 When is there enough evidence to support a conclusion?
 What is the quality of a given piece of evidence?
 Is this sufficient to justify the audit opinion?

The two characteristics of quantity and quality are also inter-related: an auditor
may be able to reach a conclusion based on a smaller quantity of high quality
evidence, but a larger quantity of lower quality evidence may be required to
reach the same conclusion.

b) Deciding how much audit evidence will be sufficient, or whether existing audit
evidence is sufficient, is a matter of judgment by the auditor and the quantity of
audit evidence required will depend to a large extent on:

i. The quality of that evidence;

ii. The seriousness of the risk that the financial statements might not give a
true and fair view: when this risk is high, more audit evidence will be
required;
iii. The materiality of the item;
iv. The strength of the internal controls in the client‟s accounting systems; and
v. The sampling method that the auditor will use to obtain the audit
evidence: the chosen method will affect the size of the audit sample that
the auditor requires.

51
c) Auditors‟ role in case of inadequate audit evidence

Having obtained audit evidence, the auditor must assess whether it is sufficient
to allow him to reach the opinion that the financial statements give a true and
fair view. If the auditor decides that the evidence obtained is insufficient to reach
this opinion, he may take any of the following actions, depending on the
circumstances:
i. He may obtain additional audit evidence by means of: more tests of
controls and more substantive testing procedures;
iii. Discuss the problem with the client‟s senior management or the audit
committee or those charged with governance so that they are aware of the
problem;
iv. Indicate the findings from the audit evidence obtained - these should be
included in the management letter prepared by the auditor for the client;
v. Make enquiries of management and verify management‟s responses, and
perform other audit procedures as necessary; and
vi. Modify the audit report. This should only be used as an extreme measure,
which the auditor should only use if other methods fail to resolve the
problem.

c) Reasons for preparing sufficient and appropriate audit documentation:

ISA 500: audit evidence sets out the objective of the auditor as being to design
and perform audit procedures on a timely basis and in such a way to enable him
to:

i. Enhance the quality of the audit, and

ii. Facilitate the effective review and evaluation of the audit evidence
obtained and conclusions reached, before the audit report is finalised.

Documentation enables the auditor record the audit evidence which serves as
basis for determination of the audit opinion.
Documentation prepared at the time the work is performed is likely to be more
accurate than documentation prepared later.
Other purposes of audit documentation include the following:

i. Assisting the audit team to plan and perform the audit;

ii. Assisting supervisors in directing and supervising audit work;
iii. Ensuring members of the audit team are accountable for their work;

52
 iv. Keeping a record of matters of continuing significance to future audits;
and
v. Enabling an experienced auditor, with no previous connection with that
audit, to conduct quality control reviews or other inspections i.e. by
understanding the work that has been performed and the conclusions that
have been reached.

Examiner’s report
The question tests candidates‟ knowledge on audit evidence and audit documentation.

About 80% of the candidates attempted the question. The understanding of the question
was fair.

The commonest pitfall was that candidates‟ solutions in parts (b) to (d) were generic
and not related to the factors when deciding the amount of audit evidence needed, and
reaction of the auditor to inadequate audit evidence.

Candidates are advised to answer questions according to the requirements of the

examiner to earn maximum points.

Marking guide

Marks
(a) Meaning of sufficient and appropriate audit evidence. 5
(b) 1 mark each for 4 factors for amount of audit evidence. 4
(c) 1 mark each for 5 auditors‟ action on inadequate audit
evidence. 5
(d) 1 mark each for 6 reasons for audit documentation. 6
Total 20

SOLUTION 6

Wakaso Nigeria Limited

a. Meaning of threats to Independence: In audit practice, any development or

relationship that may influence the auditors sense of judgment is usually referred
to as threat to auditor‟s independence. For example, in this case, the company
offering undue hospitality by way of accommodation and promises to double
audit fee certainly constitutes a threat to auditor‟s independence.

53
b. Independence of auditors
i. Fees and pricing: The auditor should not charge fees outside the basis
approved by the Institute. The firm should not accept an engagement
whose fee will be more than 25% of the firms total fee income unless as
exempted by the Institute. The auditor should not depend so much on a fee
from a client to the extent that he will be afraid of losing that particular
assignment and may want to compromise his integrity.

ii. Financial interest: An auditor should not have financial interest

in a client‟s business except if such a client is a financial institution and
the transaction will be done at arm‟s length. Financial interest includes
lending to or borrowing from a client, subscribing to bonds issued by the
company and having proprietary capital in the company.

iii. Contingent fees: The auditor should not accept assignment where fees
payable are contingent upon the outcome of an event or satisfactory
completion of an assignment to be decided by the client. For example, in
this case, the fees will be paid provided the auditor completes the audit
within three weeks. Such a fee, is contingent and should not be
acceptable to the auditor.

iv. Family and personal relationship: Family refers to members of immediate

family of the auditor, such as spouses, parents and children. Personal
relationship implies persons that the auditor has personal relationship
with other than members of his immediate family that can influence his
judgement and opinions.

c. The reasons why the preparation of accounting records and management

accounts constitute a threat to independence of the auditors are:
i. Preparation of accounting records and management accounts are the
responsibility of management while the auditor‟s duty is to audit these
accounts and express an independent opinion on the accounting records
and statements examined. If the accounting records and the management
accounts are prepared by the auditor, his opinion on such cannot be
independent since the statements were prepared and audited by the
auditors as there may be self review threats; and
ii. It is not sufficient for the auditor to be independent, he must be seen to be
independent, if the auditor prepares the accounting records and the
management accounts and at the same time, he audits the statements, the
parties using the statements may not believe in the auditors‟ independence
even when he has complied with all relevant legal and ethical standards.
54
Examiner’s report

The question test candidates‟ knowledge on threats to independence of auditors.

About 85% of the candidates attempted the question and they generally exhibited
very fair understanding of the requirements of the question.

The candidates‟ commonest pitfall was juxtaposing of solutions in the question

which cost them valuable points.

Candidates are advised to study well to avoid giving wrong solutions to

questions. They should also make use of ICAN Study Text adequately.

Marking guide
Marks Marks
(a) Meaning of threats to independence 2
(b) i. 4 marks for fees and pricing 4
ii. 4 marks for financial interest 4
iii. 2 marks for contingent fees 2
iv. 4 family and personal relationship 4 14
(c) 2 marks each for 2 points on reasons for threat
to independence 4
20

55
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION – MAY 2021
PERFORMANCE MANAGEMENT
Time Allowed: 31/4 hours (including 15 minutes reading time)

INSTRUCTION: YOU ARE REQUIRED TO ANSWER FOUR OUT OF SIX QUESTIONS IN

THIS PAPER

SECTION A: COMPULSORY QUESTION (40 MARKS)

QUESTION 1

The Managing Director of NTAMS Manufacturing Company Limited located in Lagos

attended a seminar titled “optimising scarce resource utility in a manufacturing setting
with particular reference to linear programming”. On his return after three days of the
programme, he called for a management meeting to discuss his experiences at the
seminar in view of the board decision to produce two major products in the coming
years.

The following information are made from the work of a research team earlier conducted
by a group of external research experts.

The expected products are “Biggi” and “smalli”. The expected costs statistics are as
follows:
Biggis N Smallis N
Material costs (5kg @ N50/kg) 250 (3kg @ N50/kg) 150
Labour costs:
Machining time (4 hours@ N15/Hr) 60 (2hours @ N15/Hr) 30
Other Processing Time (4hours @ N10/Hr) 40 (5 hours @ N10/Hr) 50

The company expects to maintain a pricing policy that is hinged on total cost of
production plus 20% mark up on cost. The Company further expects to incur annual
period overhead of N10,000,000 with normal production expectation of 200,000 units
of Biggis and 100,000 units of Smallis absorbing the overhead on 3 to 2 basis
respectively.

It is expected that in the forth coming year, the company will have the following
resources available
56
Materials 1,800,000kgs
Machine time 800,000 hours
Other Process time 1,400,000 hours

You are required:

As the management accountant
a. Explain briefly the concept of linear programming and usefulness of the model
(5 Marks)
b. Compute the Prices that will be adopted by the company for the two products using
the company pricing policy (5 Marks)
c. Advise the company on the output that needs to be produced to maximise its total
profit, supporting your answer with full financial analysis (10 Marks)
d. i. Explain the meaning of „shadow prices‟ and comment on the
usefulness of it and its limitation (5 Marks)
ii. Calculate the shadow prices of the constraints (7 Marks)
e. Assuming the company‟s position in (c) is maintained for three years with an
investment cost of N45,000,000 on the day of the commencement of
manufacturing business, using a cost of capital of 15%:
i. Can this venture be justified for the period? (4 Marks)
ii. What is the breakeven discount factor for this project? (4 Marks)
(Total 40 Marks)

SECTION B: OPEN-ENDED QUESTIONS (60 MARKS)

INSTRUCTION: YOU ARE REQUIRED TO ANSWER ANY THREE OUT OF FIVE

QUESTIONS IN THIS SECTION

QUESTION 2
PQR Plc is preparing its budgets for next year. It has already prepared forecasts of
demand levels for its product range. These are as follows:

Forecast 1 Forecast 2
Price Quantity Price Quantity
₦ ₦
Product A 10.00 500 15.00 350
Product B 20.00 800 25.00 700
Product C 30.00 2,200 40.00 1,000
57
You are to assume that only one of either forecast 1 or forecast 2 would be accepted.
The expected variable unit costs of each product are as follows:

Product A Product B Product C

₦ ₦ ₦
Direct materials (50k per kg) 2.00 3.50 7.00
Direct labour 3.00 5.00 7.40
Variable overhead 1.50 2.50 3.70
6.50 11.00 18.10

General fixed costs are budgeted as ₦20,000 for the year and no specific fixed costs are
expected for any product.
All three products use the same direct material which is expected to be limited in supply
to a maximum of 22,020 kgs in the budget year.

Required:
a. Recommend, with supporting calculations, whether forecast 1 or forecast 2 should be
adopted for the budget period. (11 Marks)
b. Prepare a report, addressed to the managing director, to explain the budget
preparation process, with particular reference to:
i. The principal budget factor (3 Marks)
ii. The budget manual (3 Marks)
iii. The role of the budget committee (3 Marks)
(Total 20 Marks)

QUESTION 3

Some time ago, Robert launched a new product. At first, sales were good but now the
figures are causing concern. Robert wants a more accurate sales forecast to produce
detailed cash forecasts.
Since there are some seasonality present in the raw data, the series for sales shown
below represents the underlying trend based on an averaging process:

58
 Year Quarter Trend Sales
point (Cartons)
x y
2016 3rd 1 10,000
2016 4th 2 10,760
2017 1st 3 10,920
2017 2nd 4 11,000
2017 3rd 5 11,050
2017 4th 6 11,080
2018 1st 7 11,085
2018 2nd 8 11,095
2018 3rd 9 11,120
2018 4th 10 11,130

On average, quarters 1 and 3 are 5% and 6% respectively above trend whilst quarters 2
and 4 are respectively 2% and 9% below trend. Some preliminary calculations on the
above ten observations have been carried out and the results are summarised below:
Results from ten periods‟ observations:
Linear regression y = a + bx
Slope = 82.67
Intercept = 10,472.33
Coefficient of determination = 0.535

It is required to make forecasts of sales for quarters 3 and 4 in 2019 and for quarters 1
and 2 in 2020 but there is some discussion on whether the ten-period data shown above
are suitable for forecasting or whether only the last five periods would provide a better
basis for forecasting. Linear analysis of the last five periods only gives the following
intermediate results:

Results of last five periods‟ observations:

y = 555.10
x2 = 330
y2 = 61,627.40
xy = 4,442.15

Note: the y values have been scaled down by 100 times for ease of calculation.
Required:
a.

59
 Probability No of pupils joining late
0.2 80 Forecast the sales of the four
0.3 30 quarters required using the
ten- 0.5 52 period observations results.
(8 Marks)
b. Prepare similar forecasts based on the last five periods‟ observations
(8 Marks)
c. Explain which forecasting bases produce the better forecast (4 Marks)
(Total 20 Marks)

QUESTION 4
Adrac Community School was founded by Adrac Community Resident Association of
Garki, Abuja, Nigeria. The school is being supervised by a board of governors made up
of selected experienced members of the community. The school is not allowed to charge
the pupils any fee as it is a community project donated to assist members of the
community.

Adrac Community Residents Association pays the school ₦21,000 for each child
registered at the beginning of the school year, which is September 1, and ₦18,000 for
any child joining the school part-way through the year. The school does not have to
refund the money to the association if a child leaves the school part-way through the
year. The number of pupils registered at the school on September 1, 2019 is 720, which
is 10% lower than the previous year. Based on past experience, the probabilities for the
number of pupils starting the school part-way through the year is as follows:

The school‟s headmistress normally prepares annual budget for consideration of the
board of governors. Since she is not too comfortable with figures, she does not
understand how to use the probability distribution provided for her annual budget.
Therefore, she just used simple average for her calculation of number of pupils expected
to join late. The revenue budget for 2019/2020 submitted by the headmistress is as
follows:

60
 Pupils Rate per Total
pupil income
N’000
Pupils registered at beginning of school year 720 ₦21,000 15,120
Average expected number of new joiners 54 N18,000 972
16,092

The headmistress uses incremental budgeting to budget for her expenditure, taking
actual expenditure for the previous year as a starting point and simply adjusting it for
inflation, as shown below.

Note Actual cost for Inflationary Budgeted cost

y/e 30 June 2019 adjustment y/e 30 June 2020
N‘000 N‘000
Repairs and maintenance 1 880 +3% 906.4
Salaries 2 12,400 +2% 12,648
Capital expenditure 3 1,300 +6% 1,378
Total budgeted expenditure 14,932.4
Budget surplus 1,159.6

Notes

i. N600,000 of the costs for the year ended 30 June 2019 related to standard
maintenance checks and repairs that have to be carried out by the school every
year in order to comply with the local government health and safety standards.
These are expected to increase by 3% in the coming year. In the year ended 30
June 2019, N280,000 was also spent on redecorating some of the classrooms. There
will be no redecoration in the coming year.

ii. One teacher earning a salary of N520,000 left the school on 30 June 2019 and
there are no plans to replace her. However, a 2% pay rise will be given to all staff
with effect from 1 December 2019.

iii. The full N1,300,000 actual costs for the year ended 30 June 2019 related to
improvements made to the school building. This year, the canteen is going to be
substantially improved, although the extent of the improvements and level of
service to be offered to pupils is still under discussion. There is a 0·7 probability
that the cost will be N1,450,000 and a 0·3 probability that it will be N800,000.
These costs must be paid in full before the end of the year ending 30 June 2020.

The school‟s board of governors, who review the budget, are concerned that the budget
surplus has been calculated incorrectly. They believe that it should have been calculated
using expected income, based on the probabilities provided, and using expected
61
expenditure, based on the information provided in notes i to iii. They believe that
incremental budgeting is not a reliable tool for budget setting in the school since, for
the last three years, there have been shortfalls of cash despite a budget surplus being
predicted. Since the school has no other source of funding available to it, these
shortfalls have had serious consequences, such as the closure of the school kitchen for a
considerable period in the last school year, meaning that no meals were available to
pupils. This is thought to have been the cause of the 10% fall in the number of pupils
registered at the school on 1 September 2019.

Required:

a. Redraft the school‟s budget for the year ending 30 June 2020 based on the views
of the board of governors. (6 Marks)
b. Discuss the advantages and disadvantages of using incremental budgeting
(4 Marks)
c. Discuss the THREE main steps involved in preparing a zero-based budget
(6 Marks)
d. Discuss the extent to which zero-based budgeting could be used by Adrac
Community School to improve the budgeting process (4 Marks)
(Total 20 Marks)

QUESTION 5

A national boutique chain sells a wide range of high quality customised fashion goods.
One particular outfit is bought at ₦8,000 and sold at ₦13,000. Mean holding costs per
season per outfit work out at ₦500 and it costs ₦80,000 to order and receive goods in
stock. The manufacturers require orders in advance and once a batch has been made it
is not possible to place a repeat order. Further, it is not possible for delivery to be
staggered over the fashion season.

When a customer buys an outfit that requires adjustments, any alterations or

adjustments are made and she collects the outfit a day or so later. Generally, if an outfit
is out of stock at one boutique it can be readily obtained from another branch, usually
in a matter of hours. However, if the chain as a whole runs out of an item, then not only
is the profit not earned, but the ₦2,000 or so profit that comes from the extras that
customers buy is also lost. If the chain has excess purchase for a season then it is
expected that the chain will be able to dispose of the surplus outfits at ₦5,000 each.

62
The pattern of past sales of a comparable outfit show the following probability
distribution for the chain as a whole:
Outfits Probability
sold
1,100 0.30
1,200 0.40
1,300 0.20
1,400 0.10

The problem facing the management accountant of the chain is to decide how many
outfits to order for the season ahead, in order to maximise expected profit, bearing in
mind the penalties for over and under ordering.

You are required to:

a) Determine the number of outfits to order to maximise expected profits.
(17 Marks)
b) Compare and contrast the model that you have developed with the
classical economic order model. (3 Marks)
(Total 20 Marks)

QUESTION 6

Chukwukah Nigeria Limited manufactures three products, JEL, JET and JAL. Demand for
products JEL and JET is relatively elastic whilst demand for product JAL is relatively
inelastic. Each product uses the same materials and the same type of direct labour but
in different quantities. For many years, the company has been using full absorption
costing and absorbing overheads on the basis of direct labour hours. Selling prices are
then determined using cost plus pricing. This is common in the company‟s industry with
most competitors applying a standard mark-up.

Budgeted production and sales volumes for JEL, JET and JAL for the next year are
25,000, 20,000 and 27,600 units respectively.

The budgeted direct costs of the three products are shown below:

Product JEL JET JAL

N per unit N per unit N per unit
Direct materials 250 280 220
Direct labour (N120 per hour) 300 360 240

63
In the coming year, Chukwukah also expects to incur indirect production costs of
N6,887,000, which are analysed as follows:

Cost pools N‘000 Cost drivers

Machine set up costs 1,400 Number of batches
Material ordering costs 1,580 Number of purchase orders
Machine running costs 2,100 Number of machine hours
General facility costs 1,807 Number of machine hours
6,887

The following additional data relates to each product:

Product JEL JET JAL

Batch size (units) 500 800 400
No of purchase orders per batch 4 5 4
Machine hours per unit 1.5 1.25 1.4

The management of Chukwukah Nigeria Limited wants to boost sales revenue in order to
increase profits but its capacity to do this is limited because of its use of cost plus
pricing and the application of standard mark-up. The management accountant has
suggested using activity based costing (ABC) instead of full absorption costing, since
this will alter the cost of the products and may therefore enable a different price to be
charged.

Required:

a. Calculate the budgeted full production cost per unit of each product using
absorption costing. All workings should be to two decimal places. (6 Marks)
b. Calculate the budgeted full production cost per unit of each product using activity
based costing. All workings should be to two decimal places. (8 Marks)
c. Discuss the impact on the selling prices and the sales volumes of each product
which a change to activity based costing would be expected to bring about.
(6 Marks)
(Total 20 Marks)

64
 Formulae
Learning curve
Y = axb
Where Y = cumulative average time per unit to produce x units
a = the time taken for the first unit of output
x = the cumulative number of units produced
b = the index of learning (log LR/log2)
LR = the learning rate as a decimal

Demand curve
P = a – bQ

change in price
b
change in quantity

a = price when Q = 0
MR = a – 2bQ

The linear regression equation of Y on X is given by:

Y= 𝑎 + 𝑏𝑋
𝑛 𝑋𝑌 − ( 𝑋)( 𝑌)
where b= 2
𝑛 𝑋 − 𝑋 2

𝑦 𝑏 𝑥
a= −
𝑛 𝑛

Coefficient of determination (r2)

2
𝑛 𝑋𝑌 − 𝑥 𝑌1
r2 = 2 2
(𝑛 𝑋 − 𝑋 2 (𝑛 𝑦 − 𝑋 2

65
 The Miller-Orr Model
1
3 3
x Transaction Cost x Variance of Cash flows
4
𝑆𝑝𝑟𝑒𝑎𝑑 = 3 x
Interest rate as a proportion

Annuity Table
Present value of an annuity of 1 i.e. 1 - (1 + r)-n
r
Where r = discount rate

n = number of periods

Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1

2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2

3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3

4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4

5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5

6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6

7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7

8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8

9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9

10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10

11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11

12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12

13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13

14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14

15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1

2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2

3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3

4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4

5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5

6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6

7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7

8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8

9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9

10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10

11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11

12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12

13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13

14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14

15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15

66
67
SECTION A

SOLUTION 1

a. Concept of linear programming and usefulness

Linear programming is a mathematical method for determining a way to achieve
the best outcome (such as maximum profit or lowest cost) subject to a number of
limiting factors (constraints).

A linear programming problem involves maximising or minimising a linear

function (the objective function) subject to linear constraints.

Both the constraints and the “best outcome” are represented as linear
relationships.

What constitutes the best outcome depends on the objective. The equation
constructed to represent the best outcome is known as the objective function.

Uses of linear programming (LP)

 Budgeting: In preparing budget, one of the first steps is the identification of the
key (limiting) factor. When there is more than one limiting factor, LP can be used
to identify the most profitable use of resources.

 Capital budgeting: When we have multi-period capital rationing, LP can be used

to optimally allocate the available funds among the competing projects.

 Transfer pricing: In a divisionalised organisation, LP can be used to compute

optimal transfer price between divisions when the supplying division does not
have sufficient capacity to met all the demands placed upon it.

 Calculating relevant costs: The relevant cost of a scarce resource is calculated as

acquisition cost of the resource plus opportunity cost. When more than one scarce
resource exist, LP can be used to establish the opportunity cost (Shadow price).

 Maximum payment for the supply of additional scarce resources: If labour is

an effective limiting factor, for example, the maximum overtime premium to pay
per additional hour is the shadow price which can be determined using LP.

 Control: LP is also useful in the analysis of variances. For example, adverse

material usage variances can be indication of material wastage. Such variances
68
 should be valued at the standard cost of the material plus the opportunity cost of
the loss of one scarce unit of material. LP can be used to determine the
opportunity cost.

b. Computation of unit selling price and associated unit profit of the two products.
Biggis Smallis
N N
Material 250 150
Labour costs:
Machine time 60 30
Processing 40 50
Overhead cost 30 40
Total costs 380 270
Profit per unit 76 54
Selling price per unit 456 324

c. ADVICE ON THE OUTPUT TO BE PRODUCED TO MAXIMISE TOTAL PROFIT

STEP 1 –DETERMINATION OF LIMITING FACTOR

Materials needed to produce 200,000 units of Biggis & 100,000 units of Smallis

BIGGIS 5kg x 200,000 1,000,000

SMALLIS 3kg x 100,000 300,000
Total Required 1,300,000
Available Material 1,800,000

Conclusion:
Materials are not limiting factor since available resources exceed
resources needed to meet production levels.

Machine time needed to produce 200,000 units of Biggis and 100,000 units of
Smallis.

69
 BIGGIS 4hrs x 200,000 800,000
SMALLIS 2hrs x 100,000 200,000
Total Required 1,000,000
Available Hours 800,000

Conclusion:
Machine time is a limiting factor since hours available are less than
the hours needed to meet production levels.

Other processing time needed to produce 200,00 units of Biggs and

100,000 units of smallis:

BIGGIS 4hrs x 200,000 800,000

SMALLIS 5hrs x 100,000 500,000
Total Required 1,300,000
Available Hours 0
1,400,000

Conclusion:
Other processing time is not a limiting factor since hours available
exceeds hours needed to meet production levels.

STEP 2 – DETERMINATION OF PRIORITY OF PRODUCTION PLAN

Biggis Smallis
N N
Selling price 456 324
Total variable costs (350) (230)
Contribution per unit 106 94
Machine time per unit 4 2
Contribution per machine time 26.5 47
Ranking 2nd 1st

PRODUCT UNITS HOURS USED HOURS LEFT

SMALLIS 100,000 200,000 600,000
BIGGIS 150,000 600,000 -

70
 Comment
Hence, the optimal production plan for NTAMS Manufacturing Company Ltd
is to produce 100,000 units of Smallis and 150,000 units of Biggis.

(d) SHADOW PRICE

MEANING
The shadow cost of a binding constraint is the amount by which the objective
function decreases (or increases) as a result of availability of one unit less or
more of the scarce resource. The solutions to the dual problem of the
primal problem give the shadow costs (prices), hence the alternative term
dual costs (prices).

USEFULNESS OF SHADOW PRICES

 Can be used to determine the relevant cost of a scarce resource
 Useful in setting transfer price
 Useful in setting transfer price
 It assists in determining opportunity cost
 Can be used in allocating funds to projects when there is multi-period capital
rationing.
The major limitation of shadow price is that it is valid for a limited range of output.
For example, if labour hour is the limiting factor, the shadow price will tend to zero
as more labour hours are supplied.

71
 CALCULATION OF SHADOW PRICE OF THE CONSTRAINTS
Shadow price only exists for binding resources – hence shadow price
will only exist for machine time. If one (1) additional machine time is
available, total machine time will be 800,001

Total units of Biggis to be produced wil l be 150,000.25 units (600,001/4)

New Total contribution will be (100,000 x 94) + (150,000.25 x 106) =
25,300,026.50
Previous total contribution was (100,000 x 94) + (150,000 x 106) =
25,300,000
Increase in contribution = 25,300,026.50 – 25,300,000 = 26.50

Alternative solution

Candidates may reduce the available machine time by 1 hour.

If one machine hour is reduced Total units of Biggis =149,999.75 units

N
New contribution (100,000 x 94 + 149,999.75 x 106) = 25, 299,973.5
Old contribution 25,300,000

Shadow price (reduction in contribution)

(26.50)
Shadow price = N26.50k

ei) NPV (Discount Factor 15%) = 2.283

Total contribution = 25,300,000 (2.283) = 57,759,900
Total Outflow = 45,000,000 = 45,000.000
NPV = N12,759,000

Yes, the project‟s NPV is positive and therefore worthwhile.

ii) If a discount factor = 35%

Total contribution = 25.300,000 x 1.696 = N42,908,800
Total Outflow = N
45,000,000
NPV at 35% = (N2,091,200)

A
IRR = a + ( ) (b – a)
A B

72
 a = Positive NPV discount rate
A = Positive NPV
b = Negative NPV discount rate
B = Negative NPV
12,759,000
= 15% + ( ) (35% – 15%)
12,759,000  2,091,200

12,759,000 (20%)
= 15% + ( )
14,851,100

= 15% + 17.18%

= 32.18%

Examiner’s report
The question tests students‟ understanding of resource allocation using
contribution per limiting factor. It was attempted by the majority of the
candidates being a compulsory question.

The performance was below average.

The major pitfall was the lack of understanding in the subject area and the
conditions that must be satisfied before the linear programming is applied.

Candidates are advised to read the ICAN study text when preparing for future
examination of the Institute.

Marking guide
Mark Total
a. Definition of linear programming 1
Explanation of linear programming 1
Usefulness (3 points at 1 mark per point) 3 5
b. Selling Price (20 ticks at ¼ mark per tick) 5
c. Advice on the optimal output 10
d. Shadow Price/usefulness/limitation 5
Shadow price computations 7 12
e. Investment analysis - NPV 4
Calculation of IRR 4 8 40

73
SECTION B

SOLUTION 2

(a) Materials supply is a limiting factor for forecast 1, but not for forecast 2.

Forecast 1

Product A Product B Product C

₦ ₦ ₦
Sales price per unit 10.00 20.00 30.00
Variable cost per unit 6.50 11.00 18.10
Contribution 3.50 9.00 11.90
Contribution per kg of material 0.88 1.29 0.85

Ranking 2nd 1st 3rd

Optimal production plan for forecast 1

Units Contribution ₦
kg of material
Product B 800 5,600 7,200
Product A 500 2,000 1,750
Product C 1,030 14,420 12,257
Total contribution 22,020 21,207

Optimal Production Plan for forecast 2

Product A Product B Product C

Total
₦per unit ₦ per unit ₦ per unit
Sales price 15.00 25.00 40.00
Variable-cost 6.50 11.00 18.10
Contribution 8.50 14.00 21.90
Sales volume (units) 350 700 1,000
Total contribution ₦2,975 ₦9,800 ₦21,900 ₦34,675

74
 Recommendation:
Forecast 2 should be adopted for the budget period. It produces a
contribution of ₦34,675 which is ₦13,468 higher than the contribution for
forecast 1.

(b) REPORT

To: The Managing Director

From: The Finance Manager

Subject: Budget Preparation Process

Date: 5 May 2021

1. INTRODUCTION
In line with the request of the management of our company, PQR Plc
(“PQR” or “the Company”) kindly see below the detailed discussion o n
some of the key issues in the budget preparation process.

2. PRINCIPAL BUDGET FACTOR

The principal budget factor or limiting factor or key budget factor is a
factor, which at any time is an overriding planning limitation on the
activities of the organisation. Examples of principal budget factors
include: staffing limitations, scarcity of materials and other logistics,
limited financial resources, low sales demand, limited storage facilities,
etc.
3. BUDGET MANUAL
The budget manual sets out the budget guidelines which are budgeting
instructions, that the Budget Committee gives to guide departmental
heads involved in the preparation of the budget so that they follow a
particular goal, objective, technique, trend or method of estimating the
income and expenditure variables.

4. ROLE OF THE BUDGET COMMITTEE

The Budget Committee is made up of members of senior management
that oversees all budgetary matters. A typical budget committee
includes the chief executive officer, heads of strategic business units
and the chief finance officer. The committee sets or approves the
overall budget goals for the organisation, and its major business units,

75
 directs and coordinates budget preparation, approves the final budget,
monitors operations as the year unfolds, and reviews the operating
results at the end of the period.

The budget committee also approves major revisions of the budget

during the period. This committee usually consists of sectional or
departmental managers and is usually serviced by the Budget Officer
who normally is the finance officer.

Apart from the above, the functions of the committee may include the
following:
 Determine budget policy guidelines and selecting
budget policies compatible with organisational goals
and objectives;
 Establishing the budget timetable;
 Review budget estimates submitted by sectional heads;
 Facilitate the co-ordination of the budgets;
 Suggest amendments to budgets and revising budget
estimates when necessary;
 Approve budgets after amendments;
 Facilitate the generation of budgetary control reports;
 Analysing budget reports and recommending changes;
 Examine variances, recommend investigation of variances
and recommend solutions to remedy off-standard
performance; and
 Advise top management on all matters concerning the
budget.

Examiner‟s report
The question examines candidates on optimal mix of production and some
concepts associated with the budgeting process. Majority of the candidates
attempted the question, the performance was average. The main pitfall is
inability of the students to identify the quantity of the limiting factor.

Candidates are encouraged to read the Institute‟s study text when preparing for
the examination of the Institute.

Marking guide

Mark Total
a. Forecast to be Adopted/Computation 11
b. i) Principal budget factor 3
ii) Budget manual 3
iii) Role of budget committee 3 9 20

76
SOLUTION 3
a) Year Quarter Trend point Sales trend (cartons)
x y = a + bx
2019 3 13 10,472.33 + (82.67 × 13) = 11,547
2019 4 14 10,472.33 + (82.67 × 14) = 11,630
2020 1 15 10,472.33 + (82.67 × 15) = 11,712
2020 2 16 10,472.33 + (82.67 × 16) = 11,795

The seasonally adjusted forecasts are therefore as follows:

Year Quarter Seasonally adjusted forecast sales (cartons)
2019 3 11,547 × 1.06 = 12,240
2019 4 11,630 × 0.91 = 10,583
2020 1 11,712 × 1.05 = 12,298
2020 2 11,795 × 0.98 = 11,559

b) We need to calculate the regression line of the last five periods'

observations. This line is
y = a + bx

n xy − x y
where b =
n x2− x 2

y 𝑏 x
and a = −
n n

5 × 4,442.15 − (40 × 555.1) 6.75

So b= = = 0.135
5 × 330 − 40 × 40 50

555.1 0.135 × 40
a= − = 111.02 − 1.08 = 109.94
5 5

We need to multiply the a and b values back up by 100 to compensate for

the fact that the y values were scaled down by 100 before the sigma
calculations were carried out.

So the regression line is y = 10,994 + 13.5x

77
 Year Quarter Trend point Sales trend (cartons)
x y = a + bx
2019 3 13 10,994 + (13.5 × 13) = 11,169.5
2019 4 14 10,994 + (13.5 × 14) = 11,183.0
2020 1 15 10,994 +(13.5 × 15) = 11,196.5
2020 2 16 10,994 + (13.5 × 16) = 11,210.0

The seasonally adjusted forecasts are therefore as follows:

Year Quarter Seasonally adjusted forecast sales (cartons)

2019 3 11,169.5 × 1.06 = 11,840
2019 4 11,183.0 × 0.91 = 10,177
2020 1 11,196.5 × 1.05 = 11,756
2020 2 11,210.0 × 0.98 = 10,986

c) One common method of deciding on which forecasting basis produces the

better result is to compare the coefficients of determination. With ten
periods' observations we are told that r2 = 0.535.

With five periods' observations we have to calculate the coefficient of

determination from the equation given in the tables provided.

n xy − x y 2
r2 = 2
n x − x 2 n 𝑦 2 − ( 𝑦)2

5 × 4,442.15 − 40 × 555.1 2 6.752

= =
5 × 330 − 40 × 40 5 × 61,627.4 − (555.1 × 555.1) 50 × 0.99
= 0.92

Prima facie the forecasting method, using five periods' observations is

much better than the other using ten periods, since the coefficient of
determination of the former is 0.92 compared with 0.535 for the latter.

We can explain 92% of the variations in sales by the passage of time using
the former method, but can explain only 53.5% of the variations in sales
using the latter method.

78
 Examiner’s report

The question tests candidates‟ knowledge of regression analysis in forecasting.

Few candidates attempted the question, the performance was average. The
major pitfall of the candidates was inability to apply seasonal variation of the
trend to the forecast.

Candidates are encouraged to read the Institute‟s study text when preparing for
future examination of the Institute.

Marking guide

Mark Total
a. Forecast of 4 Quarters using 10-period
observation 8
b. Forecast of 4 Quarters using 5-period
observation 8
c. Commenting of better of forecast:
- Coefficient of determination formulae 1
- Substituting of figures into the formulae 1
- Comparation of two forecast figures 1
- Decision 1 4 20

SOLUTION 4

ADRAC COMMUNITY SCHOOL

a. REDRAFTING THE BUDGET FOR THE YEAR ENDED 30 JUNE 2020

BUDGETED INCOME

N‟000
Pupils Rate/Pupil
N
Pupils registered at the beginning of school year 720 21,000 15, 120
Average Expected Number of New Joiners 51 18,000 918
16,038

79
 BUDGETED EXPENDITURE

Actual cost for Inflationary Budget Cost for

the year Ended Adjustment the year Ended
30-June-2019 30-June-2020
N‟000 N‟000
Repairs and Maintenance Note 1 600 3% 618
Salary Note 2 11,880 2% 12,019
Improvement of canteen Note 3 1,300 1,255
13,892
Budgeted Surplus/(Deficit) 2,146

Note 1:

Repairs & maintenance 600,000 (1.03) = 618,000

Note 2:

Salaries (12,400,000 – 520,000) (1 + 0.02 x 7/12) = 12,019,000

Note 3:

Improvement of canteen

Estimated cost Pro Expected cost

1,450,000 0.7 1,015,000
800,000 0.3 240,000
1,255,000

(b) Advantages of Incremental Budgeting

– Incremental budgeting is very easy to prepare. This makes it possible for a

person without any accounting training to build a budget.
– Incremental budgeting is also very quick to comprehend compared to other
budgeting methods.
– The information required to complete it is also usually readily available

Disadvantages of Incremental Budgeting

– There is no incentive to eliminate wasteful or unnecessary

spending from the budget;
– It encourages more waste (or budget slack) because managers will
try to spend up to their budget limit so that budget for next financial
year will not reduce.
– It increases allocated cost irrespective of performance.

80
(c) STEPS IN PREPARING ZERO-BASED BUDGET

Zero-based Budget is prepared as follows:

(i) A decision must be taken to provide for a minimum level of operation.
This means deciding for each basic operation whether or not to
perform the operation.
(ii) Having decided on a basic level of operations, a basic expenditure
budget can be prepared.
(iii) The next step is to consider each incremental decision package and
decide whether additional operation is justified. An incremental
decision package is justified if the expected benefits exceed the
estimated costs.

(d) EXTENT TO WHICH ZERO-BASED BUDGET CAN BE USED BY

ADRAC TO IMPROVE BUDGETING PROCESS

i. It can be used to help lower costs by avoiding blanket increases or

decreases to a prior period's budget.
ii. It can be used to help in efficient allocation of resources
(department-wise) as it does not look at the historical numbers but
looks at the actual numbers
iii. It leads to the identification of opportunities and more cost-
effective ways of doing things by removing all the unproductive or
redundant activities.
iv. Since every line item is to be justified, zero-based budget
overcomes the weakness of incremental budgeting of budget inflation.
v. It also improves coordination and communication within the
department and motivates employees by involving them in decision-
making.

Examiner’s report

The question tests candidates‟ understanding of Incremental Budget and Zero

Based Budget. Majority of the candidates attempted the question.

Candidates performance was above average.

The candidates are advised to read the Institute‟s study text when preparing for
the Institute‟s examination in future.

81
Marking guide

Mark Total
a. Redrafted budget 6
b. i) Advantages (Any 2 at 1 mark) 2
ii) Disadvantages (Any 2 at 1 mark) 2 4
c. 3 steps at 2 marks 6
d. Extent of use of ZBB by Adrac (Any 2 points
at 2 marks each) 4 20

SOLUTION 5

a) Unit contribution
₦13,000 – (8,000 + 500) = ₦4,500
Unit loss when surplus sold
₦8,500 – 5,000 = ₦3,500
Unit penalty when demand not satisfied
₦2,000 per outfit not sold
Probability of sales levels
Sales Probability
1,100 0.3
1,200 0.4
1,300 0.2
1,400 0.1

Contribution calculations
(1,100 units purchased)
Demand contribution ₦
1,100 1,100 × ₦4,500 = 4,950,000
1,200 1,100 × ₦4,500 – 100 × ₦2,000 = 4,750,000
1,300 1,100 × ₦4,500 – 200 × ₦2,000 = 4,550,000
1,400 1,100 × ₦4,500 – 300 × ₦2,000 = 4,350,000

(1,200 units purchased)

Demand Contribution ₦
1,100 1,100 × ₦4,500 – 100 × ₦3,500 = 4,600,000
1,200 1,200 × ₦4,500 = 5,400,000
1,300 1,200 × ₦4,500 – 100 × ₦2,000 = 5,200,000
1,400 1,200 × ₦4,500 – 200 × ₦2,000 = 5,000,000

82
 (1,300 units purchased)
Demand Contribution ₦
1,100 1,100 × ₦4,500 – 200 × ₦3,500 = 4,250,000
1,200 1,200 × ₦4,500 – 100 × ₦3,500 = 5,050,000
1,300 1,300 × ₦4,500 = 5,850,000
1,400 1,300 × ₦4,500 – 100 × ₦2,000 = 5,650,000

(1,400 units purchased)

Demand Contribution ₦
1,100 1,100 × ₦4,500 – 300 × ₦3,500 = 3,900,000
1,200 1,200 × ₦4,500 – 200 × ₦3,500 = 4,700,000
1,300 1,300 × ₦4,500 – 100 × ₦3,500 = 5,500,000
1,400 1,400 × ₦4,500 = 6,300,000

Summary of outcomes
Probability Order quantity

Demand Expected
1,100 1,200 1,300 1,400 contribution
0.3 0.4 0.2 0.1 ₦000
1,100 4,950,000 4,750,000 4,550,000 4,350,000 4,730
1,200 4,600,000 5,400,000 5,200,000 5,000,000 5,080
1,300 4,250,000 5,050,000 5,850,000 5,650,000 5,030
1,400 3,900,000 4,700,000 5,500,000 6,300,000 4,780

Application of probability on the Pay off Matrix

State of Nature (Sales)

Decision 0.3 0.4 0.2 0.1
Alternatives 1,100 1,200 1,300 1,400 Max
1100 1,485,000 1,900,000 910,000 435,000 1,900,000
1200 1,380,000 2,160,000 1,040,000 500,000 2,160,000
1300 1,275,000 2,020,000 1,170,000 565,000 2,020,000
1400 1,170,000 1,880,000 1,100,000 630,000 1,880,000

:. On the basis of the expected contribution the number of outfits to order is

1,200 units.

Note: The order/receipt costs of ₦80,000 are constant throughout and

therefore have been ignored.

83
 b) The basic EOQ model assumes a known demand per period e.g., per year
and the aim is then to find how often, and therefore how much, to order at
a time so as to minimise total costs, each order arriving when the stock
level is zero so that there are no „lost sales‟ and no surplus stock. (It has to
be said that the basic EOQ model is rarely, if ever applicable in this simple
form in a real-life case, although refinements such as variable demand can
be built into the model).

By contrast, in the model calculated, demand is not known with certainty

but is assumed to conform to the probability distribution given. Since the
whole of the season‟s stock has to be ordered in a single batch at the start
of the season, both overstocking and under stocking are possible, with
resultant loss of profit contribution.

Examiner’s report

The question tests the candidates‟ understanding of decision making under

uncertainty. Few students attempted the question and performance was below
average. The major pitfall was lack of understanding in identifying possible
scenarios for decision making.
Candidates are advised to study the Institute‟s text for future Institute‟s study
examination.

Marking guide

Mark Total
a. i) Number of outfits to maximise profits
(32 ticks at ½ mark) 16
ii) Decision 1 17
b. Compare models 1½
Contrast models 1½ 3 20

SOLUTION 6

CHUKWUKAH NIGERIA LIMITED

(a) Full budgeted production cost per unit using absorption costing
Product Jel Jet Jal Total
Budgeted annual production (units) 25,000 20,000 27,600
Labour hours per unit 2·5 3 2
Total labour hours 62,500 60,000 55,200 177,700

Overhead absorption rate = N6,887,000/177,700 = N38·76 per hour.

84
 Product Jel Jet Jal
N per unit N per unit N per unit
Direct materials 250.00 280.00 220.00
Direct labour 300.00 360.00 240.00
Overhead (N38·76 x 2·5/3/2) 96.90 116.28 77.52
Full cost per unit 646.90 756.28 537.52

(b) Full budgeted production cost per unit using activity based costing

Product Jel Jet Jal Total

Budgeted annual production (units) 25,000 20,000 27,600
Batch size 500 800 400
Number of batches (i.e. set ups) 50 25 69 144
Number of purchase orders per batch 4 5 4
Total number of orders 200 125 276 601
Machine hours per unit 1·5 1·25 1·4
Total machine hours 37,500 25,000 38,640 101,140

Cost driver rates:

Cost per machine set up N1,400,000/144 = N9,722.22
Cost per order N1,580,000/601 = N2,628.95
Machine running cost = ₦21,000,000/101140 = ₦20.76
General facility cost = 1,807,000/101140 = ₦17.87

Allocation of overheads to each product:

Product Jel Jet Jal Total
N N N N
Machine set up costs 486,111 243,055 670,833 1,400,000
Material ordering costs 525,790 328,619 725,591 1,580,000
Machine running cost 778,624 519,082 802,294 2,100,000
General facility cost 669,987 446,658 690,355 1,807,000
Total 2,460,512 1,537,414 2,889,073 6,887,000

85
Quantity Produced 25,000 20,000 27,600

Overhead cost per unit N98.42 N76.87 N104.68

Allocation of overheads to each product

Total cost per unit: N per unit N per unit N per unit
Direct materials 250.00 280.00 220.00
Direct labour 300.00 360.00 240.00
Overhead 98.42 76.87 104.68
ABC cost per unit 648.42 716.87 564.68

c. The company prices product on the basis of cost plus pricing model. The
application of ABC model will impact the selling price and sales volume of
the products as follows:

Jel: The demand is elastic.

As a result of ABC model, cost will increase from N646.90 to N648.42

meaning increase in selling price and reduction in sales volume

Jet: The demand is elastic.

As a result pf ABC method, cost will decrease from N756.28 to N716.87

meaning that there will be a decrease in selling price and increase in sales
volume.

JAL: The demand is inelastic meaning change in price will not affect the
quantity demanded. Hence, even though the cost increased from N537.52
to N564.68, selling price will increase but will not affect the sales volume.

Examiner’s report

The question tests the candidates‟ understanding of overhead apportionment

using Traditional and Activity Based Costing Method. Majority attempted the
question and the performance was average. The major pitfall was the
determination of the number of batches involved.
Candidates are encouraged to make use of the Institute‟s text for future
Institute‟s examination.

86
Marking guide

Mark Total
a. Budgeted full cost per unit (12 ticks at ½ mark
each tick) 6
b. Budgeted ABC full production cost per unit
Cost driver rate (4 ticks at ½ mark each) 2
Production cost per unit (12 ticks at ½ mark each) 6 8
c. Impact of ABC on selling price/sales volume 6 20

87
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

SKILLS LEVEL EXAMINATION – MAY 2021

PUBLIC SECTOR ACCOUNTING & FINANCE
Time Allowed: 31/4 hours (including 15 minutes reading time)

INSTRUCTION: YOU ARE REQUIRED TO ANSWER FOUR OUT OF SIX

QUESTIONS IN THIS PAPER

SECTION A: COMPULSORY QUESTION (40 MARKS)

QUESTION 1

Okuku State University is one of the parastatals of Okuku State, but it is not a
Government Business Enterprise (GBE). The following information relates to the
accounts of the University for the year ended December 31, 2018:

Statement of financial position as at December 31, 2018

Cost Accum. Dep. Carrying

amount
Non-current assets N‟million N‟million N‟million
Land and buildings 15,000 250 14,750
Equipment 1,000 100 900
Furniture 800 80 720
Plant and machinery 550 50 500
Motor vehicles 450 45 405
17,800 525 17,275

Current assets
Inventories 11,000
Receivables 15,000
Bank 3,000
29,000
Total assets 46,275
Non-current liabilities 30,000
Current liabilities 8,000
Total liabilities 38,000
Net assets 8,275

Net assets/equity
Reserves 8,275

The following transactions, which took place during the year ended December
31, 2018 were not recorded in the books.

88
 (i) The University acquired office equipment worth ₦150,000,000 from Joko
Nigeria Limited. The installation and transportation of the equipment
amounted to ₦3,000,000. Half of the cost of the equipment was paid
during the year, while the balance was paid later in January 2019. The
University took over the building of a defunct State College of Education.
The fair value of the building taken over was estimated at ₦500,000,000,
at the end of the year.

(ii) The University Teaching Hospital received motor vehicles and laboratory
equipment from a UK based research institute as donation during the year.
The intervention was to curtail the spread of lassa fever in the country. The
cost of the motor vehicles and laboratory equipment donated amounted to
₦20,000,000 and ₦50,000,000, respectively.

(iii) The University acquired a motor vehicle for ₦150,000,000 on January

1,2018.

(iv) One of the buildings owned by the University was gutted by fire during the
year ended December 31, 2018. The carrying amount of the building as at
the date of the fire incidence was put at ₦160,000,000. The fair value of
the building after the fire incidence at the end of the year was estimated
by a valuer to be ₦130,000,000.

(v) The University acquired motor vehicle on January 1, 2017 at ₦8,000,000

with an estimated useful life of 5 years. The University decided to dispose
of the motor vehicle for ₦4,000,000 at the end of the second year.
(vi) The University acquired computers on January 1, 2017 at the cost of
₦1,000,000. The computers have an estimated useful life of 5 years. Due to
fire outbreak in the University on December 31, 2018, the computers were
badly damaged and of no use to the University. It was resolved that they
should be discarded and written off. The University uses straight-line
method in depreciating its property, plant and equipment (PPE).

(vii) The University acquired a land in 2018 at the cost of ₦50,000,000 to construct
a plaza for rent. Cost of construction was put at ₦250,000,000 as at the end
of the year 2018. The plaza was estimated to have a useful life of 25 years.
It is the policy of the University to depreciate investment properties using
the straight-line method.

89
(viii) The University adopted full year depreciation policy using the following
rates:

%
Motor vehicle 20
Building 4
Furniture 10
Equipment(including Laboratory and computers) 20
Plant and machinery 15

Required:

a. Identify FOUR characteristics of Government Business Enterprises (GBEs) as

stated in IPSAS 1 on presentation of financial statements. (2 Marks)

b. Prepare the necessary journal entries to record the above transactions for
the year ended December 31, 2018. (10 Marks)

c. Prepare the adjusted statement of financial position as at December 31,

2018. (20 Marks)

d. Identify and explain FOUR qualitative characteristics of financial reporting as

required by appendix 2 of IPSAS 1 on presentation of financial statements.
(8 Marks)
(Total 40 Marks)

SECTION B: (60 MARKS)

INSTRUCTION: YOU ARE REQUIRED TO ANSWER ANY THREE OUT OF FIVE

QUESTIONS INTHIS SECTION

QUESTION 2

a. Debt management is a key component of public finance management that

enables the government meet its financing needs at minimum costs and
within acceptable levels of risk.

One of the diagnostic tools that government uses in managing its debt
portfolio is to annually conduct a Debt Sustainability Analysis (DSA).

90
 Required:
Explain the term “Debt Sustainability Analysis”, identifying its THREE
objectives and FIVE benefits. (10 Marks)

b. You have received an official memo from your Permanent Secretary, which
reads:

Director of Account and Finance:

Hope you are doing well. We have just closed from a workshop organised
by the Ministry of Finance on public finance management not long ago and
the discussion was all about adoption of IPSAS accrual accounting in the
public sector. It was emphasised that migration from IPSAS Cash Basis to
IPSAS Accrual Basis is necessary to improve financial reporting and
transparency in the public sector. You know I have little knowledge in
accounting, so I was completely lost in the discussions and I wished you
had attended the workshop with me.

Another issue discussed was commitment accounting. We were made to

understand that commitment accounting strengthens public finance
management and therefore all Ministries, Departments and Agencies (MDAs)
must ensure that every expenditure is committed in accordance with the
appropriation prior to spending.
Please could you help me with some information on these issues?

Required:
Explain to the Permanent Secretary:

i. THREE differences between accrual accounting and cash accounting.

(3 Marks)
ii. THREE justifications for adopting IPSAS accrual accounting in the
public sector. (3 Marks)

iii. The term “commitment accounting” and illustrate THREE ways it could
strengthen public financial management. (4 Marks)
(Total 10 Marks)

QUESTION 3

a. Cash management implemented by the Budget Office of the Federation

(BoF) was to ensure that the right amount of money is made available to
fund government expenditure in a timely manner as well as meeting its
obligations as they fall due.

91
 Required:
Explain FIVE strategies to enhance cash management control and FIVE
factors militating against effective cash management. (10 Marks)

b. Omidan Local Government Council has N20,000,000 to invest, if there is an

assurance that the investment will earn at least 12% p.a. In view of this, the
following projects are being considered:
Project A will earn N21,800,000 at the end of year one with a residual value
of N1,500,000;
Project B will earn N24,000,000 at the end of year two with a residual value
of N500,000; and
Project C will earn N14,000,000 at the end of year one and another
N10,000,000 at the end of year two with no residual value.
If none of the projects is undertaken, Omidan Local Government Council will
invest the N20,000,000 in a risk free security that will earn interest of 12%
p.a.

Required:
Assess and advise Omidan Local Government Council on which of the
projects to be undertaken using Net Present Value (NPV) method.
(10 Marks)
(Total 20 Marks)

QUESTION 4

a. As the Accountant in charge of the expenditure division, you are to assist the
Director of Finance in the ministry to set up a budget committee. You have
also been asked to review the recently issued 2020 Budget Call Circular.

Required:
Explain briefly the following:
i. Medium Term Expenditure Framework (MTEF) including FOUR of its
objectives (6 Marks)
ii. Budget Call Circular (2 Marks)
iii. The main difference between MTEF and Budget call circular.
(2 Marks)
(10 Marks)

b. The Ministry of Health of Federal Republic of Wazobia is currently

considering public-private partnership as a means of improving health
facilities in some rural areas in the country. The Ministry intends to use
Public-Private Partnership (PPP) to construct and manage modern primary
health centres in rural areas to increase access to quality health facilities.
The project would be fully financed by the private sector, but will be built
on land secured from the state governments. The private sector requires
government guarantee to borrow externally to execute the project.
Currently, health services are free, however, the new project, when

92
 executed through Public-Private Partnership would be on “user-pay” basis.
The government and the private contractors determine the average fees
payable per user and it will be subject to an upward review from time to
time. In order to stimulate private sector interest in the project, the Ministry
intends to protect the private sector against risks associated with the
project. Meanwhile, the Ministry would insist that local materials and skills
are employed in the construction and management of the primary health
centre projects. The project is also environmentally friendly as there will be
little or no destruction of the forest vegetation. The project when completed,
will be of great benefit to the country as a whole.

Required:
Based on guiding principles of Public-Private Partnership identify and
explain THREE principles and TWO associated risks of the feasibility of the
proposed primary health centre projects by the Ministry of Health.
(10 Marks)
(Total 20 Marks)

QUESTION 5

a. IPSAS 12 on Inventories deals with the valuation and presentation of

inventories in the financial statements in the context of historical cost
system, the most widely adopted basis on which financial statements are
presented.

Required:
In accordance with IPSAS 12, identify FOUR costs that are excluded from
the cost of inventories and FOUR requirements to be disclosed in the
financial statements. (10 Marks)

b. External debt does not constitute a burden when contracted loans are
optimally deployed and the return on investment is sufficient to meet
maturing obligations, as and when due, while servicing of the domestic
economy is not undermined. The magnitude and severity of debt burden
cannot be determined on the basis of debt volume only, rather, the debt
volume should be viewed in combination with certain debt ratios for better
appreciation of the debt problem.

Required:
Discuss THREE ratios commonly used to analyse the degree of indebtedness of a
country and explain TWO sources of external debts. (10 Marks)
(Total 20 Marks)

93
 QUESTION 6

a. Expenditure assignment deals with the division or sharing of expenditure,

regulatory and tax functions or responsibilities among multi-levels of
government in a federation.

Required:
Explain THREE principles guiding expenditure assignment and highlight
TWO of its drawbacks. (10 Marks)

b. The importance of classification code as a system driven for budget cannot

be over emphasised as it forms the basis for budgeting and budgetary
control mechanism. Thus, for a country, state or local government to
achieve a reasonable level of success in accountability, transparency,
performance evaluation and adherence to Appropriation Act, the
application of unified chart of accounts is paramount.

Required:
Discuss FOUR uses of budget and FOUR steps to be followed to ensure
completeness of using the National Chart of Accounts for budgeting.
(10 Marks)
(Total 20 Marks)

SECTION A

SOLUTION 1
a. Government Business Enterprise (GBE) is an entity that has all the following
characteristics:

i. It is an entity with the power to contract in its own name;

ii. It has been assigned the financial and operational authority to carry on a
business;
iii. It sells goods and services, in the normal course of its business to other
entities at a profit or full cost recovery;
iv. It is not reliant on continuing government funding to be a going concern
(other than purchases of outputs at arm‟s length); and
v. It is controlled by a public sector entity.

94
b. Okuku State University
Journal entries to record transactions not recognised
for the year ended December 31, 2018
S/N Details DR CR
N‟m N‟m
i. Office equipment 153
Bank 78
Accounts payable 75
Being the cost of assets made up of the purchase
cost plus all attributable costs
ii. Building 500
Take over grant/ reserve 500
Being the fair value of building taken over from
State College of Education

iii. Motor vehicles 20

Laboratory equipment 50
Donation 70
Being aids and grants received during the year from
a UK based research institute.

iv. Motor vehicles 150

Bank 150
Being cost of motor vehicle acquired during the
Year

Depreciation charged 30
Accumulated depreciation 30
Being depreciation charged during the year.

v. Impairment 30
Accumulated impairment 30
Being impairment loss written off on building.

vi. Disposal account 8

Motor vehicles 8
Being the cost of motor vehicle disposed off
during the year.

Accumulated depreciation 3.2

Disposal account 3.2
Being accumulated depreciation on disposed
motor Vehicle.

95
 Bank 4
Disposal account 4.8
Loss on disposal 0.8
Being loss on the sale of the motor vehicle.

vii. Accumulated depreciation 0.4

Loss on disposal 0.6
Computer 1
Being loss on computer gutted by fire during
the year.

viii. Investment property 300

Bank 300
Being the cost of investment property acquired
during the year.

Depreciation a/c 10
Accumulated depreciation 10
Being deprecation charged during the year.

c. Okuku State University

Statement of financial position as at December 31, 2018

Accumulated Carrying
Cost depreciation amount
Non-current assets N‟m N‟m N‟m
Land and buildings 15,500.00 280.00 15,220.00
Equipment 1,202.00 140.20 1,061.80
Furniture 800.00 80.00 720.00
Plant and Machinery 550.00 50.00 500.00
Motor vehicles 612.00 75.80 536.20
Investment property 300.00 10.00 290.00
Total 18,964.00 636.00 18,328.00

Current assets:
Inventories 11,000.00
Receivables 15,000.00
Bank 2,476.00
Total 28,476.00
Total assets 46,804.00
Less liabilities:
Non current liabilities 30,000.00
Current liabilities 8,075.00
Total liabilities 38,075.00
Net assets 8,729.00

96
 Equity
Reserves 8,729.00

Workings

W (i) Property, Plant and Equipment (PPE)

Land Office &

and laboratory Plant and Motor
buildings equipment Furniture equipment vehicles
Non-current assets N' million N' million N' million N' million N'million

Unadjusted balanceb/f 15,000 1,000 800 550 450

Additions 153 150
Disposal (1) (8)
Transfer 500
Donation -- 50 -- -- 20
Bal. at December 31,
2018 15,500 1,202 800 550 612
Accumulated
depreciation/impairment
Unadjusted balanceb/f 250 100 80 50 45
Depreciation charges 40.6 34
Impairment charges 30 -3.2
Disposal -- (0.4) -- -- --
Bal. at December 31,
2018 280 140.2 80 50 75.8
Carrying amount as at
December 31, 2018 15,220 1,061.8 720 500 536.2

W (ii) Calculation of additional depreciation charges for the year

N' million
Office, computer and laboratory equipment (N203m X 20%) 40.6
Motor vehicles (N170million X 20%) 34.0
Investment property (N250million /25) 10.0
Total 84.6

97
 W (iii) Calculation of adjusted cash balance for the year ended December 31,
2018

N'million N'million
Bank
Bal. 3,000
Sale of motor vehicle 4
Total 3,004

Expenditure
Office equipment 78
Motor vehicle 150
Investment 300 528
Adjusted cash balance 2,476

Calculation of adjusted reserves balance for the year ended December 31, 2018

Reserves N'million N'million

Bal b/d 8,275
Add
Building taken over 500
Donation 70 570
8,845
Less
Loss on disposal of vehicle 0.8
Depreciation charges 57.6
Impairment charges 30.0
Computer loss due to fire 0.6 89
Bal c/d 8,729

d. Qualitative characteristics of financial reporting

The qualitative characteristics are:

i. Understandability
Information is understandable when users might reasonably be
expected to comprehend its meaning. For this purpose, users are
assumed to have a reasonable knowledge of the entity‟s activities, the
environment in which it operates and be willing to study the
information. Information about complex matters should not be
excluded from the financial statements merely on the grounds that it
may be too difficult for certain users to understand.

98
 ii. Relevance
Information is relevant to users, if it can be used to evaluate past,
present or future events or to confirm, or correct past evaluations. In
order to be relevant, information must also be timely.

iii. Materiality
The relevance of information is affected by its nature and materiality.
Information is material if its omission or misstatement could influence
the decisions of users or assessments made on the basis of the
financial statements. Materiality depends on the nature or size of the
item or error of judgment in the particular circumstances of its
omission or misstatement. Thus, materiality provides a threshold or
cut-off point rather than being a primary qualitative characteristic
which information must have, if it is to be useful.
iv. Reliability
Reliable information is free from material error and bias and can be
depended on by users to represent faithfully that which it purports to
represent or could reasonably be expected to represent.

v. Faithful representation
For information to faithfully represent transactions and other events, it
should be presented in accordance with the substance of the
transactions and other events, and not merely in their legal form.

vi. Substance over form

If information is to faithfully represent the transactions and other
events that it purports to represent, it is necessary that they are
accounted for and presented in accordance with their substance and
economic reality and not merely in their legal form. The substance of
transactions or other events is not always consistent with their legal
form.

vii. Neutrality
Information is neutral if it is free from bias. Financial statements
are not neutral if the information they contain has been selected
or presented in a manner designed to influence the making of a
decision or judgment in order to achieve a predetermined result
or outcome.

vii. Prudence
Prudence is the inclusion of a degree of caution in the exercise of the
judgments needed in making the estimates required under conditions
of uncertainty, such that assets or revenue are not overstated and
liabilities or expenses are not understated. However, the exercise of

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 prudence does not allow, for example, the creation of hidden reserves
or excessive provisions, the deliberate understatement of assets or
revenue, or the deliberate overstatement of liabilities or expenses,
because the financial statements would not be neutral and, therefore,
not have the quality of reliability.
viii. Completeness
The information in financial statements should be complete within the
bounds of materiality and cost.

ix. Comparability
Information in financial statements is comparable when users are
able to identify similarities and differences between that and
information in other reports.
Comparability applies to the:
 Comparison of financial statements of different entities; and
 Comparison of the financial statements of the same entity over
periods of time.

An important implication of the characteristic of comparability is that users

need to be informed of the policies employed in the preparation of financial
statements, changes to those policies and the effects of those changes. Since
users wish to compare the performance of an entity over time, it is
important that financial statements show corresponding information for
preceding periods.

x. Timeliness
If there is an undue delay in the reporting of information, it may lose its
relevance. To provide information on a timely basis, it may often be
necessary to report before all aspects of a transaction are known, thus
encouraging reliability. Conversely, if reporting is delayed until all aspects
are known, the information may be highly reliable but of little use to users
who have had to make decisions in the interim. In achieving a balance
between relevance and reliability, the overriding consideration is how best
to satisfy the decision-making needs of users.

xi. Balance between benefit and cost

The balance between benefit and cost is a pervasive constraint. The
benefits derived from information should exceed the cost of providing
it. The evaluation of benefits and costs is, however, substantially a
matter of judgment. Furthermore, the costs do not always fall on those
users who enjoy the benefits. Users other than those for whom the
information was prepared may also enjoy benefits. For these reasons, it
is difficult to apply a benefit-cost test in any particular case.
Nevertheless, standard-setters, as well as those responsible for the
preparation of financial statements and users of financial statements,
should be aware of this constraint.

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Examiner’s report
The question tests candidates‟ knowledge on the features of Government
Business Enterprises (GBEs) in part (a), while parts (b) and (c) test candidates‟
knowledge on the preparation of journal entries for after year end transactions
and the preparation of adjusted statement of financial position respectively. Part
(d) of the question also tests candidates‟ knowledge on qualitative characteristics
of financial reporting as required by appendix 2 of IPSAS 1 on presentation on
financial statements.

All the candidates attempted the question but their performance was below
average.
The commonest pitfalls were the inability of the candidates to understand the
characteristics of Government Business Enterprises (GBEs) and financial reporting
as required by IPSAS 1 on preparation of financial statements. Also, candidates
could not prepare journal entries and incorporate the additional information
given in the notes to the question in the preparation of adjusted statement of
financial position.

Candidates are advised to have adequate knowledge of relevant provisions of

International Public Sector Accounting Standards (IPSAS) for better performance in
the Institute‟s future examinations.

Marking guide

Marks Marks
a. Characteristics of Government Business Enterprise
Four characteristics 2
b. Journal entries
Journal entries including narration 10
c. Statement of financial position
Title 1
Calculation:
Total non current assets 5¼
Total current assets 1
Total assets ½
Total liabilities ¾
Net assets ½
Equity- reserves ¼
Workings:
Adjusted cost on PPE 3
Adjusted accumulated depreciation on PPE 2½
Additional depreciation per annum on PPE and investment 1
Adjusted cash balance at the end of the year 1¾
Adjusted reserves balance at end of the year 2½ 20
d. Qualitative characteristics of financial reporting
Identification of four characteristics 4
Explanation of four characteristics 4 8
Total 40

101
SECTION B

SOLUTION 2

a. Debt Sustainability Analysis (DSA)

When government is able to service all its debts without undue stress or
adjustments to its revenue and expenditure balances in the medium to long term.
Debt is sustainable when government‟s current and future streams of income
cover expenditure.

The objectives of DSA

 To evaluate government‟s ability to finance its programmes and at the same
time service the ensuing debt without undue pressure on its revenue stream.
 To reduce chances of excessive increase of debt.
 To recommend for a borrowing that limits risk of debt distress.
 To help guide countries and donors in mobilising critical financing for low income
countries.

Benefits of DSA
To integrate fiscal and debt issues more effectively into economic analysis;
To make comparison across countries, as it raises the profile of fiscal and debt
issues in low income countries.

To dissuade policy makers from pursuing policies that deliver short–term benefits
at the cost of creating unsustainable debts in the future.

To allow policy makers to identify the economic sectors responsible for excessive
debt accumulation, (be they the national government, sub-national governments
and state enterprises or the private sector)

To assess the impact of and response to powerful technological and demographic

changes that constrain government policies in the long run.

To quantify the fiscal impact of population aging, immigration and other long–
run population changes.

b. i. The differences between accrual accounting and cash

accounting
 In accrual accounting, comprehensive set of financial statements
are prepared to measure financial performance, financial position
and cash condition of the entity. However, cash accounting reports
mainly on cash condition of the entity by emphasising receipts and
payments information.

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  Under accrual accounting, non-financial assets are capitalised and
depreciated over their useful life span but under cash accounting
cost of non-financial assets are written off in the year of acquisition
or construction, hence, no depreciation is charged.
 Under accrual accounting, all obligations of government are
disclosed on the statement of financial position but in cash
accounting system, such information is not disclosed in the
financial statements until they are paid.
 Under accrual accounting, allowances are permitted for receivables
but no such allowances are accounted for under cash accounting.
 Under accrual accounting, revenues are reported when they are
earned, and expenditures, when incurred but under cash
accounting, Revenues are recognised only when received, and
expenditures, when actually made.

ii. Justifications for adopting accrual accounting are that:

 It provides superior measure of performance in terms of cost of

service, efficiency and effectiveness in service delivery.
 It promotes accountability and transparency in public financial
management through increasing disclosure of all assets and
liabilities.
 It provides comprehensive financial information that supports
decision-making and control.
 It ensures general improvement in the quality of financial reporting
in the public sector.

iii. Commitment accounting: It is a basis that records anticipated

expenditure evidenced by a contract or a purchase order. In public sector
financing, budgetary and accounting systems are closely related to the
commitment basis. It is a technique of accounting in which expenditures
are recorded when decision is made by management to spend on an
activity or item. It is a process by which appropriations are encumbered
against future expenditure decisions of management.

Commitment accounting strengthens public financial management in the

following ways:
 It ensures that departments do not over spend their appropriation
without further authorisations;
 It also ensures that spending is done within the ambit of a vote,
hence misapplication of funds may be reduced or curtailed;
 It promotes effective planning of expenditure within the available
resources and ensures that disbursements are synchronised with
commitment;
 Separate payment tabulation is available when required;

103
  Adjustments occurring when actual expenditure has been obtained
does not affect the final accounts;
 It is an aid to financial control. A commitment is regarded as a
charge, which has been made on a budget provision;
 It takes a realistic view of financial transactions;
 It reveals an accurate picture of the state of financial affairs at the
end of the period;
 It is used for both economic and investment decision-making, as all
parameters for performance appraisals are available;
 It aligns with the matching concept; and
 It makes allowance for the diminution in the value of assets
employed to generate the revenue of the enterprise.

Examiner’s report

Part (a) of the question requires candidates to explain the term “Debt
Sustainability Analysis”, including its objectives and benefits, while part (b)
requires candidates to explain the differences between accrual and cash
accounting, justifications for adopting IPSAS accrual accounting in the public
sector and commitment accounting including in which ways it could be used to
strengthen public financial management.

Few candidates attempted the question and performance was below average.
The commonest pitfalls were the inability of the candidates to differentiate
between the objectives and benefits of “Debt Sustainability Analysis (DSA)” They
also lacked the knowledge of accounting bases and justification for the adoption
of IPSAS accrual accounting in the public sector.

Candidates are advised to make use of the Pathfinder and Study Text of the
Institute for better performance in future examinations.

Marking guide

Marks Total
a Explanation of Debt Sustainability Analysis 2
Identification of three objectives 3
Identification of five benefits 5 10
b.i. Three differences between accrual accounting and cash
accounting 3
Three justifications for adopting IPSAS and Accrual
accounting in the public sector 3
ii. Explanation of commitment accounting 1
Three ways of how it could strengthen public financial
management 3 10
Total 20

104
 SOLUTION 3

a. Strategies initiated to enhance cash management control

i. Allocation of Ministries, Departments and Agencies (MDAs) indicative

envelopes.
ii. All costs for proposals for inclusion in the budget prepared by MDAs
are required to be examined by the Ministry of Finance (MoF) before
admission into the annual budget.
iii. All disbursements from the Consolidated Revenue Fund (CRF) must be
in line with the provisions of the Constitution and the Appropriation
Act.
iv. The authority to disburse funds is conveyed by the Honourable
Minister of Finance after the budget has been approved, through
Financial Warrants, as well as, through instrument of Authority to
incur Expenditure (AIE), where the need arises.
v. Recurrent warrants are issued monthly for personnel costs and
quarterly for overheads and capital warrants.
vi. Lump sum releases (100%) are not allowed, however where such
provision is admitted for exceptional reasons, proposals, which are
intended to be financed from the lump sum provision, are examined
and disposed of by BoF.
vii. The automation of budget data capture and computation templates
enhance operational efficiency for expenditure control.
viii. Application of embargo on releases to Ministries, Departments and
Agencies (MDAs) where necessary, enhances cash management
discipline.
ix. Introduction of electronic movement of funds and information to
provide more ease and accessibility to government services for citizens
and taxpayers.
x. Introduction of Integrated Payroll and Personnel Information System
(IPPIS). The initiatives were to identify ghost employees, ghost
pensioners and implement a computer-based IPPIS geared to ensuring
efficient management of the wage bill.
xi. Introduction of Treasury Single Account (TSA) is an accounting system
under which all government revenue receipts and income are
collected into one single account maintained by Central Bank of
Nigeria (CBN).
xii. Introduction of the Medium Term Expenditure Framework (MTEF) is an
integrated top-down and bottom-up system of public expenditure
management.

105
 Factors militating against effective cash management and other
public sector financial management reforms

i. There has been total disregard for accountability on the part of many
public enterprises over the years.
ii. A lot of public enterprises do not bother to produce promptly their
annual reports and audited financial statements due to inefficiency,
negligence and mal-administration.
iii. Funds are allocated yearly without getting the accountability reports
of previous years. Accountant General should begin to request for
submission of audited financial statements before subventions are
released by the end of specified month of the year.
iv. One of the root causes of the ineffective management of the public
sector finances is the poor quality of leadership provided by the
management of government agencies and inadequate staffing.
v. Lack of effective Management Information Systems (MIS) powered by
Information and Communication Technology (ICT) infrastructure is a
militating factor on effective financial management in the public
sector.
vi. Public sector practitioners or operators seem to be more interested in
expenditure/outflows, believing that there will always be substantial
revenue/inflow, losing sight of revenue generation from various
sources.

b. Calculation of Net Present Value (NPV)

Year D/F Project A Project B Project C

12 % Cash flow PV Cash flow PV Cash flow PV
N N N N N N
0 1 20,000,000 -20,000,000 20,000,000 -20,000,000 20,000,000 -20,000,000
1 0.8929 21,800.00 19,465,220 14,000,000 12,500,600
0.8929 1,500,000 1,339,350
2 0.7972 24,000,000 19,134,800 10,000,000 7,972,000
0.7972 500,000 398,600
NPV 804,570 -468,600 472,600

Project A - The positive NPV of N804,570 indicates that the project will
earn more than the required rate of returned of 12%.
Project B - The negative NPV of N468,600 indicates that the project
would fail to make the expected return of 12%.

106
Project C - The positive NPV of N472,600 indicates that the project will
earn more than the required rate of return of 12%.
Conclusion: Project A has positive NPV of N804,570 while project C has
positive NPV of N472,600. Project A should be undertaken
because it has a higher positive NPV. It should be noted that
investing in risk free security that will earn maximum interest of
12% p.a. will not be necessary because projects A and C gave
positive NPV.

Examiner’s report
Part (a) of the question tests the candidates‟ knowledge of the strategies to
enhance cash management control and factors militating against effective cash
management, while part (b) tests the candidates‟ decision making skills on
project evaluation under mutually exclusive scenario.

Majority of the candidates attempted the question and performance was above
average.

The commonest pitfalls were the inability of the candidates to identify the
strategies to enhance cash management control and factors militating against
effective cash management.

Candidates are advised to cover all sections of the syllabus for better performance in
future examinations.

Marking guide

Marks Marks
a. Five strategies initiated to enhance cash management
control 5
Five factors militating against effective cash
management 5 10
b. Calculation of Net Present Value (NPV)
Title ¼
Calculation of discount factors ¾
Calculation of present values and net present values 6
Decision on project‟s A, B and C 1½
Conclusion 1½ 10
Total 20

107
SOLUTION 4

a. i. MTEF is a medium term high level strategic plan of the government, usually
three years in Nigeria and which forms the basis of annual budgeting taking
into consideration the legal requirement that spending should not exceed
revenue by more than 3% of GDP. It shifts the psychology of budgeting from
“needs” to an “availability of resources”
In line with the Part II, Sections 11-17 of the Fiscal Responsibility Act
(FRA), 2007, the MTEF shall contain the following for the next three
financial years:
 Macro-economic framework;
 Fiscal strategy paper;
 Expenditure and revenue framework;
 Consolidated debt statement; and
 Statement on contingent liabilities.

Objectives of MTEF

 To improve macroeconomic balance, including fiscal discipline through

good estimates of the available resource envelope, which are then used
to make budgets that fit squarely within the envelope.
 To improve inter and intra sectoral resource allocation by effectively
prioritising all expenditure (on the basis of the government‟s socio-
economic programme) and dedicating resources only to the most
important ones.
 To increase greater budget predictability as a result of commitment to
more credible sectoral budget ceilings.
 To increase greater political accountability for expenditure outcomes
through legitimate decision-making.
 To make public expenditure more efficient and effective, essentially by
allowing line ministries greater flexibility in managing their budgets in
the context of hard budget constraints and agreed policies and
programmes.

ii. Budget Call Circular is also known as the Budget Circular. It is a budget
manual aimed at providing guidance to Ministries, Departments and
Agencies (MDAs) in preparing the Medium Term Expenditure Framework
(MTEF) and annual budget estimates of revenue and expenditure.

iii. Difference between MTEF and budget call circular

The difference is that the MTEF is a 3-year projection, while the call circular is
an annual estimation, which forms part of the MTEF.

108
b. Feasibility of Primary Health Centres PPP project PPP guiding principles.

i. Value for money

It states that the project should be cheaper when executed by PPP than
when executed by the public entity. In this case, the private sector will
provide all the financing for the project and therefore the Ministry
would not spend any money on the project. Thus, value for money is
ensured in the proposal.

ii. Risk allocation

The risk associated with PPP project should be shared by both the
public and the private entities or at best, the public entity should
transfer the risk to the private sector. In case the Ministry proposes to
immune the private sector of risk associated with the project of PPP.
This will be contrary to the guiding principles of PPP. The risk identified
should be shared or transferred to the private sector.

iii. Ability to pay

Affordability of the service is paramount in PPP considerations.
Existing primary health services are free throughout the country and
introducing PPP will mean paying for the services by the users. This is
likely to make the services unaffordable. On account of ability to pay,
the project is likely to fail.

iv. Local content and technology transfer

The project proposes the use of local materials and skills, which meets
the requirement of the PPP guiding policy.

v. Environment, climate and social safeguards

The project is environmentally friendly and therefore it meets this
requirement of the guiding policy.

vi. Safeguard of public interest and consumer rights

The project seeks to benefit the entire citizens.

Risk associated with the Primary Health Centre projects

i. Exchange, default and interest rate risks

This may give rise to exchange rate risk, default risk and interest rate
risk and all these risks should be appropriately allocated in the PPP
contract, if the project is to be embarked upon.
ii. Demand risk. The risk that the project will be executed and the
patronage will be lower than anticipated, leading to revenue fall to the
private sector. Allocation of demand risk is necessary.

109
 iii. Availability risk. The risk associated with the inability of the private
sector to deliver the project at the agreed time.
iv. Construction risk. The risk associated with strikes, physical collapse of
structure, accidents on the project, etc.

Examiner’s report

Part (a) of the question tests candidates‟ knowledge of Medium Term

Expenditure Framework (MTEF), Budget Call Circular” and the main difference
between the two, while part (b) tests the principles and associated risks of the
feasibility of the proposed primary health centres under Public-Private
Partnership (PPP).

Majority of the candidates attempted the question and performance was above
average.

The commonest pitfalls were the inability of the candidates to have in-depth
knowledge of Medium Term Expenditure Framework (MTEF) and Public- Private
Partnership (PPP).

Candidates are advised to make use of the Pathfinder and Study Text of the
Institute for better performance in the Institute‟s future examinations.

Marking guide

Marks Marks
a.i. Explanation of Medium Term Expenditure Framework(MTEF) 2
Four objectives 4
ii. Explanation of Budget Call Circular 2
iii. Difference between MTEF and Budget Call Circular 2 10
b.i. Public-Private Partnership policy:
Identification of three principles 3
Explanation of three principles identified 3
ii. Associated risks of the feasibility of the proposed primary
health centres
Identification of two risks 2
Explanation of two risks identified 2 10
Total 20

110
 SOLUTION 5

a. Costs excluded from costs of inventories

The following costs are excluded from the cost of inventories and recognised as
expenses in the period in which they are incurred:

i. Abnormal amounts of wasted materials, labour or other production costs;

ii. Storage costs, unless those costs are necessary in the production process
prior to a further production stage;
iii. Administrative overheads that do not contribute to bringing inventories to
their present location and conditions; and
iv. Selling costs.

IPSAS 12 disclosure
The standard stipulates that the financial statements should disclose the
following:
i. The accounting policies adopted in measuring inventories, including the
cost formula used;
ii. The total carrying amount of inventories and the carrying amount in
classifications appropriate to the entity;
iii. The carrying amount of inventories carried at fair value less cost to sell;
iv. The amount of any reversal of any written-down that is recognized in the
statement of financial performance in the period;
v. The circumstances or events that led to the reversal of a written- down of
inventories;
vi. The carrying amount of inventories pledged as security for liabilities; and
vii. The cost of inventories recognised as an expense during the period or the
operating costs applicable to revenues, recognised as an expense during
the period, classified by their nature.

b. Ratios commonly used to analyse the degree of indebtedness of a country

There are four major ratios or indicators commonly used to determine the extent
of indebtedness of any country. These ratios are explained briefly below:

i. External debt service to export ratio.

This relates total external debt service to export of goods and services. It
reflects the level of export earnings committed to servicing external debts.
Since external debts are denominated in foreign currency, then servicing
and repayment must be in foreign currency which can only be procured
through export earnings.

ii. External debt stock to export ratio.

The ratio relates to the availability of foreign exchange earnings in the
economy. It is an important indicator since foreign exchange is needed to
pay off foreign debts. It reflects the extent to which total exports of goods

111
 and services can be used to liquidate external debt outstanding. The
movement in this ratio is an indicator of the nation‟s debt service capacity.

iii. External debt stock to nominal gross domestic product ratio.

This ratio measures the extent to which total domestic output can be
deployed to defray total outstanding external debt obligations. The higher
this ratio, the greater the degree of external debt burden.

iv. External debt service to nominal gross domestic product ratio

This ratio relates to the proportion of total domestic output set aside for
servicing external debt. The ratio will be rising while total domestic output
is falling.

Sources of external debt

Nigeria has contracted a number of debt obligations from various sources, some
of which are discussed briefly below:

i. Paris club of creditors.

The club came into existence in 1956 as a result of outstanding balances in
the books of Argentina and some European countries. Since then, it has
become a common forum where debtor nations and creditor countries meet
to discuss debt repayment problems. The club actually represents only
government guaranteed creditors. Membership of the club includes United
States of America, United Kingdom, Federal Republic of Germany, France
and Canada which guaranteed the export activities of their nations through
their official export credit guarantee agencies. When the recipient nation‟s
government is unable to pay the foreign exchange equivalent of the
domestic currency cover paid by the importer, it then becomes government
owed debt to creditor nations.

ii. London club of creditors.

These are mainly uninsured and unguaranteed debts extended by
commercial banks to nationals of debtor countries. Members of the club are
commercial banks mainly of industrialised nations. The first meeting of the
London club was convened in 1976. Such meetings are held to discuss
repayment problems and conclude restructuring agreements.

iii. Multilateral creditors.

These are international institutions funded by member nations. They
include the World Bank and its affiliates such as International Monetary
Fund (IMF), African Development Bank (AfDB), European Investment Bank
(EIB), International Development Assistance (IDA), International Fund for
Agricultural Development (IFAD), that provide credit for development
purposes, balance of payment support, as well as private ventures.

112
iv. Promissory note creditors.
These are providers of uninsured trade credits, arising mainly from trade
arrears accumulated between 1982 and 1983. The debts were refinanced by
the issuance of promissory notes to the creditors.

v. Bilateral creditors
Bilateral credit is provided by a government to another government. Such
credits are intended for development purposes in the recipient countries.
Examples are Official Development Assistance (ODA), sometimes provided
on bilateral basis with a minimum grant element of 25 per cent and export
credits guaranteed by export credit agencies of exporting countries.

vi. Private sector creditors

These are usually short-term credits extended by commercial banks,
institutional investors and individual foreign suppliers in form of suppliers
„or buyers‟ credits.

Examiner’s report

Part (a) of the question tests candidates‟ knowledge on the provisions of IPSAS
12 as it relates to costs that are excluded from the cost of inventories and
disclosure requirements in the financial statements. Part (b) tests candidates‟
knowledge on ratios commonly used to analyse the degree of indebtedness of a
country and the sources of external debts.

Few candidates attempted the question and performance was below average.
The commonest pitfalls were the inability of the candidates to mention the
costs that are excluded from the cost of inventories and disclosure requirements
of IPSAS 12 on inventories. Also they were unable to identify ratios commonly
used to analyse the degree of indebtedness in a country. Majority of the
candidates used investment ratios for the analysis.

Candidates are advised to have adequate knowledge of relevant provisions of

IPSAS and make use of the Pathfinder and Study text of the Institute for better
performance.

Marking guide

Marks Marks
a. Four exceptions to the costs of inventories 4
Four requirements to be disclosed in the financial
statements 6 10
b. Ratios commonly used to analyse the degree of
indebtedness of a country:

113
 Identification of three ratios used 3
Explanation of three ratios identified 3
Sources of external debt:
Identification of two sources 2
Explanation of two sources identified 2 10
Total 20

SOLUTION 6

(a) Basic principles guiding expenditure assignment

The basic principles that should guide expenditure assignment as
suggested by Anwar Shah are discussed briefly below:

i. Efficient provision of public services

Public services are provided most efficiently by the jurisdiction
having control over the minimum geographic area that would
internalise benefits and costs of such provision. In this case, local
governments are better placed to meet the need of the local residents
being the closest to the grassroots.
ii. National equity or fairness
It is commonly argued that effective redistribution is possible only
through national programmes, that is, progressive income taxes and
transfers to the poor. Allowing local subnational governments to
carry out redistributive policies are likely to drive out the rich.

iii. Provision of quasi-private goods

Modern governments provide many services that, by nature, are
essentially private goods, for example, health, education and social
insurance. The national government‟s involvement is nevertheless
justified to ensure horizontal equity and minimum standards of
service in all jurisdictions.

iv. Preservation of the internal common market

Preservation of an internal common market is an important area of
concern to most nations undertaking decentralisation. Sub- national
governments, in their pursuit of labour and capital, may indulge in
beggar-thy-neighbour policies and, in the process, erect barriers to
goods and factor mobility. Decentralisation of government regulatory
functions may create the potential for disharmonious economic
relations among sub- national units. In order to prevent misuse of
power, the Constitution guarantees free domestic flow of goods and
services that may be the best alternative to assigning regulatory
responsibilities solely to the national government.

114
 v. Economic stabilisation
It is customary to argue that the federal government should be
responsible for stabilisation policies, because such policies cannot be
carried out effectively by local jurisdictions. Monetary policy has
little scope for being carried out by local governments.

Drawbacks of expenditure assignment

i. Lack of formal assignment
The absence of a formal assignment of responsibilities among the multi-levels
of government is a common problem with expenditure assignment.
A formal assignment of responsibilities contributes to the stability of the system
of intergovernmental finances. From a fiscal management perspective, a formal
expenditure assignment also introduces an important element of certainty for
budget planning at all levels of government.

ii. Inefficient assignments

Another common problem in the assignment of expenditure responsibilities
is the inefficiency of the assignments. First is the issue of capital
expenditure responsibilities. The problem has been the assignment of all
capital expenditure responsibilities at the central level, independently of
the level of government responsible for the provision of the services
associated with the capital infrastructure. This assignment is guided either
by the capacity to finance large projects or by the belief that only central
government officials are qualified to make capital investment decisions.
However, the full assignment of capital expenditure responsibilities is
inappropriate.

iii. Ambiguity in certain assignments

Despite the ambiguity in assignments, there are few open conflicts or
disputes that have taken place between the central and sub-national
governments in terms of assignment of expenditure responsibilities. For
example, there are arguments on whose responsibility it is to maintain
internal security in Nigeria when the police force is under the control of the
central government while the governors have little or no control over the
police.

iv. Co-sharing of responsibilities

The co-sharing of responsibilities within a particular public service is likely
to cause confusion leading to inefficiencies. In the case of education, it
would appear to be, for the most part, a local (or state) activity. Many key
decisions in educational policies are carried out at the central level in many
countries, for example, the Federal Ministry of Education may be
responsible for the construction of school buildings, curriculum design,
teacher training and production of textbooks. Activities that are reserved
for the local level may be the recruitment and hiring of teachers, however,

115
 even in these cases, local authority is limited because of the dual
subordination of school officials to both the Federal Ministry of Education
and to the sub-national government. Similar issues to those in the
education sector arise in other sectors, such as health. The co-sharing or
fragmentation of responsibilities within a particular public service has the
disadvantage that it is likely to cause confusion, leading to inefficiencies.

b. Uses of budget
Budgets are used for the following:

i. Planning
Budgets are plans in which monetary values are assigned to what
are to be achieved in a determinable future time, for example, a
year.

ii. Communication
Budgets assist in communicating horizontally and vertically. When
budgets are being prepared, individuals, groups, communities and
associations will inform government about their areas of interests.
This is upward communication. When the budget is approved,
government reads it to members of the public and publishes it in
newspapers. This is communicating downwards.

iii. Motivation
Government motivates its staff through promotions and improved
conditions of service, for assisting in the full and successful
implementation of the budget.

iv. Standard for measurement of performance

Since a budget is a target, it is a measure of performance. What is
achieved is recorded and compared with the targeted of
performance. The process of implementation draws management
attention to problematic areas.

v. Evaluation of economic and social policy

Budgets are used to solve social problems of inflation and
unemployment.

vi. Cost reduction technique project appraisal

Evaluation of operations and procedures may result in cost savings.

Steps to be followed to ensure completeness of using National Chart

of Accounts (NCOA) for budgeting

The following steps should be taken to ensure completeness of using the

National Chart of Accounts (NCOA) for budgeting. This involves identifying:

116
 i. The government institutions (cost and revenue centre) from the
hierarchy of administrative list and codes provided in the chart of
accounts;
ii. The economic items that would be executed during the fiscal year;
iii. The functions intended to be performed by government institutions
(revenue and cost centre);
iv. The programmes intended to be carried out by government
institutions;
v. The sources of financing the budgeted amount for each budget line;
and
vi. The planned location for the economic transactions or government
institutions.

Examiner’s report
Part (a) of the question tests candidates‟ knowledge of the principles guiding
expenditure assignment and its drawbacks, while part (b) requires the
candidates to discuss uses of budget and steps to be followed to ensure
completeness of using the National Chart of Accounts (NCOA) for budgeting.

Few candidates attempted the question and their performance was average.
The commonest pitfalls were the inability of the candidates to identify principles
guiding expenditure assignment and their drawbacks. Also, candidates could not
discuss the steps to be followed to ensure completeness of using the National
Chart of Accounts (NCOA) for budgeting.

Candidates are advised to have adequate knowledge of relevant provisions of

National Chart of Accounts (NCOA) and other regulations relating to public sector
account for better performance in future examinations.

Marking guide
Marks Marks
a. Basic principles guiding expenditure assignment:
Identification of four principles 2
Explanation of four principles identified 4
Drawbacks:
Identification of two drawbacks 2
Explanation of two drawbacks identified 2 10
b. Budgets:
Identification of four uses of budget 2
Explanation of four uses of budget identified 4
Four steps of National Chart of Accounts for budgeting 4 10
Total 20

117
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION – MAY 2021
CORPORATE STRATEGIC MANAGEMENT & ETHICS
Time Allowed: 31/4 hours (including 15 minutes reading time)
INSTRUCTION: YOU ARE REQUIRED TO ANSWER FOUR OUT OF SIX
QUESTIONS IN THIS PAPER

SECTION A: COMPULSORY QUESTION (40 MARKS)

QUESTION 1

Davidson Ltd is an automobile company based in Aba, Nigeria. It has been in

existence for nearly eighty years. The company originally began by supplying
components for small vehicles and was producing equipment during the Second
World War. However, in the nineties, it underwent rapid transformation under
the founder‟s son, Tony. Tony has diversified the company into supplying tricycle
components and spare parts to the Nigerian market. The company now employs
some 500 staff around the country and is well known for the quality of its
workmanship. The company operates under three divisions. One division is
concerned with the manufacture of tricycle components, a second division with
spare parts and the third division undertakes specific one–off work in automobile
and automobile design. The tricycle component division is by far the biggest and
accounts for seventy per cent of the total turnover. The smaller specialist
automobile design division is by far the most profitable in terms of return on
capital employed and it relies a great deal on a senior engineer, Emmanuel, who
has been with the company for more than twenty years.

Recently, the company was invited to send sample components to a Japanese car
manufacturer who is keen to commence operations in Nigeria. These components
are needed within eight months. However, Mr. Tony is concerned that his
company may not be able to meet the strict standard imposed by the Japanese
manufacturer. The deal, if it is sealed, would establish Davidson Ltd as an
important auto component supplier in South East Asia, thus, opening up the
potential for exports. Tony realises that the export potential is great and that any
initiative towards exports would get full backing from the government. While,
this is happening, the spare parts division is also showing signs of growth.
Recent reforms in part of North Africa has made companies in that region to be
very keen to modernise and innovate their old manufacturing processes and
Davidson had received business enquiries from the region.

Tony faces a dilemma. He knows that the opportunities that have presented
themselves would give the company a global presence. At the same time, he
knows that the company is solely under his management as chief executive.
Tony holds eighty percent of the shares. The other two directors hold ten percent
each. Although the other divisions have managing directors, they rely on him for
decision making. The current managing directors are family members. One is a

118
brother in-law and the other a cousin. Their knowledge of the industry and its
workings is generally poor. He made these appointments to please his father so
that he could be left to run the company as he deems fit. Tony knows that to
satisfy the Japanese auto manufacturer, he needs to reorganise the automobile
design division and consider issues of Total Quality Management (TQM). This will
take time and requires that he delegates responsibilities to other divisions.
However, he feels uncomfortable doing this.

The company is at crossroads. The three divisions are doing well, but could do
even better, if their old, bureaucratic and hierarchical systems are reviewed.

Indeed, some of the younger managers and engineers would prefer a more open,
flexible management structure. Some of them have studied both engineering and
management in Holland and the United States, and are keen to see key
innovations in place. While Tony knows that these opportunities highlighted
above should not be missed, he has to ensure that they are handled successfully
so that the future is secured for Davidson Ltd. This requires that he takes some
tough decisions in restructuring the company within a few months.

Required:
Write a report to the Chief Executive of Davidson Ltd addressing the following
issues:
a.
i. The key resources and implementation issues facing Davidson Ltd in
the scenario above. (15 Marks)
ii. How the key resources will affect strategic choices (7 Marks)
iii. How implementation issues will affect strategic choices (8 Marks)

b. How should Tony restructure the company? (10 Marks)

(Total 40 Marks)

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SECTION B: (60 MARKS)

INSTRUCTION: YOU ARE REQUIRED TO ANSWER ANY THREE OUT OF FIVE

QUESTIONS IN THIS SECTION

QUESTION 2

“A risk manager is not a line manager and is not directly responsible for risk
management but might help with the management of specific risks.”

Required:
a.
i. Review the statement above within the context of the role of a risk
manager. (7 Marks)
ii. Evaluate THREE specific risks that can be managed. (3 Marks)

b. Discuss the purposes of risk monitoring. (10 Marks)

(Total 20 Marks)

QUESTION 3
a. A friend of yours, who invested heavily in the ordinary shares of a company
that has been struggling in recent years, came to you for advice. He is
confused as to what he can do to protect his investment.

Advise him on:

i. How he can use his voting rights as a shareholder to secure his
investment. (6 Marks)
ii. Limitations to the use of his voting rights. (4 Marks)

b. Using the Institute of Chartered Secretaries and Administrators (ICSA)

guidance note, explain responsibilities of board of directors that should not
be delegated. (10 Marks)
(Total 20 Marks)

QUESTION 4

Gray, Owen and Adams (1996) provided a framework for classifying different
groups of people and their views of the relationship between business
organisations and society.

Required:
a. State and explain SEVEN levels or positions on social responsibility by Gray,
Owen and Adams (1996). (15 Marks)

120
b. State Johnson and Scholes FOUR possible ethical stances for a business
entity. (5 Marks)
(Total 20 Marks)

QUESTION 5

a. Discuss FOUR of the different ways in which agency conflict can arise.
(5 Marks)
b. With the aid of a diagram, explain the concept of “As Low as Reasonably
Practicable” (ALARP) principle. (5 Marks)

c. Risk Assessment is a very important activity in an organisation.

With the use of a table, relate „Impact and Likelihood‟ to „Objective
and Subjective‟ risk perception. (5 Marks)
(Total 20 Marks)

QUESTION 6

Mr John, a professional accountant, is the Chief Executive Officer of a company

quoted on the Nigerian Stock Exchange. He also owns about 20% of the
company‟s shares worth hundreds of millions of Naira. But due to a number of
factors, the company started performing poorly to such an extent that the
unpublished financial report just forwarded to him shows that a huge loss will be
declared by the company. In anticipation of a slide in the price of the company‟s
shares, Mr John instructed his stockbroker to help him sell half of his share in the
company for possible repurchase when the price eventually falls after the
financial statements are published. He made substantial amount of money from
this transaction.

a. Analyse the action of Mr. John using:

i. The Model Code. (3 Marks)
ii. Critical theory. (3 Marks)
iii. Moral development of accountants. (4 Marks)

b. Advise Mr. John on the fundamental ethical principles which professional

accountants are expected to comply with. (10 Marks)
(Total 20 Marks)

121
SECTION A

SOLUTION 1

DAVIDSON LTD: STRATEGIC DIRECTION

To: Tony
From:
Date: May 4, 2021
Subject: Strategy Implementation Issues

a) (i) Key Resources and Implementation Issues:

1) Human Resources: include both full-time and part-time employees,
and the skills and competencies available to an entity.
The automobile design division has the following human resource
issues:
 Mr Emmanuel is the only one competent enough to run the
automobile design division such that his exit from the company
will have serious consequences on the division‟s performance.
2) Management: this describes the size, historical performance, level
of competence and structure of management including decision
making process.
 Davidson has issues with competence of the management, as
only Tony has the requisite managerial skill and experience to
run the company.
 Centralised decision making and bureaucracy inherent in the
company‟s management system could impair the firm‟s ability
to take advantage of business opportunities opening up in Asia
and North Africa.
3) Non-current Assets: These are physical assets such as machinery
and equipment, etc.
 Tony‟s lack of confidence in Davidson‟s ability to meet quality
standards of overseas customers suggests that there are issues
with the production process which may affect the company‟s
product quality.
4) Raw Materials: These are current assets used in the course of
production.
 No mention was made on the state of Davidson‟s raw materials
or reliability of its source.
5) Intangible Resources: These include intellectual rights, patent
rights, copyrights, goodwill and reputation.
 The scenario indicates that Davidson enjoys some level of
goodwill and reputation with its customers.

122
6) Financial Resources: These include capital, cash and other liquid
assets.
 The scenario was silent on the state of Davidson‟s financial
resources.
7) Internal Control and Organisation: These are mechanisms,
structures, rule and procedures put in place to ensure efficiency
and effectiveness in the use of financial and other resources,
decision making and coordination of affairs of the organisation.
 The divisional organisation structure of the company has proven
to be effective so far. However, the bureaucratic system and
centralised decision making could hinder the success of the
company‟s strategies.
(ii) Resource issues inherent in Davidson‟s strategic choice can be
identified and evaluated under the strategies the company
adopted, which can be categorised into the following:

a. Corporate Level and International: choice of line of business of

the entity and market where products will be sold.
 Davidson in response to emerging opportunities has decided
to produce for both local and international markets.
Resource issues that can adversely affect the success of this
strategy are:
i. Human Resources:
 The Company currently has shortage of talents who
could head the automobile design division.
Currently, Mr Emmanuel who has served Davidson
for over two decades is the only employee competent
enough to manage this division. His exit from the
company, which is inevitable and may be imminent,
could adversely affect the automobile design
division and thereby impair the company‟s ability to
serve both local and international markets.
ii. Management:
 Tony is currently the only competent member of the
board. To pursue a strategy focused on producing
high quality output to serve both local and
international markets will require an effective board
and good corporate governance structure which are
currently lacking.
 The effectiveness of the board could also be
adversely affected by its size, which is just 3. This
could limit the board‟s ability to generate requisite
ideas that will improve quality of products.

123
 iii. Non-current Assets:
 Tony‟s lack of confidence in the company‟s ability to
meet quality requirements of the international
markets suggests inherent weaknesses in the
company‟s production processes and systems.
iv. Internal Control and Organisation:
 The organisational structure which is largely
divisional has worked well for the company so far.
However, bureaucracy and centralised decision
making could hamper Davidson‟s ability to
effectively expand to meet the needs of international
market.

b. Business Strategies: This involves choosing among, cost

leadership, differentiation and focus strategies.

c. Development Direction and Methods: These are the choices of

growth strategies the company decided to adopt. Alternatives
include internal (organic) and/or external growth strategy
(mergers, acquisition, etc).
 From the given scenario, the company has chosen to adopt
internal growth strategy through reliance on its ability to
provide needed resources for growth from within.
 However, resource issues which include human resources,
management, non-current assets and organisational
structure could adversely affect Davidson‟s ability to achieve
this growth strategy.
(iii) Issues of implementation affecting strategic choices:
Three criteria for evaluating strategic choices are:
 Suitability
 Feasibility
 Acceptability
 Corporate level and international strategy: If the firm is to
take advantage of emerging opportunities to serve the
international markets, it needs to implement changes in
the management structure.
 Inherent weakness of the management structure must
be addressed.
 The centralised decision making process could also
hamper the firm‟s international strategy.
 Shortage of managerial talent: which made Mr.
Emmanuel the only individual competent enough to
manage the automobile design division puts the
implementation of the firm‟s growth and international
strategy at risk.

124
b. Restructuring of Davidson should centre on addressing the identified
resource issues:
i. The company currently possesses a pool of young and qualified talents
that if provided needed training and opportunity, could fill Davidson‟s
identified talents gap that can succeed Mr. Emmanuel.
 This skills gap can also be addressed through appropriate
recruitment strategy.
ii. Management: Management restructuring is essential for Davidson to
achieve success in its growth and corporate level strategies. This can
be achieved through:
 Expansion of board membership to allow for improved
management effectiveness through the appointment of outside
directors.
 The firm could consider leveraging on the current pool of qualified
young talents in its possession.
 Training and development of board members to improve their skills
and competence levels.
 Decentralisation will bring decision making closer to the points of
activity. This is in line with the philosophy of TQM which it plans to
adopt.
 Removal of bureaucratic bottlenecks in decision making process.
iii. Non-current assets: production process improvement could be achieved
through adoption of TQM philosophy or other appropriate quality
improvement management philosophies. This may lead to improved
product quality.
Examiner’s report
This compulsory question requires candidates to write a report addressing the
following issues:
a. i. Key resources and implementation issues confronting a company in
the execution of the strategy in the given scenario;
ii. how key resources affect strategic choices; and
iii. how implementation issues affect strategic choices.
b. Restructuring of the company.
Almost all the candidates attempted this question, but performance was poor.
The common pitfall was that candidates could not link the resources and
implementation issues to the scenario. This implies that they were not able to
demonstrate the skill of practical application of knowledge.
Candidates are admonished to develop skills that will enable them apply
knowledge to practical situations.

125
Marking guide
Marks Marks
(a) i. Heading to Memo 1
Listing key resource and implementation issues
(7 points X 1 Mark each) 7
Explanation (7 points X 1 mark each) 7 15
ii. Listing points (3 points X ½ Mark ) 1½
Explanation and relating to scenario 5½ 7
iii. Explanation of how implementation will affect
strategic choices 8
(b) Mentioning and explanation of areas of restructuring 10
40

SOLUTION 2

a) Risk managers are staff managers who only advise line managers in
functional areas on risk management. Except in relation to some risks,
they do not have direct responsibility for managing specific risks.

(i) The role of a risk manager includes:

1) Helping with the identification of risks.

2) Establishing „tools‟ to help with the identification of risks.
3) Establishing modelling methods for the assessment and
measurement of risks.
4) Collecting risk incident reports (e.g. health and safety incident
reports).
5) Assisting heads of department and other line managers in the
review of reports by the internal auditors.
6) Preparing regular risk management reports for senior managers or
risk committees.
7) Monitoring „best practice‟ in risk management and encouraging the
adoption of best practice within the entity.
(ii) Types of specific risks that can be managed by risk managers include:

1) Insurance.
2) Health and safety.
3) Information systems and information technology.
4) Human Resources.
5) Financial or treasury.
6) Compliance (with specific area of the law and industry regulations).

126
b) Purposes of Risk Monitoring
The purposes of risk monitoring are to ensure that:
i) There are processes and procedures for identifying risk, and that
these are effective.
ii) There are internal controls and other risk management processes in
place for managing risks.
iii) Risk management systems are effective.
iv) The level of risk faced by the entity is consistent with the policies on
risk that are set by the board of directors.
v) Failures in the control of risk are identified and investigated.
vi) Weaknesses in risk management processes are identified and
corrected.

Examiner’s report
This question on risk management tests the role of risk managers and the
purpose of risk management.
Many candidates attempted the question and performance was above average.
However, those candidates that did not perform well could not clearly identify
role of risk managers in the risk management process.
Candidates are advised to effectively cover the materials in the Study Text.

Marking guide
Marks Marks
(a) i. Role of a risk manager 7 x 1 mark 7
ii. Types of specific risk 3 x 1 mark 3 10
(b) Purposes of risk monitoring 5 x 2 marks 10
Total Marks 20

SOLUTION 3

a. i. Shareholders can secure their investments by voting for or

against:
 Election or re-election of directors.
 Reappointment of the company‟s auditors.
 Approving a dividend proposed by the directors.
 Approval of directors‟ remuneration report.
 Approval of new share incentive scheme.
 Approval of proposed major transactions, such as mergers and
acquisitions.

127
 ii. The following are limitations to the use of voting rights by
shareholders:
Individual shareholders might own only a small portion of the
company‟s shares, as such, may be unable to influence
management decisions. Shareholders are considered significant
only if they own more than 3% of the shares of the company.
Minority shareholders need to organize themselves into blocks to
use their votes in concert to have any chance of obtaining majority
of the votes.
Some shareholders may be unable to use their votes because
 A fund manager manages their shareholdings for them, thus
limiting their access to direct voting.
 Institutional investors might engage in stock lending, a
practice which cedes the voting right to the borrower for the
duration of the agreement.
 If owned shares are for companies located abroad, there might
be restrictions on foreign shareholders‟ ability to vote.

b. According to ICSA guidance, responsibilities of board of directors that

cannot be delegated are:
i. Strategy and management: Overall management of the company,
involving approval of long-term objectives, commercial strategies
and annual budget. Others include oversight of operations, review of
performance of the company or group and decision about expanding
operations into new product areas or new markets and decision
about closing any significant part of operations.
ii. Structure and capital: changes relating to capital structure of the
entity including its management and control structure. This also
includes changes in company status.
iii. Financial reporting and control: approval of financial statements,
dividend policy, and treasury policy such as foreign currency
exposures and use of financial derivatives.
iv. Internal controls: ensuring that there is a sound system of internal
control and risk management by monitoring the systems that are in
place.
v. Contracts: approval of major capital projects and strategically
significant contracts. Approval of loans or foreign currency
transactions above a stated amount. Approval of all major
acquisitions and disposals.
vi. Communication: approval of all communications to shareholders and
the stock market, and all major press releases.
vii. Board membership and other appointments: decisions about
appointments to the board, appointment of company secretary and
the appointment of company auditors.
viii. Remuneration: decision about remuneration of directors and senior
managers, including approval of major share incentive schemes
(which may also require the approval of shareholders).
128
 ix. Delegation of authority: deciding what responsibilities should be
delegated to board committees and the division of responsibilities
between the chief executive officer and board chairman.
x. Corporate governance matters: such as communications with the
company‟s shareholders, deciding on balance of interest between the
shareholders and other stakeholders and ensuring that independent
non-executive directors should remain independent.
xi. Policies: approval of company policies such as health and safety
policy, and environmental policy.
xii. Other issues: such as decisions affecting company‟s contribution to
employees‟ pension fund, appointment of company‟s main
professional advisers and decision to prosecute, defend or settle
major litigations involving costs and payments above specified
amount.

Examiner’s report

This question on Corporate Governance tests in part (a) the use of shareholders‟
voting right to secure their investments and the limitations to the use of this
power and part (b) tests the explanation of board responsibilities that cannot be
delegated as enunciated by ICSA guidance note.

Many candidates attempted this question, but performance was below average.

The common pitfall was the inability of some candidates to relate voting rights to
securing shareholders‟ interest in a company. Some others were unable to state
the limitations to this right. Also, a sizable number of candidates did not know
those board responsibilities that ICSA guidance note prohibits from board
delegation.

Candidates at the skills level are admonished to give attention to practical

application of the knowledge they had acquired.

Marking guide
Marks Marks
(a) i. Identification of actions to secure investment
(6 points x 1 mark) 6
ii. Limitations of voting rights (2 points x 2 marks) 4 10
(b) ICSA‟s guidance notes on responsibilities that cannot
be delegated (10 points x 1 mark) 10
Total 20

129
SOLUTION 4

The 7–Level classification was propounded by Gray, Owen and Adams (1996) on
social responsibility.

Level Comment

1.Pristine Pristine capitalists believe that:

capitalists
 The only responsibility of a company is to make money for
its shareholders‟ and to maximize shareholders‟ wealth.

 Shareholders have invested the risk capital and are the

legal owners of their company. It therefore follows that
only the shareholders should have any right to decide the
strategies and policies of the company.

 The Pristine capitalist view is based on rational self-

interest and putting individual self-interest before the
collective benefits of society as a whole. Believes that
market economy is a good thing.

 There are no environmental problems because human

beings are inventive and adaptable; the market economy
will find solutions to the world‟s environmental problems.

2. Expedients  Individuals who have an „expedient‟ view also believe that

the main aim of a company is to maximize the wealth of its
shareholders. However, some concessions have to be made
at times to other stakeholders in order to put the company
in a stronger position, strategically. By doing so, it is more
likely to maximize shareholders‟ wealth.

 This „expedient‟ position is taken by people with a longer-

term view than pristine capitalists, who recognize that
economic success can only be achieved by companies
which accept certain social responsibilities.

3. Proponents of These individuals believe that:

the social
contract  Companies and other organisations exist at the will of
society, and there is a „social contract‟ between the
company and the society in which it operates.

 Companies therefore have a responsibility and an

obligation to respond to the needs of society. A company
must therefore act in accordance with standards of
behaviour of the society in which it operates.

 A company must therefore act in accordance with

standards of behaviour of the society, otherwise, that

130
 society will not allow the company to continue, if it does
not.

 It is right–based perspective in which the rights of all

human beings are considered to be significant. Holders of
this view would argue that government regulations might
be necessary for the market economy, because free market
prices do not properly reflect all the effects that companies
have on society and its environment, e.g. pollution and
other environmental damages.

4. Social ecologists Individuals taking this position are concerned about the
social environment. They believe that companies and other
large organisations have been responsible for creating
social and environmental problems. They should therefore
be held responsible for dealing with those problems and
finding solutions to them.

5. Socialists These individuals believe that there should be a significant

re-adjustment in the ownership of assets and in the
structure of society. They criticize all forms of domination,
including the governments of a nation state, concentrated
economic power (large companies) and authoritarianism.

6. Radical feminists These individuals believe that society and social systems
are dominated by an aggressive masculine view of the
world. This is harmful and wrong. There is an urgent need
for more feminine values, such as care, compassion and
cooperation to guide attitudes,

7.Deep These individuals are at the opposite extreme to pristine

ecologists/deep capitalists. They believe that human beings have no
Greens greater right to decisions and therefore business decisions
should be based on concerns for all forms of life.

To a greater or lesser extent, there is an acceptance of the views in levels 1 to 3

within business. Levels 4 – 7 are all based on a view that the world should be
made a better place, but to do this, there must be radical re-assessment of basic
assumptions in society.

b) Johnson and Scholes‟ four possible ethical stances are consistent with
existing diverse view of corporate governance. These ethical stances are

i) Maximizing short-term shareholders interests (the „least ethical‟ of the

four stances).
ii) Maximising long–term shareholder interests.
iii) Multiple stakeholder obligations: recognising obligations to different
stakeholder groups.
iv) Being a shaper of society.

131
Examiner’s report
This question on Ethics tests candidates‟ knowledge of Grey, Owen and Adams
framework on the levels on social responsibility in part (a), whilst part (b) tests
ethical stances of business entities as stated by Johnson and Scholes.

Many candidates attempted the question, but performance was just average, as
several candidates did not have a good grasp of the Johnson and Scholes
framework in part (b).

Candidates are advised to master all the frameworks and models specified in the
syllabus.

Marking guide

Marks Marks
(a) 7 Levels of social responsibility (7 x 2 marks) 14
Conclusion 1 15
(b) Four ethical stances
(4 ethical stance X 11/4 marks each) 5 5
Total 20

SOLUTION 5
a. Ways in which Agency Conflict can arise are:
i) Moral Hazards
ii) Effort Level
iii) Earnings Retention
iv) Risk Aversion
v) Time Horizon

i) Moral hazards
Moral hazard sets in and can lead to agency conflicts when provisions
are not made for a manager to receive benefits from his or her
position.

These include all the benefits that come from status, such as a
company car, a private chauffeur, use of company airplane, lunches,
attendance at sponsored sporting events, and so on.
Jensen and Meckling suggested that a manager‟s incentive to obtain
these benefits is higher when he has no shares, or only a few shares in
the company.

132
 ii) Effort level
 Managers may work less hard than they would if they were the owners
of the company. The effect of this „lack of effort‟ could be lower profit
and a lower share price.
 The problem may exist in a large company at middle levels of
management as well as at senior management level.
 The interests of middle managers and senior managers might well be
different, especially if senior management are given pay incentives to
achieve higher profits, but the middle managers are not.

iii) Earnings retention

 The remuneration of directors and senior managers is often related to
the size of the company, rather than its profits. This gives managers an
incentive to grow the company and increase its sales turnover and
assets, rather than to increase the returns to the company‟s
shareholders.
 Managements are more likely to want to re-invest profits in order to
make the company bigger, rather than pay out the profit as dividend.
 When this happens, companies might invest in capital projects where
the expected profitability is quite small.

iv) Risk aversion

 Executive Directors and Senior Managers usually earn most of their
income from the company they work for. They are therefore interested
in the stability of the company, because this will protect their jobs and
their future income. This means that management might be risk–
averse, and reluctant to invest in high-risk projects.
 In contrast, shareholders might want a company to take bigger risks, if
the expected return is sufficiently high. Shareholders often invest in a
portfolio of different companies, therefore, it matters less to them if an
individual company takes risks.

v) Time horizon
 Shareholders are concerned about the long-term financial prospects of
their company, because, the value of their shares depends on
expectations for the long-term future. In contrast, managers might only
be interested in the short-term.
 This is partly because they might receive annual bonuses based on
short- term performance, and partly because they might not expect to
be with the company for more than a few years.
 Managers might have an incentive to increase accounting return on
capital employed (or return on investment), whereas, shareholders
have a greater interest in long-term value as measured by net present
value.

b. The concept of “As Low As Reasonably Practicable” (ALARP) is a principle

that is centred on low risk being more acceptable than high risks.
This can be explained through the following diagram.

133
 High

Risk

Low

Low Acceptability High

 The above does not mean that risk should be totally avoided. It only
suggests that there is an acceptable level of risk in a given circumstance
to achieve a given objective. It is important to remember that risk and
return are usually linked in a positive way so that higher return is often
associated with higher risk.
 ALARP, which stands for “As Low As Reasonably Practicable” is a term
associated with safety precautions which was derived from UK Health and
Safety legislation.
 The ALARP principle is that it is usually impossible (or if it is possible, it is
grossly expensive) to eliminate all risks but that any residual risk should
be as low as reasonably practicable. A risk is said to be ALARP when the
cost involved in reducing it further would be grossly disproportionate to
the benefit gained.
 ALARP should not be thought of as a simple quantitative measure of cost
against benefit, because any safety improvement would not be worthwhile
only if the costs were disproportionately more than the benefit achieved.
This is a matter of judgment and might vary from country to country.

c. Relating Impact and Likelihood to objective and subjective risk perception.

Risk assessment is very important for an organisation.

In many cases, it is difficult to assign a value to either likelihood or impact
with any degree of accuracy. In this case, subjective judgments must be
used.

The following table contains illustrations of risks where impact and

likelihood might be objective or subjective.

Objective likelihood measurement Subjective likelihood measurement

Quality failure in a batch of An oil well disaster occurring this year

components (based on previous in Siberia
manufacturing experience)

Objective impact measurement Subjective impact measurement

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 The change in interest payments as a Change in a revenue due to change in
result of a 1% increase in interest consumer taste.
rates.

Assessment of a risk based on objective measurement of likelihood and

impact is more robust than if based on subjective judgment. This will
affect the risk management strategy.

Examiner’s report
This composite question is on Corporate Governance and Risk Management and it
tests in part (a) causes of agency conflict, part (b) the concept of ALARP and in
part (c) relation of impact and likelihood to objective and subjective risk
perception.

Many candidates did not attempt this question.

Performance in parts (a) and (b) was good, however, that in part (c) was dismal.

It is recommended that candidates should cover the entire syllabus in their

preparation for the examination.

Marking guide

Marks Marks
(a) Listing of ways agency conflict can arise (4 x 1/2 2
mark)
Explanation of any 4 x 2 marks 8 10
(b) i. ALARP Diagram 2
Explanation of ALARP (3 x 1 mark) 3 5
ii.
(c) Introduction (1 x ½ mark) /2
1

Explanation with Quadrants (4 x 1 mark) 4

Conclusion (1 x ½ mark) ½ 5
Total 20

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SOLUTION 6

a. From the scenario:

i. The Model code requires that:
 Directors must not deal in shares of the company during „closed
period‟. A closed period is the period before the announcement to
the stock market of the company‟s interim or final financial result.
Mr John broke this section of the moral code by selling his shares
during closed period.
 Directors must not deal in shares of the company at any time that
they have price-sensitive information. Again, Mr John infringed
on this section of the code by selling his shares when he has price
sensitive information .
 Before dealing in the company‟s shares at any other time, a
director must obtain a prior permission from the chairman. Again,
Mr. John erred on this one by not seeking the permission of the
chairman before selling his shares.

ii. Critical theory believes that accounting is not objective for the
following reasons:
 Accounting is not objective and value free. It was developed as a
tool for government and business leaders to help them maintain
their position of power within society. Traditional financial
reporting, for example, helps business leaders to retain control
over the company they run. Its main focus is on shareholders and
profits. Different interest groups (such as shareholders and
employees) are treated differently and some have more or better
accounting information than others. This position may justify Mr.
John‟s action.
 Accounting is not objective because it is a social as well as
technical process. In any given situation or context, different
accountants may have different views arising from cultural
differences. All societal attitudes are based on historical
conditioning and development of culture, and these attitudes
cannot be changed easily because they are deep-rooted in the
past.
 The accountancy profession has created the concept of „truth‟ in
financial reporting, although the meaning of truth is uncertain
and subject to different interpretations.

iii. Moral Development: If a person is moral and ethical, he will take

moral decisions in the following way:
 Step 1: recognition of the moral issue or moral dilemma,
whenever there is an ethical aspect to a situation. In such a
situation, there must be recognition that there is a moral decision
to be made. Mr John clearly erred on this, by failing to recognise
the moral significance of his decision.

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  Step 2: The decision made must be consistent with the course of
action that is morally correct.
 Step 3: The decision-maker must give priority to the moral issue
above all other considerations (for example, self-interest).
 Step 4: the decision-maker must have enough moral strength to
implement the decision that he took in steps 2 and 3.
b. The fundamental principles to which professional accountants are
expected to comply are:
i. Integrity: Honesty and straightforwardness in the discharge of
professional dealings. This includes a requirement for „fair dealing‟
and truthfulness. Independence of mind and judgment are critical.
ii. Objectivity: must not allow professional or business judgment to be
affected by bias, conflict of interest and undue influence from others.
iii. Professional competence and due care: duty to maintain professional
knowledge and skills at a level that enables him to provide
competent professional service to clients or employer. Accountants
should also act diligently in accordance with relevant technical and
professional standards, when doing their work for clients or
employer.
iv. Confidentiality: respect for confidentiality of information obtained in
the course of their work. This applies to confidentiality of information
within the firm or employer‟s organisation as well as confidential
information about clients.
v. Professional Behaviour: this requires compliance with relevant laws
and regulations and ensure that nothing is done to put the profession
or organisation into disrepute.

Examiner’s report

This question is on Ethics and it tests in part (a) application of the model code,
critical theory and moral development to a particular course of action in a
scenario and tests the fundamental ethical principles for chartered accountants
in part (b).

Many candidates did not attempt this question.

The performance in part (a) was poor, whilst that in part (b) was good. The
overall performance was below average.

The poor performance in part (a) was due to candidates mixing up the elements
of the different models.

Candidates are advised to pay attention to details of the different models

required by the syllabus.

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Marking guide
Marks Marks
(a) i. Model Code (3 points x 1 mark) 3
ii. Critical Theory (3 Points x 1 mark) 3
iii. (4 Steps x 1 mark each) 4 10
(b) 5 fundamental principles:
Mentioning 5
(c) Explanation 5 10
Total 20

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