Series: MAY 2016

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AA – May 2016 – L2 – Q7b – Risk Assessment and Internal Control

Identify business risks for Moovy Magic’s procurement and suggest control strategies.

You are the internal auditor of Moovy Magic Limited, which runs a chain of video rental stores.

The company guarantees that if a video is not available for rental, the customer will get a free rental when that video comes back into inventory. It is not possible for customers to pre-book videos. The company purchases a number of copies of each video, taking the above policy into account, but has no way of monitoring whether their procurement strategy is effective. Procurement decisions are made and auctioned locally, and no central budgets are produced.

You have been asked by the directors to review the procurement and other strategies of the company.

Required:

Identify and explain the potential business risks arising from the above procurement and other strategies. Suggest controls and strategies that the management of Moovy Magic could instigate to mitigate those business risks. (9 Marks)

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AA – May 2016 – L2 – Q7a – Audit Evidence

Identify additional information needed to determine the audit opinion for Musky Fresh Ltd following supplier difficulties.

Musky Fresh Limited has been in existence, for a number of years, importing perfume. The managing director had built up the business using contacts he already had in the industry. The company imports only one brand of perfume which is manufactured exclusively by one company. The perfume is distributed via ‘shops within shops’ at 20 branches of a well-known store. Under this agreement, Musky Fresh Limited pays a percentage of its takings to the store, with a minimum annual payment of N100,000 per store.

The audit is nearing completion, but you have just heard that the Arabian manufacturer is facing serious financial difficulties, and that supplies have ceased.

Required:

a. Set out the further information the auditor would require before reaching his audit opinion. (6 Marks)

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AA – May 2016 – L2 – Q6 – Internal Control Systems

Identify control activities in a trade payables system and the need for substantive procedures.

Control activities may be defined as policies, procedures, and operations that help to enable management directives to be carried out. These activities are detailed procedures designed to prevent, or to detect and correct errors that may arise in processing information.

Required:

a. Set out the five types of control activities and illustrate each one in the context of purchases or trade payables system. (10 Marks)

b. Explain why, even where tests of controls prove satisfactory, substantive procedures can never be completely eliminated. (5 Marks)

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AA – May 2016 – L2 – Q4 – Internal Control Systems

Identification and improvement of control weaknesses in the sales system of Sofa Ltd.

You are carrying out the audit of the sales system of Sofa Limited, a company that manufactures office furniture. The company has annual sales revenue of N150 million. All the shares are owned by Sofi and her husband Andy. Neither is involved in the running of the business. The chairman is responsible for running the business, but does not own any of the company’s shares.

The bookkeeper maintains all the accounting records and prepares the annual financial statements.

A stand-alone computer is used to maintain the accounting records, including those of the sales system. Standard accounting software is used, which was purchased from an independent supplier. For the sales system, a sales ledger is maintained to which sales invoices, credit notes, cash, and discounts are posted. When sales invoices are posted and credit notes are input into the computer, the value is updated in both the sales ledger and the nominal ledger.

You have determined that the documents and personnel involved in the sales ledger are as follows:

  • When order is received by telephone, it is recorded by the sales clerk in the sales department. This is usually done on a notepad.
  • The sales clerk will then pass the sales order to the stores, to the goods outwards department where the office furniture is kept.
  • If the goods ordered are in inventory, then the goods will be loaded onto one of the delivery trucks. A two-part dispatch note will be prepared to accompany the sales order. This is usually done before the stores have received the sales order from the sales department.
  • The goods are delivered to the customer together with the top copy of the goods dispatch note.
  • The driver on his return will inform the sales department that the delivery has been successful and will maintain the last copy of the goods dispatch note in the stores.
  • At the end of the week, the sales department prepares a sales invoice for the customer.
  • When the post is received, it is opened by a staff of the sales department.
    The person opening the post will both make a list of all the cheques
    received and that same person will then go to the bank and bank the
    cheques. Upon return, the remittances and cheque paying-in book are
    passed to the book keeper for updating the receivables ledger.
  • The receivables ledger is reviewed by the book keeper on a monthly basis
    to see which customers are above their credit terms and will inform the
    sales staff who to telephone and chase their debt.

Required:

a. Identify and describe eight weaknesses in the sales system of Sofa Limited. (8 marks)

b. Provide recommendations to rectify each of the weaknesses identified. (8 marks)

c. Explain why segregation of duties is important in an internal control system. (4 marks)

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AA – May 2016 – L2 – Q3 – Ethical Issues in Auditing

Examination of ethical issues in client engagement, fundamental ethical principles, and lawful disclosure obligations for auditors.

You have recently been appointed the auditors of Spicer Plc, a company whose shares are traded on a stock exchange. The directors of Spicer Plc have recommended that you perform the following services:

  • The statutory audit of the annual accounts
  • Taxation services
  • Consultancy services in respect of the implementation of a new information technology system

Your firm has not acted for Spicer Plc before but does act as auditors to one of its major competitors.

Required:
a. Identify and explain the professional and ethical issues that should have been identified by your firm in relation to the provision of the services outlined above to Spicer Plc and describe the safeguards that should be in place in order to address these issues. (11 marks)

b. What are the five fundamental principles of ethics? Briefly explain their meaning. (5 marks)

c. A client’s affairs should not be disclosed to third parties. However, where a client has been guilty of an unlawful act, to whom should the auditor disclose this information, and in what order? (4 marks)

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AA – May 2016 – L2 – Q2 – Planning an Audit

Planning and identifying audit risks for a new client with an increased demand for products, using a standard costing system for inventory valuation.

Sweet Dreams, a limited liability company, is a new audit client and you are at the
planning meeting for the forthcoming audit. The company has grown rapidly and has
May 31 as year-end. The financial statements have not been audited in previous years
since the organization has only just converted from a partnership to a company.
The company’s bankers have requested that an audit be undertaken on the financial
statements for the year ending May 31, 2016. Higher levels of inventory required to
meet the increasing demand for its products have necessitated a request for an increase
in the bank’s overdraft facility.
The company makes beds, buying its materials directly. At the year-end, inventory
comprises raw materials, work-in-progress and finished goods. It does not undertake
continuous inventory counting but does intend to perform a full inventory count on
May 31, 2016. It uses standard costing system to value finished products and work-inprogress.

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AA – May 2016 – L2 – Q1 – The Role and Responsibilities of Auditors

Examines responsibilities in fraud prevention, asset ownership verification, depreciation rates, asset register contents, and revaluation effects.

You are an employee of Ben, Tai & Co., a firm of Chartered Accountants. One of the firm’s clients is Keke Limited, a car rental company whose shares are not traded on a stock exchange. The company has a large fleet of vehicles which it hires out on a contract basis.

The duration of a contract varies from one day to three months. Anybody wishing to hire a car must possess a valid driver’s license. In addition, they must take out insurance with Keke Limited.

You are involved in the audit of non-current assets for the year ended December 31, 2015.

The company’s main non-current assets are:

  • Freehold land and buildings
  • Office equipment (mainly computers)
  • Motor vehicles

The company was formed ten years ago, and all non-current assets (except for land and buildings) are maintained in a non-current assets register. The company depreciates non-current assets at the following rates:

  • Freehold land and buildings: 2% on cost
  • Office equipment: 20% on cost
  • Motor vehicles: 50% on cost

The company has recently revalued its buildings upwards by N200 million. The directors believe that they have fallen victim to a fraudster who has disappeared with a number of the company’s vehicles.

Required:

a. What is the difference between the responsibilities of management and the auditor for the prevention and the detection of fraud? Explain how these responsibilities are carried out. (6 marks)

b. Describe how you would verify the ownership of:
i. Freehold land and buildings
ii. Computers
iii. Motor vehicles
(6 marks)

c. Comment on the appropriateness of the depreciation rates of the non-current assets and their respective effect on the income statement. (6 marks)

d. List the contents of a non-current asset register and describe its usefulness for Keke Limited. (6 marks)

e. Explain the accounting effect of the revaluation of the buildings to the financial statements and the audit work you would perform in this matter. (6 marks)

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FR – May 2016 – L2 – Q7b – Financial Instruments (IAS 32, IFRS 9)

Calculate amortised cost and fair value of a financial liability issued by Anifowose Plc.

Anifowose Plc issued a debt instrument at its fair value of N100 million on January 1, 2013. The debt instrument is to mature in 2017. It has a principal amount of N125 million and carries a fixed interest rate of 4.72%, which is paid annually. The effective interest rate is 10%, and on December 31, 2015, it had a fair value of 105 for every N10 nominal value. The company makes up its accounts to December 31 every year.

Required:

i. Show your computation schedule for the amortised cost of the financial liability up to December 31, 2015, on the assumption that the financial liability is valued at amortised cost.

ii. What is the value of the financial liability as of December 31, 2015, if the fair value option is adopted by Anifowose Plc?

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FR – May 2016 – L2 – Q7a – Financial Instruments (IAS 32, IFRS 9)

Explain fair value and amortised cost measurement of financial assets under IAS 39 with examples of applicable asset classes.

After initial recognition in the Financial Statements, Financial Assets are measured either at fair value or amortised cost according to the provisions of IAS 39 – Financial Instruments: Recognition & Measurement.

Required:

Briefly explain how fair value and amortised costs of financial assets are determined and give one example each of the class of financial assets that can be measured using the methods.

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FR – May 2016 – L2 – Q6 – Inventory Accounting (IAS 2)

Calculate the working capital cycle and assess liquidity using specific ratios for Apapta Limited.

The statement of financial position extract of Apapta Limited is given as follows:

2015 (N’000) 2016 (N’000)
Inventories 3,950 3,250
Receivables 2,151 2,675
Investments (Marketable Securities) 430 375
Cash 565
7,460 6,300
Payables amounts due within one year (3,865) (3,755)
3,595 2,545

Payables are analysed as follows:

2015 (N’000) 2016 (N’000)
Trade payables 2,600 2,215
Company Income Tax 695 820
Dividend payable 570 540
Bank overdraft 180
3,865 3,755

Its profit or loss account extract is as follows:

Item 2015 (N’000) 2016 (N’000)
Sales 17,795 16,715
Cost of sales (12,100) (11,200)
Gross profit 5,695 5,515

Cost of sales is analysed as follows:

2015 (N’000) 2016 (N’000)
Opening inventory 3,250 3,150
Add: Purchase 12,800 11,300
Less: Closing inventory (3,950) (3,250)
Cost of sales 12,100 11,200

In 2014 and 2015, credit sales were 83% of total sales.

Required:

a. Calculate the working capital cycle for 2015 and 2014. (9 Marks)

b. Compute the ratios listed below and comment on the company’s liquidity over the two years.

i. Cash ratio
ii. Current ratio
iii. Quick ratio (6 Marks)

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FR – May 2016 – L2 – Q5b – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Assess the validity of the assistant accountant's suggestion on extending plant life for depreciation and illustrate its impact on the financial statements.

The directors of Oluwaseun Plc are disappointed by the draft profit for the year ended September 30, 2015. One of your staff, who is an assistant accountant, has suggested one area where he believes the reported profit may be improved, if it is acceptable to the company’s management.

Included in the financial statement of Oluwaseun Plc is an item of plant which had cost N80 million to purchase and install three years ago on October 1, 2012. It is the policy of Oluwaseun Plc to depreciate this plant on a straight-line basis over a five-year period, assuming nil residual value.

The depreciation of the plant has progressed as envisaged, but at the start of the current year (October 1, 2014), the production manager estimated that the plant was likely to last eight years in total from the date of its purchase as against the original five-year period upon which current depreciation is based.

The assistant accountant has calculated that, based on an eight-year life (with no residual value), the accumulated depreciation of the plant at September 30, 2015, would be N30 million (N80 million/8 years × 3). In the financial statements for the year ended September 30, 2014, the accumulated depreciation was N32 million (N80 million/5 years × 2). Therefore, by adopting an eight-year life, Oluwaseun can avoid making a depreciation charge in the current year and instead credit N2 million (N32 million – N30 million) from the accumulated depreciation account to the income statement in the current year to improve the reported profit.

Required:

i. Comment on the acceptability of the assistant accountant’s suggestions. (6 Marks)
ii. Illustrate how the suggestions will affect the financial statements of Oluwaseun Plc based on the correct application of the relevant IFRS. (9 Marks)

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FR – May 2016 – L2 – Q5a – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Explain the basis of selecting accounting policies and distinguish between changes in accounting policies and estimates with examples.

As one of the accountants of Oluwaseun Plc, a company that has migrated to IFRS, you are aware that IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” contains guidance on the use of accounting policies and accounting estimates.

Required:

Explain the basis on which the management of an entity, such as Oluwaseun Plc, must select its accounting policies, and distinguish, with an example, between changes in accounting policies and changes in accounting estimates.

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FR – May 2016 – L2 – Q3 – Business Combinations

Calculate goodwill and prepare the consolidated income statement for Panda Group, including post-acquisition adjustments.

On October 1, 2015, Panda purchased 75% of the equity shares in Sanda through a share exchange of two shares in Panda for every three shares in Sanda. The stock market price of Panda’s shares on October 1, 2015, was N6 per share.

The summarized statements of comprehensive income for the two companies for the year ending March 31, 2016, are as follows:

Item Panda (N’000) Sanda (N’000)
Revenue 675,000 360,000
Cost of Sales (390,000) (165,000)
Gross Profit 285,000 195,000
Distribution Costs (35,400) (18,000)
Administrative Expenses (40,500) (34,500)
Finance Costs (2,250) (1,800)
Profit Before Tax 206,850 140,700
Income Tax Expense (72,000) (41,700)
Profit for the Year 134,850 99,900
Other Comprehensive Income
Gain on Revaluation of Land 3,750 1,500
Loss on Fair Value of Equity Financial Asset (1,050) (600)
Total Comprehensive Income 137,550 99,900

Additional Information:

  1. Equity at October 1, 2015:
    • Panda: Equity Shares (N1 each) N375,000, Share Premium N150,000, Revaluation Reserve (Land) N12,600, Retained Earnings N135,000
    • Sanda: Equity Shares (N1 each) N240,000, Retained Earnings N220,500
  2. Immediately after acquisition, Panda transferred a plant item to Sanda valued at N7.5 million (carrying amount: N4 million). The plant had a remaining life of two and a half years, and depreciation is charged to cost of sales.
  3. After the acquisition, Sanda sold goods to Panda for N60 million, which cost Sanda N45 million. N18 million of these goods remained in Panda’s closing inventory.
  4. Non-controlling interest in Sanda is valued at fair value, set at N150 million by Panda’s directors.
  5. The goodwill of Sanda has not suffered impairment.
  6. All items in the comprehensive income statements accrue evenly over the year.

Required:

a) Calculate the amount paid by Panda and the goodwill arising on the acquisition of Sanda. (6 Marks)

b) Prepare the consolidated statement of comprehensive income for Panda Group for the year ending March 31, 2016. (14 Marks)

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FR – May 2016 – L2 – Q4 – Business Combinations (IFRS 3)

Calculate and assess Quintet Plc's performance against industry averages using ratio analysis.

Quintet Plc sells provisions through its stores located in various retail shopping centers in the major cities in Nigeria. It has recently been experiencing declining profitability, and the board is concerned whether this issue is specific to the company or related to the sector as a whole. Additionally, concerns regarding the company’s solvency have been raised. To address these, the company has engaged a consulting firm specializing in corporate report analysis to provide average ratios across the business sector to rate performance.

Below are the ratios provided by the consulting firm for Quintet Plc’s business sector based on the year ending June 30, 2015:

  • Debt to equity: 38%
  • Gross profit margin: 35%
  • Operating profit margin: 12%
  • Return on year-end capital employed (ROCE): 16.8%
  • Net asset turnover: 1.4 times
  • Current ratio: 1.25:1
  • Average inventory turnover: 3 times
  • Trade payables’ payment period: 64 days

The financial statements of Quintet Plc for the year ending September 30, 2015, are as follows:

Income Statement

Item Amount (N’000)
Revenue 224,000
Opening Inventory 33,200
Purchases 175,600
Closing Inventory (40,800)
Gross Profit 56,000
Operating Costs (39,200)
Finance Costs (3,200)
Profit Before Tax 13,600
Income Tax Expense (4,000)
Profit for the Year 9,000

Statement of Financial Position

Item Amount (N’000)
Assets
Non-current assets
Property and shop fittings 102,400
Deferred development expenditure 20,000
Total Non-current assets 122,400
Current Assets
Inventory 40,800
Bank 4,000
Total Current Assets 44,800
Total Assets 167,200
Equity and Liabilities
Equity
Equity shares of N1 each 60,000
Property revaluation reserve 12,000
Retained earnings 34,400
Total Equity 106,400
Non-current Liabilities
10% loan notes 32,000
Current Liabilities
Trade payables 21,600
Current tax payable 7,200
Total Current Liabilities 28,800
Total Equity and Liabilities 167,200

Note:

  1. Net asset is defined by the consulting firm as total assets less current liabilities.
  2. The deferred development expenditure relates to a one-off payment for a franchise as a sole distributor of a particular product under negotiation but not concluded as of September 30, 2015, although payment has been made.

Required:

a) Compute the equivalent ratios for Quintet Plc provided by the consulting firm for the business sector.
(9 Marks)

b) Write a report to the board assessing the profitability and solvency performance of Quintet Plc compared to its business sector averages. For clarity, solvency measures both liquidity and gearing.
(11 Marks)

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FR – May 2016 – L2 – Q2b – Consolidated Financial Statements (IFRS 10)

Preparation of consolidated financial position statement, considering goodwill and NCI.

The statement of financial position of PAPA Pie and MAMA Pie as at December 31, 2015, were as follows:

PAPA PLC N’000 MAMA PLC N’000
Property Plant & Equipment 9,000 Property Plant & Equipment 5,000
Investment in MAMA Pie 5,000 Other Assets 1,500
Other Assets 2,000
Total Assets 16,000 Total Assets 6,500
Share Capital 500 Share Capital 500
Retained Earnings 14,500 Retained Earnings 5,000
Other Liabilities 1,000 Other Liabilities 1,000
Total Equity & Liabilities 16,000 Total Equity & Liabilities 6,500

PAPA Plc acquired 80% equity interest in MAMA Plc two years ago.

At the date of acquisition, MAMA’s retained earnings stood at N3 million, and the fair value of its net assets was N5 million. This was N1.5 million above the carrying amount of the net assets at this date. The fair value adjustment related to an asset that had a remaining useful economic life of 10 years as at the date of acquisition.

The goodwill arising on consolidation has not suffered any impairment.

Required:

Prepare the consolidated statement of financial position of PAPA Pie Group as at December 31, 2015, on the assumption that non-controlling interest is valued at fair value (the full goodwill method). (15 Marks)

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FR – May 2016 – L2 – Q2a – Business Combinations (IFRS 3)

Calculate goodwill for a parent company's acquisition using both proportionate share and fair value methods.

A Parent Company acquired 60% equity interest in a subsidiary company for N440 million. The market value of the net assets of the subsidiary on the acquisition date was N400 million. The parent company estimates that the full 100% interest in the subsidiary company would have cost N640 million.

Required:

Calculate the goodwill at acquisition date where non-controlling interest is measured:

i. As a proportionate share of the net assets of the subsidiary company.
ii. At fair value (the full goodwill method).

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FR – May 2016 – L2 – Q1 – Presentation of Financial Statements (IAS 1)

Prepare profit or loss statement and financial position statement for Gbenga Nig. Plc for the year ending December 31, 2015, following IFRS standards.

GBENGANIG Plc. Trial balance as at December 31, 2015 is shown below:

Account Debit (N) Credit (N)
Revenue 2,290,125
Administrative expenses 237,150
Selling and distribution expenses 175,200
Legal and professional expenses 81,150
Allowance for receivables – 31/12/15 8,625
Inventories – finished goods – 31/12/14 276,750
Work-in-progress – 31/12/14 49,125
Inventories – raw materials at cost-31/12/14 162,600
Purchases – raw materials 1,125,900
Carriage inwards – raw materials 15,750
Manufacturing wages 375,000
Manufacturing overheads 187,500
Authorized and issued 900,000 ordinary shares of N0.50 each fully paid 450,000
150,000 8.4% cumulative preference shares of N1 each fully paid 150,000
Revaluation surplus 65,000
Share premium 150,000
General reserve 85,000
Retained earnings-31/12/14 425,250
Patents and trademarks 323,250
Freehold property at cost 375,000
Leasehold property at cost 112,500
Amortization of leasehold property – 31/12/14 22,500
Plant and equipment at cost 225,000
Accumulated depreciation – plant and equipment – 31/12/14 102,750
Furniture and fittings at cost 75,000
Accumulated depreciation – furniture and fittings – 31/12/14 23,625
Motor vehicles at cost 112,500
Accumulated depreciation – motor vehicles 31/12/14 37,500
10% loan notes 150,000
Trade payables 146,250
Trade receivables 266,445
Bank overdraft 76,875
Cash 7,680
Total 4,183,500 4,183,500

Additional Information:

  1. A gain of N20,000 made on the revaluation of old freehold property during the year is yet to be accounted for.
  2. Inventories at December 31, 2015 were:
    • Raw materials: N168,900
    • Finished goods: N413,025
    • Work-in-progress: N56,700
  3. Legal and professional expenses include solicitor’s fees of N7,500 for the purchase of new freehold land.
  4. Provision is to be made for a full year’s interest on the loan notes.
  5. The leasehold land and buildings have an unexpired life of 40 years as of December 31, 2014.
  6. Depreciation for the year is charged as follows:
    • Plant and equipment at 8% on cost (production)
    • Furniture and fittings at 10% on cost (administration)
    • Motor vehicles at 20% on carrying amount (25% to administration and 75% to selling/distribution).
  7. Income tax for the year is estimated at N68,900.
  8. A dividend of N2.25 per ordinary share is recommended by the directors. No dividend was paid in the prior year.

Required:

a. Prepare the statement of profit or loss and other comprehensive income for the year ended December 31, 2015.
b. Prepare a statement of financial position as at December 31, 2015, in accordance with International Financial Reporting Standards.

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BMF – MAY 2016 – L1 – SA – Q20 – Management, Individual, and Organisational Behaviour

Multiple choice question on the relationship between job satisfaction and employee behaviors like absenteeism and labor turnover.

Job satisfaction ……………………. relates to absenteeism and labour turnover

A. Positively
B. Negatively
C. Directly
D. Elastically
E. Indirectly

 

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BMF – MAY 2016 – L1 – SA – Q19 – The Business Environment

Multiple choice question on the most likely result of competition in a market.

Which of the following is most likely to be a result of competition?

A. Development of new products
B. Reduction in product quality
C. High prices
D. More monopolies
E. Market regulation

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BMF – MAY 2016 – L1 – SA – Q18 – Management, Individual, and Organisational Behaviour

Multiple choice question on the management model that emphasizes leadership motivation over monetary incentives.

‘Leadership motivates the people to work and not the power of money’. This concept is related to the

A. Autocratic model
B. Custodial model
C. Supportive model
D. Collegial model
E. Collective bargaining

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