Series: NOV 2023

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  • 15 Marks

AAA – Nov 2023 – L3 – SC – Q7 – Audit Planning and Strategy

Outlines audit strategies, factors for strategy selection, and distinction between audit strategy and audit plan for Orlando Professional Services.

The overseas technical partners of Orlando Professional Services came for a review of operations and system of internal control of the firm. A number of audit engagement files regarding financial statements on which the firm had expressed audit opinion were selected for review. It was believed that the strategic review would be necessary to determine the appropriate audit approach for a detailed audit plan in the firm to bring efficiency and enhance good client service delivery. The review exercise also covered:

i. The firm’s basis of risk assessment on audit and assurance engagements;
ii. Determination of staff recruitment, training, reward, and evaluation;
iii. Previous audit opinions on financial statements and progress on ongoing jobs;
iv. System of archival and retrieval of documents;
v. Major risks and other factors such as industry issues;
vi. Procedures for engaging and monitoring experts both internal and external; and
vii. Reports from regulators.

The team interviewed partners, staff, and directors of major clients of the firm. It was believed that the outcome of the review exercise would help to reposition the firm and upscale strategies to get a fair share of the market in the upcoming mandatory rotation of auditors.

At the end of the exercise, it was reported that the audit strategy of the firm was not robust enough, too generic, and lacked focus to meet the firm’s need in the next decade. The team recommended that proactive steps should be taken to evolve a good strategy that would stand the test of time in the light of the increasing competition in the audit and assurance marketplace.

As a staff of the firm, you have been selected as a member of the committee to develop the new audit strategies for submission in the next two weeks for the consideration and approval of the executive council of Orlando Professional Services.

Required:

a. Outline the approaches to the main audit strategies your firm is expected to adopt.
(9 Marks)

b. Explain the factors that will be considered in the selection of audit strategies.
(4 Marks)

c. Explain the difference between Audit Strategy and Audit Plan.
(2 Marks)

Total: 15 Marks

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  • 15 Marks

AAA – Nov 2023 – L3 – SC – Q6 – Internal Audit and Corporate Governance

Discusses control activities for Reliable Ltd and external auditor responsibilities in light of control gaps and bank requirements.

Reliable Limited is into wholesale and retail supply and distribution of stationeries to companies and educational institutions. The company maintains business relationships with other enterprises that are owned by close friends and relatives. The books of account of the company were kept manually and in simple Excel. The company had only a staff member in the accounts department since it is a small business operation.

A review of the company’s operations shows that inventory of stationeries purchased was not properly valued due to incomplete recording of purchases made. Although bank statements are obtained, the balances on the bank statements were not reconciled with the cash book.

Cash from sales made was not banked intact, and expenses relating to cash takings from the till were not all recorded or properly monitored. Added to this, goods bought from related parties were sometimes overvalued as suppliers made frivolous claims which could not be disputed due to poor record keeping. The Managing Director and owner of the company has been sick for some time, and the wife concentrated more on her own business, leaving the operations of the company to a relation who is not well educated. Available evidence revealed that invoices and vouchers of the company were approved without management review, and the procedure or selection of suppliers was not transparent.

The company has just won a contract for the supply of stationeries in one of the states in the Federation, and it was found that there was inadequate cash flow to execute the contract. The manager of the company informed the Managing Director’s wife of the development, and it was agreed that a bank loan would be needed. On approaching the bank, updated financial statements of the company were requested to determine the financial health of the business and ability to repay the loan when due.

Your firm has been appointed as auditors of the company with a stipulated deadline to complete the audit so that the company could meet the bank’s conditions. The firm has conducted a preliminary review of the operations of the company, and some control gaps have been noted.

Required:

a. Discuss suitable control activities that will be required in the above scenario and how you will assess the degree of effectiveness of the internal control systems.
(10 Marks)

b. Identify and explain what the external auditors are expected to do during the course of the above audit.
(5 Marks)

Total: 15 Marks

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  • 15 Marks

AAA – Nov 2023 – L3 – SC – Q5 – Audit of IT Systems and Data Analytics

Discusses COBIT's purposes, components, and its application in business processes for IT governance and audit functions.

Hillary Professional Services is a medium-sized firm on a retreat having successfully combined business operations to take advantage of mandatory audit rotation guidelines. At the retreat, it was agreed that a robust software to reduce paperwork was inevitable. All along, one of the combined firms has an Information Technology (IT) Unit which has been strengthened with state-of-the-art equipment.

All auditors are now encouraged to show more interest in information technology, especially in areas relating to data analytics, artificial intelligence, and machine learning. Undoubtedly, understanding the business information system used by management is necessary as they affect risk assessment involved in the financial reporting process. It was also concluded that obtaining an understanding of the field of information technology is a standard audit procedure to be followed; otherwise, it will be difficult to evaluate the adequacy of the expert’s work as recommended by International Standards on Auditing. The purpose of the merger will be defeated if the firm will not be able to win jobs and perform well in a highly competitive market. The after-effect of the COVID-19 pandemic has also revealed that one could work with flexibility anywhere if there is a robust audit software in place.

The IT Audit Partner made a presentation on “COBIT (Control Objectives for Information and Related Technologies) – a globally accepted suite of tools that a client might use in order to ensure IT is working effectively.” He stated that COBIT is all about doing the right things the right way in order to deliver benefits to the client.

You are a staff of Hillary Professional Services. Based on the presentation made on COBIT at the retreat, you have been divided into groups and the groups are to debrief the main group after one hour.

Required:

a. State the purposes of COBIT (Control Objectives for Information and Related Technologies).
(3 Marks)

b. Identify and explain the specific components of COBIT.
(8 Marks)

c. Explain how COBIT will be applied in the business process.
(4 Marks)

Total: 15 Marks

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  • 20 Marks

AAA – Nov 2023 – L3 – SB – Q4 – Internal Audit and Corporate Governance

Evaluate auditor’s rights, management's responsibilities, and reasons for possible auditor resignation at Phil Plc.

Phil Plc has been in business of manufacturing textile materials for about twenty years and has been rendering good returns to shareholders on their investments until about a few years ago, precisely in 2019. The business of the company went down drastically in 2020 due to measures taken to contain the spread of the COVID-19 virus, which included travel bans, quarantines, social distancing, and closures of non-essential services. The COVID-19 pandemic significantly caused disruptions to businesses worldwide, resulting in economic slowdown. The problem was aggravated with the Federal Government of Nigeria enforcing restrictions on movement. All businesses and offices were affected with exceptions of power distribution, oil and gas (petroleum), and retail companies.

COVID-19 pandemic impacted the economy generally, and the following were the impacts on the company:

  • Increase in cost of raw materials as a result of devaluation of the currency due to the drop in the price of crude oil;
  • Shortage in supply of key raw materials sourced from other countries, for example, China; and
  • Increase in ocean freight costs and inland transportation.

The impact of the outbreak of COVID-19 directly caused economic losses through disruptions in supply chains, demand, and financial markets, affecting business investment, household consumption, and international trade. The crisis led to a decline in revenue.

However, despite the challenges, management continued to strive for impressive performance for the shareholders. A board member believed there is an unhealthy relationship between management and the board of directors as she accused management of lack of transparency and threatened to resign. The problem was compounded after the year-end audit when the auditors reported that the company’s internal controls were ineffective and accused management of fraudulent financial reporting. The external auditors also threatened to restate the prior year’s financial statements, believing there were misstatements of certain account balances.

The Managing Director and some directors argued that it is their responsibility to prepare financial statements and that auditors do not have the right to make restatements. However, the Chairman of the audit committee and a few directors supported the auditors and appealed to management to allow the auditors to perform their regulated duties, warning that they may report to the Financial Reporting Council on management’s activities.

The external auditors, surprised by management’s actions, threatened to resign. They were also uncomfortable with the following issues during the audit:

  • The supporting documents from which financial statements were prepared;
  • Review of opening balances revealing omission of some transactions and significant information in disclosures;
  • Misapplication of accounting principles regarding amounts, classifications, presentation, and disclosures.

Added to the above, the external auditors identified risks likely affecting asset valuation and other significant accrued liabilities. Your firm is preparing for a discussion with the audit committee and has instructed your team to review specific sections.

Required:

a. Evaluate the rights and duties of the auditors in a professional engagement. (10 Marks)

b. Enumerate what you consider as the responsibilities of management and those charged with governance in Phil Plc. (5 Marks)

c. Discuss the reason why your firm may resign the appointment as the auditors of the company. (5 Marks)
(Total 20 Marks)

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  • 20 Marks

AAA – Nov 2023 – L3 – SB – Q3 – Internal Audit and Corporate Governance

Discuss audit activities, key focus areas, and factors of concern in auditing Giant Club.

Giant Club has been in existence for about 6 years. The club membership comprises of eminent individuals in society and has a certificate of registration under the relevant laws. It has an approximate enrollment of 1,000 members. The club’s funding is supported by membership fees, parking fees, rental fees, voluntary donations, and income from endowment investments.

The club has been named as a beneficiary under the wills of two deceased members. Collection on the proceeds of the estate is made subsequent to the balance sheet date. Collections from the will receivable in the amount of N6,200,000 have been recorded based on the available information from the estate administrators. During the 2020 financial year, the club was committed to giving scholarships to seven students in various higher institutions. Accordingly, the club has agreed to pay these individuals regular pocket money in addition to providing medical coverage as needed. Since it is a non-for-profit organisation (NFPO), the club has not been conducting an independent statutory audit of the financial statements since inception. However, the club has been appointing its officers as and when due every two years.

The new Treasurer, who is a professional accountant, took over the control of the treasury and his review revealed that:

  • There was no periodic review of inventory items and background check on vendors/suppliers;
  • There were calls from vendors stating they haven’t been paid when records show payments have been made;
  • There were cases of cash takings not banked;
  • No control over cheque lodgments and reconciliation of the bank account;
  • No background check for those who handled money;
  • The computers used for transactions did not have protective passwords;
  • No evidence that the organisation sent acknowledgements to contributors with a record of such acknowledgements kept on file;
  • When new members were admitted and they made yearly subscription payments, the club did not issue pre-numbered tickets, which could then be compared to funds deposited;
  • When cheques were issued, supporting documentation of expenses and approvals at the time of signing cheques were not available; and
  • Requests for reimbursement were not checked for arithmetical accuracy and reasonableness before approval.

The new management of Giant Club has just appointed your firm as the external auditor, and you have been selected as the senior in charge of the audit.

Required:

a. Discuss the activities you will carry out when performing the audit of the Club. (10 Marks)

b. Evaluate the key audit areas that you will focus on to get enough audit evidence on this type of audit.

(5 Marks)

c. Determine other factors that should be of concern in this type of audit. (5 Marks)
(Total 20 Marks)

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  • 20 Marks

AAA – Nov 2023 – L3 – SB – Q2 – Audit of Complex Entities

Outline procedures for consolidated audit, risk approach, and communication with new auditors.

ABC Limited is owned and controlled by DOBS Plc, which is involved in the manufacture of car fittings and accessories. TRC & Co (Chartered Accountants), where you work, has been auditing DOBS Plc for the last five (5) years.

ABC Limited is preparing for its first AGM, and at its last board of directors meeting, a member proposed appointing another firm, different from TRC & Co, as its auditors. The appointment will subsequently be approved at the said AGM. With the directives from DOBS Plc, the idea was accepted, and Tim Brown & Co. (Chartered Accountants) was appointed for the year under consideration.

There are issues with the marketing of the products of ABC Limited, and there have been criticisms in the public domain over the last two quarters. The audits of the two companies are ongoing concurrently by the two firms.

Required:

a. Prepare the list of items to be included in the “letter of instruction” TRC & Co. should send to Tim Brown & Co.
(6 Marks)

b. For the purpose of ensuring that the financial statements are properly consolidated, prepare a document outlining the audit procedures TRC & Co. needs to adopt.
(9 Marks)

c. Evaluate the nature of the business risk approach to be adopted by TRC & Co. in the review of ABC Limited during the audit.
(5 Marks)
(Total 20 Marks)

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  • 30 Marks

AAA – Nov 2023 – L3 – SA – Q1 – Audit of Complex Entities

Prepare the consolidated statement of financial position for Sports PLC Group as of September 30, 2020, with adjustments for subsidiaries, non-controlling interests, goodwill, and investments.

BP Fashion Limited is trading and expanding in the fashion industry. Over the years, the company has been audited by LMP Professional Services. The company is considering going to the stock market to raise funds through an increase in its issued share capital for the purpose of expansion into new markets.

The summarised two-year financial statements and the nine (9) months accounts of the company are given below:

BP Fashion Limited

Summarised Income Statement For the Years Ended December 31,

2019 2020 2021 (9 months)
Revenue ₦2,952m ₦3,510m ₦4,139m
Cost of sales (₦1,402m) (₦1,671m) (₦1,987m)
Gross profit ₦1,550m ₦1,839m ₦2,152m
Other income ₦15m ₦21m ₦25m
Operating costs:
– Employee costs (₦390m) (₦460m) (₦538m)
– Occupancy costs (₦262m) (₦312m) (₦373m)
– Other operating costs (₦278m) (₦326m) (₦389m)
Earnings before interests, taxes, depreciation and amortisation (EBITDA) ₦635m ₦762m ₦877m

 

Summarised Statement of Financial Position

2019 2020 2021 (9 months)
Non-current assets
Property, plant and equipment ₦375m ₦470m ₦470m
Deferred tax ₦30m ₦35m ₦40m
Total non-current assets (A) ₦405m ₦505m ₦510m
Current assets
Inventories ₦425m ₦525m ₦655m
Trade and other receivables ₦125m ₦150m ₦175m
Cash and equivalents ₦425m ₦545m ₦780m
Total current assets (B) ₦975m ₦1,220m ₦1,610m
Total assets (A + B) ₦1,380m ₦1,725m ₦2,120m

Equity and Liabilities

2019 2020 2021 (9 months)
Share capital and reserves ₦885m ₦1,135m ₦1,430m
Long-term loans ₦125m ₦125m ₦125m
Employees’ benefits ₦20m ₦35m ₦50m
Deferred tax ₦55m ₦65m ₦70m
Non-current liabilities ₦200m ₦225m ₦245m
Trade and other payables ₦270m ₦335m ₦410m
Tax payable ₦25m ₦30m ₦35m
Current liabilities ₦295m ₦365m ₦445m
Total equity and liabilities ₦1,380m ₦1,725m ₦2,120m

It has become necessary, and as part of the NGX Exchange Limited‟s requirements,
to appoint another firm of accountants to review the financial statements for some
specified periods. Your firm Stratcom Partners has been approached to carry out the
necessary review.

Required:

a. Highlight the features of professional engagements as contained in ISRE 2410:
International Standard on Review Engagement and ISRS 4410 (revised):
International standard on Related Services. (8 Marks)
b. Detail out the procedures to be carried out in the review of interim financial
information. (6 Marks)

c. In view of the changes in inventories in the financial statements given above,
between the last two periods, provide the substantive procedures that would
be carried out to establish a reliable evidence of the change. (6 Marks)

d. Prepare the outline of the reporting requirements of a compilation engagement.
(10 Marks)

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  • 15 Marks

FM – Nov 2023 – L1 – SC – Q7 – Corporate Governance and Financial Strategy

Analyze FP’s dividend payout impact on stock price using forward P/E ratio, ROE, and sustainable growth rate.

Ope plc has N10m 5 percent convertible bonds in issue. The option to convert into 40 N1 ordinary shares is open only for one more year; they must be either converted in one year’s time or left as ordinary bonds until nine years’ time when they will be redeemed at par. The current share price is ₦1.60, and the annual growth rate in the share price is 15 percent per annum. The current required return on Ope’s equity is 25 percent, its business being relatively risky.

The current yield on ordinary non-convertible bonds in similar companies is 11 percent. These interest rates are expected to remain constant.

Ife plc has 100,000 warrants outstanding, each entitling the holder to subscribe for one N1 ordinary share at 90 kobo any time during the next 3 years. The current share price is 57 kobo, and the capital growth is expected to be constant at 12 percent p.a. in the future. The current price of the warrant is 10 kobo.

Required:

a. Calculate the current value of Ope’s convertibles as straight debt, i.e., ignoring the option to convert and the value if conversion were to take place today. Would you expect the market value of the convertible to be above or below each of these amounts and why? (5 Marks)

b. By how much should the share price of Ope Plc rise before holders would be induced to convert, on the last possible date for conversion? (4 Marks)

c. Explain why the market value of a convertible bond is likely to be affected by the dividend policy of the issuing company. (4 Marks)

d. Based on the projected capital growth for Ife Plc, would you expect holders of the warrants to exercise them before expiry? What is the minimum annual growth rate of the share price necessary to induce holders to exercise their warrants? (2 Marks)

(Total 15 Marks)

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  • 15 Marks

FM – Nov 2023 – L1 – SC – Q6 – Corporate Governance and Financial Strategy

Explain conflicts of interest between shareholders and managers and assess the impact of lower interest rates on a typical company.

a. State and explain examples of conflicts of interest that may exist between shareholders and managers. (9 Marks)

b. Explain the likely implications for a typical company of lower interest rates. (6 Marks)

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  • 15 Marks

FM – Nov 2023 – L1 – SC – Q5 – Business Valuation Techniques

Calculate convertible bonds' value as debt, assess market expectations, and analyze conversion inducements and dividend policy effects on convertible bonds.

Ope plc has N10m 5 percent convertible bonds in issue. The option to convert into 40 N1 ordinary shares is open only for one more year; they must be either converted in one year’s time or left as ordinary bonds until nine years’ time when they will be redeemed at par. The current share price is ₦1.60, and the annual growth rate in share price is 15 percent per annum. The current required return on Ope’s equity is 25 percent, as its business is relatively risky.

The current yield on ordinary non-convertible bonds in similar companies is 11 percent. These interest rates are expected to remain constant.

Ife plc has 100,000 warrants outstanding, each entitling the holder to subscribe for one N1 ordinary share at 90 kobo anytime during the next 3 years. The current share price is 57 kobo, and capital growth is expected to be constant at 12 percent per annum in the future. The current price of the warrant is 10 kobo.

Required:

a. Calculate the current value of Ope’s convertibles as straight debt, i.e., ignoring the option to convert, and the value if conversion were to take place today. Would you expect the market value of the convertible to be above or below each of these amounts, and why? (5 Marks)

b. By how much should the share price of Ope Plc rise before holders would be induced to convert on the last possible date for conversion? (4 Marks)

c. Explain why the market value of a convertible bond is likely to be affected by the dividend policy of the issuing company. (4 Marks)

d. Based on the projected capital growth for Ife Plc, would you expect holders of
the warrants to exercise them before expiry? What is the minimum annual
growth -rate of the share price necessary to induce holders to exercise their
warrants?
(2 Marks)

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  • 20 Marks

FM – Nov 2023 – L3 – SB – Q4 – Financial Risk Management

Assess whether debt or equity financing is more suitable for a business expansion and discuss related financial concepts.

Xeco is considering a N15 million expansion to increase profit before interest and tax by 20%. Financial details for Xeco are as follows:

Item Amount (N’000)
Profit before interest 13,040
Finance charges (interest) (240)
Profit before tax 12,800
Taxation (3,840)
Profit for the year 8,960

Financing Options:

  1. Debt: Issue N15m in 8% loan notes, with each note at a nominal value of N100.
  2. Equity: 1-for-4 rights issue at a 20% discount to current share price (N6.25/share). Xeco has 12 million shares outstanding.
  3. Corporate tax rate: 30%.

Required:

  • a. Evaluate whether Xeco should finance the expansion with debt or equity. (10 Marks)
  • b. Explain the relationship between systematic and unsystematic risk. (5 Marks)
  • c. Discuss the assumptions made by the Capital Asset Pricing Model (CAPM). (5 Marks)

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  • 20 Marks

FM – Nov 2023 – L3 – SB – Q3 – Investment Appraisal Techniques

Calculate and compare NPV for two proposals involving equipment purchase vs. existing machinery for contract fulfillment.

Niko Plc, a large equity-financed company, has a year-end of December 31. It must fulfill a contract in Abuja and has two proposals to choose from: Proposal A (purchasing new machinery) and Proposal B (using existing machinery).

Proposal A:

  • Outlay of N312,500,000 on December 31, 2023, for new plant and machinery.
  • Projected net cash inflows (before tax, in nominal terms):
    • 2024: N200,000,000
    • 2025: N275,000,000
    • 2026: N350,000,000
  • Scrap value: N25,000,000 at end of 2026.

Proposal B:

  • Uses a machine with a net realizable value of N250 million, with an alternative sale value of N300 million on January 1, 2025, if unused.
  • Cash inflows (in nominal terms):
    • 2024: N350,000,000
    • 2025: N350,000,000
  • Labour costs:
    • 2024: N100 million (replacement staff cost of N110 million)
    • 2025: N108 million (replacement staff cost of N118.8 million)
  • Machine residual value: N0 at project end in 2025.

Additional Details:

  • Working capital: 10% of year-end cash inflows, released upon project completion.
  • Expected annual inflation rates: 2024 – 10%, 2025 – 8%, 2026 – 6%, 2027 – 5%.
  • Real cost of capital: 10%.
  • Income tax: 40%, payable one year after the accounting period.
  • Capital allowances: 20% reducing balance for Proposal A’s plant and machinery.

Required:

  • a. Calculate the NPV at December 31, 2023, for each proposal. (17 Marks)
  • b. State any reservations about making an investment decision based on these NPV figures. (3 Marks)

Answer:

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  • 20 Marks

FM – Nov 2023 – L3 – SB – Q2 – Foreign Exchange Risk Management

Analyze hedging methods for foreign exchange risk involving a future CHF transaction.

About one year ago, you were employed by Tesco, an American company based in New York. You work online from home in Nigeria and are a member of the international treasury of Tesco.

Tesco supplies medical equipment to the USA and Europe and also buys some basic raw materials from Europe. It is currently 30 November 2024. On 31 May 2025, Tesco is due to receive CHF16.3 million from a Swiss customer and also to pay CHF4.0 million to a Swiss supplier.

Exchange rates (quoted as US$/CHF1):

  • Spot: 1.0292 – 1.0309
  • Three months forward: 1.0322 – 1.0341
  • Six months forward: 1.0356 – 1.0378

Annual interest rates available to Tesco:

  • Switzerland: 3.2% (investing), 4.4% (borrowing)
  • USA: 4.6% (investing), 5.8% (borrowing)

Currency futures (contract size CHF125,000, futures price quoted as US$ per CHF1):

  • Future price: December – 1.0306, March – 1.0336, June – 1.0369

Currency options (contract size CHF125,000; exercise price quotation US$ per CHF1, premium in US cents per CHF1):

Calls Puts
Dec Mar June Dec Mar June
1.0375 0.47 0.50 0.53 0.74 0.79 0.86

Required:

  • a. Calculate the net receipt if hedged using a forward contract. (4 Marks)
  • b. Calculate the net receipt if hedged using money market hedging. (8 Marks)
  • c. Calculate the net receipt if hedged using futures. (10 Marks)
  • d. Calculate the net receipt if hedged using options. (8 Marks)
    (Total: 30 Marks)

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  • 30 Marks

FM – Nov 2023 – L1 – SA – Q1 – Mergers and Acquisitions

Evaluate Finkex Plc's acquisition strategy of Toba Plc, focusing on share-for-share impact, valuation methods, and shareholder implications.

Finkex Plc (FP) is a listed company that operates in the pharmaceutical sector, manufacturing a broad range of drugs under license in a number of countries along the ECOWAS sub-region. For a number of years, the company has grown organically.

Three years ago, the company acquired 20% of the issued share capital of Toba Plc (TP) for N110 million, as a route to both expansion and diversification. The acquisition was by private negotiation in exchange for an issue of its own shares.

Toba Plc is involved in a different area of the pharmaceutical sector from FP as it is primarily a research-driven company involved in the development of new drugs.

To expedite the realization of its diversification strategy, the directors of FP have now decided to acquire the remaining 80% of Toba’s share capital.

Extracts from the financial statements of Finkex Plc are given below:

Finkex Plc – Extracts from financial statements for the last two years

Year 2023 2022
N’m N’m
Non-current assets (including investment in Toba plc) 602.8 499.4
Current assets 265.0 180.4
Total Assets 867.8 679.8
Current liabilities 199.2 136.8
Total assets less current liabilities 668.6 543.0
Non-current liabilities 149.5 159.4
Net assets 519.1 383.6
Issued share capital (ordinary shares of ₦1 each) 100.0 73.6
Share premium 84.0 12.4
Profit or loss account 335.1 297.6
Total Equity 519.1 383.6
Sales revenue 1320.6 496.0
Earnings after tax 51.50 37.60
Dividend 14.0 14.0
Retained profits 37.5 23.6

All that is known about Toba Plc is that it has 114 million shares in issue; total share capital and reserves are N684 million; earnings after tax in the most recent year were ₦85.2 million on sales of N1,252.0 million, which were double those of the previous year; and that it has an investment valued at N80 million (book and market) in a type of enterprise which might not be of interest to Finkex Plc.

The current stock market prices per share are: Finkex Plc 300k; Toba plc 341k. Both companies pay tax at 50%.

Required:

a. At the above market prices, how many shares of Finkex Plc would have to be issued to buy the rest of Toba Plc on a share-for-share offer? (4 Marks)

b. With regard to earnings and also the book value of assets per share, how would the above share-for-share offer affect the position of:

i. Existing shareholders in Finkex Plc; (6 Marks)

ii. The 80% shareholders in Toba Plc whose shares were to be acquired? (4 Marks)

c. Assuming that the 80% shareholders in Toba Plc were prepared to accept ₦80 million 10% Loan Stock as part of the consideration:

i. What advantages might there be for Finkex Plc in this arrangement? (2 Marks)

ii. What total price could Finkex Plc afford to pay without diluting the earnings per share of its existing shareholders, as calculated in (b) (i) above? (6 Marks)

d. If the board of Toba Plc decided to advise its shareholders not to accept an offer from Finkex Plc, what arguments might they use – including any derived from the financial information available about Finkex Plc?

(8 Marks)

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  • 15 Marks

AT – Nov 2023 – L3 – SC – Q7 – Taxation of Specialized Businesses

Calculation of tax liabilities under the Mining Act and an explanation of tax neutralities with applications to policy issues.

Udi Nigeria Limited is a mining company which was established ten years ago. The company makes up its accounts to December 31 of every year. The Managing Director, who is an engineer, while having a chat with his former colleagues in the university during the week, heard for the first time, the concept of tax neutralities. He wondered how tax could be neutral.

On getting to the office the following week, he requested further information on tax neutralities from the accountant, but based on his personal opinion, the accountant’s response was not convincing enough.

The company is in the process of filing its annual returns for the year ended December 31, 2021, to the tax authorities. The Managing Director has directed the Financial Accountant to forward the following reports to you (being the company’s Tax Consultant) in respect of the company’s operational activities for the year:

Operational Results:

Description N’000
Gross Turnover 125,490
Salaries and Wages 25,900
Depreciation of Mining Equipment 15,400
Transport and Traveling 2,100
Repairs and Maintenance 3,700
Allowance for Bad Debts 6,200
Electricity and Other Utilities 4,660
Legal and Professional Fees 4,850
Certified Exploration Expenditure 4,500
Administrative Expenses 1,450
Development and Processing Expenditure 2,500
Miscellaneous Expenses 3,420
Total Deductibles 74,680
Net Profit 50,810

Additional Information:

  1. Repairs and maintenance included an amount of N1,500,000, being cost of fittings incurred at the operational site.
  2. Capital allowances computed:
    • Brought forward: N750,000
    • Current year (excluding current year capital expenditure): N12,200,000
    • Total: N12,950,000

Required:

As the company’s Tax Consultant, you are to prepare a report to the Managing Director of Udi Nigeria Limited, which will:

a. Show the tax liabilities payable by the company for the relevant assessment year in line with the provisions of Nigerian Minerals and Mining Act 2007 (as amended). (9 Marks)

b. Explain the concept of tax neutralities and its applications to specific policy issues. (6 Marks)

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  • 15 Marks

AT – Nov 2023 – L3 – SC – Q6 – Tax Administration and Dispute Resolution

Outline of the fundamental features of NTP 2017 and principles from the IESBA codes for professional accountants.

The National tax policy (NTP) 2017, provides fundamental guidelines for the orderly development of the Nigerian tax system. Professional accountants are one of the major stakeholders that are expected to drive the tenets of the tax policy for economic development of the country. In guiding professional accountants to behave in a responsible ethical manner, the International Ethics Standards Board for Accountants (IESBA) develops and issues in the public interest, high-quality ethical standards and other pronouncements for use by professional accountants around the world.

Required:

a. Explain FIVE fundamental features as provided for in the NTP 2017, which the existing and future taxes are expected to align with. (5 Marks)

b. Identify and explain FOUR principles and guidance for accountants as specified in the IESBA codes. (10 Marks)

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  • 15 Marks

AT – Nov 2023 – L3 – SC – Q5 – Tax Administration and Dispute Resolution

Steps and objectives in handling a tax audit with FIRS and the required documentation.

Zola Nigeria Limited has been in business for several years, preparing its accounts to December 31 of every year. Prior to the last two years, the company had a very good relationship with the Federal Inland Revenue Service (FIRS) as far as prompt filing of annual tax returns and payment of tax liabilities are concerned. The company was, however, fined for late filing of returns in the last financial year ended December 31, 2020.

In compliance with the provisions of the Companies Income Tax Act Cap C21 LFN 2004 (as amended), the company filed its annual returns for the 2022 assessment year (year ended December 31, 2021) within the statutory period. Payment of tax due was also made.

The review done by the tax officials at the FIRS on the tax returns filed by the company necessitated the request for additional relevant documents to authenticate some items of expenditure and capital allowances claimed. The FIRS subsequently wrote a letter to the company for the submission of the documents within two weeks of the receipt of the letter. The receipt of the letter was acknowledged by the company, but it, however, failed to forward the required documents to the tax authorities. A reminder was sent to the company four weeks after the first letter was written, yet it failed to respond to the request made.

The Managing Director of the company has just received a letter from the tax office that a team of tax inspectors will be visiting the company in a fortnight to conduct a tax audit.

The company has approached your firm of chartered accountants to assist with advice on how the company should handle the forthcoming tax audit.

Required:

Your Principal Partner has directed you, as a newly employed Audit Senior, to handle the engagement and expects you to prepare a report for his review before sending the same to the client. The report should address the following:

a. Objectives of tax audits (5 Marks)

b. Stages in a typical tax audit process (4 Marks)

c. Schedule of requirements for FIRS tax audit (6 Marks)

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  • 20 Marks

AT – Nov 2023 – L1 – SB – Q4 – Double Taxation Reliefs and Credits

Explanation of the Nigerian-UK Double Taxation Agreement provisions, exempted foreign incomes, conflict resolution mechanisms, and tax treaty benefits.

A notable State‟s Chamber of Commerce and Industries has invited you and three
other tax consultants to their quarterly interactive forum, tagged “The Nigerian
Double Taxation Agreement with the UK.” The participants are top private sector
based industrialists who will be visiting the United Kingdom on a trade mission
next week.

Required:

As the lead discussant, you are to prepare a paper explaining the provisions of the Nigerian double taxation agreements with the United Kingdom in respect of:

i. Income arising from immovable properties (2 Marks)
ii. Business profits not arising through a permanent establishment (2 Marks)
iii. Profits or gains arising from the operations of ships and aircraft in international traffic (2 Marks)
iv. Dividends derived by a company resident in one country from a company resident in another country (2 Marks)
v. Interest arising in one country and paid to a resident of the other country (2 Marks)

b. State THREE foreign incomes exempted from Nigerian tax. (3 Marks)

c. Discuss THREE widely recognised resolution mechanisms being used by the Nigerian government to mitigate the effect of the conflicts between double taxation agreements and Nigerian tax laws. (3 Marks)

d. Explain FOUR benefits of double taxation agreements. (4 Marks)

(Total: 20 Marks)

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  • 20 Marks

AT – Nov 2023 – L1 – SB – Q3 – Capital Gains Tax

Evaluate capital gains tax implications and relief for Damaturu Nigeria Ltd on asset disposal and reinvestment under Nigerian tax laws.

a. Explain the provisions of the Capital Gains Tax Act C1 LFN 2004 (as amended) in respect of tax payable on disposal of assets situated outside Nigeria by a non-Nigerian company. (2 Marks)

b. Damaturu Nigeria Limited had been in business as a manufacturer of dairy products for several years. In its bid to re-engineer its operations by investing in another viable product line (to be cited in a major city), the Board of Directors in February 2022, approved the sales and re-acquisition of some assets as shown below:

(i) The underlisted assets were acquired in 2015:

Description N’000
Land 25,000
Plant and equipment 13,000
Factory building 30,000

(ii) Sales proceeds from assets disposed of in July 2022:

Description N’000
Land 32,000
Plant and equipment 15,000
Factory building 38,000

(iii) Expenses incurred (as percentage of sales proceeds) in connection with disposal of assets:

  • Legal: 1%
  • Professional valuers’ fees: 3%

(iv) Re-investment in new assets (for the purpose of the business) to replace the disposed ones, was made between September and October, 2022:

Description N’000
Land 28,000
Plant and equipment 18,000
Factory building 30,000

Required:

i. Compute the capital gains tax payable (if any) for each of the transactions and state the date of payment of the tax due. (14 Marks)

ii. Determine the relief available (if any) on the investment in the new assets. (4 Marks)

(Total: 20 Marks)

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  • 20 Marks

AT – Nov 2023 – L1 – SB – Q2 – Petroleum Profits Tax

Calculation of hydrocarbon and companies income tax for Brass Petroleum Producing Company Ltd under Petroleum Industry Act and Companies Income Tax Act.

Brass Petroleum Producing Company Limited has been operating as an oil prospecting company in Nigeria for fifteen years. The company operates in both onshore and shallow water in the Koko area of the Niger Delta region.

Following the provisions of the Petroleum Industry Act 2021, the company applied for, and was granted a petroleum prospecting license (PPL) on January 1, 2021.

Extracts from the company’s financial records for the year ended December 31, 2021, revealed the following:

Description N’million
Revenue:
Value of crude oil sold 184,450
Value of condensate from associated gas sold 47,175
Value of natural gas liquid from associated gas sold 41,650
Gross revenue 273,275
Balancing charge 32
Total Gross Revenue 273,307
Deduct:
Production cost 106,470
Cost of gas reinjection wells 600
Drilling cost incurred 4,360
Depreciation of plant, machinery, and fixtures 1,500
Decommissioning and abandonment 1,900
Repairs and maintenance 5,750
Royalty cost paid 40,990
Niger Delta Development Commission charge 250
Finance costs 510
Terminaling cost 1,380
Donations to recognised charity home 130
Concession rentals 20,470
Host community fund 1,000
Local government municipal levy 100
Environmental remediation fund 1,420
Cost incurred in seeking information for oil deposits 370
Total Deductible Expenses 187,200
Net Profit 86,107

Additional Information:

  1. Value of crude oil sold:
    • Type: Forcados
    • Quantity (barrels): 6,200,000
    • Actual Price ($): 70
    • Fiscal Price ($): 72
  2. Value of condensate from associated gas sold:
    • Type: OSO condensate
    • Quantity (barrels): 3,700,000
    • Actual Price ($): 30
    • Fiscal Price ($): 30
  3. Value of gas liquid from associated gas sold:
    • Type: Pennington
    • Quantity (barrels): 2,800,000
    • Actual Price ($): 35
    • Fiscal Price ($): 34
  4. Drilling cost incurred:
    • Tangible drilling cost for first exploration well: N2,800 million
    • Drilling the first two appraisal wells: N1,560 million
    • Total: N4,360 million
  5. Repairs and maintenance:
    • Repairs of plant, machinery, and fixtures: N2,750 million
    • Repairs or alteration of production implement utensils: N3,000 million
    • Total: N5,750 million
  6. Losses brought forward from last year: N655 million
  7. Capital allowances computed:
    • Brought forward: N320 million
    • For the current year: N1,400 million
    • Total: N1,720 million
  8. Production allowances after commencement of the Petroleum Industry Act: N3,300 million
  9. Exchange Rate: Assume N425 is equivalent to US$1.

Required:

As the company’s Tax Manager, you are to prepare a report to the Managing Director, showing in line with the provisions of Petroleum Industry Act 2021 and Companies Income Tax Act 2004 (as amended), the:

a. Hydrocarbon tax (14 Marks)

b. Companies income tax payable (6 Marks)

(Total: 20 Marks)

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