Series: NOV 2017

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  • 15 Marks

AAA – Nov 2017 – L3 – Q7 – Audit of IT Systems and Data Analytics

Assess key controls for an online trading business, evaluate associated risks with electronic data interchange, and suggest effective risk mitigation controls.

Young Entrepreneur Trading (YET) is an online trading business established by Yemisi Tumfere. YET sources household goods from various local and international manufacturers, placing orders online with suppliers. Customers also place online orders, and invoices are processed and sent to stores for dispatch through a network of delivery centers across the country.

YET, dissatisfied with its previous auditors, has approached your firm for the audit engagement, with professional clearance obtained. As the audit manager, you are responsible for the engagement, with several new trainees under your supervision who are unfamiliar with controls for online businesses.

Requirements:
a. Discuss FIVE controls an auditor should focus on to assess the effectiveness of controls in an online system like YET. (5 Marks)
b. Evaluate FOUR risks associated with YET’s use of electronic data interchange in an online business and recommend FOUR effective controls to minimize these risks. (10 Marks)

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  • 15 Marks

AAA – Nov 2017 – L3 – Q6 – Audit Reporting

Discuss audit report modifications, draft modified report on grant treatment, and analyze auditor’s responsibilities regarding asset valuation.

During the audit of fixed assets for Next Engineering Plc as of December 31, 2016, two issues were encountered:

  1. The cost calculations for direct labor on assets under construction were destroyed, with the direct labor cost totaling ₦20,000,000.
  2. A government grant of ₦50,000,000, received for plant and equipment purchased during the year, was fully credited to the income statement as an exceptional item, though the plant and equipment have a 10-year useful life.

Requirements:
a. Discuss the general forms of modifications available to auditors in drafting their report and specify circumstances for each form.

(6 Marks)
b. Assuming a modified audit report is necessary regarding the government grant treatment, draft the relevant section (entire report not required).

(5 Marks)
c. Analyze the auditor’s general responsibility concerning the directors’ report on land and building valuation.

(4 Marks)

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  • 30 Marks

AAA – Nov 2017 – L3 – Q5 – Audit Evidence

Evaluate XYZ Bank’s provision for litigation, discuss audit procedures per ISA 501, and prepare litigation disclosure for financial statements.

You are the audit manager for XYZ Bank Limited for the year ended December 31, 2016. The Bank’s Board noted a litigation issue involving a lawsuit from BBB Limited, where the Bank was found liable for a cheque conversion worth ₦2.1 billion. The high court imposed a penalty on the Bank for this amount, which BBB Limited is now claiming.

The Bank has objected to the judgment, appealing to the Court of Appeal, with legal counsel advising that a favorable outcome is expected. The Bank’s litigation-related financial information is as follows:

  • Provision for litigation (recognized in financial statements): ₦96 million
  • Litigation cases as defendant: 50
  • Litigation cases as plaintiff: 10
  • Claims in favor of the Bank: ₦2.7 billion
  • Claims against the Bank (including the ₦2.1 billion case): ₦3.2 billion

Requirements:
a. Discuss FOUR specific considerations under ISA 501 for obtaining audit evidence on litigation provisions.

(5 Marks)
b. Evaluate the adequacy of the litigation provision recognized in the financial statements as at December 31, 2016.

(5 Marks)
c. Prepare a summary disclosure of the litigation status for inclusion in the financial statement notes as at December 31, 2016.

(5 Marks)

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  • 20 Marks

AAA – Nov 2017 – L3 – Q4 – Risk Management in Audits

Assess audit risks in taking on Pony Bank Plc, recommend management and audit firm actions to address financial statement risks, and draft a management letter.

The management of Pony Bank Plc and its wholly owned subsidiary, Ponte Micro Finance Bank Limited, engaged in fraudulent activities involving the arrangement of bogus loans amounting to ₦5.5 billion in worthless assets, which were undetected by the previous auditors. The former auditors attributed the oversight to a well-organized group within Pony Bank that actively deceived and obstructed the audit process to conceal their actions.

Your firm, Vic Viv & Co, has recently taken on the audit of Pony Bank Plc.

Requirements:
a. Advise the engagement partner on the risks involved in taking up the audit.

(4 Marks)
b. Recommend appropriate actions for management and your firm to address financial statement risks.

(8 Marks)
c. Prepare a management letter with two matters suitable for submission to the directors.

(8 Marks)

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  • 20 Marks

AAA – Nov 2017 – L3 – Q3 – Audit Reporting

Assess material and pervasive effects on financial statements, audit procedures, and draft audit report opinion paragraphs for Tophem Bank’s foreign associate investment.

Tophem Bank Nigeria Plc has been operational for 20 years, with your firm auditing the company for the past five years. During the year, Tophem acquired an investment in Accra Insurance Limited, a foreign associate, which is accounted for using the equity method and listed at ₦575 million on the Statement of Financial Position as of December 31, 2016. Tophem’s income for the year includes its share of Accra’s net income. However, the audit team was denied access to Accra’s management, auditors, and financial data.

Following a review of the audit file for the year ended December 31, 2016, your partner has recommended a modified opinion for the audit report, providing a draft outline and requesting your input to complete it.

Requirements:
a. Evaluate the circumstances under which a matter could be both material and pervasive in its effect on the financial statements.

(4 Marks)
b. Explain EIGHT appropriate procedures to follow in the audit assignment before finalizing the audit opinion.

(8 Marks)
c. Draft an appropriate basis of opinion paragraph suitable for inclusion in the auditor’s report.

(4 Marks)
d. Draft an appropriate opinion paragraph suitable for inclusion in the auditor’s report.

(4 Marks)

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  • 20 Marks

AAA – Nov 2017 – L3 – Q2 – Group Audits

Assess business risks for Chuks Zaka Limited post-acquisition, evaluate financial statement risks, and outline audit considerations.

Chuks Roberts Plc (CRP) operates as an auto-parts manufacturing company in Nigeria with headquarters in Lagos. CRP plans to manufacture drones for parcel distribution across Africa and has acquired Zaka Roberts Limited (ZRL), a South African company based in Johannesburg, to bring this plan to fruition.

Zaka previously specialized in manufacturing computer-controlled equipment for laboratories and other industries in Africa and the Middle East. The company was owned by five directors/shareholders who accepted CRP’s offer on February 1, 2016, to purchase Zaka’s manufacturing equipment, technology (patent-protected), Cape Town factory, and Johannesburg head office for US$450 million, representing 75% of Zaka’s value.

Effective March 31, 2016, Zaka ceased manufacturing, making most employees redundant except for a select few in marketing, accounts, and administration, with one month’s notice. The restructured entity, now named Chuks Zaka Limited (CZL), will operate as a marketing arm selling CRP’s drones in the South African region, with CRP holding a 55% stake.

Your firm has been CRP’s external auditor and is now engaged to audit CZL.

Required:
a. Analyse and evaluate the business risks that would be assessed by the management of CZL. (6 Marks)
b. Analyse and evaluate the business risks that would be assessed by the directors of CRP.

(6 Marks)
c. Assess and advise on the financial statements’ risks to be considered in planning the audit of CZL for the year ended December 31, 2016.

(8 Marks)

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  • 30 Marks

AAA – Nov 2017 – L3 – Q1 – Quality Control in Audit Firms

Evaluate audit quality issues and procedures in response to a regulatory review of NigerKap Plc.

Bode, Ugo, Musa and Company is a firm of Chartered Accountants that has existed for over 20 years and achieved a strong reputation for quality audit work. The firm has expanded significantly over the past ten years – doubling its client base across different sectors of the Nigerian economy. The firm currently audits two banks, five listed entities, and over seventy other companies. It has also increased its audit staff base and grown the number of its partners from two to seven over the same period.

However, in the last two years, the firm has had a series of regulatory reviews due to several instances of errors noted in some financial statements audited by the firm. One of the clients, the shareholders of NigerKap Plc, petitioned the regulator over a misstatement in the value of their investment property. This resulted in an overstatement of profit and overpayment of taxes by the company based on the financial statements for the year ended December 31, 2015. The shareholders also threatened to take legal action against the firm.

The Managing Partner (MP) of the firm is very concerned about this situation and has commenced internal procedures to evaluate the quality of audits performed by the firm, especially for the NigerKap audit of 2015. A committee has been set up…

Required:
Discuss the internal procedures that Bode, Ugo, Musa and Company should implement to improve audit quality and prevent further regulatory issues.

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  • 15 Marks

FM – Nov 2017 – L3 – Q7 – Portfolio Management

Evaluate investment risk in different portfolio scenarios and explain the implications of beta and alpha values for KT Plc’s equity.

a. In the context of the selection and holding of investments, discuss each of the following scenarios:

i. An investor holding only one security needs to be concerned with the unsystematic risk of that security. (3 Marks)

ii. However, an investor who holds a number of securities should take account of total risk. (3 Marks)

iii. An investor should never add to a portfolio an investment that yields a return less than the market rate of return. (3 Marks)

b. The equity beta of KT Plc. is 1.2 and the equity alpha is 1.4. Explain the meaning and significance of these values to the company. (6 Marks)

(Total 15 Marks)

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  • 15 Marks

FM – Nov 2017 – L3 – Q6 – Ethical Issues in Financial Management

Explore ethical considerations in capital investment and apply the Black-Scholes model in company valuation.

You have recently taken up employment with Large Plc., a Nigerian company with manufacturing subsidiaries in many countries across Africa. As the Financial Analyst, you report directly to the Managing Director who currently requires briefings on the following areas:

(i) Ethical issues and capital investment decisions,
(ii) Options and company valuation

Required:

a. Explain, with examples, ethical issues that might affect capital investment decisions and discuss the importance of such issues for Strategic Financial Management. (8 Marks)

b. Explain the circumstances in which the Black-Scholes Option Pricing (BSOP) model could be used to assess the value of a company, including the data required for the variables used in the model. (7 Marks)

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  • 15 Marks

FM – Nov 2017 – L3 – Q5 – Corporate Governance and Financial Strategy

Identify stakeholder financial objectives and discuss methods to incentivize directors to maximize shareholder wealth.

Private sector companies have multiple stakeholders who are likely to have divergent interests.

Required:

(a) Identify FIVE stakeholder groups and discuss briefly their financial objectives.
(10 Marks)

(b) Explain ways in which companies’ directors can be encouraged to achieve the objective of maximisation of shareholders’ wealth.
(5 Marks)

(Total 15 Marks)

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  • 4 Marks

FR – Nov 2017 – L2 – Q2a – IFRS 5: Non-current assets held for sale and discontinued operation

Classify assets for sale under IFRS 5 and apply measurement rules.

Atta Kay Ltd has the following assets which it would like to classify under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations today:

Asset Carrying Amount (GH¢million) Open Market Value (GH¢million) Estimated Selling Costs (GH¢million)
Investment properties (at fair value through profit or loss) 62.3 30.9 0.5
Land used as company car park (held under the revaluation model) 49 50.5 1.0
Trade Receivables 28 24 1.0
Plant (held under the cost model) 14 10 0.5

Required:
Calculate the carrying amount of assets that can be classified as held for sale (assuming the relevant criteria are met where appropriate), after applying the measurement rules of IFRS 5.

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  • 20 Marks

FR – Nov 2017 – L2 – Q1a – Group Financial Statements and Consolidation

This question tests candidates on the calculation of goodwill for an acquisition and the preparation of consolidated financial statements in accordance with IFRS.

Spacefon Ltd (Spacefon), in its quest to gain dominance in the telecommunication industry, bought an 80% holding in the equity of Buzz and 40% of the equity shares of Kasapa Ltd (Kasapa) on 1 July 2017. The purchase price of the investment of Buzz Ltd (Buzz) was agreed at GH¢4,400 million, of which GH¢1,600 million was paid in cash. The remaining balance was paid by issuing 800 million equity shares each of GH¢1 nominal value to the seller at their then fair value of GH¢3.50 each. The 20% non-controlling interest in Buzz had a fair value of GH¢900 million at that date. Buzz’s net assets had a fair value of GH¢4,700 million on 1 July 2017. Spacefon applies the fair value method to calculate goodwill on acquisition.

The following statements of comprehensive income relate to Spacefon and its investee companies, Buzz and Kasapa.

Statements of Profit or Loss for the year ended 31 October 2017 Spacefon Ltd (GH¢ million) Buzz Ltd (GH¢ million) Kasapa Ltd (GH¢ million)
Revenue 4,428 2,448 1,530
Cost of Sales (1,674) (864) (680.4)
Gross Profit 2,754 1,584 849.6
Operating expenses (1,116) (828) (522)
Finance costs (180) (108) (54)
Other income 32.4 – –
Investment income 129.6 – –
Profit before taxation 1,620 648 273.6
Taxation (270) (108) (54)
Profit for the year 1,350 540 219.6
Other comprehensive income
Gains on revaluations of property 226.8 72 64.8
Total comprehensive income for the year 1576.8 612 284.4

Additional Information:

  1. Included in the fair value of Buzz’s net assets on the acquisition date was some machinery owned by Buzz but carried at GH¢90 million below its fair value. The revised fair value was not incorporated into the books of Buzz, as Buzz has not adopted a policy of revaluing machinery assets. The useful economic life of this machinery at the acquisition date was estimated to be six years.
  2. During the post-acquisition period, Buzz sold goods to Spacefon for GH¢50 million. These goods were sold by Buzz at a profit of 30 pesewas per GH¢1 on the sales price, and 40% of the goods remained in the inventory of Spacefon at 31 October 2017.
  3. Since acquiring its investment in Buzz, Spacefon has managed the administration of the entire group. Spacefon invoiced Buzz GH¢4 million for its share of these costs. Spacefon recorded this transaction within “other income,” and Buzz recorded it within “operating expenses.”
  4. The goodwill of Buzz was reviewed for impairment at 31 October 2017 and was found to have a recoverable amount of GH¢400 million. There was no impairment of the investment in Kasapa.
  5. On 1 October 2017, Spacefon sold some land to Kasapa for GH¢12 million, recording a profit of GH¢8 million. This profit is included within “other income” in the books of Spacefon.

(Note: All calculations may be taken to the nearest GH¢0.01 million, and assume all expenses and gains accrue evenly throughout the year unless otherwise instructed.)

Required: a) Calculate the goodwill arising on the acquisition of Buzz by Spacefon, and the goodwill amount that should appear in the consolidated Statement of Financial Position of Spacefon as at 31 October 2017. (3 marks)

b) Prepare a Consolidated Statement of Profit or Loss account for Spacefon Group for the year ended 31 October 2017 in accordance with IFRS. (17 marks)

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  • 9 Marks

QT – Nov 2017 – L1 – Q7b – Mathematics of Business Finance

Calculate the future value of a depreciated vehicle and the amount required in a sinking fund to replace it.

Alpha Transport Company buys a vehicle for GH¢265,000. The value of the vehicle depreciates on a reducing balance basis at 17% per annum. The company plans to replace this vehicle in 5 years’ time, and they expect the price of a new vehicle to increase annually by 12%.

Required:
i) Calculate the book value of the vehicle in five years’ time. (3 marks)
ii) Determine the amount of money needed in the sinking fund for the company to be able to afford a new vehicle in five years’ time. (3 marks)
iii) Calculate the required monthly deposits if the sinking fund earns an interest rate of 11% per annum compounded monthly. (3 marks)

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  • 11 Marks

QT – Nov 2017 – L1 – Q7a – Mathematics of Business Finance

Determine the timeline for savings and calculate the time required to reach a target amount with compound interest.

Every Monday, Kwei puts GH¢30 into a savings account at the Ring Bank, which accrues interest of 6.92% per annum compounded weekly.

Required:
i) Draw a cash flow timeline showing the payments, the interest rate, and the present values for the first four payments. (3 marks)
ii) Determine how long it will take Kwei’s account to reach a balance of GH¢4,397.53. Convert your answer into the number of years and days to the nearest integer. (6 marks)
iii) Determine how much interest Kwei will receive from the bank during the period of his investment.

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  • 6 Marks

QT – Nov 2017 – L1 – Q6c – Elements of Calculus

Determine the optimal production level that minimizes production costs for a company capable of producing 60,000 cans per day.

If, after expanding its facilities, the company is capable of producing 60,000 cans in a day and the total daily cost is given by:

Required:
How many cans per day should they produce in order to minimize production costs?

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  • 12 Marks

QT – Nov 2017 – L1 – Q6b – Elements of Calculus

Calculate marginal cost, revenue, and profit for a company’s production of beverage cans.

Kyerewaa Ventures is a manufacturing company in the business of producing beverage cans for clients in the brewery industry. The weekly total cost to produce x cans is given by:

The demand function for the cans is given by:

The company has set a production limit to 10,000 cans and it sells all the cans that are produced.

Required:
i) Derive an expression for marginal cost, marginal revenue, and marginal profit. (4 marks)
ii) Determine the cost, revenue, and profit when the 2,501st can is produced and sold. (3 marks)
iii) Determine the cost, revenue, and profit when the 7,501st can is produced and sold. (3 marks)
iv) Advise the company whether to produce the 2,501st can or the 7,501st can. (2 marks)

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  • 20 Marks

QT – Nov 2017 – L1 – Q5 – Probability

Use the normal distribution to compute probabilities related to loan default amounts.

The distribution of the total loan amounts defaulted by customers of a bank annually is approximated by a normal distribution. The average default amount is GH¢1.50 million, and the standard deviation is GH¢0.50 million.

Required:
a) Determine the probability that the total loan amount defaulted exceeds GH¢1.50 million. (3 marks)
b) Determine the probability that the total loan amount defaulted is between GH¢0.86 million and GH¢0.90 million. (4 marks)
c) Determine the probability that the total amount defaulted is at most GH¢2 million. (4 marks)
d) Determine the amount to be allowed per annum for loan defaults if 1% of actual defaults exceed this amount. (3 marks)
e) Determine the lower quartile of the distribution of total loan amounts defaulted. (3 marks)
f) Determine the upper quartile of the distribution of total loan amounts defaulted. (3 marks)
(Total: 20 marks)

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  • 20 Marks

QT – Nov 2017 – L1 – Q4 – Data Collection | Measures of Central Tendency | Measures of Dispersion

Analyze the frequency distribution of access time to a medical consultant, draw an ogive, and calculate measures of central tendency.

Data on access time, in minutes, to a medical consultant who charges by the hour was recorded by his accountant’s assistant over a period of one week. Using a class width of 4 minutes, the following frequency distribution table was obtained:

Access Time (Minutes) Number of Patients
15 – 19 2
20 – 24 5
25 – 29 8
30 – 34 10
35 – 39 13
40 – 44 17
45 – 49 20
50 – 54 16
55 – 59 12
60 – 64 15

Required:
a) Using a graph sheet, draw a less than or a greater than (more than) cumulative frequency curve (ogive) of the data. (6 marks)
b) From the ogive in (a) above, estimate the median access time. (2 marks)
c) Calculate the mean and the mode of the access times. (6 marks)
d) Calculate the standard deviation of the distribution. (4 marks)
e) Using the values in (b) and (c) above, comment on the skewness of the distribution. (2 marks)
(Total: 20 marks)

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  • 20 Marks

QT – Nov 2017 – L1 – Q3 – Forecasting

Analyze the relationship between website hits and promotions using correlation and regression analysis.

A small business is interested in the relationship between the number of hits on its website (measured by the number of visitors that have used the main menu) and the level of website promotion (in GH¢ 00s). The table below gives the figures for the last six months:

Month Web Site Hits Web Site Promotion (GH¢ 00s)
1 25 1.0
2 24 1.2
3 56 1.6
4 54 1.4
5 55 1.2
6 58 1.8

Required:
a) Graph the number of website hits against website promotion. (2 marks)
b) Comment on any possible relationship in (a) above. (2 marks)
c) Calculate the correlation coefficient and give an interpretation to its value. (5 marks)
d) Determine the regression line. (5 marks)
e) Using the regression line found in part (d) above, predict the number of website hits if the level of monthly promotion were increased to GH¢200. (2 marks)
f) Comment on the reliability of your prediction in (e) above. (1 mark)
g) Comment on the simple forecasting model you have developed above. (3 marks)

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  • 20 Marks

QT – Nov 2017 – L1 – Q2 – Linear Programming

Formulate and solve a linear programming problem for media advertising to maximize customer reach.

An advertising agency wishes to reach two types of audiences:
Customers with annual income greater than GH¢15,000 (target audience A) and customers with annual income less than GH¢15,000 (target audience B). The total advertising budget is GH¢200,000. One programme on TV advertising costs GH¢50,000; one programme on radio advertising costs GH¢20,000. For contract reasons, at least three programmes ought to be on TV, and the number of radio programmes must be limited to five. Surveys indicate that a single TV programme reaches 450,000 customers in target audience A and 50,000 in target audience B. One radio programme reaches 20,000 in target audience A and 80,000 in target audience B.

Required:
i) Formulate the linear programming problem. (4 marks)
ii) Construct the initial simplex tableau. (4 marks)
iii) Perform the first iteration. (4 marks)
iv) Determine the media mix to maximize the total reach. (4 marks)
v) Determine the shadow prices of the binding constraint. (4 marks)

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