THE INSTITUTE OF CHARTERED

ACCOUNTANTS OF NIGERIA

PATHFINDER
MAY 2017 DIET
SKILLS LEVEL EXAMINATIONS
Question Papers

Suggested Solutions

Marking Guides

Plus

Examiner‟s Reports

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FOREWARD

This issue of the PATHFINDER is published principally, in response to a growing

demand for an aid to:

(i) Candidates preparing to write future examinations of the Institute of

Chartered Accountants of Nigeria (ICAN);

(ii) Unsuccessful candidates in the identification of those areas in which they

lost marks and need to improve their knowledge and presentation;

(iii) Lecturers and students interested in acquisition of knowledge in the relevant

subject contained herein; and

(iv) The professional; in improving pre-examinations and screening processes,

and thus the professional performance of candidates.

The answers provided in this publication do not exhaust all possible alternative
approaches to solving these questions. Efforts had been made to use the methods,
which will save much of the scarce examination time. Also, in order to facilitate
teaching, questions may be edited so that some principles or their application may
be more clearly demonstrated.

It is hoped that the suggested answers will prove to be of tremendous assistance to

students and those who assist them in their preparations for the Institute‟s
Examinations.

NOTES

Although these suggested solutions have been published under the

Institute‟s name, they do not represent the views of the Council of the
Institute. The suggested solutions are entirely the responsibility of their
authors and the Institute will not enter into any correspondence on them.

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TABLE OF CONTENTS

SUBJECT PAGE

FINANCIAL REPORTING .................................................... 1

TAXATION ........................................................................ 39

PERFORMANCE MANAGEMENT ........................................ 69

AUDIT AND ASSURANCE................................................... 107

PUBLIC SECTOR ACCOUNTING & FINANCE ....................... 134

MANAGEMENT GOVERANCE AND ETHICS ........................ 159

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

SKILLS LEVEL EXAMINATION – MAY 2017

FINANCIAL REPORTING

Time Allowed: 3 hours

INSTRUCTION: YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN

QUESTIONS IN THIS PAPER

SECTION A: COMPULSORY QUESTION (30 MARKS)

QUESTION 1

1. The following information relates to financial statements included in the

annual report of Bello Professional Nigeria Limited.

Summarised Statement of Profit or Loss for the year ended March 31

2015 2014
N‟000 N‟000
Revenue 412,500 300,000
Cost of sales (328,500) (187,500)
Gross profit 84,000 112,500
Operating expenses (90,000) (45,000)
Finance expenses (7,500) (4,500)
Profit/(loss)before tax (13,500) 63,000
Income tax credit/(expense) 5,250 (21,000)
Profit/(loss) for the year (8,250) 42,000

Summarised Statement of Financial Position as at March 31

2015 2014
N‟000 N‟000
ASSETS:
Non-current assets
Property, plant & equipment 142,500 191,250
Current assets:
Inventories 93,750 34,500
Trade receivables 33,750 15,000
Sundry receivables 3,750 -
Bank balance - - 11,250
Total assets 273,750 252,000

1
2015 2014
N‟000 N‟000
EQUITY & LIABILITIES
Equity
Ordinary shares of N1 each 75,000 60,000
Share premium 24,000 30,000
Retained earnings 33,750 47,250
132,750 137,250
Non-current liabilities:
10% loan notes - 37,500
Finance lease obligations 36,000 15,000
Deferred tax liabilities 9,000 6,000
45,000 58,500
Current liabilities:
10% loan notes 37,500 -
Current income tax - 18,750
Bank overdraft 10,500 -
Finance lease obligation 12,750 6,000
Trade payables 35,250 31,500
96,000 56,250
Total equity and liabilities 273,750 252,000

The following additional information is also available:

(i) The finance expenses are made up of the following items:
2015 2014
N‟000 N‟000
Loan notes interest 3,750 3,750
Finance lease charges 2,250 750
Interest on overdraft 1,500 - -
7,500 4,500

(ii) The property, plant and equipment schedule included in the notes to the
financial statements contained in the report are as follows:

2015 2014
N‟000 N‟000
Leased plant 48,750 18,750
Leasehold plant - 66,000
Owned plant 93,750 106,500
142,500 191,250

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During the year Bello Professional Nigeria Limited sold its leasehold plant
for N63.75million and entered into an agreement to rent it back from the
purchaser. There were no additions to or disposals of owned Plant during
the year. The depreciation charges which are included in the cost of
sales for the year ended 31 March 2015 were as follows:

N‟000
Leased plant 13,500
Leasehold plant 1,500
Owned plant 12,750
27,750

(iii) On August 1 2014 there was a bonus issue of shares from share premium of
one new share for every 10 held on May 1 2014. There was a fully
subscribed cash issue of shares at par as at March 31, 2015

(iv) The 10% loan notes is due for repayment on June 30, 2016. Bello
Professional Nigeria Limited is in negotiation with the loan providers,
Accrual Bank Plc.

Required:
a. Prepare a statement of cashflow for Bello Professional Nigeria Limited
for the year ended March 31, 2015 in accordance with IAS 7 using
indirect method. (18 Marks)

b. One of the directors present at the annual general meeting of Bello

Professional Nigeria limited where the financial statements were laid
before members was of the view that direct method of preparing
cashflow is more useful and provides better information to users than
the indirect method.

Comment on the director‟s view stating whether you agree or not,

giving reasons for your opinion. (7 Marks)

c. IAS 7 – Statement of cashflow allows some variation in the ways that

the cashflow for interests and dividends are presented in the statement.

Explain the various ways of classifying the following items in a

Statement of cashflow as permitted by IAS 7.
i. Interests paid
ii. Dividends received (5 Marks)
(Total 30 Marks)

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SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
IN THIS SECTION (40 MARKS)

QUESTION 2

Abuja Limited acquired 80% of Abaji Limited‟s ordinary shares on January 1 2015.
The company paid an immediate N5.00 per share and a further payment of
N19,440,000 in cash. The company only recorded the cash consideration of N5 per
share. The two statements of financial position as at December 31 2015 are stated
below:

Abuja Abaji
Limited Limited
N‟000 N‟000
Non- current assets:
Property, plant and equipment 75,600 57,600
Development costs - 7,200
Investment 68,400 3,600
Current assets 23,940 16,380
Total assets 167,940 84,780

Equity and liabilities:

Ordinary shares of N1 each 48,600 14,400
Share premium 14,400 7,200
Revaluation reserve 8,100 -

Retained earnings:
January 1 2015 28,800 24,120
Year to December 31 2015 34,200 13,680

Non-current liability
8% intercompany loan - 10,800
Current liability 33,840 14,580
Total equity & liabilities 167,940 84,780

Additional information provided are:

(i) The parent company, Abuja Limited, value non-controlling interests (NCI)
using the fair value at the acquisition date. The fair value of NCI at the
acquisition date was N14,940,000. There is an impairment as at December
31 2015 resulting in the reduction of NCI to N14,220,000.

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(ii) Abaji Limited revalued land and building using fair value which resulted in
an increase of N3,600,000 at the acquisition date and a further N720,000 at
December 31, 2015.

(iii) Abaji Limited have line of products with a brand name valued at N7,200,000
with an estimated life of 10 years as at 1 January 2015. The brand is not
included in Abaji statement of financial position on this date.

(iv) A loan of N10,800,000 from Abuja Limited granted to Abaji Limited at

acquisition date was included in Abuja Limited investment. Loan interest is
payable annually in arrears. Abuja Limited did not receive the interest due
and paid by Abaji for the year ended December 31, 2015 until after the year
end. Therefore Abuja Limited has not accounted for the Abaji accrued
interest.

(v) The development project of Abaji Limited was completed on June 30, 2015 at
a cost of N9,000,000. As at December 31, 2015, N1,800,000 had been
amortised. Abaji Limited had capitalised N3,240,000 at the acquisition date.
However, the directors of Abuja Limited are of the opinion that Abaji Limited
development costs cannot be recognised as an asset because it does not
meet the requirement in IAS 38.

(vi) Abuja Limited bought goods from Abaji Limited. One third of the goods were
still in the inventory of Abuja Limited at December 31, 2015. The goods was
sold to Abuja Limited at a profit of N1,080,000.

Required:

Provide figures to be included in the consolidated statement of financial position as

at December 31 2015 in respect of the following:

a. Non- controlling interest (7 Marks)

b. Goodwill (7 Marks)
(show your calculations of net assets as at date of acquisition and date
of consolidation)

c. Consolidated reserves:
i. Share premium
ii. Retained earnings
iii. Revaluation reserve (6 Marks)
(Show your workings) (Total 20 Marks)

NB. You are not required to prepare a consolidated statement of financial

position as at December 31 2015

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QUESTION 3

You are a financial reporting consultant. The management of Bode Limited a well-
diversified company with branches in all states of the federation has some
transactions for which it requires advice from you. Bode Limited has a financial
accountant who is not yet a qualified accountant.

These transactions are as listed below:

(a) The company recognised a cash generating unit during the year ended
December 31, 2015 which is made up of the following assets.

Costs
N‟m
Property, plant and equipment 4,050
Goodwill 450
Other assets 2,700
7,200

The management of Bode Limited estimated that the recoverable amount of

the cash generating unit as at the end of the year will be N6.30billion.

The financial accountant of Bode Limited is aware of some of the provisions of

IAS 36 on impairment of assets but he is confused as to how impairment (if
any) on these assets should be allocated among the assets that make up the
cash generating unit of the company.

(b) Also, on January 1, 2015 Bode Limited borrowed N300million to finance the
production of two assets both of which were expected to take one year to
build.

The work started on January 1, 2015. The loan facility was drawn down on the
same day and was utilised as follows with the remaining funds invested
temporarily.
Asset X Asset Y

N‟000 N‟000

January 1, 2015 50,000 100,000

July 1, 2015 50,000 100,000

The loan interest rate is 9% per annum and Bode Limited can invest surplus
funds at 7% per annum.

The financial accountant is not certain as to how these assets (X and Y) should
be accounted for in the financial statement of Bode Limited as at December
31, 2015.

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(c) The company owns a building which it has been using as head office in Abuja.
In order to reduce cost, the company‟s management on June 30, 2015 decided
to move the head office to the branch office at Abuja and has now let out its
head office building.

The company‟s accounting policy is to use fair value model for Investment
Property.

The head office building had an original cost on January 1, 2006 of

N37.5million and was being depreciated over 50 years. As at December 31,
2015 the fair value of the head office building was assessed by an
independent valuer to be N52.5million.

The financial accountant is confused as to how these transactions should be

treated in the financial statements of the company.

Required:

Write a memo to the management of Bode Limited explaining how these

transactions should be accounted for in their financial statements. Provide relevant
calculations where necessary. (Total 20 Marks)

QUESTION 4

a. Explain the following, stating their importance to investors in the evaluation

of financial performance:
i. Earnings per share (EPS)
ii. Price earnings ratio (PE-ratio) (6 Marks)

b. The issued and fully paid share capital of Almond Nigeria Limited which has
remained unchanged since the date of incorporation until the financial year
ended March 31, 2015 include the following:
(i) 2,400,000,000 ordinary shares
(ii) 600,000,000 6% participating preference share of N1 each.

The company has been operating at a profit for a number of years. As a result
of a very conservative dividend policy in the previous years, there is a large
accumulated profit balance on the statement of financial position.
On July 1, 2015, the directors decided to issue to all ordinary shareholders two
bonus shares for every one previously held.
The following is the extract of group statement of profit or loss and other
comprehensive income for the year ended March 31, 2016.

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Almond Nigeria Limited
Extract of Group Statement of Profit or Loss and other Comprehensive
Income for the year ended March 31, 2016
2016 2015
N‟000 N‟000
Profit for the year 740,000 540,000
Other comprehensive income -- (20,000)
Total comprehensive income 740,000 520,000

Total comprehensive income attributable to:

Owners of parent 680,000 480,000
Non-controlling interest 60,000 40,000
740,000 520,000

The following dividend have been paid or declared at the end of the period.

2016 2015
N‟000 N‟000
Ordinary 330,000 240,000
Preference 69,000 60,000

The participating preference shareholders are entitled to share profit in the

same ratio in which they share dividends after payment of fixed preference
dividend. The preference shareholders will share the same benefit as the
ordinary shareholders of the company should the company be liquidated.

Required:
i. Calculate the earnings per share (EPS) in accordance with IAS 33 and
the dividend per share (DPS) for the year ended March 31, 2015 and
2016. (10 Marks)
ii. What are the limitations of earnings per share (EPS) as a measure of a
company‟s performance? (4 Marks)
(Total 20 Marks)

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SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
IN THIS SECTION (30 MARKS)

QUESTION 5

The difference between debt and equity in an entity‟s statement of financial

position is not easily distinguishable for preparers of financial statements. Debts
and equity financial instruments may have similar characteristics, which may lead
to inconsistency of reporting.

Required:
a. Discuss the main distinguishing features in the presentation of debt and
equity under International Financial Reporting Standards (IFRS) with clear
examples. (10 Marks)

b. Explain why it is important for entities to understand the impact of the

classification of a financial instrument as debt or equity in the financial
statement. (5 Marks)
(Total 15 Marks)

QUESTION 6
a. IFRS 5 - Non-Current Assets Held For Sale and Discontinued Operations set out
requirements that specify the accounting treatment for assets held for sale
and the presentation and disclosure of discontinued operations.

Required
Explain the conditions that must apply at the reporting date for an asset (or
disposal group) to be classified as held for sale and how the assets can be
measured. (5 Marks)

b. i. Explain how impairment of asset should be identified and

accounted for at the end of a reporting period. (4 Marks)
ii. A company has decided to dispose off a group of its assets. The
carrying amounts of the assets immediately before the classification
as held for sale were as follows:-
N
Goodwill 800,000
Property, plant and equipment (at revalued amounts) 3,050,000
Property, plant and equipment (at cost ) 3,200,000
Inventory 840,000
Other current assets 700,000
Total 8,590,000
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The company estimates that the “fair value less cost to sell” of the
disposal group is N6,400,000.

Required:
Calculate the impairment loss and its allocation to the non-current
assets in the disposal group. (6 Marks)
(Total 15 Marks)

QUESTION 7

a. IAS – 37 applies to all provisions and contingencies apart from those covered
by the specific requirement of other standards.

Therefore provisions differ from other liabilities because there is uncertainty

about timing or amount of the future cashflow required to settle the liability.

Required:
Explain the criteria for recognition of provisions in the financial statements
and distinguish between provisions and contingent liabilities. (6 Marks)

b. The following activities took place in THREE different companies:

(i) Otapiapia Plc a Rat Trap Company based in Nigeria has just secured
exportation of rat killers to South Africa. The advertising slogan of the rat
killers is “KILL the BLACKS”. A South African anti-racist movement with
representative in Nigeria is claiming N15,000,000 from the company as
damages because the advertising slogan allegedly compromises the
dignity of black people. The company‟s legal representative believes that
the success of the claim will depend on the judge who presides over the
case. They estimate however, that there is a 70 percent probability that
the claim will be thrown out and a 30 percent probability that it will
succeed.

(ii) Ire-Akari Motors Plc is a Nigerian company that specialises in the

manufacture of “made-in-Nigeria cars”.
During the current financial year 100 cars have been completed and
sold. During the testing of the cars a defect was found in their steering
mechanism.
All the 100 customers that bought the cars were duly informed of the
defect and were told to bring their cars back to have the defects repaired
at no cost. All the customers have indicated that this is the only remedy
they require. The estimated cost of the recall is N10.5m.

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The manufacturer of the steering mechanism, a quoted company with
sufficient fund has accepted responsibility for the defect and has
undertaken to reimburse Ire-Akari Motors Plc all cost that it might incur
in this regard.

(iii) Abeokuta Electricity Company Plc sold a number of electricity

transformers with a warranty in the year ended December 31, 2015. At
the beginning of the year the provisions for warranty stood at
N5,625,000.

A number of claims have been settled during the period for N3,000,000.

As at the year-end there were unsettled claims for 300 customers.

Experience is that 40% of the claims submitted do not fulfil warranty
conditions and can be defended at no cost. The average cost of settling
other claims will be N52,500 each.

Required:
Explain how the matters in b(i) to b(iii) above should be accounted for in
the financial statements of the three companies using figures to illustrate
your points where appropriate. (9 Marks)
(Total 15 Marks)

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SUGGESTED SOLUTION

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SOLUTION 1
a. Bello Professional Nigeria Limited
Statement of cashflow for the year ended March 31, 2015
N'000
Cashflow from operating activities
Loss Before Tax (13,500)
Adjustments:
Depreciation 27,750
Loss on disposal of leasehold plant (w1) 750
Finance cost 7,500
22,500
Operating profit before working capital changes
Increase in Inventory (59,250)
Increase in trade receivables (18,750)
Increase in sundry receivables (3,750)
Increase in trade payables 3,750
Cash generated from operating activities (55,500)
Income Tax Paid (w2) (10,500)
(66,000 )
Net Cash used in operating activities
Cashflow from investing activities
Proceeds from disposal of leased hold plant 63,750
Net Cash generated from investing activities 63,750

Cashflow used financing activities

Issue of Shares (w4) 9,000
Dividend paid (w5) (5,250)
Finance cost paid (5,250)
Finance Lease Repayment (w6) (18,000)
Net Cash generated from financing activities (19,500)
Net Increase in cash and cash equivalent (21,750)
Cash and cash equivalents b/f 11,250
Cash and cash equivalents c/f (10,500)

Analysis of Cash and Cash Equivalents

At March Change in At March
31, 2014 the year 31, 2015
N‟000 N‟000 N‟000
Cash at bank 11,250 (11,250) -
Bank overdraft (10,500) (10,500)
-
11,250 (21,750) (10,500)

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Working (Notes)
w1. Leasedhold Plant N‟000
Balance B/F 66,000
Depreciation (1,500)
Carrying amount at disposal 64,500
Disposal proceeds (63,750)
Loss on disposal 750
w2. Taxation Account
Balance B/F - Current Tax 18,750
- Deferred Tax 6,000
Income statement (5,250)
Balance C/f - Current Tax -
- Deferred Tax 9,000
Tax Paid 10,500

w3. Leased Plant

Balance B/f (18,750)
Depreciation 13,500
(5,250)
Balance C/F 48,750
Leased Plant(w6) 43,500

w4. Ordinary Shares

Balance as at March 31, 2014 60,000
Bonus Issue: 1 for 10 or (30,000 – 24,000) 6,000
66,000
Balance as at March 31, 2015 75,000
Cash issue at Par 9,000

w5. Retained Earnings

Balance as at March 31, 2014 47,250
Loss for the year (8,250)
39,000
Balance as at March 31, 2015 (33,750)
Dividend paid 5,250

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w6. Finance Lease on Leasehold plant
Balance as at March 31, 2014 (6,000 +
15,000) 21,000
Leased Plant(w3) 43,500
Finance lease charges 2,250
66,750
Balance as at March 31, 2015
(36,000 + 12,750) 48,750
Finance Lease repayment 18,000

(b) Direct method of statement of cash flow compared with indirect method

In accordance with IAS 7, there are two methods of presenting the statement
of cash flows with respect to operating activities. These methods are “Direct
method” and “Indirect method”.
i. Direct method of preparing cash flow disclose major class of gross
receipts and gross cash payments.
ii. Direct method shows the items that affected cash flow and the size of
those cash flows, cash received from and cash paid to specific sources
such as customers and suppliers.
iii. Another observed advantage of direct method is that users see and
understand the actual cashflows and how they relate to items of
income and expenses.
iv. From the view point of the users, the direct method is preferable
because it discloses information not available elsewhere in the
financial statements, which could be used in estimating future
cashflow while indirect method involves adjusting the net profit or
loss for changes in non-cash expenditure and movement in working
capital.
v. Direct method tells the reader whether cash collections from
customers are increasing or decreasing.
vi. Direct method shows ability to compare similar types of cash receipts
and payments across companies at least annually.
vii. Direct method gives better representation of an entity‟s cash cycle for
credit guarantors and more user – friendly format for managers.
viii. Direct method highlights the differences between net income and net
cash from operating activities whereas the indirect method is most
useful in extracting the lead and lay between cashflows and income
information.

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ix. Direct method highlights the operating changes in non-cash working
capital accounts.
x. Direct method assists the users in determining the reasons for the
differences between net income and associated cash receipts and
payments to provide a basis for evaluation.
xi. Indirect method reconciles operating profit to net operating cashflow.
xiii. Indirect method is easier to prepare.
xiv. It is simple for users to analyse.
Conclusion
Therefore, from the above analysis, l agree with the opinion of the directors
that direct method would be more preferable and more useful to users of
financial statements, although, the IFRS i.e. IAS 7 on statement of cashflow
permits the use of both methods.

(c) Ways of treating interest paid and dividend received in statements of

cashflow as permitted by IAS 7

i. Interest payments
Interest payment may be classified as either:
 An operating cashflow, because they are deducted when
calculating operating profit before taxation or
 A financing cashflow, because they are cost of obtaining
finance.

ii. Dividend received

 An operating cashflow, because they are added when
calculating operating profit before taxation.
 An investing cashflow, because they represent return on
investment.

EXAMINER‟S REPORT
The question tests candidates knowledge of IAS 7 on statement of cashflow. Part (a)
requires candidates to prepare a statement of cashflow using the indirect method. Part (b)
involves an appraisal of the direct and indirect methods of presenting statements of
cashflow and to give reasons why one method is more useful than the other. Part (c)
requires candidates to explain the various methods of classifying cashflows relating to
interest paid and dividend received.

All the candidates attempted the question but performance was very poor. Only about 20%
of the candidates obtained up to 50% of the 30 marks allocated to the question.

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Candidates‟ commonest pitfall was their inability to correctly classify cashflows in the
statement of cashflow. Candidates did not address the question asked in part (b) and (c)
which suggests inadequate knowledge of the provisions of IAS – 7 on statement of
cashflows.

Candidates are advised to cover adequately all sections of the syllabus for this paper when
preparing for the examination in future.

MARKING GUIDE
Marks Marks
Statement of cashflow
- Determination of cashflows from operating activities 7
- Determination of cashflows from investing activities 1
- Determination of cashflows from financing activities 7
- Analysis of cash and cash equivalent 3 18

Assessment of Director‟s comment:

- Arguments in favour of Direct or Indirect method 3
- Arguments against Direct or Indirect method 2
- Conclusion 2 7

Ways of treating interest paid and dividend received in

the statement of cashflow:
- Classification of interest paid 2½
- Classification of Dividend received 2½ 5
Total marks 30

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SOLUTION 2

(a)

Non controlling interest N‟000

NCI value of acquisition 14,940
NCI shares of post acquisition reserves
20% x (62,640 – 53,280) 1,872
16,812
Impairment (Balancing figure) (2,592)
NCI at reporting date 14,220

(bi)

Goodwill N‟000
Abuja Limited parent
Investment at fair value 57,600
Cash (80% x 14,400 x N5)
Deferred consideration 19,440
77,040
NCI value at acquisition 14,940
91,980
Net assets at acquisition(bii) (53,280)
38,700
Less: Impairment (
2,592
𝑥 0.8) (10,368)
0.2
Good will 28,332

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(bii) Net assets Abaji Limited

At At
Acquisition Reporting
1/1/15 31/12/15
N‟000 N‟000
Share capital 14,400 14,400
Share premium 7,200 7,200
Retained Earnings 24,120 37,800
45,720 59,400

Fair value adjustments:

Brand 7,200 7,200
Amortisation of brand - (720)
Research and
Development unrealised (3,240) (7,200)
Unrealised profit
(1/3 x 1,080) ______ (360)
49,680 58,320
Land and building – revaluation 3,600 3,600
“ “ - further revaluation __-___ 720
53,280 62,640

(c) consolidated reserves N‟000

i. Consolidated share premium (parent company only) 14,400

N‟000
ii. Consolidated retained earnings – parent 63,000
Add interest receivable (10,800 x 8%) 864
63,864

Group share of post acquisition in subsidiary excluding

revaluation on land and building taken to revaluation
reserve 80% x (58,320 – 49,680) 6,912

Less impairment of investment & others 80% x(57,600 –

54,000) +12,960 15,840
54,984

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iii. consolidated revaluation reserve
Parent 8,100

Group share of fair value of land and building 80% (3,600 +

720) 3,406
11,556

N.B: (i) Cost of investment less Loan to subsidiary = N54,000

(ii) All figures are stated in N‟000

EXAMINER‟S REPORT
This question tests candidates knowledge of group or consolidated financial statements. It
requires candidates to calculate the non-controlling interest, goodwill and consolidated
reserve figures to be included in the consolidated statement of financial position.

Most of the candidates attempted the question and their performance was below average.
Only about 30% of the candidates obtained 50% of the 20 marks allocated to the question.

The candidates‟ commonest pitfall was their inability to adjust correctly for the fair value
adjustments of some assets at the acquisition and reporting dates. Some candidates
mixed- up the parameters for calculating goodwill with that of calculating non-controlling
interest.

Candidates are advised to cover all aspects of group accounts when preparing for
examination in this paper.

MARKING GUIDE

Marks

(a) Calculation of non-controlling interest 7

(b) Calculation of goodwill 7

(c) i. Calculation of consolidated share premium 1

ii. Calculation of consolidated earnings 4

iii. Calculation of consolidated reserve 1

Total marks 20

20
SOLUTION 3

From: XYZ (Financial Reporting Consultant)

To: Management of Bode Limited

Date: 21/11/2016

Subject: Explanation of Accounting Treatment of some issues

Please, find below details of our explanation on three main issues raised by you for
the treatment of some accounting issues.

The issues required the applications of some International Financial Reporting

Standards (IFRS) which l have taken time to explain below.

(a) The impairment loss should be allocated across the assets of the cash
generating unit according to IAS 36 on impairments.

- The financial accountant should determine the total impairment loss

which is (N7.2billion less N6.3billion) i.e. N900million.
- Out of this impairment loss N450million should be allocated to
Goodwill to write it down to Nil balance.
- The balance of N450million should be allocated to Property, Plant and
Equipment and other assets as follows:

i. Property, Plant & Equipment N450million x 4,050m = N270m

6,750m

ii. Other Assets 450million x 2,700m = 180million

6.750m 450million

The carrying amount of the assets that should be shown in the financial
statement of BODE Limited as at December 31, 2015 should be shown as
follows:

Cost Impairment Carrying Amount

N‟m N‟m N‟m
Property, Plant & Equipment 4,050 (270) 3,780
Goodwill 450 (450) Nil
Other assets 2,700 (180) 2,520
7,200 900 6,300

21
(b) In a situation where the company, BODE Limited, borrowed money to finance
the production of two assets. IAS 23 states that the borrowing costs that are
directly attributable to acquisition, construction or production of qualifying
assets must be identified and capitalised.
The borrowing cost that should be capitalised with cost of the asset X and Y
as at December 31, 2015 are as follows:
Asset X Asset Y
Borrowing cost N‟000 N‟000
X = (N100m x 9%) 9,000
Y = (N200 x 9%) 18,000
Less: Investment Income
X = (N50m x 7% x 6/12) (1,750)
Y = (N100m x 7% x 6/12) ______ (3,500)
Net borrowing cost 7,250 14,500

Therefore, the cost of assets X and Y of BODE Limited that should be shown in
the statement of financial position as at December 31 is:
X Y
N,000 N,000
Cost of assets 100,000 200,000
Borrowing cost to be capitalised 7,250 14.500
107,250 214,500

(c) Reclassification of owner occupied property to investment property (on fair

value model).
IAS 40 requires the following to be done when there is a change in use which
necessitates that an owner occupied property be reclassified as investment
property to be accounted for using the fair value model.
i. Ascertain the fair value of the property as at the date of change in use.
ii. The difference between the fair value ascertained in (i) and its
carrying amount at the same date should be accounted for in
accordance with IAS 16. This implies that a gain (excess of the fair
value over the carrying amount) should be recognised in other
comprehensive income from where it would be included in equity via
revaluation surplus reserve. Conversely, a loss (excess of carrying
amount over the fair value) should be recognised in profit or loss.
iii. From the date of reclassification, the property is no longer depreciable
i.e. depreciation would no longer be charged thereon.

22
iv. Every reporting date therefore, the fair value of the property should be
re-measured and gain or loss recognised in other comprehensive
income from where it would be included in equity via revaluation
surplus reserve. Conversely, a loss (excess of carrying amount over
fair value) should be recognised in profit or loss.

The building was initially a non-current asset under IAS 16: Property,
Plant and Equipment up to June 30 2015 when there was a change in
use as investment property from this date, IAS 40 becomes applicable.
In view of the above, the company‟s building, investment property
will be accounted for as shown below:
N‟m N‟m
Fair value as at 31/12/2015 52.5
Less:
Fair value as at 30/06/2015 assumed
equals to carrying value as at that date

Cost 37.5
Depreciation 1/1/2006 to 30/06/2015
(
37.5
x 10½ years ) (7.9) 29.6
50

Fair value gain on investment property 22.9

Extract of statement of Profit or Loss and other Comprehensive Income

N‟m
Depreciation (0.4)
Fair value gain on investment property 22.9

Extract of Statement of financial position

Non-current assets N‟m
Investment property 52.5

Conclusion

Please do not hesitate to contact us should you require further explanations on the
above.

Thank you.

Mr. XYZ
Financial Reporting Consultant
23
EXAMINER‟S REPORT

The question tests candidates‟ knowledge and understanding of the applications of three
accounting standards: IAS 36 on impairment, IAS 23 on borrowing costs and IAS 40 on
investment properties. The question requires candidates to apply the provisions of the
different standards to three scenarios.

About 50% of the candidates attempted the question, candidates‟ showed lack of
understanding of the requirements of the question as their overall performance was very
poor.

Candidates‟ commonest pitfall was their inability to present their solutions in MEMO form
as demanded by the question. Some candidates also lost vital marks due to non-
denomination of the relevant amounts in million or thousand naira.

Candidates are advised to ensure adequate preparation by paying special attention to

relevant financial reporting standards examinable at this level of the examination.

MARKING GUIDE
Marks Marks
(a) Impairment of assets – IAS 36
- Determination of the impairment loss 1
- Allocation of impairment loss to goodwill 1
- Calculation and allocation of impairment loss to PPE
and other assets 2
- Determination of carrying amount of assets which will
appear in the financial statement 2 6

(b) Borrowing cost – IAS 23

- Determination of borrowing cost to be capitalised 3
- Determination of cost of assets to be shown in the
statement of financial position 3 6

Investment property – IAS 40

(c) Reclassification of owner occupied property to
investment property (on fair value model):
- Ascertain the fair value of the property at the date of
change in use 1
- Determine the gain or loss in fair value i.e. excess of
carrying amount over the fair value 3
- Extract of statement of profit or loss and other
comprehensive income 1
- Extract of statement of financial position 1 6
¤ Memo format conclusion 2
Total marks 20

24
SOLUTION 4

(a) i. Earnings Per Share

- Earnings are profits available for equity holder. Earnings per share is a
measure of the amount of earnings in a financial period for each equity
share.
EPS = Net profit attributable to ordinary shareholders
Weighted average no of ordinary shares
outstanding during the period
Importance
- EPS is used by investors as a measure of the performance of companies
in which they invest or wish to invest.
- It reveals a lot about the financial health of the company.
- It helps in the choice of shares or stocks to acquire.
- It serves as input in the calculation of Price Earnings Ratio.
- It gives a more accurate picture of the actual returns to investors than
reported profits.
- EPS can have a significant effect on a company‟s share price.
- EPS serves as a means of assessing the stewardship and management of
the company.

ii. Price Earnings Ratio (P/E) Ratio

- Price Earnings Ratio is a measure of the company‟s current share price
(market price) in relation to the EPS.
P/E Ratio = Market Price of Share
EPS
Importance
- It can be used by investors to determine whether the share is expensive
or cheap.
- It is an indication of the future strength of the company‟s performance.
- A high P/E Ratio gives the investors confidence in the stock, and they are
prepared to pay high price for the stock.
- Higher P/E Ratio is an indication of a strong corporate governance in a
company.
- It indicates the ability of the company to pay high and stable dividends
to shareholders.

25
b. i. EARNINGS PER SHARE (EPS)
March, March 31,
31 2015
2016
N‟000 N‟000
Profit attributable to ordinary shareholders (wk 2) 640,000 440,000
Weighted No of shares (w3) 7,800,000 3,000,000
Earnings per share (EPS) N0.082 N0.147

Dividend Per Share (DPS)

Ordinary Shares:
Dividend (w1) 330,000 240,000
No of Ordinary Shares (w3) 7,200,000 2,400,000
DPS N0.046 N0.1

Preference shares:
Dividend (w1) 69,000 60,000
No. Or ordinary shares (w3) 600,000 600,000
DPS N0.115 N0.10

WORKINGS
W1 Percentage of Profit attributable to class of equity shares
2016 2015
N‟000 N‟000
Total pref. Dividend 69,000 60,000
Fixed portion (6% of 600,000) (36,000) (36,000)
33,000 24,000
Dividend paid to ordinary shareholders 330,000 240,000

Therefore, the participating preference shareholders will share profit

in the ratios of 1:10 (33,000 : 330,000) or (24,000 : 240,000) with
ordinary shareholders after payment of the fixed preference dividend
out of the profit.

W2
Earning per each class of share
2016 2015
N‟000 N‟000
Net profit for the year 740,000 520,000
Fixed Pref. Dividend (36,000) (36,000)
704,000 484,000

26
2016 2015
N‟000 N‟000
Net profit attributable to ordinary (10/11 of
shareholders (10/11 of 704,000) 640,000 484,000) 440,000

Net profit attributable to participating

shareholders (1/11 of 704,000) (1/11 of
64,000 484,000) 44,000
Fixed dividend 36,000 36,000
100,000 80,000

W3
Weighted number of shares in issue
Ordinary shares: 2016 2015
‟000 „000
Balance April 1, 2014 2,400,000 2,400,000
Capitalization (Bonus) 4,800,000 _____-______
7,200,000 2,400,000
Participating Preference shares 600,000 600,000
7,800,00 300,000

ii. Limitations of Earnings Per Share (EPS)

 Not all entities use the same accounting policies. It may not always
be possible to make meaningful comparison between EPS of different
companies.
 EPS does not take account of inflation, so that, growth in EPS over
time might be misleading.
 EPS measures an entity‟s profitability, but this is only part of an
entity‟s overall performance.
 Diluted EPS is based on current and not on forecast earnings,
therefore not a reliable predictor of future EPS.
 EPS is relied on by investors as the main measure of an entity‟s
performance. Hence, management try to make EPS appear as high
as possible by attempting to manipulate the figures using “creative
accounting” as well as making decisions which will increase EPS in
the short term, but which damage the entity in the longer term.

27
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of the performance ratios: Earnings Per Share
(EPS), Price Earnings Ratio (P/E) and Dividend Per Share (DPS). Part (a) requires
candidates to explain and state the importance of EPS and PE ratios to the investor. Part
(b) requires the calculation of EPS and outlining its limitations as a measure of company‟s
performance.

About 30 percent of the candidates attempted the question and demonstrated fair
understanding of the requirements of the question and performance was fairThe
commonest pitfall was candidates inability to determine correctly the ratio of participation
in the residual profit by the participating preference shareholders. Some other candidates
could neither explain the ratios as required nor correctly state the limitations of the ratios.

Candidates are advised not to undermine any aspect of the syllabus or focus on some
particular ratios. Adequate coverage of the syllabus is therefore recommended.

MARKING GUIDE
Marks
(a) Explanation and importance of ratios
- Explanation of Earnings Per Share 1
- Explanation of Price Earnings Ratio 1
- Importance of EPS in performance evaluation
(any 4 points at ½ mark each) 2
- Importance of PE Ratio in performance evaluation
(any 4 points at ½ mark each) 2 6

(b) i. Calculation of Earnings Per Share (EPS) 1½

- Calculation of Dividend Per Share - Ordinary 1½
- Calculation of Dividend Per Share - Preference 1½
- Workings for Dividend per share 2
- Workings for Earnings per share 3½ 10

(c) Limitations of Earnings Per Share

(any 4 points at 1 mark each) 4
Total marks 20

28
SOLUTION 5

(a)
- IAS 32 Financial Instruments Presentation establishes principles for
presenting financial instruments as liabilities or equity. To determine
whether a financial instrument should be classified as debt or equity, IAS 32
uses principles-based definitions of a financial liability and of equity. In
contrast to the requirements of generally accepted accounting practice in
many jurisdictions around the world, IAS 32 does not classify a financial
instrument as equity or financial liability on the basis of its legal form. The
key feature of debt is that the issuer is obliged to deliver either cash or
another financial asset to the holder. The contractual obligation may arise
from a requirement to repay principal or interest or dividends.

- Such a contractual obligation may be established explicitly or indirectly

through the terms of the agreement. For example, a bond which requires the
issuer to make interest payments and redeem the bond for cash is classified
as debt. In contrast, equity is any contract which evidences a residual
interest in the entity‟s assets after deducting all of its liabilities. A financial
instrument is an equity instrument only if the instrument includes no
contractual obligation to deliver cash or another financial asset to another
entity and if the instrument will or may be settled in the issuer‟s own equity
instruments. For example, ordinary shares, where all the payments are at the
discretion of the issuer, are classified as equity of the issuer. The
classification is not quite as simple as it seems. For example, preference
shares required to be converted into a fixed number of ordinary shares on a
fixed date or on the occurrence of an event which is certain to occur, should
be classified as equity.

- A contract is not an equity instrument solely because it may result in the

receipt or delivery of the entity‟s own equity instruments. The classification of
this type of contract is dependent on whether there is variability in either the
number of equity shares delivered or variability in the amount of cash or
financial assets received. A contract which will be settled by the entity
receiving or delivering a fixed number of its own equity instruments in
exchange for a fixed amount of cash or another financial asset is an equity
instrument. However, if there is any variability in the amount of cash or own
equity instruments which will be delivered or received, then such a contract
is a financial asset or liability as applicable.

- For example, where a contract requires the entity to deliver as many of the
entity‟s own equity instruments as are equal in value to a certain amount of
cash, the holder of the contract would be indifferent whether it received cash
or shares to the value of that amount. Thus this contract would be treated as
debt.

29
Other factors, which may result in an instrument being classified as debt,
are:
i. redemption is at the option of the instrument holder;
ii. there is a limited life to the instrument;
iii. redemption is triggered by a future uncertain event which is beyond
the control of both the holder and issuer of the instrument; and
iv. dividends are non-discretionary;

Similarly, other factors, which may result in the instrument being classified
as equity, are whether the shares are non-redeemable, whether there is no
liquidation date or where the dividends are discretionary.

(b) The importance of entities understanding the impact of the classification of a

financial instrument as debt or equity in the financial statements.

When an entity issues a financial instrument, it must determine its

classification either as a liability (debt) or as equity. That determination has
an immediate and significant effect on the entity‟s reported results and
financial position.
i. Liability classification affects an entity‟s gearing ratios and typically
results in any payments being treated as interest and charged to
earnings.
ii. Equity classification avoids these impacts but may be perceived
negatively by investors if it is seen as diluting their existing equity
interests.
iii. Understanding the classification process and its effects is therefore a
critical issue for management and must be kept in mind when
evaluating alternative financing options.
iv. This may in turn affect the entity‟s ability to pay dividends on its
equity shares (depending upon the requirements of local law).
v. Equity classification avoids the negative impact that liability
classification has on reported earnings and gearing ratios. It also
results in the instrument falling outside the scope of IAS 39 Financial
Instruments: Recognition and measurement, thereby avoiding the
complicated ongoing measurement requirements of that standard.

30
EXAMINER‟S REPORT

The question tests the Provisions of IAS 32 – Financial Instrument presentation. Candidates
are required to discuss the main distinguishing features in the presentation of debt and
equity as well as state the importance of the impact of classification of debt or equity in the
financial statements.

Less than forty percent (40%) of the candidates attempted the question and performance
was poor.

Candidates‟ commonest pitfalls include the following:

 Explaining the differences between equity holders and debenture holders instead of
stating the distinguishing feature in the presentation of debt and equity as stated
in International Financial Reporting Standards (IFRS).

 Inability of candidates to explain the importance of understanding the impact of

classification of financial instruments as debt or equity in the financial statements.

The failure to make use of ICAN Study texts as well as familiarising themselves with all
relevant accounting standards at this level of the Institute examinations, led to the poor
performance, hence candidates are advised to pay more attention to recommended study
texts and ensure that they cover the syllabus for better performance in future
examinations.

MARKING GUIDE
Marks
(a) Discussion on the main distinguishing features in the
presentation of debt and equity under IFRS
(any 10 points at 1 mark each)
10
(b) Explanation of the importance for entities to understand
the impact of the classification of financial instrument as
debt or equity. (any 5 points at 1 mark each) 5
Total marks 15

31
SOLUTION 6

(a) The following conditions must apply at the reporting date for an asset (or
disposal group) to be classified as held for sale:

(i) It must be available for immediate sale in its present condition

subject only to terms that are usual and customary for sales of such
assets (or disposal group);

(ii) The sale must be highly probable i.e:

 The appropriate level of management must be committed to a
plan to sell the asset (or disposal group);
 An active programme to locate a buyer and complete the plan
must have been initiated; and
 The asset (or disposal group) must be actively marketed for sale at
a price that is reasonable in relation to its current fair value.

(iii) The sale must be expected to be completed within one year from the
date of classification (except in limited circumstances) and actions
required to complete the plan should indicate that it is unlikely that
significant changes to the plan will be made or that the plan will be
withdrawn.

If the criteria are met for a non-current asset (or disposal group) after the
reporting date but before the authorization of the financial statements, that
asset must not be classified as held for sale as at the reporting date.
However, the entity is required to make certain disclosures in respect of the
non-current asset (or disposal group).

(b) How Impairment of assets should be identified and accounted for

(i) At the end of each reporting period, the entity should assess whether
there are any indications that an asset may be impaired.
(ii) If there are such indications, the entity should estimate the assets
recoverable amounts.
(iii) When the recoverable amount is less than the carrying value of the
assets the entity should reduce assets‟ carrying value to its
recoverable amount. The amount by which the value of the assets is
written down is an impairment loss.
(iv) The impairment loss is recognized as loss for a period.
(v) However, if the impairment loss relates to an asset that has previously
been re-valued upward. It is first off-set against any remaining
revaluation surplus for that asset, when this happens, any difference
is charged to other comprehensive income for the period.
32
(vi) Depreciation charges for the impaired assets in future periods should
be adjusted to allocate the assets revised carrying amount minus any
residual value, over its remaining useful life (revised if necessary).

b(ii) Impairment loss

Carrying Impairment Carrying
Amount loss amount
before after
Allocation allocation
N N N
Goodwill 800,000 800,000 -
Property, plant and
equipment (at revalued
amount) – w 2 3,050,000 678,320 2,371,680
Property, plant and
equipment (at cost) – w3 3,200,000 711,680 2,488,320
Inventory 840,000 - 840,000
Other current assets 700,000 ____-___ 700,000
Total 8,590,000 2,190,000 6,400,000

WORKINGS

(W 1) Impairment Loss:
N8,590,000 less N6,400,000 = N2,190,000

(W 2) Allocations N
- Goodwill = 800,000
- Property, plant & equipment (revalued asset)
3,050,000  (2,190,000  800,000)
= 678,320
6,250,000
- Property, plant and equipment (at cost)

3,200,000  (2,190,000  800,000)

(W 3) = 711,680
6,250,000
2,190,000

33
EXAMINER‟S REPORT

The question is made up of two parts. Part (a) tests candidate‟s knowledge of IFRS 5 – Non
Current Assets held for sales and discontinued operations, while Part (b) of the question
required the explanation of how impairment of assets should be identified and accounted
for as well as computation of impairment loss and its allocation to non- current assets in
the disposal group.

About 70% of the candidates attempted the question and performance was above average.
Majority of the candidates were able to calculate and allocate the impairment loss, but
only few of them could explain how impairment of assets are identified and accounted for.
Also, some candidates could not explain the conditions that must apply at the reporting
date, for an asset or disposal group to be classified as held for sale as required by IFRS 5.

Candidates are advised to study the ICAN Study text very well while preparing for the
Institute‟s examination as question b(ii) was adopted from ICAN Financial Reporting Study
text.

MARKING GUIDE
Marks Marks
(a) Explanation of the conditions that must apply at the
reporting date for an asset (or disposal group) to be
classified as held for sale: (any 5 points at 1 mark each) 5

(b) (i) Explanation of how impairment of assets should be

identified and accounted for:
(any 4 points at 1 mark each) 4
(ii) Calculation of impairment loss and its allocation to non-
current assets:
- Determination of impairment loss ½
- - Allocation of impairment loss 1½
- - Determination of carrying amount of assets 4 6
Total marks 15

34
SOLUTION 7

(a) i Criteria For Recognition Of Provisions

A provision should be recognised when:
 A company has a present obligation (legal or constructive) as a
result of past events.
 It is probable that outflow of economic benefit will be required
to settle the obligation.
 A reliable estimate can be made of the amount of the
obligation.

Please note that if one of these conditions is not met then provision
cannot be recognized.

ii. Differences between Provisions and Contingent Liabilities

Provisions: Are recognised as liabilities (assuming that a reliable

estimates can be made) because they are present obligations and it is
probable that an outflow of resources embodying economic benefit
will be required to settle the obligation.

Contingent Liabilities: Are not recognised as liabilities because they

are either:
 Possible obligations
 Present obligations that do not meet recognition criteria for
provisions because either:
 It is not probable that an outflow of resources embodying economic
benefit will be required to settle the obligation; or
 A sufficiently reliable estimate of the amount of the obligation
cannot be made.

(b)
i. Otapiapia Plc
 The present obligation is as a result of a past event. The available
evidence provided by expert indicates that it‟s more likely that no
present obligation exist at statement of financial position date
because there is a 70 percent probability that the claims will be
thrown out. Hence no obligation event has taken place.
 In view of the above no provision should be recognised.
 The matter may be disclosed as a contingent liability unless the 30
percent probability is regarded as being improbable.

35
ii. Ire Akari Motors Plc
This is in two folds

Contingent Liability
There is an obligation between Ire Akari Motors Plc and its 100
customers as it has acknowledged the defects and has also notified
the customers and accepted to repair the cars with an estimate of
N10.5m repair costs.

This satisfies the recognition criteria of IAS 37:

 There is a present obligation
 It is probable that economic benefit will flow out
 There is a reasonably reliable estimate of the cost.

In view of the above, Ire Akari Motors should recognise a contingent

liability of N10.5m and make the provision accordingly in the
financial statement by debiting profit or Loss with N10.5m and
crediting Contingent Liability with N10.5m.

Contingent Assets
There is a probable asset because the manufacturer of the defective
steering mechanism has accepted responsibility for the defect with an
undertaking to reimburse Ire Akari Motors Plc accordingly for all costs
incurred in respect thereof. This is a demonstration of the
manufacturer‟s willingness to meet the obligation. Where some or all
the expenditure required to settle a provision is expected to be
reimbursed by another party (in this case with an equal sum of the
estimated cost of N10.5million), the reimbursement shall be
recognised when, and only when, it is virtually certain that
reimbursement will be received if the entity settles the obligation.

The reimbursement shall be treated as a separate asset. The amount

recognised for the reimbursement shall not exceed the amount of the
provision.

It is also virtually certain that economic resources will flow out to Ire
Akari Motors Plc as the manufacturer is a quoted company with
sufficient fund. This is evidential of the ability to meet the obligation.

In view of the above, Ire Akari Motors Plc should recognise contingent
assets of N10.5m by debiting Contingent assets and crediting Profit or
loss with the same amount of N10.5m.

36
Iii. Abeokuta Electricity Company Plc
IAS 37 states clearly that a warranty is a constructive obligation and
satisfies all the recognition criteria. As such Abeokuta Electricity
Company Plc should provide for the warranty claims as follows:
- Provide for 40% of 300 customers at N52,500 each as at the
reporting date, amounting to N6,300,000.
- Recognise the claims of N3,000,000 paid during the year in the
provision for warranty account with the brought forward of
N5,625,000. The current year provision will be N6,825,000.

This is a provision. The provision account will be shown in the

Statement of Financial Position and details shown in a note to the
account as follows:

WARRANTY
N‟000
At January 1, 2015 5,625
Used in the year (3,000)
2,625
Charged to:
Statement of Profit or Loss 6,825
Balance as at December 31, 2015 (w1) 9,450

Workings
(W1) 300 x (100-40) 60% x 52,500 N9,450,000

The company grant warranties on certain categories of goods. The

measurement of the provision is on the company‟s experience of
likelihood and cost of paying out under the warranty.

EXAMINER‟S REPORT

The question tests candidates understanding of the provisions of IAS 37- Provisions and
Contingencies. Candidates are required to explain the criteria for recognition of provisions
in the financial statements as well as distinguish between provisions and contingent
liabilities. They are also required to apply the provisions of IAS 37 to three different
scenarios.

Majority of the candidates did not attempt the question and performance was very poor.
The commonest pitfall was the inability of the candidates to apply the provisions to the
scenarios provided in the question .

37
Most of the candidates lack understanding of the topic and could not determine whether
provisions should be made in the financial statement or not. Few of them that applied the
provisions could not justify their claims with appropriate figures to illustrate their points
and this led to loss of valuable marks.

Candidates are advised to familiarize themselves with all relevant Accounting Standards at
this level of the Institute examinations for better performance in future.

MARKING GUIDE

SOLUTION 7 Marks Marks

(a) (i) Explanation of criteria for recognition of provisions
(any 3 points at 1 mark each) 3

(ii) Differences between provisions and contingent

liabilities 3
(any 6 points at ½ mark each)

(b) Explanation of the treatment of provisions and

contingent liabilities in the given scenarios:
(i) Otapiapia Plc
Review of scenario and conclusion
(any 3 points at 1 mark each) 3
(ii) Ire Akari Motors Plc
Review of scenario and conclusion
(3 points at 1 mark each) 3
(iii) Abeokuta Electricity Company Plc
Review of scenario and conclusion
(any 3 ticks at 1 mark each) 3
9
Total marks 15

38
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

SKILLS LEVEL EXAMINATION – MAY 2017

TAXATION

Time Allowed: 3 hours

INSTRUCTION: YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN

QUESTIONS IN THIS PAPER

SECTION A COMPULSORY QUESTION (30 MARKS)

QUESTION 1

Damilola Adewunmi is the Human Resources Manager of Mighty Steel Nigeria

Limited. He is married and blessed with three children.

(i) The following details relate to Damilola Adewunmni for the year ended
December 31, 2015:
N
Salary 3,144,000
Commission 525,000
Rent received 1,350,00
Gain from sale of shares 300,000
Pension received from employment 450,000
Benefits-in-kind (all assessable) 225,000
Interest on Fixed Deposit (gross) 180,000

(ii) Damilola contributes N22,500 monthly towards the upkeep of his aged
mother. His elder brother, Adekunle, also contributes N37,500 monthly.
(iii) Damilola took an insurance policy on his life and pays a premium of N15,000
monthly.
(iv) The children are University undergraduates and enjoy scholarship for only
tuition from his State Government.
(v) Damilola took a loan to build an owner-occupied house on which he pays
N90,000 annual interest.
(vi) For an outstanding performance, he was given an end-of-year bonus in the
sum of N90,000.
(vii) Withholding Tax of N18,000 was deducted in respect of interest on Fixed
Deposit.

39
You are required to:
a. Calculate the income tax payable for the relevant year of assessment.
(10 Marks)
b. Calculate the income tax payable for the relevant year of assessment,
assuming 2015 is the year of assessment with the following additional
information:
N
Contribution to National Housing Fund 78,600
Contribution to National Health Insurance Scheme 210,000
Contribution to Pension Scheme 235,800

(10 Marks)
c. Explain briefly the following:
i. Itinerant worker (1 Mark)
ii. Non-resident individual (1 Mark)
iii. Earned income (1 Mark)
iv. Resident individual (1 Mark)
v. Unearned income (1 Mark)
d. List FIVE dividends exempted from tax. (5 Marks)
(Total 30 Marks)

SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
IN THIS SECTION (40 MARKS)

QUESTION 2

a. Mr. Bull Dozer has just submitted his application for export license to Nigerian
Export Promotion Council. The Council demanded a Tax Clearance Certificate
before granting him an export license.
Mr. Bull Dozer was worried and had approached you to explain whether or not
the presentation of this document is a condition precedent for all government
transactions in Nigeria.
Required:
State TEN transactions in respect of which a Tax Clearance Certificate may be
demanded by a government agency. (10 Marks)

b. The Tax Appeal Tribunal has power to adjudicate on tax disputes and
controversies where appeal is not discontinued by the Appellant.

40
Required:
State TEN of the procedures for hearing the appeal before the Tax Appeal
Tribunal. (10 Marks)
(Total 20 Marks)

QUESTION 3

Muyiwa, Seyi and Akpan are Partners in an Accounting Firm in Lagos; Museak & Co
(Chartered Accountants). The Statement of Profit or Loss for the year ended
December 31, 2015, is as shown below:
N N N
Gross Profit 65,000,000
Salaries and wages 5,100,000
Office expenses 4,000,000
Provision for bad debts 2,000,000
Depreciation 1,500,000
Repairs and maintenance 2,500,000
Donations 400,000
Training of staff 2,000,000
Medical expenses 1,200,000
Travelling expenses 500,000
Interest on loan granted by Seyi 400,000
Interest on Capital Accounts:
Muyiwa 1,200,000
Seyi 600,000
Akpan 250,000
2,050,000
21,650,000
Net Profit for the year 43,350,000

Additional information is as follows:

(i) Donation was for laying of foundation of the new St Peter‟s Church;
(ii) The vehicle of Muyiwa‟s wife involved in an accident was repaired at a cost
of ₦550,000 and this was included in repairs and maintenance;
(iii) Medical expenses in the sum of ₦500,000 representing the cost of flying the
principal partners‟ father-in-law abroad for treatment was funded by the
partnership;
(iv) Akpan made a voluntary contribution of N500,000 under the Pension
Reforms Act 2004 (as amended);

41
(v) Capital allowances agreed with the tax authority was ₦4,000,000; and
(vi) Partners‟ sharing profit: Muyiwa 6; Seyi 4; Akpan 2.

You are required to compute:

a. The Adjusted Income of Museak & Co (Chartered Accountants) for tax
purposes.
(6 Marks)
b. The Chargeable Income of each Partner (6 Marks)
c. The tax payable by each of the Partners (8 Marks)
(Total 20 Marks)

QUESTION 4

Jandon is a Nigerian who lived abroad for so many years. He came back few years
ago to set up a business in Nigeria and appointed your firm to audit his financial
statements.
You are a trainee Chartered Accountant and your firm has also just completed its
audit of Jandon‟s financial statements for the year ended December 31, 2014.

Jandon prepared his own tax computations for the year ended December 31, 2014
and sent the returns to the Revenue Authority. The tax returns have, however, been
disputed by the Revenue Authority.

You are required to explain the following to Jandon:

a. The options open to the Revenue Authority on receipt of a Letter of Objection.
(2 Marks)
b. The content of a Notice of Objection (3 Marks)
c. The jurisdiction of the Tax Appeal Tribunal (6 Marks)
d. The conditions to be fulfilled for an appeal to the Federal High Court to be
valid. (4 Marks)
e. The options open to an aggrieved taxpayer who is not satisfied with the
decision of the Federal High Court. (5 Marks)
(Total 20 Marks)

42
SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
IN THIS SECTION (30 MARKS)

QUESTION 5

Alhaji Oluwambe is the trustee of a Settlement created by late Chief Jongbo in

favour of his four children, grandchildren and others. He submitted the following
information to Okun State Board of Internal Revenue for assessment purposes for
the fiscal year ended December 31, 2014:
N N
Interest received 3,500,000
Dividend (Net) 14,000,000
Rental income 10,500,000
Business profit 31,500,000
Miscellaneous income 5,600,000
Trustee‟s remuneration:
Fixed 787,500
Variable: 3% of Gross Income
Fixed Annuity to grandchildren:
Ojo 87,500
Gbenga 52,500
Administrative expenses 4,550,000

Additional information:
(i) The Trustee made discretionary payments in line with the Trustee Deed to
the beneficiaries as follows:
N
Banke 262,500
Abidemi 350,000
Sunkanmi 437,500
Olajire 315,000
(ii) Each beneficiary is entitled to 1/6th share of 1/3rd of the distributable income.
(iii) Capital allowance agreed with relevant tax authority was N7,350,000.

You are required to compute:

a. Assessable income in the hands of each beneficiary (14 Marks)
b. The Net Assessable Income in the hands of the Trustee (1 Mark)
(Total 15 Marks)

43
QUESTION 6

Campbell Limited located in Arama Town has been in business since 1994 and is
involved in manufacturing of plastic containers. The company‟s accounts for the
year ended December 31, 2014 showed the following results:

N N
Turnover 1,909,425
Less Expenses:
Transport and travelling 93, 000
Salaries and wages 224,000
Printing and stationery 25,000
Donation to ICAN building fund 5,000
Audit fees 20,000
Stamp duty on increase in share capital 75, 000
Rent 50,000
Depreciation 234,450
Tertiary Education Tax 37, 325 763,775
Net profit 1,145,650

The following additional information was extracted from the computations of

Capital Allowance and Income Tax for Assessment Year 2014:

(i) Unutilised Capital Allowance brought forward N70,000

(ii) Tax Written Down Values of the following assets purchased in 2011:
N
 Motor vehicles 40,000
 Furniture and Fittings 60,000
 Plant 70,000

(iii) In year 2014, the company purchased the following assets:

N
 2 Motor vehicles 840,000
 4 Furniture and Fittings 160,000
 1 Generating set 300,000
You are required to:
a. Compute Capital Allowances assuming that assets purchased in 2011 have
been used for two years. (7 Marks)
b. Compute the Total Profits, Companies Income Tax (CIT) and Tertiary
Education Tax (TET) for the relevant year of assessment. (8 Marks)
(Total 15 Marks)

44
QUESTION 7

The recently employed Accounts Officer of Oriade Limited understands that the
company must report Withholding Tax information to the Revenue Authority
according to the provisions of the law. Being a fresh graduate, he does not know
how Withholding Tax is reported to the Revenue Authority.

You are required to explain:

a. The peculiarities of Withholding Tax (3 Marks)
b. Where international transactions are involved:
i. The rate of Withholding Tax (1 Marks)
ii. Types of income involved (3 Marks)
c. The currency of payment where the currency of transaction is not in Naira
(3 Marks)
d. FIVE particulars contained in the Withholding Tax Payment Schedule.
(5 Marks)
(Total 15 Marks)

45
NIGERIAN TAX RATES
1. CAPITAL ALLOWANCES

Initial % Annual %
Office Equipment 50 25
Motor Vehicles 50 25
Office Buildings 15 10
Furniture and Fittings 25 20
Industrial Buildings 15 10
Non-Industrial Buildings 15 10
- Agricultural Production 95 Nil
Plant and Machinery – Others 50 25

2. INVESTMENT ALLOWANCE 10%

3. RATES OF PERSONAL INCOME TAX

Graduated tax rates with consolidated relief allowance of N200,000 or 1% of
Gross Income whichever is higher + 20% of Gross Income.
Taxable Income (N) Rate of Tax (%)

First 300,000 7

Next 300,000 11

Next 500,000 15

Next 500,000 19

Next 1,600,000 21

Over 3,200,000 24

After the relief allowance and exemption had been granted, the balance of
income shall be taxed as specified in the tax table above.

4. COMPANIES INCOME TAX RATE 30%

5. TERTIARY EDUCATION TAX (2% of Assessable Profit)

6. CAPITAL GAINS TAX 10%

7. VALUE ADDED TAX 5%

46
SUGGESTED SOLUTIONS

47
SOLUTION 1

a. Damilola Adewunmi
Computation of Income Tax Payable for 2015 Year of Assessment

N N

Basic Salary 3,144,000

Commission 525,000

Bonus 90,000

Benefits-in-kind 225,000

GROSS INCOME 3,984,000

Consolidated Relief Allowance(see working) (996,800)

2,987,200

Tax Exempt Items:

Insurance 180,000

Mortgage Interest 90,000 (270,000)

Chargeable Income 2,717,200

Income Tax Payable

N
1st N300,000 @ 7% 21,000
Next N300,000 @ 11% 33,000
Next N500,000 @ 15% 75,000
Next N500,000 @ 19% 95,000
Next N1,117,200 @21% 234,612
N2,717,200 ________
458,612

48
b. Damilola Adewunmi
Computation of Income Tax Payable for 2015 Year of Assessment
N N
Basic Salary 3,144,000
Commission 525,000
Bonus 90,000
Benefits-in-kind 225,000
GROSS INCOME 3,984,000
Consolidated Relief Allowance (See Working) (996,800)
2,987,200
Tax Exempt Items:
Insurance Premium 180,000
National Housing Fund Contribution 78,600
National Health Insurance Scheme 210,000
Pension Contribution 235,800
Mortgage Interest 90,000
(794,400)
Chargeable Income 2,192,800

Income Tax Payable N

1st N300,000 @ 7% 21,000
Next N300,000 @11% 33,000
Next N500,000 @ 15% 75,000
Next N500,000 @ 19% 95,000
Next N592,800 @ 21% 124,488
N2,192,800
348,488

c.
i. Itinerant Worker
An itinerant worker means an individual irrespective of his status, who
works at any State during a year of assessment (other than a member of
the armed forces) for wages, salaries or livelihood by working in more
than one State, and work for a minimum of twenty (20) days in at least
three (3) months of every assessment year.

ii. Non-resident Individual

A non-resident individual is a person who is not domiciled in Nigeria or
who stays in Nigeria for less than 183 days in a 12-month period but
derives income or profit from Nigeria.

49
iii. Earned Income

This refers to an income derived from a trade, business, profession,

vocation or employment carried on or exercised by him and a pension
derived by him in respect of a previous employment. It includes profits,
salaries, wages, commissions, bonuses, etc.

iv. Resident Individual

An individual is regarded as resident in Nigeria if he
 is domiciled in Nigeria;
 sojourns in Nigeria for a period or periods all amounting to 183 days
or more in a 12-month period; and
 serves as a diplomat or diplomatic agent of Nigeria in a country other
than Nigeria.

v. Unearned income

This is income derived from a source other than trade, business,

profession or employment e.g. dividend, rental income, royalty, interest,
etc.

d. The following dividends are excluded from tax:

i. Dividend paid out of pioneer profit;

ii. Dividend paid by issue of bonus shares;
iii. Dividend from small companies (revenue less than N2,000,000);
iv. Dividend paid by companies assessed under Petroleum Profits Tax;
v. Dividend from companies in petrochemical and liquefied natural gas;
vi. Dividend earned from abroad and brought into Nigeria by a Nigerian
resident in convertible currency and paid into a domiciliary account in
a bank approved by the government; and
vii. Dividend distributed by a Unit Trust.

Working:

Consolidated Relief Allowance

Higher of N200, 000 or 1% of Gross Income + 20% of Gross Income
= N200,000 + N796,800 = N996,800

50
EXAMINER‟S REPORT

The question tests candidates‟ understanding of the assessment of an individual.

Candidates had a good understanding of the question and performance was above
average.

The commonest pitfall was the inability of the candidates to recognise the fact that
investment incomes are taxed on preceding year basis.

Candidates are advised to pay attention to incomes assessable on preceding year basis.

MARKING GUIDE

MARKS MARKS
a. Computation of Chargeable Income:
8 points raised @ 1 mark each 8
4 points in Computation of Tax liability @¼ mark each 1
Tax payable 1 10

b. Computation of Chargeable Income:

The first 5 points @ ½ mark each 2½
The five Exempt Items @ 1 mark each 5
Chargeable Income @ ½ mark ½
5 points in Computation of Tax liability @ ¼ mark each 1¼
Tax Payable ¾ 10

c. The 5 definitions @ 1 mark each 5

d. The first 5 dividends exempted from tax @ 1 mark each 5

30

51
SOLUTION 2

a. TRANSACTIONS IN RESPECT OF WHICH A TAX CLEARANCE CERTIFICATE MAY BE

DEMANDED BY GOVERNMENT AGENCY
The requirement to obtain a Tax Clearance Certificate on an annual basis
places the onus on the taxpayers to ensure full compliance with the
requirements of the tax laws.

The following are transactions in respect of which a Tax Clearance Certificate

may be demanded by a government agency:

i. Application for Government loan for industry or business;

ii. Registration of motor vehicles;
iii. Application for firearms license;
iv. Application for foreign exchange or exchange control permission to
remit funds outside Nigeria;
v. Application for Certificate of Occupancy;
vi. Application for award of contracts by governments, their agencies
and registered companies;
vii. Application for approval of building plans;
viii. Application for trade license;
ix. Application for transfer of real property;
x. Application for import or export license;
xi. Application for agent license;
xii. Application for pools or gaming license;
xiii. Application for registration as a contractor;
xiv. Application for distributorship;
xv. Confirmation of appointment by government, as chairman or
member of public board, institution, commission, company or to any
other similar position made by the government;
xvi. Stamping of guarantor‟s form for Nigerian Passport;
xvii. Application for registration of a limited liability company or of a
business name;
xviii. Application for allocation of market stalls;
xix. Appointment or election into public office;
xx. Change of ownership of vehicle by vendor; and
xxi. Application for a plot of land.

52
b. PROCEDURES FOR HEARING AN APPEAL BEFORE A TAX APPEAL TRIBUNAL

Where an appeal is not discontinued, the procedures for hearing the appeal
before the Tax Appeal Tribunal are as follows:

i. The Tax Appeal Tribunal gives seven (7) days notice to the appellant
and Federal Inland Revenue Service (FIRS) of the date and place fixed
for hearing of the appeal;
ii. An appeal should be heard by not less than three members of the Tax
Appeal Tribunal in attendance with the Chairman or any other member,
(in the absence of the Chairman), presiding;
iii. A member with vested interest in any matter before the Tax Appeal
Tribunal must disclose such interest and abstain from attending any
sitting at which the matter is to be heard;
iv. All appeals before the Tax Appeal Tribunal are heard in public;
v. Appellant may be represented by a professional adviser or may give his
evidence by written notice;
vi. Appellant leads the case, by proving that the assessment is excessive,
that is, onus of proof is put on the appellant;
vii. If the representative of the FIRS can prove to the Tax Appeal Tribunal
that:
 The appellant failed to file returns, audited accounts etc. as
required by the provisions of Companies Income Tax (CITA) C21 LFN
2004 (as amended); or
 The appeal is frivolous, vexatious or an abuse of appeal process; or
 It is expedient to require the appellant to pay a security deposit:
 The Tax Appeal Tribunal may make an order that the
appellant pay deposit to the tax authority on account of tax
being disputed before the matter could be heard; and
 The deposit payable, is the lower of tax paid in the
immediately preceding year and half of the tax charged
(which is on an appeal), plus 10% of the deposit.

viii. The Tax Appeal Tribunal can confirm, reduce, increase, or annul the
assessment, as deemed necessary;
ix. The Tax Appeal Tribunal‟s decisions are recorded in writing, by the
Chairman, and a Certified True Copy is supplied to the appellant or the
FIRS on request, within 3 months of the decision;
x. Particulars of the extent to which the Tax Appeal Tribunal is dissatisfied
with the appellant‟s accounts, books, etc, non-compliance with precepts
representative and refusal to answer questions put, should all be noted
in the decision of the Tax Appeal Tribunal; and
xi. Notice of the amount of tax chargeable, as determined by the Tax
Appeal Tribunal, shall be served on the company by FIRS.

53
The tax payable as determined by the Tax Appeal Tribunal is payable within
one month of the date of Notice of Assessment notwithstanding that an
appeal may be pending on same before the Federal High Court.

EXAMINER‟S REPORT

The question tests candidates‟ knowledge of issues relating to Tax Clearance Certificate and
procedures for hearing an appeal before the Tax Appeal Tribunal.

Candidates had a fair understanding of the question and performance was average.

The commonest pitfall was the inability of the candidates to differentiate between
Objection and Tax Appeal.

Candidates are advised to read wider for future examinations by reading ICAN Study Text
and other relevant study materials.

MARKING GUIDE
MARKS
a. 1 mark each subject to a maximum of any 10 transactions 10

b. 1 mark each subject to a maximum of any 10 procedures 10

20

54
SOLUTION 3

(a) COMPUTATION OF ADJUSTED INCOME OF MUSEAK & CO (CHARTERED

ACCOUNTANTS) FOR 2016 ASSESSMENT YEAR
₦ ₦
Net Profit for the year 43,350,000
Add: Disallowable expenses:
Provision for bad debts 2,000,000
Depreciation 1,500,000
Repairs and Maintenance 550,000
Donations 400,000
Medical expenses 500,000
4,950,000
Adjusted Income 48,300,000
Agreed Capital allowances (4,000,000)
Distributable Income 44,300,000

(b) Computation of Partners‟ Chargeable Income

Muyiwa Seyi Akpan Total
₦ ₦ ₦ N
Interest on Capital 1,200,000 600,000 250,000 2,050,000
Share of Profit (6:4:2) 22,150,000 14,766,667 7,383,333 44,300,000
23,350,000 15,366,667 7,633,333 46,350,000
Interest on Loan 0 400,000 0 400,000
Partners‟ Assessable Income 23,350,000 15,766,667 7,633,333 46,750,000

Consolidated Relief Allowance (1,726,66

(4,903,500) (3,353,333) 7) (9,983,500)

18,446,500 12,413,334 5,906,666 36,766,500

Tax Exempt Items:

Contribution to Pension Scheme ( 0) ( 0) (500,000) (500,000)

Chargeable Income 18,446,500 12,413,334 5,406,666 36,266,500

55
(c) Computation of Tax Payable by Partners:

Muyiwa Seyi Akpan

₦ ₦ ₦
Chargeable Income 18,446,500 12,413,334 5,406,666

First ₦300,000@7% 21,000 21,000 21,000

Next ₦300,000@11% 33,000 33,000 33,000
Next ₦500,000@ 15% 75,000 75,000 75,000
Next ₦500,000@19% 95,000 95,000 95,000
Next ₦1,600,000@21% 336,000 336,000 336,000
Above ₦3,200,000@24%

Muyiwa:₦18,446,500 – ₦3,200,000@24% 3,659,160

Seyi: ₦12,413,334 – ₦3,200,000@24% 2,211,200
Akpan: ₦5,406,666 – ₦3,200,000@24% ___ _____ ___ 529,600
4,219,160 2,771,200 1,089,600

NOTES:
i. Consolidated Relief Allowance is the higher of N200,000 or 1% of Gross
Income plus 20% of Gross Income.

ii. The deduction of Capital allowances from the Adjusted Income before
arriving at the Distributable Income is preferable to sharing of Capital
Allowances amongst the partners.

EXAMINER‟S REPORT

The question tests candidates‟ knowledge of taxation of partners in partnership business.

Many candidates attempted this question and performance was average.

The commonest pitfall was the inability of the candidates to calculate Consolidated Relief
Allowance and identify disallowable expenses.

Candidates are advised to pay attention to computation of tax liabilities of partners.

56
MARKING GUIDE

MARKS MARKS
a. Heading ½
Net profit ½
5 disallowable expenses @ ½ mark each 2½
Sub-total 1
Adjusted income ½
Agreed Capital allowances ½
Distributable Income ½ 6

b. Heading 1½
Interest on Capital ½
Share of Profit ½
Sub-total ½
Interest on loan ½
Partners‟ Assessable Income ½
Consolidated Relief Allowance ½
Sub-total ½
Contribution to Pension Scheme ½
Chargeable Income ½ 6

c. Heading 1
First ₦300,000@7% ½
Next ₦300,000@11% ½
Next ₦500,000@ 15% ½
Next ₦500,000@19% ½
Next ₦1,600,000@21% ½
Above ₦3,200,000@24% 1½
Tax payable by the 3 partners @ 1 mark each 3 8
20

57
SOLUTION 4

(a) Options Open to the Revenue Authority on Receipt of Letter of Objection

On receipt of the Notice of Objection, the tax authority has the following
options:

(i) Review and revise the assessment to an amount that is mutually-

agreeable to the taxpayer and the Federal Inland Revenue Service. If
this occurs, the tax authority will amend the assessment and serve on
the company a notice of revised tax payable; or

(ii) Review and refuse to revise the assessment to the amount claimed by
the taxpayer.

In a situation where the taxpayer fails to agree with the tax authority
on the amount of tax payable, and the Federal Inland Revenue Service
does not see any reason to further revise the assessment, then it will
issue a Notice of Refusal to Amend its assessment.

(b) Content of a Notice of Objection

In line with the provision of Section 69 of Companies Income Tax Act Cap C21
LFN 2004 (as amended), for a Notice of Objection to be valid, it must:

i. be in writing and addressed to the Chairman, Federal Inland Revenue

Service;
ii. state the grounds of objection, namely:
- Amount of Assessable and Total Profit of the company for the
relevant assessment year; and
- Amount of tax which the taxpayer claims is payable for the year of
assessment.
iii. be raised within thirty days of the date of service of the Notice of
Assessment.

(c) Jurisdiction of the Tax Appeal Tribunal

i) The Tribunal shall have power to adjudicate on disputes, and

controversies arising from the following tax laws (hereinafter referred
to as “the tax laws”):

- Companies Income Tax Act CAP C21 LFN 2004 (as amended)
- Personal Income Tax Act CAP P8 LFN 2004 (as amended)
- Petroleum Profits Tax Act CAP P13 LFN 2004 (as amended)
- Value Added Tax Act CAP V1 LFN 2004 (as amended)

58
- Capital Gains Tax Act CAP C1 LFN 2004 (as amended)
- Any other law contained in or specified in the First Schedule to
this Act or other laws made from time to time by the National
Assembly.

ii) The Tribunal shall apply such provisions of the tax laws referred to in
sub-paragraph (1) of the paragraph as may be applicable in the
determination or resolution of any dispute or controversy before it.

(d) The conditions to be fulfilled for an Appeal to the Federal High Court to be
valid

For such appeals to be valid, the following conditions must be satisfied:

(i) Amount involved must not be less than N400;

(ii) The appeal must be on points of law;

(iii) Notice of appeal must be given to the Tax Appeal Tribunal within 30
days after the date of the judgement of the Tax Appeal Tribunal; and

(iv) The grounds of law on which the decision of the Tax Appeal Tribunal
is being challenged should be stated.

(e) Option open to an aggrieved taxpayer who is not satisfied with the decision
of the Federal High Court

Further appeal against the decision of the Federal High Court shall lie with
the Court of Appeal and from there to the Supreme Court.

EXAMINER‟S REPORT

The question tests candidates‟ knowledge of Objections and Appeals before a Tax Appeal
Tribunal.

Many candidates attempted the question and performance was average. Candidates had a
fair understanding of the question.

The commonest pitfall was the inability of the candidates to state the Jurisdiction of the
Tax Appeal Tribunal.

Candidates are advised to pay attention to Objections and Appeals before a Tax Appeal
Tribunal as contained in ICAN Study Text.

59
MARKING GUIDE

MARKS MARKS
(a) (i) Review and revise the assessment 1
(ii) Review and refuse to revise the assessment 1 2

(b) (i) Be in writing 1

(ii) State the grounds of objection 1
(iii) Be raised within 30 days 1 3

(c) (i)Companies Income Tax 1

(ii) Personal Income Tax 1
(iii) Petroleum Profits Tax 1
(iv) Value Added Tax 1
(v) Capital Gains Tax 1
(vi) Any other law 1 6

(d) Amount involved must not be less than N400 1

Must be on points of law 1
Notice within 30 days 1
Grounds of law stated 1 4

(e) Court of Appeal 2½

Supreme Court 2½ 5
20

60
SOLUTION 5

a. CHIEF JONGBO SETTLEMENT

ASSESSABLE INCOME IN THE HANDS OF BENEFICIARIES
Banke Abidemi Sunkanmi Olajire Ojo Gbenga Total
N N N N N N N
Discretionary
Income 262,500 350,000 437,500 315,000 - - 1,365,000

Annuity
Received - - - - 87,500 52,500 140,000

Share of
distributable
Income
2,815,772 2,815,772 2,815,772 2,815,772 2,815,772 2,815,772 16,894,632

Assessable
Income in the
hands of the
beneficiaries 3,078,272 3,165,772 3,253,272 3,130,772 2,903,272 2,868,272 18,399,632

See Workings i and ii

WORKINGS N N
i. Interest received 3,500,000
Dividend (Gross) 15,555,556
Rental Income 10,500,000
29,555,556
Business Profit 31,500,000
Capital Allowance (7,350,000) 24,150,000
Miscellaneous income 5,600,000
Gross Income 59,305,556
Less: Allowable Expenses
Trustee‟s remuneration:
Fixed 787,500
Variable: 3% of N59,305,556 1,779,167
Fixed Annuity for grandchildren:
Ojo 87,500
Gbenga 52,500
Administrative expenses 4,550,000 (7,256,667)
Computed Income 52,048,889
Discretionary Payments:
Banke 262,500
Abidemi 350,000
Sunkanmi 437,500
Olajire 315,000 (1,365,000)
Distributable Income 50,683,889

61
N N
Less: Amount available for distribution
1
/3 of N50,683,889 = N16,894,632
ii. Distribution as follows:
Ojo (1/6 x N16,894,632) = 2,815,772
Gbenga (1/6 x N16,894,632) = 2,815,772
Banke (1/6 x N16,894,632) = 2,815,772
Abidemi (1/6 x N16,894,632) = 2,815,772
Sunkanmi (1/6 x N16,894,632) = 2,815,772
Olajire (1/6 x N16,894,632) = 2,815,772 (16,894,632)

b. COMPUTATION OF NET ASSESSABLE INCOME IN THE HANDS OF THE

TRUSTEE

N
Distributable Income 50,683,889
Amount available for distribution 16,894,632
33,789,257
Dividend (Gross) (15,555,556)
Net assessable income in the hands of the Trustee 18,233,701

EXAMINER‟S REPORT

The question tests candidates‟ knowledge of the assessment of Trustees, Estates and
Settlements.

Most of the candidates that attempted the question did not understand its requirements.
Consequently, performance was poor.

The commonest pitfall was the non-grossing up of the dividend.

Candidates should pay attention to computation of net assessable income in the hands of
Trustees.

62
MARKING GUIDE
MARKS MARKS
a. Discretionary Income 11/3
Annuity received 2
/3
Share of distributable income 2
Assessable income in the hands of the beneficiaries 2

Workings:
Interest received 1
/3
Dividend Gross 1
/3
Rental Income 1
/3
Sub-total 1
/3
Business Profit 1
/3
Capital Allowance 1
/3
Sub-total 1
/3
Miscellaneous Income 1
/3
Gross Income 1
/3
Trustee‟s remuneration – Fixed 1
/3
– Variable 1
/3
Fixed Annuity – Ojo 1
/3
– Gbenga 1
/3
Admin expenses 1
/3
Discretionary Payments – Banke 1
/3
– Abidemi 1
/3
– Olasunkanmi 1
/3
– Olajire 1
/3
Distribution to beneficiaries 2 14

b. 4 entries @ ¼ mark each 1

15

63
SOLUTION 6

CAMPBELL COMPANY LIMITED

(a) COMPUTATION OF CAPITAL ALLOWANCES FOR 2015 YEAR OF ASSESSMENT
Accounting Date or Basis Period 1/1/2014 - 31/12/2014

Motor Furniture Plant Total

Vehicle & Fittings
Initial Allowance 50 25 50
Annual Allowance 25 20 25
N N N N
TWDV b/f 40,000 60,000 70,000
Cost – Additions 840,000 160,000 300,000
Initial (420,000) (40,000) (150,000) 610,000
Annual – Old (20,000) (20,000) (35,000) 75,000
Annual – New (105,000) (24,000) (37,500) 166,500
851,500
Investment allowance 30,000
881,500

Workings

Initial: MV F&F PLANT

50% x 840,000 = 420,000 25% x 160,000 50% x 300,000
=40,000 =150,000

TWDV 40,000 60,000 70,000

Annual 1  20,000  20,000  35,000
V  n 2 years 3 years 2 years

Annual 2 cost – TWDV

840,000  420,000 160,000  40,000 70,000
 35,000
4 5 2 years
=105,000 =24,000 = 37,500

64
CAMPBELL COMPANY LIMITED
(b) COMPUTATION OF TOTAL PROFIT, COMPANIES INCOME TAX (CIT) AND
TERTIARY EDUCATION TAX (TET)

N N
Net profit 1,145,650
Add:
Stamp duty on increase in Share Capital 75,000
Depreciation 234,450
Tertiary Education Tax 37,325 346,775
Assessable Profit 1,492,425
Capital allowances:
Brought forward 70,000
For the year 881,500
Relieved (951,500)
TOTAL PROFIT 540,925

Companies Income Tax (30% of Total Profit) = N162,277.50

Tertiary Education Tax (2% of Assessable Profit) = N29,848.50

EXAMINER‟S REPORT

The question tests candidates‟ knowledge of Capital Allowances and Companies Income
Tax Computations

Many candidates that attempted the question did not understand its requirements.
Consequently, the performance was below average.

The commonest pitfall was the poor presentation of the solution.

It is recommended that attention should be paid to the presentation of solutions.

65
MARKING GUIDE
MARKS MARKS
a. 1
/3 mark each for 21 entries 7

b. Heading ½
Net Profit ½
Stamp duty ½
Depreciation ½
Tertiary Education Tax ½
Total of disallowable expenses ½
Assessable Profit ½
Capital allowances 1½
Total Profit 1
Companies Income Tax 1
Tertiary Education Tax 1 8
15

66
SOLUTION 7

(a) Withholding Tax is a tax deducted at source from payments made to a

taxable person for the supply of goods and services.

It is not another form of tax, but simply an advance payment of tax, as the
withholding tax deducted at source is off-settable against any subsequent
tax liability that may be due in respect of other income.

In certain cases, the Withholding Tax deducted at source is the final tax in
the hands of the recipients.

(b) (i) The Withholding Tax rate is reduced to 7.5% for dividend, interest,
and royalty for recipients of a country which has double tax treaty
with Nigeria at the rates contained in the double taxation treaty.

(ii) The types of income involved are royalty, interest and dividend.

(c) The currency in which tax is to be deducted and paid over to the relevant tax
authorities is the currency of transaction. Where the transaction is in foreign
currency, the tax is to be withheld in the foreign currency and paid to the
relevant tax authority, through the Central Bank of Nigeria (CBN). The CBN
would then effect the necessary conversion, using the ruling rate of
exchange and then credit the appropriate government account with the sum.

(d) The payment schedule must contain the following particulars:

i. Name of the taxpayers who suffered the deductions;
ii. Their addresses;
iii. The nature of their activities/services and period covered;
iv. Their tax file numbers [now Tax Identification Number (TIN)];
v. The total amount payable;
vi. The rate of tax applied;
vii. The amount of tax withheld;
viii. The balance paid to the taxpayer;
ix. The tax contract for which returns were being made;
x. The date of payment; and
xi. The cheque number and date.

67
EXAMINER‟S REPORT

The question tests candidates‟ knowledge of the provisions of the law relating to
Withholding Tax.

Many candidates attempted the question and performance was above average.

The commonest pitfall was the candidates‟ inability to state the rate applicable to
international transactions.

Candidates are advised to study the law relating to Withholding Tax as contained in ICAN
Study Text.

MARKING GUIDE
MARKS MARKS
(a) Deducted at source 1
Advance payment of tax 1
Final tax liability 1 3

(b) i. Rate 1
ii. Dividend 1
Interest 1
Royalty 1 4

(c) Currency of transaction 3

(d) Nature of the taxpayer

Addresses
Nature of activities
Tax file number
Total amount payable
The rate of tax
Amount of tax withheld
The balance paid to the taxpayer
The tax contract
Date of payment
Cheque number and date

(1 mark each subject to a maximum of 5 points) 5

15

68
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION – MAY 2017

PERFORMANCE MANAGEMENT
Time Allowed: 3 hours
INSTRUCTION: YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN
QUESTIONS IN THIS PAPER

SECTION A: COMPULSORY QUESTION (30 MARKS)

QUESTION 1

Kardex Industries Nigeria Limited is a subsidiary of a large manufacturing

company based in China (Kardex International). The company manufactures
washing machines, table gas cookers and refrigerators which are being sold by the
subsidiary in Nigeria. Demand for the company‟s product is growing especially
among the growing middle-class population until recently when the company
started experiencing some hiccups as a result of the economic recession in the
country and stiff competition.

The company is currently selling only two products in Nigeria (both are types of
washing machine). These are:
- A basic product (Wash Up) with functions which are comparable with the
existing local competitors‟ products and;
- A premium product (Perfect Wash) which has functions and features similar to
Kardex‟s products in developed countries.

The competitive environment in Nigeria is changing rapidly. Apart from Kardex,

two other companies are offering similar machines in the market. One of these has
a factory in Nigeria and is producing machines similar to “Wash Up” to compete
directly with Kardex. The government of Nigeria has supported this new entrant
with tax holiday, as its product has been approved as a pioneer product. The other
competitor is now considering building a manufacturing plant in Nigeria to
produce more highly specialised washing machine similar to Kardex‟s Perfect
Wash.

Kardex international‟s stated mission is to be the “leader in its industry”. The

Board of Kardex has set the following critical success factors (CSFs) for Kardex‟s
Nigerian subsidiary:

- To be the market leader;

- To maximise profits and shareholders‟ wealth within acceptable risk; and
- To maintain the brand image of Kardex as top of the range product.
The Board is considering using the following key performance indicators (KPIs) for
each product: total profit, average sales price per unit, contribution per unit,
market share, margin of safety, return on capital employed and total quality costs.
69
You have just been employed by Kardex as its Performance Management Controller
and the Board of Kardex International has requested that you provide calculations
which will show the various indicators suggested above and then assess how the
key performance indicators will address issues in the external environment in
Nigeria. The data given in Appendix 1 below has been collated for your use.
Appendix 1
Nigerian subsidiary‟s information for the most recent financial year:
Wash Up Perfect Wash
Variable costs N per unit N per unit
Materials 9,000 12,000
Labour 6,000 8,000
Overheads 4,000 5,000
Distribution costs 4,500 4,500
Quality costs 2,000 3,000

Total
Fixed costs N‟m N‟m N‟m
Administration costs 1,800 1,800 3,600
Distribution costs 1,600 1,600 3,200
Quality costs 600 600 1,200
Marketing costs 8,000 8,000 16,000

Other data N‟m N‟m N‟m

Revenue 44,800 30,800 75,600
Capital employed 32,600 25,000 57,600

Units Units Units

Total market size (millions) 9.33 1.33 10.66
Kardex‟s sales (millions) 1.12 0.44 1.56

Note:
The allocations of fixed costs are based on a recent activity-based costing exercise
and are considered to be valid.
Required:
a. Provide calculations which show the key performance indicators (KPIs)
suggested by the Board, for the performance assessment of Kardex Industries
Nigeria Limited. (20 Marks)
b. Use PEST analysis to identify issues in the company‟s external environment
and then comment on whether the suggested KPIs address these issues.
(10 Marks)
(Total 30marks)

70
SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THE THREE
QUESTIONS IN THIS SECTION (40 MARKS)

QUESTION 2
Sadet Nigeria Limited assembles three types of motorcycle in the same factory; the
50cc Prelude, the 100cc Roadmaster and the 150cc Roadstar. It sells the
motorcycles throughout the West African Coast. In response to market pressure,
Sadet has invested heavily in new manufacturing technology in recent years and,
as a result, has significantly reduced the size of its workforce.

Historically, the company has allocated all overhead costs using total direct labour
hours, but is now considering introducing activity-based costing (ABC). Sadet‟s
Accountant has produced the following analysis.
Types of Annual Output Annual direct Selling price Raw Material
Motorcycles (Units) labour hours (N/ unit) cost (N/ unit)

Prelude 5,000 500,000 25,000 4,000

Roadmaster 4,000 550,000 30,000 6,000
Roadstar 1,400 200,000 40,000 9,000

The three cost drivers that generate overheads are:

Deliveries to retailers - the number of deliveries of motorcycles to retail
showrooms.
Set – ups - the number of times the assembly line process is
re-set to accommodate the production run of a
different type of motorcycle
Purchase orders - the number of purchase orders.
The annual cost driver volumes relating to each activity and each type of motorcycle
are as follows:
Number of deliveries Number of Number of
to retailers set-ups purchase orders
Prelude 200 70 400
Roadmaster 160 80 300
Roadstar 140 50 100
The annual overhead costs relating to these activities are as follows:
N‟000
Deliveries to retailers 24,000
Set –ups costs 60,000
Purchase orders 36,000
Direct labour is paid at N50 per hour. The company holds no inventories.

71
You are required to:
a. Calculate the total profit on each of Sadet‟s three types of product, using the
following methods to absorb overheads:
i. The existing method based upon labour hours.
ii. Activity-based costing. (14 marks)

b. Write a report to the Directors of Sadet, as a Management Accountant,

evaluating the labour hours and the activity- based costing methods in the
circumstances of Sadet.
Refer to your calculations in requirement (a) above, where appropriate.
(6 marks)
(Total 20 marks)

QUESTION 3
Tadex Nigeria Limited is an engineering company that specialises in building
engines for grinding machines. One of the components for building these engines
is sourced from Toka Nigeria Limited, a company in the same group with Tadex
Nigeria Limited. Each component is being transferred to Tadex, taking account of
Toka‟s opportunity cost of the component. The variable cost of Toka is N280 per
component.

A prospective customer has approached Tadex to submit a quotation for a contract

to build a new engine. This is a new customer to Tadex but directors of Tadex are
keen on winning this contract as they believe that this may lead to more contracts
in the future. As a result of this, they intend pricing the contract using relevant
costs.
The following costs data is given in respect of the contract:
(i) The production director of Tadex is on an annual salary equivalent to N15,000
per 8 - hour day;
(ii) The materials needed for the contract are:
- 110 square metres of material A. This material is normally being used by
Tadex and it has 200 square metres in stock. These were bought at a cost
of N120 per square metre. They have resale value of N105 per square
metre and replacement cost is N125 per square metre.
- 30 litres of material B. This material has to be purchased specially for
this contract and the minimum order quantity from the supplier is 40
litres at a cost of N90 per litre. Tadex has no use for this material after
the contract is executed. Sixty (60) components will be purchased from
Toka at a purchase price of N500 per component.

72
(iii) A total of 240 direct labour hours will be required. The current wage rate for
the grade of labour that will work on the contract is N110 per hour. Tadex
currently has 75 direct labour hours of spare capacity for this grade and are
being paid under collective wages agreement. The additional hours required
will be sourced by either
- overtime at a cost of N140 per hour; or
- employment of temporary staff at a cost of N120 per hour.
But this temporary staff, because they are not experienced, will require
10 hour supervision by existing supervisor who would be paid overtime
at a rate of N180 per hour for this contract.
(iv) 25 machine hours will be required. The machine to be used is already leased
at a weekly lease rental of N6,000. It has 40 hours per week capacity. The
machine has sufficient available capacity to complete the contract. The
variable cost of running the machine is N70 per hour.
(v) The company‟s fixed overhead absorption rate is N200 per direct labour hour.

You are required to:

a. Calculate the relevant cost of building the new engine and explain why you
have included or excluded any costs in your calculations. (15 marks)
b. Discuss the factors that would be considered by Tokas to determine the
opportunity cost of the component. (5 marks)
(Total 20marks)

QUESTION 4
Debens Nigeria Limited‟s Job costing system has two direct cost categories: direct
materials and direct manufacturing labour. Manufacturing overhead (both
variable and fixed) is allocated to products on the basis of standard direct
manufacturing labour hours (SDMLH). At the beginning of 2016, Debens adopted
the following standards for its manufacturing costs and sales:
S/N Cost per output
Cost details Input unit
N
1 Direct Materials 3 kg at N500 1,500
2 Direct Manufacturing Labour 5 hours at N200 1,000
3 Manufacturing Overhead:
Variable N120 per SDMLH 600
Fixed N160 per SDMLH 800
4 Unit Manufacturing cost 3,900
5 Standard Profit margin 1,300
6 Standard Selling Price 5,200
73
The denominator level for total manufacturing overhead per month in 2016 is
40,000 direct manufacturing labour hour. Debens flexible budget for January 2016
was based on this denominator level. The records for January indicate the
following:

 Direct materials purchased 25,000kg at N520 per kg

 Direct materials used 23,100kg
 Direct manufacturing labour 40,100 hours at N190 per hour
 Total actual manufacturing overhead N12,000,000
(Fixed and Variable )
 Actual Production/Sales 7,800 output units
 Actual Selling price N5,350

The proportion of the actual variable and fixed overhead costs is the same with in
the standard.
Required:
a. Calculate the budgeted profit of the company for the month of January 2016?
(2 Marks)
b. Calculate the following for the month of January 2016:
i. Direct material variances.
ii. Direct manufacturing labour variances
iii. Variable manufacturing overhead variances.
iv. Fixed manufacturing overhead variances.
v. Sales variances. (10 marks)
c. Prepare a statement reconciling the actual profit with the budgeted profit.
(8 marks)
(Total 20 Marks)

SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THE THREE
QUESTIONS IN THIS SECTION (30 MARKS)

QUESTION 5

A systems analyst uses different methods to gather information required for the
system analysis phase of any project.
You are required to discuss these methods showing their advantages and
disadvantages. (Total 15 Marks)

74
QUESTION 6

AL Limited is a manufacturing company based in Aba. One of its most successful

products is Hadtone, a mortar colouring agent. Hadtone is made using a single
processing machine which mixes the raw ingredients and dispenses the completed
product into five-litre cartons.

A five-litre carton of Hadtone sells for ₦300 and estimated maximum annual
demand at this price is 300,000 cartons. At this level of demand, AL can justify the
operation of only one processing machine, which AL currently replaces every three
years, although the processing machine has a productive life of 4 years.

In the first year of its life, the processing machine has a productive capacity in line
with the maximum annual demand for the product, but each year thereafter this
productive capacity falls at a rate of 15,000 units per annum. Annual maintenance
costs in the first year of operating the processing machine are estimated at
₦300,000. Thereafter, the directors expect the annual maintenance costs to increase
by ₦50,000 per annum regardless of the actual number of five-litre cartons
produced. AL incurs variable costs, excluding depreciation and maintenance costs,
of ₦200 in producing each five-litre carton. AL provides for depreciation on all its
non-current assets using the straight-line method.

If AL were to dispose of the processing machine after one year, the directors
estimate sale proceeds of ₦8,000,000, but these could fall by ₦3,000,000 per
annum in each of the following two years. Assume the processing machine has
three years life span.

Following a recent increase in the cost of a processing machine to ₦12,000,000,

AL‟s Directors are reconsidering their current replacement policy with a view to
maximising the present value of the company‟s cash-flows. It can be assumed that
all revenues and costs are received or paid in cash at the end of the year to which
they relate, with the exception of the initial price of the processing machine which
is paid in full at the time of purchase.

Required:
a. Assuming that the processing machine is used to maximum capacity, and
showing all your supporting calculations, advise AL‟s directors how often they
should replace the processing machine. Assume cost of capital of 10%.
(12 marks)
b. Itemise the major assumptions made in your calculations above. (3 marks)
(Total 15 marks)

75
QUESTION 7
Adebel Nigeria Limited manufactures motor cycles. The company is split into two
divisions: the assembling division (division A) and the engine division (division E).
Division E supplies engine to both Division A and to external customers. The two
divisions run as autonomously as possible, subject to the group‟s policy that
Division E must make internal sales first before selling outside the group; and that
Division A must always buy its engine from Division E. However, this company
policy, together with the transfer price which Division E charges Division A, is
currently under review.

Details of the two divisions are given below:

Division A
Division A budget for the coming year shows that 45,000 engines will be needed.
An external supplier could supply these to Division A for N80,000 each.

Division E
Division E has the capacity to produce a total of 70,000 engines per year. Details of
Division E‟s budget, which has just been prepared for the forth coming year, are as
follows:
Budgeted sales volume (units) 70,000
Selling price per engine for external sales of engine N85,000
Variable costs per unit for external sales of engine N77,000

The variable cost per unit for engines sold to Division A is N3,000 per unit less due
to cost saving on distribution and packaging. Maximum external demand for the
engines is 35,000 units per year.

Required:
a. Recommend the transfer price or prices at which these internal sales should
take place. (5 marks)

b. Assuming that the group‟s current policy could be changed, advise, using
suitable calculations, the number of engines which Division E should supply to
Division A in order to maximise group profits. All relevant workings must be
shown. (5 marks)

c. Discuss TWO main performance measurements that are appropriate for

evaluating divisional performance of an autonomous division that operates as
an investment centre. (5 marks)
(Total 15marks)

76
Formulae
Learning curve
Y = axb
where Y = cumulative average time per unit to produce x units
a = the time taken for the first unit of output
x = the cumulative number of units produced
b = the index of learning (log LR/log2)
LR = the learning rate as a decimal

Demand curve
P = a – bQ

𝑐𝑕𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
𝑏=
𝑐𝑕𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦

MR = a – 2bQ

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

Y= a + bX or Y - Y = b(x – X)
where:

𝐶𝑜𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 (𝑋𝑌) 𝑛 𝑋𝑌 − ( 𝑋)( 𝑌)

𝑏= = 2
𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒 (𝑋) 𝑛 𝑋 − 𝑋 2

 
a  Yb X

𝑌 = 𝑛a + 𝑏 𝑋

𝑋𝑌 = a 𝑋+𝑏 𝑋2

77
Annuity Table
1 − (1 + 𝑟)𝑛
𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑛 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 𝑜𝑓 1 =
𝑟

Where r = discount rate

n = number of periods

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5

6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9

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

11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14

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

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

1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4

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

6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9

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

11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15

78
79
SOLUTION 1

SECTION A:

QUESTION 1 KARDEX INDUSTRIES NIGERIA LIMITED

a. Calculation of the key performance indicators

(i) Product Wash Perfect Total

Up Wash
N‟M N‟M N‟M
Revenue 44,800 30,800 75,600
Less costs:
Total Variable costs 28,560 14,300 42,860
Total Fixed costs 12,000 12,000 24,000
40,560 26,300 66,860

Total profit 4,240 4,500 8,740

(ii) Product Wash Perfect

Up Wash
N‟M N‟M
Revenue (N‟M) 44,800 30,800

Sale in Units (Millions) 1.12 0.44

Sales price per unit (N) 40,000 70,000

(iii) Product Wash Perfect

Up Wash
N‟M N‟M
Sales per unit 40,000 70,000
Less variable cost per unit 25,500 32,500
Contribution per unit 14,500 37,500

80
𝑠𝑎𝑙𝑒𝑠 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠
(iv) 𝑀𝑎𝑟𝑘𝑒𝑡 𝑠𝑕𝑎𝑟𝑒 = x 100%
𝑚𝑎𝑟𝑘𝑒𝑡 𝑠𝑖𝑧𝑒 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠

Product Wash Up Perfect Wash Total

N‟M N‟M N‟M

Total market size (Millions) 9.33 1.33 10.66

Kardex‟s sales (Millions) 1.12 0.44 1.56
Market shares (%) 12% 33% 15%

(v) Margin of Safety = (Actual sales – Sales at BEP)

Product Wash Up Perfect Wash

Sales in Units (millions) 1.12 0.44

Break-even sales units (millions) 0.83 0.32
Margin of safety (million units) 0.29 0.12
Sales price per unit (N) 40,000 70,000
Margin of safety (N‟M) 11,697 8,400

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
(vi) Return on Capital Employed (ROCE) = 𝑥 100%
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑

Product Wash Up Perfect Wash Total

Total profit (N‟M) 4,240 4,500 8,740

Capital employed (N‟M) 32,600 25,000 57,600
Return on capital employed (%) 12 18 15

(vii) Total quality costs

Product Wash Up Perfect Wash Total

N‟M N‟M N‟M

Total variable costs 2.240 1.320 3,560

Total fixed costs 600 600 1,200
Total quality costs 2,840 1,920 4,760

81
b. PEST Analysis of Kardex Industries
The issues on the external environment can be identified using PEST, which
stands for political, economic, socio-cultural and technology.
The political environment is characterized by government actions which
include the giving of tax holidays to a competitor to set up manufacturing
operations in the country. This is not Kardex‟s mode of operation which is to
manufacture outside Nigeria and only to undertake selling operations within
the country. None of the KPIs directly addresses this issue which could lead
to increased shareholders‟ wealth and increased available profit to develop
the competitor‟s products or government action against Kardex by increasing
import tariffs.

The economic environment is characterised by growth as the population of

the middle-class is increasing although economic recession is creating some
problem. There is no measure of this included in the KPIs. There is no
measure of competitors‟ activity, although market share provided some
measures of the relative strength of Kardex and its competitors. It is noticed
that none of the KPIs measures current rates of growth in their area.
Furthermore, the KPIs do not reflect the foreign exchange risk which Kardex
could encounter in repatriating profits from the country.

The socio-cultural factors include demographic trends and changes in

customers‟ taste. The increasing middle-class population mentioned will be
a factor that is likely to drive the consumers‟ taste towards the more
expensive “perfect wash” model. These would justify the large potential
growth indicated in making Plan B. There are several measures which will
bear on this area but all will require knowledge of trends, for example, the
inflation of average price per unit and consequent improvement in profit
and contribution indicators.

Technology can impact on Kardex in two ways: first, the development of new
feature for the products themselves will require continued product
development at Kardex as a whole, although it will be less relevant to the
operation in Nigeria which may not have the market for cutting–edge
technology yet. Therefore, it is appropriate that this area is not covered by
the existing KPIs; and second, new technology in manufacturing could
improve further the contribution per unit as costs are cut from the
manufacturing process by, for example, increased automation in production.
The use of contribution to measure this impact is indirect as it is also

82
influenced by the selling price, so a measure of manufacturing cost per unit
would better capture the change.

EXAMINER‟S REPORT

The question tests candidates‟ understanding of Computation of key performance

indicators (KPI) as well as PEST Analysis. About 80% of the candidates attempted the
question.

However, about 30% of them understood the subject matter and that was responsible for
the poor performance.

The commonest pitfalls were their inability to compute BEP, CSR and explain the meaning
of PEST Analysis.

Candidates are encouraged to use their ICAN Study Text when preparing for future
examinations.

MARKING GUIDE

SOLUTION 1 MARKS MARKS

(a) Key performance Indicators:
i. Total profit 4¼
ii. Average sales price per unit 2
iii. Contribution per unit 2
Iv. Market share 2¾
V. Margin of safety 4
vi. Return on capital employed 2¾
vii. Total quality costs 2
viii. Title ¼ 20

(b) Identification of PEST acronym:

P – Political ½
E – Economical ½
S - Socio-cultural ½
T – Technological ½
Explanations of the points @ 2 marks each 8 10
30

83
SOLUTION 2

a. i. Existing Method
Prelude Roadmaster Roadstar
N‟000 N‟000 N‟000
Direct labour (N350) (W1) 25,000 27,500 10,000
Materials (W2) 20,000 24,000 12,600
Overhead cost (at N96/hr) 48,000 52,800 19,200
93,000 104,300 41,800

Output (units) 5,000 4,000 1,400

Cost per unit (W4) = N18,600 N26,075 N29,857

Selling price per unit N25,000 N30,000 N40,000

Profit per unit N6,400 N3,925 N10,143
Total units produced 5,000 4,000 1,400
Total profit per product N32,000,000 N15,700,000 N14,200,200
Total profit N61,900,200

ii. Activity-Based Costing

Prelude Roadmaster Roadstar
N‟000 N‟000 N‟000
Direct labour (W1) 25,000 27,500 10,000
Materials (W2) 20,000 24,000 12,600
Overhead:
Deliveries (W5a) 9,600 7,680 6,720
Set up costs (W5a) 21,000 24,000 15,000
Purchase (W5a) 18,000 13,500 4,500
93,600 96.680 48,820

Output N93,600,000 N96,680,00 N48.820,00

5,000 4,000 1,400
Cost per unit N18,720 N24,170 N34,871
Selling Price per unit N25,000 N30,000 N40,000
Profit per unit N6,280 N5,830 N5,129
Total profit per product N31,400,000 N23,320,000 N7,180,000
Total profit N61,900,600

84
WORKINGS

1. Labour cost
Prelude = 500,000x50 = N25,000,000
Roadmaster = 550,000x50 = N27,500,000
Roadstar = 200,000x50 = N10,000,000

2. Material cost
Prelude = 5,000x4,000 = N20,000,000
Roadmaster = 4,000x6,000 = N24,000,000
Roadstar = 1,400x9,000 = N12,600,000

3. Overhead per labour hour

Total overhead cost N(24,000,000 + 60,000,000+ 36,000,000) = N120,000,000

Total labour hours (500,000 +550,000 + 200,000) = 1,250,000 hours

Overhead per labour hour = N120,000,000

1,250,000

= N96
4. Cost per unit
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 93,000,000
Prelude = = 𝑁18,600
𝑈𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 5,000
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 104,300,000
Roadmaster = = 𝑁26,075
𝑈𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 4,000
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 41,800,000
Roadstar = = 𝑁29,857
𝑈𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 1,400

5. Overheads
𝑂𝑣𝑒𝑟 𝑕𝑒𝑎𝑑 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑙𝑖𝑣𝑒𝑟𝑖𝑒𝑠 𝑡𝑜 𝑟𝑒𝑡𝑎𝑖𝑙𝑒𝑟𝑠 𝑁24,000,000
= N48,000
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑒𝑙𝑖𝑣𝑒𝑟𝑖𝑒𝑠 500
𝑂𝑣𝑒𝑟 𝑕𝑒𝑎𝑑 𝑐𝑜𝑠𝑡 𝑠𝑒𝑡 𝑢𝑝𝑠 𝑁60,000,000
= N300,000
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑒𝑡 𝑢𝑝𝑠 200

𝑂𝑣𝑒𝑟 𝑕𝑒𝑎𝑑 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑝𝑢𝑟𝑐 𝑕𝑎𝑠𝑒 𝑜𝑟𝑑𝑒𝑟𝑠 𝑁36,000,000

= N45,000
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑢𝑟𝑐 𝑕𝑎𝑠𝑒 𝑜𝑟𝑑𝑒𝑟𝑠 800

85
i. Deliveries overheads:
Prelude = N48,000 x 200 = N9,600,000
Roadmaster = N48,000 x 160 = N7,680,000
Roadstar = N48,000 x 140 = N6,720,000

ii. Set up overheads:

Prelude = N300,000 x 70 = N21,000,000
Roadmaster = N300,000 x 80 = N24,000,000
Roadstar = N300,000 x 50 = N15,000,000

iii. Purchase order overheads:

Prelude = N45,000 x 400 = N18,000,000
Roadmaster = N45,000 x 300 = N13,500,000
Roadstar = N45,000 x 100 = N4,500,000

b. REPORT

To: Directors - Sadet

From: Management Accountant
Subject: Labour hours and Activity-Based Cost allocation
Date: 15-05-2016

Labour hours
The use of labour hours for allocation of overheads is only appropriate where
there is a direct relationship between overheads and labour hours. This does
not appear to be so for Sadet as painted in the scenario. The traditional
method of cost allocation, such as the one based on labour hours was
developed when manufacturing operations were simple and products went
through similar operations. Also, this method was being widely used when
overhead costs were only a small proportion of total costs while direct labour
and material costs accounted for significant proportion of total costs. It
seems that Sadet has invested so much in new technology and, as a result
the labour size, has been reduced significantly. Direct labour costs now
account for a relatively small proportion of total costs while overheads make
up the highest single item. Allocation of overheads on the basis of labour
costs would tend to allocate a greater proportion of overheads to the higher
volume “Prelude” than lower volume Roadstar, ignoring the fact that lower

86
volume product may require relatively more support services. Allocation of
overheads on the basis of labour hours may therefore lead to inappropriate
decision.

Activity-Based Costing.
Activity-based costing is an attempt to overcome the problem highlighted
earlier by identifying the factors that drive the costs of an organization‟s
major activity.

The idea behind activity-based costing is that activities such as ordering,

materials handling, deliveries, set up etc, drive costs. Costs are therefore,
assigned to a product on the basis of the product‟s consumption of such
activities.

It is also argued by the proponents of activity-based costing that, it is

activities that generate costs and not labour hours. The accuracy of any
activity-based costing system will depend on the appropriateness of the
activities as cost drivers. Each cost driver selected should be appropriate to
the overheads to which it relates. There should be a direct and proportionate
relationship between the relevant overhead costs and the cost driver
selected. The labour hours overhead costs allocation system and activity-
based costing result in different profit figures. The profit per unit of
“Roadstar” significantly reduced from N10,143 to N5,129 while that of
“Prelude” increased from N6,400 to N6,480 per unit.

The reason for this is that, although the “Roadstar” uses about 50% more
labour hours per unit than the “Prelude”, its low output volume of only 1,400
units (compared with 5,000 units of “Prelude”) means that a proportionately
lower amount of overheads is absorbed.

I hope this will assist in your further deliberations on the matters.

Thank you.

Signed
Management Accountant

87
EXAMINER‟S REPORT
This question tests candidates understanding of activity-based costing as a method
of overhead absorption.
About 60% of them attempted the question and the performance was fair as the
commonest pitfall noticed was poor presentation.

Candidates are advised to make better use of ICAN Study Text and other high
quality Study materials.

MARKING GUIDE

SOLUTION 2 MARKS MARKS

(a) Heading for each product 3 x 1/3 = 1
Calculation of sales value 3 x 1/3 = 1
Calculation of material costs 3 x 1/3 = 1
Calculation of labour costs 3 x 1/3 = 1 4

Appointment of overhead under existing method (Labour)

Delivery to retailers 3 x 1/3 = 1
Set-up costs 3 x 1/3 = 1
Purchase orders 3 x 1/3 = 1
Total overheads 3 x 1/3 = 1
Profit 3 x 1/3 = 1 5

Appointment of overhead under activity based costing (ABC)

Deliveries to retailers 3 x 1/3 = 1
Set-up costs 3 x 1/3 = 1
Purchase orders 3 x 1/3 = 1
Total overheads 3 x 1/3 = 1
Profit 3 x 1/3 = 1
5

(b) Heading/layout of the report

4 points at ½ mark 2

Any 4 points in the report at 1 mark each 4

6
20

88
SOLUTION 3

a. Relevant cost
Note N
Production Director‟s salary (i) -
Material A (ii) 13,750
Material B (iii) 3,600
Components (iv) 30,000
Direct labour (v) 21,600
Machine hours (vi) 1,750
Fixed overhead (vii) ___-___
Total relevant cost 70,700

Notes: Explaining why a cost is included or excluded:

i. The Production Director is paid an annual salary and therefore there is no
incremental cost to Tadex.

ii. Material A is in regular use by Tadex and consequently its relevant value is
its replacement cost. The historical cost is irrelevant because it is a past cost
and the resale value is not relevant since Tadex is not going to sell it as the
material is in regular use and therefore must be replaced.

iii. Material B is to be purchased for the contract, therefore, its purchase cost is
relevant. Although 30 liters are required for the work, the minimum order
quantity is 40 liters and since Tadex has no other use for this material and
there is no indication that the unused 10 liters can be sold, the full cost of
purchasing the 40 liters is the relevant cost.

iv. The components are to be purchased from Tokas at a cost of N500 each. This
is a relevant cost because it is future expenditure that will be incurred as a
result of the work being undertaken.

v. Since 75 hours of spare capacity are available which have a zero relevant
cost, the relevant cost relates only to the other 165 hours. Tadex has two
choices:
- Either to use its existing staff and pay them overtime at N140 per hour
which is a total cost of N23,100; or
- To engage temporary staff which attracts a cost of N19,800 plus
supervision cost of N1,800 which is equal to N21,600.

89
The relevant cost is the cheaper of these alternatives which is to use the
temporary staff.

vi. The machine is currently being leased and it has spare capacity so it will
either stand idle or be used for this work. The lease cost will be incurred
regardless, so the only relevant cost is the incremental running cost of N70
per hour.

vii. Fixed overhead costs are incurred whether the contract is accepted or not, so
it is not a relevant cost.

(b) The factors that should be considered by Tokas to determine the opportunity
cost of the components are its available capacity and the extent to which it
has unsatisfied demands for its products.

If Tokas has spare capacity, then the components can be produced for Tadex
using the capacity that is available. There is no opportunity cost so the
relevant cost to the group would be the same as the relevant cost to Tokas
which is the variable cost. If Tokas does not have sufficient spare capacity to
produce all the components demanded by Tadex, then the extent that the
internal sales are utilizing capacity that would have been used to produce
more units for external customers there is an opportunity cost to the group
equal to the contribution forgone by not making those external sales.

Once there is no further unsatisfied external demand, then the opportunity

cost reverts to zero because there is no loss of contribution.

i. When a cost-based transfer pricing policy is used, it is usual for

it to be on a cost-plus basis so that the “plus” provides an incentive to
the supplier to make the internal sale. If it is on a cost basis, then
there is no profit to the supplier, nor is there any incentive for them to
be efficient because the cost (and therefore the inefficiency) is simply
passed on the buyer. When a cost-plus transfer price is used, then the
efficiency issue is made worse as illustrated by the following
examples:

Assume that the transfer price is actual cost + 25%.

If the cost to the supplier is N200 the transfer price would be N250
(i.e. N200 + 25%) and thus the supplier would record a profit of N50
from the internal sale.

90
However, if the supplier were to become inefficient so that the cost of
the item increases to N240, then the new transfer price would be
N300 (i.e. N240 + 25%) with the result that the new supplier‟s profit
would be N60.

This means that the supplier‟s profit increases as a result of the

supplier‟s inefficiency, and therefore, the transfer pricing policy
encourages such inefficiency to occur.

ii. If standard costs are used instead of actual costs, then the problem is
solved provided the standard that is used is fair to both the supplier
and the buyer.

Firstly, it is important that both the supplier and buyer agree on the
standard cost for the item as being a fair standard. This may be
difficult to achieve without the intervention of head office as it may be
affected by the negotiating skills of the managers of the respective
responsibility centres.

Secondly, there is the need to review the standard in the light of

changing conditions that are beyond the control of the supplier. It
would not be fair for the transfer price to be based on an out-of-date
standard if the reason it has become out-of-date is outside the control
of the supplier. This would require a renegotiation of the standard.

The use of the example given and assuming that the standard cost of
the item is N200, means that initially the supplier was achieving the
standard cost and there would be no change in the transfer price.
However, if the supplier was to become inefficient, the transfer price
would remain N250 and so, the supplier‟s profit reduces to N10.
Conversely, if the supplier was to become more efficient and produced
the item for N180, then his profit would increase to N70.

This would seem to solve the problem identified in (i) above as it

encourages the supplier to be efficient.

91
EXAMINER‟S REPORT

The question tests candidates understanding of relevant costing in project quotation.

Candidates‟ understanding of the concept and requirements of the question was average,
as over 50% attempted it. The pass rate was about 40%.

The commonest pitfall was candidates poor understanding of factors that need to be taken
into consideration in determining opportunity costs.

Candidates need to prepare better for future examination using ICAN Study Text and other
relevant text.

MARKING GUIDE
MARKS MARKS
SOLUTION 3
(a) Calculation of relevant costs 3
Explanation why a cost is included or excluded 7 10
(b) Discussion on factors to be considered before determining
opportunity cost
4
(c) Performance measurement problem where there is no external 3
market
Explanation on how standard costs can solve the problem 3 6
20

92
SOLUTION 4

Debens Nig Ltd. - Standard costing and Variance Analysis

a. Budgeted Profit = Budgeted sales - Unit Std Cost x budgeted Quantity.

N5,200 x 40,000
5
= N5,200 x 8,000 - N3,900 x 8,000
= N41,600,000 - N3,900 x 8000 = N10,400,000

b. Schedule of total manufacturing costs

Cost Element Actual Unit Total Cost
Production Standard N
Cost(N)
Direct material 7,800 1,500 11,700,000
Direct manufacturing Labour 7,800 1,000 7,800,000
Variable Manufacturing Overhead 7,800 600 4,680,000
Fixed Manufacturing Overhead 7,800 800 6,240,000
Total manufacturing Overhead 30,420,000

i. Direct material Variances:

Direct Material Price = (Actual Qty Purchased x Actual purchase price) less (Actual
Quantity Purchased x Std Purchased price) = (25,000 x N520) – (25,000 x N500) =
N500,000(U)
Direct Material Usage variance
= (Actual Quantity Used x Standard Price) - (Standard cost of actual production)
= (N500 x 23,100) - (N1,500 x 7,800) = (N11,550,000 – N11,700,000) = N150,000 (F)

ii. Direct Manufacturing Labour Variances:

Direct Labour rate = (Actual rate x Actual Hours) - (Standard rate x actual Hours ) =
(N190 x 40,100) – (40,100 x N200) = N7,619,000 – N8,020,000 = N401,000 (F)
Direct Labour efficiency:

= (Actual hours x Standard labour rate) – (Standard labour rate per unit x actual
production) = (40100 x N200) - (N1,000 x 7,800) = (N8,020,000 - N7,800,000) =
N220,000(U)

iii. Manufacturing Overhead variances:

Manufacturing Overhead rate variance = (Actual overhead rate x Actual labour Hours) –
(Standard overhead rate x Actual Direct Labour Hours) = (N12,000,000 – (N280 x
40100 ) = (N12,000,000 – N11,228,000) = N772,000(U).
Manufacturing overhead efficiency variance = Standard overhead rate x Actual Hours -
Standard overhead rate per unit x actual production = (N280 x 40100) - (N 1400 x 7800)
= N11,228,000 – N10,920,000 = N308,000(U)

93
iv. This is made up of:
Variable manufacturing overhead efficiency variance =

(Standard Cost of Variable Manufacturing Overhead – Standard Cost of variable

manufacturing overhead at Actual Production)

= (40,100 x N120) – (N600 x 7,800)

= (N4,812,000 – N4,680,000)

= N132,000(U)

- Fixed Manufacturing Overhead efficiency Variance =

(Standard cost of Fixed manufacturing overhead - Standard Cost of Fixed

Manufacturing Overhead at actual production)
= (40,100 x N160) – (7,800 x N800) = N6,416,000 – N6,240,000 = N176,000(U)

v. Sales Price variance =

= (Actual selling Price x Actual Sales Quantity) - (Standard selling Price – Actual Quantity
sold) = (N5,350 x 7,800) - (N5,200 x 7,800)
= N41,730,000 - N40,560,000 = N1,170,000(F)

Sales Volume Variance =

(Actual Sales Quantity x Standard selling price) – (Budgeted sales quantity x Standard
selling Price) = (N5,200 x 7800) - (N5,200 x 8000) = (N40,560,000 – N41,600,000)
= N1,040,000 (U)

Actual Volume Margin variance = Standard Profit Margin x Sales Volume variance
Standard Selling Price

= 1300 x N1,040,000 = N260,000 (U)

1 N5,200

Alternative Solution

Calculation of variances

(i) Material variances

 Price variance
= AQ purchased (SP –AP)
= 25,000 kg (N500-N520) = N500,000 (A)

 Usage Variance
= SP(SQ-AQ used)
= N500 {(7800 x 3 kg) – 23,100 kg} = N150,000 (F)

94
(ii) Labour Variances
 Rate Variance
= AH (SR –AR)
= 40,100 hrs (N200 – N190) = N401,000 (F)

 Efficiency Variance
= SR (SH –AH)
= N200 (7,800 X 5 hrs) – 40,100 = N220,000 (A)

(iii) Variable overhead Variances

Note: The total actual manufacturing overhead is divided into variable and
fixed as follows:
600
- Variable = x N12𝑚 = N5,142,857
600+800

600
- Fixed = x N12𝑚 = N6,857,143
600+800

 Expenditure variance
= AH(SR – AR)
𝑁5,142,857
= 40,100 hrs N120 –( ) = N330,857(A)
40,100

Efficiency Variance

= SR (SH – AH)
= N120 (7,800 x 5 hrs) – 40,100 = N132,000 (A)

(iv) Fixed Overhead Variances

 Expenditure variance
= Budgeted FOH –Actual FOH
= (N800 x 8000) – N6,857,143 = N457,143 (A)

 Volume variance
= SR (SH –BH)
= N160 (7,800 x 5 hrs) - (8,000 x 5 hrs = 160,000 (A)

(v) Sales Variances

 Price Variance
= AQ sold (AP – SP)
= 7,800 (N5,350 – N5,200)
= N1,170,000 (F)
95
 Sales Volume Variance
= STD Profit (AQ –BQ)
= N1,300 (7,800 – 8,000) = N260,000(A)

c.
(i) Schedule of Actual Profit for January 2016
Cost Element Actual Unit Selling Total Total
Quantity/ Price/Unit N N
Hours Actual
Cost(N)
Actual sales Revenue 7800 units 5,350 41,730,000
Less:
Direct material 25000kgs 520 13,000,000
Less: closing stock of raw
materials at Standard cost 1900kg 500 (950,000) 12,050,000
Direct manufacturing Labour 40100hrs 190 N7,619,000
Total Manufacturing Overhead 40100hrs N12,000,000
Total cost N31,669,000
Actual Profit N10.061,000

(ii)
N N N
Reconciliation of Budgeted Profit with Actual
Profit
Budgeted Profit = 10,400,000
Add: Sales Variances:
Sales price variance 1,170,000
Sales Volume Margin Variance (260,000) 910,000
Standard Profit 11,310,000
Add/less Cost Variances Add Less
Material Price variance 500,000
Material usage Variance 150,000 -
Labour Rate variance 401,000 -
Labour Efficiency variance - 220,000
Manufacturing Overhead rate variance - 772,000
Manufacturing Overhead efficiency - 308,000
Variance
Total variances 551,000(F) 1,800,000(U) (1,249.000)
Actual Profit 10,061,000

NOTE:

Variable Manufacturing overhead efficiency variance - N132,000(U)

Fixed Manufacturing overhead efficiency variance - N176,000(U)
N308,000(U)

96
EXAMINER‟S REPORT

The question tests candidate‟s knowledge of Standard Costing, Variance Computation and
reconciliation.

Candidates‟ understanding of the question was average even though over 80% attempted
it, the pass rate was about 40%. Commonest pitfall noticed was their inability to reconcile
budgeted profit with Actual Profit.

Candidates are advised to use ICAN Study Text and other relevant text material.

MARKING GUIDE
SOLUTION 4
MARKS MARKS
(a) Computation of budged profit 2

(b) Calculation of:

i. Direct material variance 2

ii. Director manufacturing labour variance 2

iii. Manufacturing overhead variance 4

iv. Sales variances 2 10

(c) i. Schedule of actual profit for January 2016 2

ii. Reconciliation of Budgeted profit with Actual

profit 6 8
20

97
SOLUTION 5

The following table provides an overview of the basic methods for data collection as well
as their advantages and disadvantages.

SN Method Advantages Disadvantages

1 Observation is a systematic (i) Collect data where and (i) Susceptible to observer
data collection approach. when an event or activity bias - (Hawthorne effect
Researchers use all of their is occurring where people usually
senses to examine people in (ii) Does not rely on people‟s perform better when they
natural settings or naturally willingness to provide know they are being
occurring situations. information observed).
(iii) Directly see what people (ii) Does not increase
do rather than relying on understanding of why
what they say they do people behave the way
they do
2 Interview – Verbal (i) Useful for gaining insight (i) Susceptible to interview
conversation between two and context into a topic bias
people with the objective of
collecting relevant (ii) Allows respondents to (ii) Time consuming and
information. describe what is expensive compared to
important to them other data collection
methods
(iii) Useful for gathering
quotes and stories (iii) May seem intrusive to
the respondent
3 Focus Group is a small, but Quick and relatively easy to (i) Susceptible to facilitator
demographically diverse set up bias
group of people whose (ii) Discussion can be
reactions are studied. Group dynamics can provide dominated or sidetracked
useful information that by a few individuals
individual data collection (iii)Data analysis is time
does not provide consuming and needs to
be well planned in
Is useful in gaining insight advance
into a topic that may be more
difficult to gather information (iv) Does not provide valid
through other data collection information at the
methods individual level

(v) The information is not

representative of other
groups
4 Survey and Questionnaire (i) Administration is (i) Survey respondents may
consisting of a series of comparatively inexpensive not complete the survey
questions and other prompts and easy even when resulting in low response
for the purpose of gathering gathering data from large rates
information from respondents. numbers of people spread
over wide geographic area (ii) Items may not have the
same meaning to all
(ii) Reduces chance of respondents
evaluator bias because the
same questions are asked (iii) Size and diversity of
of all respondents sample will be limited by
people‟s ability to read
98
SN Method Advantages Disadvantages
(iii) Many people are familiar
with surveys (iv) Given lack of contact with
respondent, never know who
(iv) Some people feel more really completed the survey
comfortable responding
to a survey than (v) Unable to probe for
participating in an additional details
interview
(vi) Good survey questions
(v) Tabulation of closed- are difficult to write and they
ended responses is an take considerable time to
easy and straightforward develop and own
process
5 Experimental Method: This (i) Experimentation normally (i) May suffer lower levels
involves the testing of a involves the testing of a of reliable complex and
hypothesis about the hypothesis about the be difficult to carry out.
relationship between an relationship between an
independent variable and independent variable (ii) Sometimes the basis of
dependant variable (cause)and a dependent the experiment may not
variable (effect). reflect realities.

(ii) Experiments are usually (iii) Can only apply under

set up so that the scientist given conditions and such
controls the introduction of conditions may not add up
possible independent
variables.
6 Town Hall Meetings and Other (i) Can gather large amount of (i) Organizing the event
large group events – used to data at one time. takes time and resources
gather large amount of data
at one time, during the (ii)Allows respondents to (ii) Definitely need to have
congregation of relevant describe the issues that are a draw to get people to
respondents important to them. attend in the form of
incentives.
(iii) Provides a venue where
people can build on each (iii) Need to have access to
others‟ knowledge people with good
facilitation skills.

(iv)Need to have “ducks in

a row” to ensure
attendance at event.
7 Case studies are indepth (i)Fully depicts people‟s (i) Usually quite time
investigations of a single experience in program input, consuming to collect
person, group, events or process, and results. information, organize and
community. analyze it.
(ii) Powerful way of portraying
program to outsiders. (ii) Represents depth of
information rather
than breadth.
8 Document Review: Data (i) Relatively inexpensive. (i) Information may be in-
collected from documents, (ii)Good source of information. applicable.
journals and reports. (ii) Could be time biased.
(iii) Provide authenticated data.

99
EXAMINER‟S REPORT

This question demands candidates‟ understanding of the different methods of gathering

information needs of systems analyst as well as their advantages and disadvantages.

Candidates understanding of the question was poor. However, over 60% attempted the
question but the pass rate was about 15%.

The commonest pitfall was candidates‟ lack of adequate use of the ICAN Study Text where
this topic was well dealt with. Candidates are advised to regularly and diligently use ICAN
Study Text to ensure better performance in future examinations.

MARKING GUIDE

SOLUTION 5 MARKS MARKS

Five discussion points at 1 mark each 5

One advantage for each of the five selected methods at
1 mark each 5
One disadvantage for each of the five selected methods at 1 mark
each 5
15

100
SOLUTION 6

(a)
i.
Year 1 2 3 4
Maximum capacity (units) 300,000 285,000 270,000 255,000
₦‟000 ₦‟000 ₦‟000 ₦‟000
Annual contribution at ₦100 30,000 28,500 27,000 25,500

ii. Where AEV = Annual Equivalent Value

Option 1: Replace every year
Year 0 1
₦‟000 ₦‟000
Outlay (12,000)
Contribution - 30,000
Scrap value - 8,000
Maintenance costs - (300)
NCF (12,000) 37,700
PVF at 10%
PV 1 0.909
(12,000) 34,269

NPV = ₦22,269,000
AEV = ₦22,269,000/0.909 = ₦24,498,350

iii. Option 2 – Replace every 2 years

Year 0 1 2
₦‟000 ₦‟000 ₦‟000
Outlay (12,000)
Contribution - 30,000 28,500
Scrap value - - 5,000
Maintenance costs - (300) (350)
NCF (12,000) 29,700 33,150
PVF at 10% 1 0.909 0.826
PV (12,000) 26,997 27,382

NPV = ₦42,379,000
AEV = ₦42,379,000/1.736 = ₦24,411,866

101
(iii) Option 3 – Replace every 3 years
Year 0 1 2 3
₦‟000 ₦‟000 ₦‟000 ₦‟000
Outlay (12,000) - -
Contribution - 30,000 28,500 27,000
Scrap value - - 5,000 2,000
Maintenance costs - (300) (350) (400)
NCF (12,000) 29,700 33,150 28,600
PVF at 10% 1 0.909 0.826 0.751
PV (12,000) 26,997 27,382 21,479

NPV = ₦59,728,000
AEV = ₦59,728,000/2.487 = ₦24,016,084

(v) Conclusion: The Directors should change their existing policy of replacing the
processing machine every 3 years to replacing it every year, as that gives the
greatest annual equivalent value.

(b) The following assumptions are made in the calculations:

 The existing machine will always be replaced with financially

identical machine.
 Replacement will continue to infinity
 There is no inflation
 No taxation
 No competition
 No price change
 No technological change

EXAMINER‟S REPORT

This question tests candidates‟ understanding of Net Present Value (NPV) calculation and
related decision making at various times. Candidates exhibited below average
understanding of the question even though over 20% of them attempted it. Performance
pass rate was below 30%. Commonest pitfall was hinged on poor understanding of the
requirements of the question. This can easily be resolved using the ICAN Study Text and
other relevant text materials.

102
MARKING GUIDE

SOLUTION 6 MARKS MARKS

(a) i. Computation of Contribution
10 ticks = 2 marks 2
ii. Replaceable in Year one (Every year)
10 ticks = 2 marks 2
iii. Replaceable in Year 2 (Every Two Years)
15 ticks = 3 marks 3
iv. Replaceable in Year 3 (Every Three Years)
20 ticks = 4 marks 4
v. Decision 1
12
(b) Any three major assumptions at 1 mark each 3
15

103
SOLUTION 7
(a) In order to work out the Transfer Price which should be set for the internal
sales of 35,000 engines, the perspective of both divisions must be
considered.

i. From the group‟s perspective.

For every engine sold externally, Division E generates a profit of
N8,000 i.e(N85,000 – N77,000) for the Group.

For every engine which Division A buys from outside the group, there
is an incremental cost of N6,000 per unit {N80,000 – (N77,000 –
N3,000}.
Therefore, from the Group‟s perspective, as many external sales
should be made as possible before any internal sales are made.
Consequently, the Group‟s current policy will need to be changed.
This however, assumes that the quality of the engines bought from
outside the Group is the same as the quality of the engine made by
Division E.

Hence, Transfer Prices are N74,000 and N80,000.

ii. From Division E‟s perspective.

Division E‟s only buyer for these 35,000 engines is Division A, so the
lowest price division E would be prepared to charge is the marginal
cost of making these engines, which is N74,000 per engine. However,
Division E would want to make higher profit on these engines too and
would consequently expect a higher price than N74,000.

iii. From Division A‟s perspective

Division A knows that it can buy as many external engines as it needs
from outside the group at a price of N80,000 per engine. Therefore,
this will be the maximum price which it is prepared to pay.

iv. Overall Transfer Price Range

Therefore, the Transfer Price should be set between N74,000 and
N80,000. From the perspective of the Group, the total group profit will
be the same irrespective of where in this range the transfer price is
set. However, it is important that divisional managers and staff
remain motivated. Given the external sales price which Division A
would have to pay N80,000 for each engine bought from outside the
group, the transfer price should probably be at the higher end of the
range.

104
(b)
Division E‟s total capacity is 70,000 units.
Given that it can make external sales of 35,000 units it can only
supply Division A 35,000 units of 45,000 engines demanded. These
35,000 engines should be bought from Division E since, from the
Group‟s perspective, the cost of supplying these internally is N6,000
per engine cheaper than buying externally. The remaining 16,000
engine required by Division A should then be bought in from the
external suppliers at N80,000 per engine.

Profit on sales by Division E = 35,000 units at (N85,000 – N77,000) = 280,000,000

Loss on an external purchase of 10,000 at (N74,000 – N8,000) = (60,000,000)
Group Profit = 220,000,000

(c) The two main performance measurements that are appropriate for
evaluating divisional performance of an autonomous division that operates
as an investment centre are:

i. Return on Investment (ROI) – This is the profit of the division as a

percentage of capital employed. The performance of the manager of
an investment centre may be judged on the basis of ROI – whether the
division has succeeded or not in achieving a target ROI for the
financial year or whether ROI has improved since the previous year.
𝑃𝑟𝑜𝑓𝑖𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
ROI =𝐶𝑎𝑝𝑖𝑡𝑎𝑙 or
𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡

ii. Residual Income (RI) – Residual Income is another way of measuring

the performance of an investment centre. It is an alternative to ROI.
RI is measured in either of the following ways:
Managerial evaluation:
N
Controllable profit XX
Less national interest on average
Controllable investment XX
Controllable Residual income XX
Or
Residual Income: Divisional evaluation:
N
Traceable profit XX
Less national interest on average

105
Traceable investment XX
Divisional Residual income XX

EXAMINER‟S REPORT
This question test candidates‟ understanding of transfer pricing and measures of
evaluating divisional performance. 0ver 82% of the candidates attempted the question,
and performance was poor as less than 20% of them scored above the pass marks.
Candidates‟ poor understanding of the requirement of the question was attributable to the
poor performance. Candidates are therefore advised to use the ICAN Study Text and other
relevant text in order to improve their performance in future examinations.

MARKING GUIDE

SOLUTION 7 MARKS MARKS

(a)
i. Division E‟s external sales generate N8,000 1
ii. Division A‟s external purchases cost N6,000 1
iii. Maximum TP from division E‟s perspective 1
iv. Maximum TP from division A‟s perspective 1
v. Range of TP discussion 1 5

(b)
i. Division A should buy 10,000 units from outside 1
ii. Sale/computation of max. profit 4 5

(c) Two main performance measures in autonomous divisions 5

15

106
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

SKILLS LEVEL EXAMINATION – MAY 2017

AUDIT AND ASSURANCE

Time Allowed: 3 hours

INSTRUCTION: YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN

QUESTIONS IN THIS PAPER

SECTION A: COMPULSORY QUESTION (30 MARKS)

QUESTION 1
The following is the statement of Profit or Loss and other comprehensive Income of
ABRICON NIGERIA LIMITED for the year ended December 31, 2016

ABRICON NIGERIA LIMITED

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 2016
2016 2015
N N
Turnover 51,911,612 45,283,683
Less: Cost of Sales (36,844,571) (35,850,619)
15,067,041 9,433,064
Loss on sale of Motor Vehicle (13,034) -
GROSS PROFIT 15,054,007 9,433,064

LESS: ADMIN EXPENSES

Staff Salaries & Allowances 3,255,785 1,605,977
Repairs & Maintenance 762,755 496,580
Transport & Travelling 320,810 180,840
Printing, Postage & Stationery 1,200 62,000
Telephone Expenses 306,916 33,340
Office Rent 238,000 140,000
Motor Running Expenses 421,910 337,430
Electricity 68,355 39,400
Advertising 35,750 50,000
Medical Expenses 55,000 24,000
Subscriptions & Donations 513,045 71,324
Insurance 21,500 27,500
Legal & Professional Fee - 10,000
Entertainment 17,655 10,960
Sundry Expenses 363,800 642,640
107
2016 2015
N N
Audit Fee 100,000 50,000
Bank Charges & Interest 1,656,484 900,000
Depreciation 781,400 758,400
Prov. for Bad & Doubtful Debts 149,084 (43,818)
9,069,449 5,396,573
Profit Before Taxation 5,984,558 4,036,491
Taxation (897,684) (1,009,123)
PAT transferred to Gen. Reserves 5,086,874 3,027,368

You are required to:

a. Perform analytical tests on the figures given. (16 Marks)
b. Identify unusual features. (8 Marks)
c. Provide possible explanations why some apparently unusual items were not
selected in (b) above. (6 Marks)
(Total 30 Marks)

SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
IN THIS SECTION (40 MARKS)

QUESTION 2

The Auditor is required by ISA 500 to design and perform appropriate audit
procedures for obtaining sufficient and appropriate audit evidence.

You are required to:

a. Identify FIVE factors that an Auditor will consider in determining what constitutes
sufficient audit evidence. (5 Marks)
b. Explain FIVE principles that would assist the Auditor in assessing the reliability of
audit evidence. (5 Marks)
c. Explain FOUR principles that would assist the Auditor in assessing the relevance of
audit evidence. (10 Marks)
(Total 20 Marks)

108
QUESTION 3

There are a variety of circumstances that could give rise to the threats of self-interest,
advocacy, familiarity and intimidation against the five fundamental principles of integrity,
objectivity, personal competence and due care, confidentiality, and professional behaviour
as enunciated in the Code of Ethics. There are however safeguards created to help the
Professional Accountant in such circumstances.

You are required to:

a. List FIVE safeguards created by the profession and legislation. (5 Marks)

b. Identify and explain FIVE safeguards that could be created by

firms of Chartered Accountants. (10 Marks)

c. List FIVE possible safeguards that an individual Chartered Accountant could

apply. (5 Marks)
(Total 20 Marks)

QUESTION 4

For many businesses, inventory is one of the areas requiring most attention from
the auditor.
You are required to:
a. State FIVE reasons supportive of the importance of closing inventory to an Auditor.
(5 Marks)

b. Prepare a list of FIVE audit procedures relevant to ascertaining the cost of work-in-
progress and finished goods. (5 Marks)

c. State FIVE reasons why a physical count of inventory is important. (5 Marks)

d. List FIVE reasons why the Auditor must be present at physical inventory count

(5 Marks)
(Total 20 Marks)

109
SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
IN THIS SECTION (30 MARKS)

QUESTION 5

You are the Auditor of Bistro Bottling Limited (BBL), a major manufacturer and
distributor of fruit juice drinks based in Lagos. A review of the previous year‟s audit
working papers revealed some weaknesses in internal controls with regard to
safeguarding the company‟s non-current assets.

The company uses a combination of both owned and leased motor vehicles for
operational activities including deliveries to customers. It has recently sold some
old vehicles and bought new ones in a bid to lower motor vehicle running
expenses.

During the planning of the audit, you have decided that motor vehicles will be a
key area because of the likelihood of weaknesses in the company‟s system of
internal control over non-current assets.
Required:
a. Explain with suitable illustration the meaning of Internal Control.
(4 Marks)
b. List FIVE examples of internal controls. (5 Marks)
c. Identify TWO sources of audit evidence you will obtain for each of the
following: completeness, ownership and valuation, to provide reasonable
assurance with regard to the company‟s assets and liabilities. (6 Marks)
(Total 15 Marks)

QUESTION 6
ISA 230 requires the Auditor to prepare documentation on a timely basis, sufficient
to enable an experienced auditor, with no previous connection with the audit to
understand significant matters arising during the audit and the conclusions
reached thereon.

You are required to:

a. Explain THREE reasons for preparing audit working papers. (3 Marks)

b. State FIVE other purposes of audit documentation. (5 Marks)

c. List FIVE items of information that might be included in the Permanent Audit File.
(5 Marks)
d. Explain what differentiates the Permanent Audit File from the Current Audit File.
(2 Marks)
(Total 15 Marks)
110
QUESTION 7

One essential feature of analytical procedures in auditing is „comparison‟. The

auditor will calculate key relationships between figures (non-financial figures as
well as financial figures) and then make comparisons.

You are required to:

a. Identify FOUR areas of comparison when using analytical procedures and explain
their purpose. You could tabulate your answers. (8 Marks)

b. List FOUR precautionary steps the Auditor is required to take before using analytical
procedures in substantive testing. (4 Marks)
c. Describe THREE limitations of ratio analysis in its use in substantive testing.
(3 Marks)
(Total 15 Marks)

111
SOLUTION TO QUESTION 1
a.
ABRICON NIGERIA LIMITED
Analytical procedures on the figures of the Statement of Profit or Loss and
other Comprehensive Income
2016 2015 DIFFERENCE CHANGE
N N N %

Turnover 51,911,612 45,283,683 6,627,929 14.64

Less: Cost of Sales (36,844,571) (35,850,619) (993,952) 2.77

15,067,041 9,433,064

Loss on sale of M/V (13,034) -

GROSS PROFIT 15,054,007 9,433,064 59.59

LESS: ADMIN EXPENSES

Staff Salaries & Allowances 3,255,785 1,605,977 1,649,808 102.73

Repairs & Maintenance 762,755 496,580 266,175 53.60

Transport & Travelling 320,810 180,840 139,970 77.40

Printing, Postage & Stationery 1,200 62,000 (60,800) (98.06)

Telephone Expenses 306,916 33,340 273,576 820.56

Office Rent 238,000 140,000 98,000 70.00

Motor Running Expenses 421,910 337,430 84,480 25.04

Electricity 68,355 39,400 28,955 73.49

Advertising 35,750 50,000 (14,250) (28.50)

Medical Expenses 55,000 24,000 31,000 129.17

Subscriptions & Donations 513,045 71,324 441,721 619.32

Insurance 21,500 27,500 (6,000) (21.82)

Legal & Professional Fee - 10,000 (10,000) (100.00)

Entertainment 17,655 10,960 6,695 61.09

Audit Fee 100,000 50,000 50,000 100.00

Bank Charges & Interests 756,484

112
1,656,484 900,000 84.05

Depreciation 781,400 758,400 23,000 3.03

Prov. for Doubtful Debts 149,084 (43,818) 192,902 (440.23)

9,069,448 5,396,573

Profit Before Taxation 5,984,559 4,036,491 1,948,068 48.26

Taxation 897,684 1,009,123 (111,439) (11.04)

PAT transferred to Gen.
Reserves 5,086,875 3,027,368

(b) Using the growth in gross profit of 59 percent as benchmark, the following
exhibit unusual features:

i. Staff Salaries & Allowances

ii. Transport & Travelling
iii. Printing, Postage & Stationery
iv. Telephone Expenses
v. Office Rent
vi. Electricity
vii. Medical Expenses
viii. Subscriptions & Donations
ix. Bank Charges & Interests
x. Legal and Professional fees

(c) Possible explanations why some apparently unusual items were not selected
in (b) above include the following:

i. Audit Fee is higher than the gross profit percentage and it was not
selected because the auditor should have explanation for it.
ii. Provision for Doubtful Debts was not selected because the auditor will
review the debtors‟ lists during the audit and re-compute the
provision figure.
iii. Depreciation of Non-Current Assets was not selected because the
auditor will still do a comprehensive work on the Schedule of Non-
Current Assets and will thereafter check the calculation of the
depreciation figure.

113
EXAMINER‟S REPORT

The question, which is in three parts, tests candidates on analytical procedures.

About 97% of the candidates attempted the question. The candidates displayed
poor understanding of the question in parts (a) and (c) but performance in part (b)
was just fair.

Performance was consequently poor in the question. The commonest pitfalls were
poor interpretation of requirements of the question and poor application of their
knowledge to practical situation.

Candidates are advised to study well and be able to duly apply their knowledge.

MARKING GUIDE

SOLUTION 1 MARKS
(a) Analytical tests of figures given
40 entries under difference and % change x 0.4marks each 16

(b) Unusual figures identified

8 points x 1 mark each 8

(c) Explaining why some unusual items are selected in (b) above
3 points x 2 marks each 6
30

114
SOLUTION TO QUESTION 2

(a) SUFFICIENCY OF AUDIT EVIDENCE

Deciding on whether existing audit evidence is sufficient is a matter of

judgement by the auditor. The sufficiency of audit evidence required will
depend largely on the following:

i. The quality of that evidence. The quality will depend on the source of
the evidence and its reliability.

ii. The gravity of the risk that the financial statements might not give a
true and fair view: when this risk is high, more audit evidence will be
required.

iii. The materiality of the item.

iv. The strength of the internal controls in the client‟s accounting

systems.

v. The sampling method that the auditor uses to obtain the audit
evidence: the chosen method will affect the size of the audit sample
that the auditor requires.

(b) RELIABILITY OF AUDIT EVIDENCE

There are a number of general principles set out in ISA 500 to assist the
auditor in assessing the reliability of audit evidence. These can be
summarised as follows:

i. Audit evidence is more reliable when it is obtained from independent

sources outside the entity under audit. For example, letter of
confirmation of bank balance obtained from the bank by the auditor.

ii. Internally generated audit evidence is more reliable when the related
controls are effective.

iii. Audit evidence obtained directly by the auditor is more reliable than
audit evidence obtained indirectly or by inference. For example,
observation of the operation of a control by the auditor is more
reliable than inquiry about the operation of that control, such as
attendance at inventory counts.

115
iv. Audit evidence is more reliable when it exists in documentary form.
This could be paper, electronic or other medium. For example, a
written record of a meeting is more reliable than a subsequent oral
representation of the matters discussed.

v. Audit evidence provided by original documents is more reliable than

audit evidence provided by photocopies, or documents that have been
filmed, or otherwise transformed into electronic form. This is because
the reliability of those other forms may depend on the controls over
their preparation and maintenance.

(c) RELEVANCE OF AUDIT EVIDENCE

There are a number of general principles set out in ISA 500 to assist the
auditor in assessing the relevance of audit evidence. These can be
summarised as follows:

i. Relevance deals with the logical connection with, or bearing upon,

the purpose of the audit procedure, and, where appropriate, the
assertion under consideration. For example, relevance may be
affected by the direction of testing, say when testing for
overstatement in the existence or valuation of accounts payable,
testing the recorded accounts payable may be a relevant audit
procedure. On the other hand, when testing for understatement,
testing the recorded accounts payable would not be relevant, but
rather testing subsequent disbursements, unpaid invoices, suppliers‟
statements and unmatched receiving reports may be relevant.

ii. A given set of audit procedures may provide audit evidence that is
relevant to certain assertions, but not others. For example, inspection
of documents related to the collection of receivables after the period
end may provide audit evidence regarding existence and valuation,
but not necessarily cut-off.

iii. Tests of controls are designed to evaluate the operating effectiveness

of controls in preventing, or detecting and correcting, material
misstatements at the assertion level. Relevant audit evidence would
include identifying conditions that indicate performance of a control,
and deviation conditions. The presence or absence of those conditions
can then be tested by the auditor.

116
iv. Substantive procedures are designed to detect material misstatements
at the assertion level. Designing substantive procedures includes
identifying conditions relevant to the purpose of the test that
constitute a misstatement in the relevant assertion.

EXAMINER‟S REPORT

The question is in parts (a) to (c). It tests candidates understanding of audit

evidence.

About 60% of the candidates attempted the question. The candidates generally
showed a fair understanding of the question and their performance was average.

The commonest pitfall was lack of proper differentiation between sufficiency,

reliability and relevance of audit evidence.

Candidates should study for proper understanding.

MARKING GUIDE

SOLUTION 2 MARKS
(a) Five factors the auditors will consider in determining what
constitutes sufficient audit evidence
5 points x 1 mark each 5

(b) Five principles that will assist the auditor in assessing the
reliability of audit evidence
5 points x 1 mark each 5

(c) Four principles that would assist the auditor in assessing the
relevance of audit evidence
4 points x 2.5 marks each 10
20

117
SOLUTION TO QUESTION 3

(a) Safeguards created by the profession and the legislation include:

i. Educational, training and experience requirements for entry into the

profession.

ii. Continuing professional development requirements.

iii. Corporate governance regulations.

iv. Professional standards (such as ISAs / NSAs).

v. Professional or regulatory monitoring and disciplinary procedures

(such as the ICAN‟s disciplinary procedures).

vi. External review by a legally empowered third party (such as a

regulator appointed by the government) of the reports or information
produced by a member.

vii. Enactments governing the qualifications and working requirements of

the auditor, where appropriate, like the Companies and Allied Matters
Act CAP C20 LFN 2004.

(b) Safeguards created by firms of chartered accountants include:

i. The employer‟s own systems of monitoring and ethics and induction

programmes (such as an internal training or mentoring programme).

ii. Recruitment procedures, ensuring that only high-calibre, competent

staff are recruited.

iii. Appropriate disciplinary processes to deal with cases of infractions

and non-compliance with the firm‟s procedures and policies.

iv. Strong internal controls being applied by the firm.

v. Leadership that stresses the importance of ethical behaviour .

vi. Policies and procedures to implement and monitor the quality of

employee performance.

118
vii. Policies and procedures to implement and monitor the quality of
engagements.

viii. Documented policies regarding the identification of threats to

compliance with the fundamental principles, the evaluation of those
threats and the implementation of appropriate safeguards.

ix. Communication of such policies and procedures and training on them.

x. The use of different partners and engagement teams for the provision
of non-assurance services to assurance clients.

xi. Use of different partners and engagement teams for the provision of
assurance services to competing clients.

(c) Safeguards created by the individual chartered accountant include:

i. Complying with continuing professional development requirements.

ii. Keeping records of contentious issues and approach to decision-
making.

iii. Having a broader perspective on how other organisations operate by

forming business relationships with other professionals

iv. Using an independent mentor.

v. Keeping in contact with legal advisors and professional bodies.

vi. Taking up professional indemnity insurance Policy

EXAMINER‟S REPORT

The question, in three parts, tests candidates on safeguards which are created to
assist the professional accountant in the face of threats of self-interest, advocacy,
familiarity and intimidation. About 75% of the candidates attempted the question.

Candidates exhibited low understanding notwithstanding the relevance attached to

this part of the syllabus. Performance was generally average.

The candidate‟s major undoing was writing out of context.

Candidates are advised to study well and relate their knowledge to the
requirements of the question.
119
MARKING GUIDE

SOLUTION 3 MARKS
(a) Safeguards created by the profession and legislation
5 points x 1 mark each 5

(b) Safeguards created by the firm of Chartered Accountants

5 points x 2marks each 10

(c) Safeguards the individual Chartered Accountants could apply

5 points x 1 mark each 5
20

120
SOLUTION TO QUESTION 4

(a) The reasons for the importance of closing inventory for the auditor include
the following:

i. Inventory is often a material item in the financial statements with its

attendant effect on operating results of a business entity.

ii. Inventory may be a high risk area, involving a high degree of

judgement in areas such as valuation. For example, judgement may
be needed to estimate the stage of completion of work in progress.

iii. Inventory may suffer deterioration, loss or theft that may not be
recognised in the client‟s financial statements.

iv. Inventory may be highly technical in nature. Where inventory is

complex, the auditor may need to consider whether to rely on the
work of an expert.

v. Establishing a closing inventory figure may be a lengthy and complex

process for the client, with a high risk of error.

vi. Closing inventory is often not part of the double entry system, so
directional testing (tests on other areas and other balances) may not
reveal misstatements in inventory.

(b) Cost of work –in-progress and finished goods

For work-in-progress and items of finished (manufactured) goods, the

auditor needs to check each of the elements in the cost: direct materials,
direct labour and production overheads.

He should therefore carry out the following tests:

i. Obtain schedules showing the make-up of the cost figures for each
item of work-in-progress and finished goods.

ii. Check the accuracy of the calculations.

iii. Materials:
- Check that the correct quantity of materials has been used in the
valuation.

121
- Confirm the approach adopted by the company to ascertain the
cost of materials used or sold (e.g. FIFO, weighted average cost)
- Check the costs of inventory with prices in purchase invoices or
suppliers price lists.

iv. Labour: Check pay rates for direct labour cost against
payroll/personnel records for the employees who produced the work-
in-progress or finished goods items. Check the hours worked (and
used to calculate labour costs in the inventory) with the time records
for the employees concerned.

v. Production overheads: Confirm that only production overheads (as

opposed to selling and administration overheads) are included in the
valuation. Confirm that overhead absorption rates are based on
normal levels of output.

vi. Work-in-progress: In addition to the above tests, the auditor may also
need to check the stage of completion of the work-in-progress, in
respect of both materials and conversion costs (labour and
overheads).

(c) The reasons for physical counts of inventory include the following:

i. Physical counts provide evidence of the actual existence of the

inventory. This evidence is important to the company (for preparing
the financial statements) as well as for the auditor (for checking the
reliability of those statements).

ii. Physical counts can be used by the entity to check the accuracy of its
inventory records, where it maintains continuous inventory records.

iii. Where the entity does not have continuous inventory records, a
physical count of inventory is probably the only way of establishing
the quantity of inventory at the year-end.

iv. Discrepancies between the physical count of inventory and the entity‟s
inventory records may indicate weaknesses in physical controls over
inventory, and losses due to theft or for losses from other causes.

v. A physical count of inventory can also be used to check the physical

condition of inventory, and to confirm whether there has been any
deterioration in condition.
122
vi. Physical count may be easy to arrange, particularly where most items
of inventory are held in a limited number of physical locations.

vii. Physical count enables easier ascertainment of inventory belonging to

third parties.

(d) Reasons why auditors must be present at physical inventory count include:

i. Evaluate management‟s instructions and procedures for recovering

and controlling the results of the count.

ii. Observe the performance of management‟s count procedures.

iii. Inspect the inventory to confirm existence

iv. Perform test count

v. Perform audit procedures over the final inventory records to

determine whether they accurately reflect the results of the count.

vi. Confirm whether or not inventory not owned by the entity is properly
identified and labelled.

EXAMINER‟S REPORT

The question is in four parts. It relates to the auditor‟s work as regards inventory.

About 70% of the candidates attempted the question. The understanding exhibited
by the candidates was low for parts (a) to (c), but fair in part (d). This obviously
translated to the average marks earned by the candidates.

The commonest pitfalls were misinterpretation of the question and avoidable mix-
up of answers between different parts.

Candidates are advised to ensure that they know the specific needs of a question
before attempting them.

123
MARKING GUIDE

SOLUTION 4 MARKS
(a) Five reasons supporting the importance of closing inventory to the
auditor
5 points x 1 mark each 5

(b) Five audit procedures relevant to ascertaining the cost of work-in-

progress and manufactured finished goods
5 points x 1 mark each 5

(c) Reasons why a physical count of inventory is important

5 points x 1 mark each 5

(d) Five reasons why the auditor must be present at physical inventory
count
5 points x 1 mark each 5
20

124
SOLUTION TO QUESTION 5

(a) Internal Control - Is the process designed and implemented by the company‟s
management or those charged with governance to provide reasonable
assurance with regard to:

- effectiveness and efficiency of operations

- reliability of financial reporting
- compliance with laws and regulations

The following points should be noted from this definition:

i) It is the responsibility of management or those charged with governance

to design and put in place a suitable system of internal control.

ii) Internal control is designed to deal with financial risks, operational risks
and compliance risks.

iii) Since internal control is established by management or those charged

with governance, the auditor has to accept what controls are in place.
However, he can assess and evaluate the controls, and will plan his audit
on the basis of his assessment.

The five elements of Internal Control System are

- The control environment
- The entity‟s assessment process
- The information system
- Control activities (internal controls)
- Monitoring of controls

(b) Examples of Internal controls include:

 Segregation of duties
 Organisational controls
 Physical controls
 Personnel
 Accounting / arithmetical control
 Performance reviews
 Information processing
- Application controls
- General IT controls

125
(c) Sources of Audit evidence that would be obtained for

(i) Completeness – All assets, liabilities and equity have been recorded
with disclosures. Example of the sources are: test of controls,
substantive procedures, receivable and payable circularisations, and
confirmation letters.

(ii) Ownership – Full control and right to assets, liabilities and obligations
Examples of sources are: non-current assets register, insurance
policies, physical inspection, solicitors‟ certificates, suppliers invoices,
title documents.

(iii) Valuation – Accuracy and allocation of assets, liabilities are correctly

included in the financial statements. Examples of sources of evidence
are test of controls, substantive procedures, suppliers‟ invoices, sales
invoices, bank statements, Interviewing of management staff and
employees.

EXAMINER‟S REPORT

The question is in three parts. Parts (a) and (b) test candidates on Internal Control
while part (c) is on audit evidence. About 85% of the candidates attempted the
question.

The candidates exhibited good understanding in part (a), but poor understanding
in (b) and (c). The performance generally was average.

The commonest pitfall was wrong interpretation of the question and lack of use of
the Institute‟s Study Text.

It is recommended that candidates should cover the syllabus adequately and make
use of the Institute‟s Study Text.

126
MARKING GUIDE

SOLUTION 5 MARKS MARKS

(a) Explanation of “Internal Control” 3
Illustration 1 4

(b) Five examples of Internal Controls

5 points x 1 mark each 5

(c) Sources of audit evidence for

Completeness:
2 points 2

Ownership
2 points 2
Valuation
2 points 2 6
15

127
SOLUTION TO QUESTION 6

(a) Preparing sufficient and appropriate audit documentation on a timely basis

helps to:

i. enhance the quality of the audit

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

iii. assure that documentation prepared at the time the work is performed
is likely to be more accurate than documentation prepared later.

(b) Other purposes of audit documentation include the following:

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

ii. Assisting supervisors in directing and supervising audit work.

iii. Ensuring members of the audit team are accountable for their work.

iv. Keeping a record of matters of continuing significance to future

audits.

v. Enabling an experienced auditor, with no previous connection with

that audit, to conduct quality control reviews or other inspections i.e.
by understanding the work that has been performed and the
conclusions that have been reached.

(c) The permanent audit file records information that are likely to be of
significance to every annual audit of that client. Examples of such
information may include:

i. the legal constitution of the company or entity

ii. other important legal documents such as loan agreements, major

contracts/agreements

iii. a summary of the history, development and ownership of the business

or organisation

128
iv. a summary of accounting systems and procedures

v. copies of previous years‟ financial statements, together with key ratios

and trends.

vi. Letter of appointment as auditors

vii. Important minutes of board meetings

viii. Information about directors and advisers

ix. Copy of the engagement letter and subsequent amendments

x. Result of the assessment of the entity‟s internal control system

(d) Differences Between The Permanent Audit File And The Current Audit File

While the Permanent Audit File records information that is likely to be of

significance and continuing importance to every annual audit of that client,
the Current Audit File contains information of relevance to the current year‟s
audit.

The Current Audit File is prepared annually while the Permanent Audit File is
updated only when there are changes in the information content.

EXAMINER‟S REPORT

The question, in four parts, tests candidates on audit documentation.

About 90% of the candidates attempted the question. Understanding was poor in
parts (a) and (b), but good in parts (c) and (d). Performance was good in parts (c)
and (d), but poor in (a) and (b).

The candidates undoing was poor exhibition of their learning faculty in the
examinations and lack of use of the Institute‟s Study Text.

Candidates are advised to study well for the examination and utilise the Institute‟s
Study Text.

129
MARKING GUIDE

SOLUTION 6 MARKS
(a) Three main reasons for preparing audit working papers
3 points x 1 mark each 3

(b) Other purposes of audit documentation

5 points x 1 mark each 5

(c) Items of information in the permanent audit file

Any 5 items x 1 mark each 5

(d) Differences between the permanent audit file and current audit file
2 points x 1 mark each 2
15

130
SOLUTION TO QUESTION 7

(a) Areas of comparison when using analytical review procedures include:

COMPARISON WITH PURPOSE OF COMPARISON

To establish patterns and trends, and to

look for unusual fluctuations in amounts
in the current financial year that seem
Prior accounting periods inconsistent with what happened
previously.

Actual results can be compared with the

budgeted results or with forecasts, or
Expected results
with results that the auditor was
expecting.

Comparable information may be

obtained for other entities in the
industry or about individual entities in
Industry average results the same industry. Information may be
obtainable for the industry as a whole
from an industry body or a financial
information service. Information about
individual companies in the same
industry may be obtainable as published
financial statements.

The auditor may be able to compare the

results of different branches or divisions
Comparable parts of the same
within the same entity, where there are
entity
similar branches or divisions within the
entity.

(b) Precautionary steps the auditor is required to take before using

analytical review procedures in substantive testing:

i. Determine the suitability of particular substantive analytical

review procedures for given assertions – i.e. how effective they will
be in detecting a particular type of material misstatement.

131
ii. Develop an expectation of recorded amounts or ratios and evaluate
whether that expectation is sufficiently precise to identify a
misstatement.

iii. Evaluate the reliability of the data from which the expectation has
been developed.

iv. Determine what level of difference from expected amounts is

acceptable without further investigation.

(c) Limitations of ratio analysis in its use in substantive testing

i. The auditor needs to understand the client‟s business, so that he is

able to understand the potential significance of ratios, or reasons for
differences (for example, differences between one year and the next).

ii. The usefulness of ratio analysis depends on the quality of the

underlying financial information. It is usual for the auditor to
calculate financial ratios from the client‟s management accounts,
which are more detailed than financial statements and can provide a
source of more and better information.

iii. For comparison purposes, the ratio analysis must be calculated on a

consistent basis.
iv. The figures used to calculate a ratio must be logically related.

EXAMINER‟S REPORT

The question is in three parts. It tests candidates on analytical procedures and its
use in substantive testing.

About 15% of the candidates attempted the question and the understanding
exhibited was poor, therefore performance was also poor.

The candidates exhibited a shallow knowledge ostensibly occasioned by their non-

coverage of this area of the syllabus.

Candidates are advised to adequately cover the syllabus.

132
MARKING GUIDE

SOLUTION 7 MARKS

(a) Four areas of comparison when using analytical review

procedures and their respective purposes 4 points x 2 marks 8
each
(b) Precautionary steps the auditor is required to take before using
analytical review procedures in substantive testing 4
4 points x 1 mark each
(c) Three limitations of ratio analysis in substantive testing
3 points x 1 mark each 3
15

133
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

SKILLS LEVEL EXAMINATION – MAY 2017

PUBLIC SECTOR ACCOUNTING & FINANCE

Time Allowed: 3 hours

INSTRUCTION: YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN

QUESTIONS IN THIS PAPER

SECTION A: COMPULSORY QUESTION (30 MARKS)

QUESTION 1
The following balances were extracted from the books of KALOBA State
Government of OTAN as at December 31, 2015:
Dr Cr
N‟Million N„Million
Cash Account 60,000
Consolidated Revenue Fund as at January 1, 2015 120,000
Allocation from Federation Account 300,000
Other Revenue 40,000
Personnel Costs 150,000
Ordinary Shares of N1 each in AKRAN Plc 150,000
Deposits 60,000
Advances 80,000
Loans from Federal Government 60,000
Loans to Local Government 80,000
Fixed Deposit – LOBO Bank Plc 60,000
Total 580,000 580,000

Additional information:

(i) N40 billion should be transferred to Development Fund for Capital

projects to be embarked upon in the 1st quarter of 2016.
(ii) Other charges approved by the Fund Management Committee and
paid during the year but which were omitted from the books
amounted to N50 billion.
(iii) Total grants of N100 billion collected from Federal Government for
capital project to be embarked upon in the 1st quarter of 2016 was
not recorded anywhere in the books.

134
Required:
Prepare the following statements for submission to the Auditor-General for
the State
a. i. Consolidated Revenue Fund Account for the period ended December
31, 2015. (8 Marks)

ii. Development Fund Account for the period ended December 31,
2015 . (3
Marks)
iii. Statement of Assets and Liabilities as at December 31, 2015.
(9 Marks)

b. State the components of General Purpose Financial Statements (GPFS) of

a typical Federal or State Government. (4 Marks)

c. State FOUR principal users of government financial reports and their

needs. (6 Marks)
(Total 30 Marks)

SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
IN THIS SECTION (40 MARKS)

QUESTION 2

The Zero-based budgeting system is a budgeting system that requires every item of
expenditure to be justified as if the particular activity or programme is taking off
for the first time.

Required:
a. State the stages involved in Zero-based budgeting system. (5 Marks)
b. Explain THREE benefits associated with the Zero-based budgeting system.
(6 Marks)
c. Explain THREE drawbacks of the Zero-based budgeting system. (6 Marks)
d. State THREE key users of the Zero-based budgeting system. (3 Marks)
(Total 20 Marks)

135
QUESTION 3

Engineer Paul Maihala assumed duty as the Managing Director/CEO of FCT Abuja
Water Authority (FAWA) – a company fully owned by the Federal Government of
Nigeria. FAWA is responsible for the supply of water to the Federal Capital. Engr.
Maihala, before resuming at FAWA in October 2015, was the Director (General
Services) at the Federal Ministry of Works and Housing. Upon resumption, he was
determined to put an end to the shortage of water supply in the Federal Capital in
fulfilment of the mandate given to him on his appointment.
At a meeting with his directors, the new Managing Director/CEO asked for a list of
challenges facing the Authority and suggestions on how to solve them. Top on the
list of challenges were the issues of unreliable public power supply and the
excessive cost of running generators due to the high cost of diesel. There was also
the case of shortage of raw materials such as chlorine (Sodium Hypo chloride) and
other essential chemicals used for water treatment.

The Director, (Maintenance) decried the incessant cases of non-availability of

essential chemicals and materials. He also said that there were cases of low quality
and unusable chemicals supplied to the store.
The Managing Director directed that adequate stock of diesel and essential
chemicals must be kept at all times and that he would not tolerate any case of
stock-out, diversion or theft of diesel, chemicals and other store items.
The Director, (General Services), stated that the major challenge he faced was that
the Authority‟s store was porous and that the controls in the store were inadequate.
He blamed the Finance and Accounts department for inadequate records keeping
leading to frequent stock-outs and non-documentation of stores discrepancies. He
said that “he would have preferred a situation where the accounts department
would leave his stores alone”.
The Director, Finance and Accounts said in his presentation, that he had no control
over the store as the storekeeper reports to the Director, General Services. He said
he was only responsible for the store accounting function and that the
officer-in-charge of stores accounting had his office in the Accounts section. He
further said that the storekeeper was not co-operating with the accounts staff and
saw them as unnecessary disturbance as they often presented themselves as
“policemen”. The argument between the two directors was heated up to the extent
that the meeting had to be adjourned.

Required:
a. According to Government Financial Regulation (2009 Edition), explain the
term “STORES” (2 Marks)
b. In line with the Treasury‟s objective of ensuring an effective system of internal
control in the management of stores, what are the responsibilities of the
Accounting Officer? (4 Marks)

136
c. State SIX actions the Accounting Officer could take to prevent cases of:
i. Stock-outs (6 Marks)
ii. Diversion or theft of diesel or other store items. (6 Marks)

d. State TWO measures necessary to ensure that chemicals and other store
materials meet the required standards. (2 Marks)
(Total 20 Marks)

QUESTION 4

Treasury Single Account (TSA) is one of the financial policies being implemented by
the Federal Government of Nigeria to consolidate all inflows from all Ministries,
Departments and Agencies (MDAs) in the country by way of deposit into
Commercial Banks traceable into a single account at the Central Bank of Nigeria.

You are required to identify:

a. FIVE benefits associated with the financial policy. (5 Marks)
b. FIVE challenges inherent in operating the financial policy. (5 Marks)
c. FIVE roles and responsibilities of Ministries, Departments and Agencies
(MDAs) under the TSA scheme in Nigeria. (5 Marks)
d. FIVE roles and responsibilities of State Accountant-Generals under the TSA
scheme in Nigeria (5 Marks)
(Total 20 Marks)

SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
IN THIS SECTION (30 MARKS)

QUESTION 5

The accumulation of external debt is a common phenomenon in developing

countries at the stage of development where external resources are needed to
bridge budgetary gap.
Required:
a. Explain what is meant by External Debt. (3 Marks)
b. Discuss the causes and likely adverse consequences of the rising level of
Nigeria‟s total external debt stock. (12 Marks)
(Total 15 Marks)

137
QUESTION 6
State and explain FIVE macroeconomic objectives of the Federal Government of
Nigeria.
(Total 15 Marks)

QUESTION7
A number of factors have been identified as inevitably leading to rapid growth in
government spending in many countries over time.

Required:
Identify and explain FIVE of these factors as they apply to Nigeria.
(Total 15 Marks)

138
SUGGESTED SOLUTIONS

139
SOLUTION 1

a. i. KALOBA State Government of OTAN

Consolidated Revenue Account for the Period Ended December 31, 2015

N‟Million N‟Million
Opening Balance 120,000
Revenue
Allocation from Federation Account 300,000
Other Revenue 40,000 340,000
Total Revenue 460,000
Expenditure
Personnel Costs 150,000
Other Charges 50,000
Total Recurrent Expenditure 200,000
Transfer to Capital Development Fund 40,000
Total Expenditure (240,000)
Closing Balance 220,000

a.ii. KALOBA State Government of OTAN

Development Fund Account for the Period Ended December 31, 2015

N‟Million N‟Million
Revenue
Grants from Federal Government 100,000
Transfer from Consolidated Revenue Fund 40,000
Total Revenue 140,000
Expenditure 0
Closing Balance 140,000

140
a.iii. KALOBA State Government of OTAN
Statements of Assets and Liabilities as at December 31, 2015
N‟Million N‟Million
ASSETS
Liquid Assets:
Cash Account (W I) 110,000
Investments and Other Cash Assets:
Ordinary Shares of N1 each in AKPAN Plc 150,000
Fixed Deposit- LOBO Bank Plc 60,000
Advances 80,000
Loans to Local Governments 80,000
Total Investments and Other Cash Assets 370,000
Total Assets 480,000
LIABILITIES
Fund Balances:
Consolidated Revenue Fund Balance 220,000
Development Fund Balance 140,000
Total Fund Balances 360,000
External and Internal Loans:
Loans from Federal Government 60,000
Total External and Internal Loans 60,000
Other Liabilities:
Deposits 60,000
Total Other Liabilities 60,000
Total Liabilities 480,000

(W I) Cash Balance
= N60 Billion + N100 Billion – N50 Billion
= N110 Billion

b. Components of General Purpose Financial Statements (GPFS)

Presently, entities in Nigeria prepare the following GPFS:
i. Cash Flow Statement;
ii. Statement of Consolidated Revenue Fund;
iii. Statement of Capital Development Fund;
iv. Statement of Assets and Liabilities
v. Notes to the Accounts;
vi. Performance Reports i.e. Comparison of budget and actual amounts;
vii. Statistical Reports;
viii. Accounting Policies; and
ix. Responsibility Statement.
141
c. Users and their needs
There are two groups of users of Government financial reporting. These are
“Internal‟and External‟ users whose peculiarities and areas of interest are
briefly discussed, as follows:
Internal Users: This group of users includes;
i) The Labour Union in the public service which is interested in
negotiating for improved conditions of employment and security of
tenure for their members.
ii) Members of the Executive Arm of Government such as the President,
Ministers, Governors, Commissioners and Chairmen of Local
Governments. Their areas of interest are to ensure probity and
accountability through efficient and effective record keeping and
performance evaluation and control which are achieved through
useful accounting information.

External users include:

i) Members of the Legislature at National, State and Local Government

levels. Information in the accounts of Governments is the major
medium through which politicians render stewardship to their
constituencies and appraise them of the endeavours of governance.

ii) Members of the Public: It assists the people to appreciate or

otherwise the efforts of Governments.
iii) Researchers and Financial Journalists: Researchers are expected to
develop new and better ideas of governance. Financial journalists
cherish accounting information to advise existing and potential
investors.
iv) Financial Institutions: These include the Commercial Banks, World
Bank and International Monetary Fund (IMF). Accounting information
assists them to evaluate the credit rating of a borrowing nation.
v) Governments: Apart from the ones reporting, governments
collaborate on ideas of investment and research. They also require
accounting information on the well-being or otherwise of each
other. They require accounting information to ascertain the financial
viability of the public sector organisations and the efficiency and
effectiveness of management. They would want to know whether
the accounting information enhances the quality, consistency, and
transparency of public sector financial reporting.

142
vi) Suppliers and Contractors: It assists these groups to ascertain the
ability of a government to pay for goods and services delivered as at
when due.

EXAMINER‟S REPORT
The question tests candidates‟ ability to prepare the accounts of Consolidated Revenue
Fund, Development Fund and Statement of Assets and Liabilities. In addition, the question
also requires candidates to state the components of General Purpose Financial Statements
(GPFS) and users of government financial reports.

All candidates attempted the question and performance was average. The major pitfall of
the candidates was their inability to state the users of financial information and their
needs.

Candidates are advised to make good use of ICAN Study Text for future examinations by
stud.

MARKING GUIDE
Marks Marks
a (i) Heading (2 ticks @ ½ mark each) 1
Opening Balance ½
Calculation of Total Revenue (5 ticks @ ½ mark each) 2½
Calculation of Total Expenditure (6 ticks @ ½ mark each) 3
Calculation of Closing Balance (2 ticks @ ½ each) 1 8
(ii) Heading ½
Calculation of Total Revenue (3 ticks @ ½ mark each) 1½
Calculation of Closing Balance (2 ticks @ ½ mark each) 1 3
(iii) Heading ½
Calculation of Total Assets (7 ticks @ ½ mark each) 3½
Calculation of Total Liabilities (8 ticks @ ½ mark each) 4
Workings for Cash Closing Balance 1 9

b. Any Four Components at 1 mark each 4

c. Any four users @ ½ mark each 2

Any four needs of the Users @ 1 mark each 4 6

Total 30

143
SOLUTION 2

a. The stages involved in Zero-based budgeting system are as follows:

i. Identification of Decision units/tasks and formulating operational
plans;
ii. Analysing/evaluating the whole budget into Decision packages based
on the Decision units/tasks to which costs are assigned;
iii. Ranking in priority the Decision packages covering the activities,
both new and existing, in a competitive manner;
iv. Determination of the cut-off point, to choose the packages which can
be included and those to be rejected, and
v. Prioritisation/selection of the packages, to highlight the ones which
fit in with the available resources.

b. Benefits associated with Zero-based budgeting system include the following:

i. It acts as a tool for change from which benefits are likely to
accrue/Improve coordination and communication within departments;
ii. It allows for optimal allocation of resources;
iii. It provides better yardstick for the measurement of performance;
iv. It focuses attention on the future rather than on the past i.e. old and
new projects are appraised on the same basis/accuracy as against
traditional method;
v. Important projects can continue to receive funds, owing to their
viability/reduction in redundant activities;
vi. It is good for profit-oriented projects/social oriented projects; and
vii. The budgets of the Ministries, Departments and Agencies (MDAs) are
closely linked with government overall agenda

c. Drawbacks associated with Zero-based budgeting (ZBB) system include the

following:
i. It may cause a major shift in resource allocation;
ii. It is not considered useful for recurrent expenditure;
iii. Departments like Research and Development may encounter cash-
crunch or may be denied desired resources;
iv. Sometimes ZBB sounds too radical and so consensus is difficult to
obtain;
v. Justifying every expense may not be feasible or practicable;
vi. Preparation time and the cost of preparing the budget tend to
increase; and
vii. It involves the task of analysing and ranking of data and information
which a number of civil servants find difficult to manage .

144
d. Key users of Zero-based budgeting system in public sector are:
i. The Legislative Arm e.g. National Assembly, State Assemblies;
ii. The Executive Arm, e.g. President, Governors; and
iii. The various Ministries, Departments and Agencies (MDAs)and
Parastatals

EXAMINER‟S REPORT

The question tests candidates‟ knowledge of the Zero-based budgeting system, its stages,
benefits, drawback and users.

Majority of the candidates attempted the question and the performance was average. The
major pitfall was their inability to state the stages, drawbacks and the users of Zero-based
budgeting system.

Candidates are advised to use the ICAN Study Text and other materials for future
examinations.

MARKING GUIDE
Marks
A Stating of five Stages at 1 mark each 5
B Stating of any Three benefits at 2 marks each 6
C Stating of any Three Drawbacks at 2 marks each 6
D Stating of any Three Key Users at 1 mark each 3
Total 20

145
SOLUTION 3

a. According to Financial Regulation (2009 Edition), the term „Stores‟ include

all movable property purchased from public funds or otherwise acquired by
government.

b. The Accounting Officer is responsible for:

i) The general supervision and control of stores and stores accounts of
his Ministry/Extra-Ministerial office and other arms of government.
ii) The introduction and implementation of Stores accounting procedure
that covers the receipt, custody, issue and disposal of store items
iii) The maintenance of Stores Guide, setting out detailed approve system
and procedures and store instructions.
iv) The appointment of Officers to inspect all stores within his Ministry/
Extra-Ministerial department; and
v) Surcharging any Officer responsible for loss of stores.

c. i. The Accounting Officer should introduce the following to prevent

Stock-out:
 Introduce and maintain Lead Time for all the store items. This is
the time between the time an order is made and the time the
item is received;
 Introduce Re-order Levels and Quantities for all the Store items;
 Introduce Maximum and Minimum Levels for all the Store Items.;
 In the case of unallocated Stores, the maximum limit of the value
of the stores that may be held in stock at any point in time shall
not be exceeded without the authority of the Minister of Finance;
 Ensure that periodic physical stocktaking is carried out;
 Unserviceable and obsolete stores should be posted in separate
ledgers;
 Ensure that stores are well arranged and labelled;
 Avoid irregular issue or waste of stock items;
 Introduction and maintenance of Buffer stock;
 Ensure that high quality products are delivered by suppliers to
avoid low quality products; and
 Ensure that there are more than one supplier for individual store
items.

146
ii. The Accounting Officer should ensure that:
 The inspection of all stores within the Ministries/Extra-Ministerial
offices and other arms of government, whether at headquarters or
outstations shall be carried out at least twice yearly;
 Checking of every item of stock at least once a year by stock
verifiers;
 Inspection by Internal Auditors are carried out as part of their
regular routine function;
 Board of Surveys are held annually and at such other times as
may be necessary;
 Stores officers and/or stock verifiers shall not participate in the
procurement of stores. They are also not to participate in the
selection of a contractor or sit on the Tenders Board. Their duties
are mainly to ensure that the goods ordered are received
according to specifications and recorded in the stores ledgers as
appropriate;
 All necessary Stock Records e.g. Bin Cards, Store Requisition
Forms, Store Issue Vouchers, Store Receipt Vouchers etc are
being maintained accordingly;
 In case of Loss of Stores, proper procedures are being followed in
accordance with Financial Regulations (2009 Edition);
 All stores premises must have adequate fire fighting appliances
provided and maintained in a serviceable condition;
 Security Guards should be employed to look after all government
stores; and
 Frequent and periodic Stocktaking/Inventory should be carried
out.

d The measures necessary to ensure that chemical and other store materials
meet the required standards are :
i. Set up an Internal Quality Control Unit in the office;
ii. Benchmark products, services, and practices against those of the
strongest competitors;
iii. Supplier partnering; which means that the Office work directly with
their stores suppliers to improve quality at the supplier's location;
iv. Quality awards: As quality control grows in popularity, companies
strive to prove to customers that quality is their most important
concern. One way they do this is to compete for the plethora of quality
awards that are now available;
v. Due process must be followed in engaging suppliers; and
vi. Checking for the expiry dates.

147
EXAMINER‟S REPORT
The question tests candidates‟ understanding of the concept of „Stores‟, its required
effective internal control system in the management of stores, action to be taken by the
Accounting Officer to prevent stock-out and theft by the as contained in the Government
Financial Regulation (2009 Edition).
Majority of the candidates attempted the question and the performance was below
average.
Candidates‟ major pitfall was their lack of in-depth knowledge in this area of the syllabus.

Candidates are advised to always cover the syllabus while preparing for the examination.

MARKING GUIDE
Marks
a. Explanation/Definition of Stores 2

b. Stating of any Two responsibilities @ 2 marks each 4

c. i. Stating of any six actions to prevent Stock out @ 1 mark each 6

ii. Stating of any six actions to prevent Theft/Diversion @ 1 mark each 6

D Stating of any Two measures @ 1 mark each 2

Total 20

148
SOLUTION 4

a. Benefits associated with Treasury Single Account (TSA) include the following:

i. Provision of complete and timely information on government cash

resources;
ii. Improvement of operational control on budget execution or support
government budget execution;
iii. Enablement of efficient cash management;
iv. Reduction of bank charges and transaction costs maintained by
MDAs;
v. Facilitation of efficient payment mechanisms;
vi. Improvement of bank reconciliation and quality of fiscal data;
vii. Improvement of liquidity of government;
viii. Issuance of Warrants and Authority to Incur Expenditure (AIEs) are
based on cash plan;
ix. Drastic fall on the Ways and Means (Overdraft) requirement from
CBN;
x. Prevention and detection of potential and actual fraud
xi. Improvement of transparency and accountability of all FGN receipts.

b. Challenges inherent in operating the Treasury Single Account (TSA) include:

i. Fees charged by service provider deducted at source not provided for

in the Budget;
ii. Lack of unified service agreement among Stakeholders;
iii. Some MDAs still maintain hidden Commercial Bank Accounts;
iv. Poor internet connectivity;
v. Infrastructure, incentives and logistics (i.e. unnecessary delay in fund
transactions);
vi. Resistance by some MDAs;
vii. Capacity gap of users;
viii. Inadequate sensitization;
ix. Diversion of tax revenue and other government funds into personal
accounts;
x. Different IT platforms- REMITA, GIFMIS, NIBBS;
xi. Over-extension of CBN‟s existing capacity in view of new roles;
xii. Unethical practices by banks; and
xiii. Internet hacking or cyber crime.

149
c. Roles and responsibilities of Ministries, Departments and Agencies (MDAs)
under the Treasury Single Account (TSA) include:
i. Ensure that the revenue targets are met;
ii. Provide the payers with details of payment including amount and
nature of payment;
iii. Guide payers on e-collection processes including how to pay at
the bank or through other channels of the CBN Payment Gateway;
iv. Ensure that appropriate services are rendered upon confirmation
of payment where applicable;
v. Monitor the payers and collecting banks to ensure that payments
are actually made;
vi. Undertake regular reconciliation of all collections;
vii. Render revenue returns to the Office of the Accountant-General of
Federation on monthly basis;
viii. Ensure that proper books of Revenue Accounts are maintained;
ix. Ensure prompt issuance of receipts for remittances paid through
the e-collection;
x. Ensure that Internally Generated Revenue is not diverted; and
xi. Ensure that sharp practices emanating from collusion among
dishonest revenue officers are discouraged and stopped forthwith.

d. Roles and Responsibilities of State Accountant-Generals under the Treasury

Single Account (TSA) are:

i. Ensuring effective implementation of e-collection reform;

ii. Proper monitoring of the e-collection gateway;
iii. Prompt reconciliation of all collections;
iv. Providing MDAs with periodic report of collection;
v. Supporting MDAs, banks and payers on the operation of
e-collection;
vi. Regular monitoring of all collections to ensure prompt remittance
and accounting for collection;
vii. Continuous update of e-collection guidelines and processes;
viii. Abiding by the provisions of the MoU with Stakeholders; and
ix. Revenue monitoring visits to all MDAs, Government Companies
and Parastatals.

EXAMINER‟S REPORT
The question tests candidates‟ knowledge of the operation of Treasury Single Account
(TSA). It requires candidates to identify its benefits, challenges, the roles of the MDAs and
State Accountant-General under the scheme.
Majority of the candidates attempted the question and the performance was below
average.

150
Candidates‟ major pitfall was their poor knowledge of the TSA operation in Nigeria.
Candidates are advised to be aware of government financial policies and make good of
ICAN Study Text when preparing for future examinations

MARKING GUIDE
Marks
a Stating of any Five benefits @ 1 mark each 5
b Stating of any Five challenges @ 1 mark each 5
c Stating of any Five roles and responsibilities @ 1 mark each 5
d Stating of any Five roles and responsibilities @ 1 mark each 5
Total 20

151
SOLUTION 5

a. External Debt.
This refers to debt that a country owes to foreign individuals, governments
and international organizations. From the experience of Nigeria, there are
four types of external debt; trade debt, balance of payments support loan,
project-tied loans and loans for socio-economic needs. Sources of Nigeria‟s
external debt include the Paris Club of Official Creditors, London Club of
Commercial Creditors, Multilateral Creditors such as the World Bank,
International Monetary Fund (IMF), African Development Bank (AFDB) and
others.

b. The causes of the rising level of Nigeria‟s total external debt stock includes:

i. Fluctuations in government revenue: Nigeria operates a mono

cultural economy depending substantially on crude oil export for
foreign exchange income. Poor performance of the product in the
international market always reduces income considerably and affects
budget implementation adversely. Any country that finds itself in
such a situation will have no option than to borrow from outside the
economy to bridge budgetary gap.

ii. Deficit financing: The persistent practice of deficit financing adopted

by national and sub-national governments in Nigeria may also be a
factor for steady increase in the level of external debt stock from
which deficits are usually being financed.

iii. Balance of payments disequilibrium: Excessive reliance on foreign

resources to maintain domestic production processes and on foreign
goods and services beyond the nation‟s foreign exchange earning
capacity also creates the need for the government to borrow.

iv. Rapidly increasing population: Nigeria has one of the fastest growing
population in the world. The need arises for government borrowing to
expand public enterprises and public utilities to cater for the welfare
of the people.

v. Implementation of development programmes: To promote economic

development usually requires the provision of new and upgrading of
existing social and economic infrastructural facilities like roads,
railways, electricity, schools and hospitals. Financing of domestic
projects, which could not pay their way as well as instability of the
exchange rate, also increased external debt stock, hence the resort to
government borrowing.

152
vi. Natural disaster and sectarian violence: Government has the
responsibility to provide relief to the victims of flood and fire disasters
and sectarian violence such as Boko Harram terrorist attacks.
Government borrowing will be justified because such occurrences are
never expected or budgeted for.

Likely adverse consequences of rapidly increasing external debt stock

include:
i. Burden on future generation: It imposes future obligation on
taxpayers when borrowed funds are diverted to prestigious or white
elephant projects that have no direct relevance to economic growth
and development.
ii. Depletion in foreign exchange: Funding excessive interest rate on
public debt in hard currency deprives the nation of foreign exchange
needed to procure critical inputs, especially in a country like Nigerian
that is highly import dependent with respect to inputs required in the
industrial sector. This leads to declining industrial capacity utilization
and loss of industrial jobs.
iii. Effects on living standards: Borrowing goes along with unbearable
conditionalities. For example, the conditions attached to the IMF
balance of payments support loan, usually include trade
liberalization, withdrawal of subsidies on essential products,
expenditure reduction, non-increase of salary of public servants and
other stiff conditions that carry repercussion on living standards of the
people
iv. Effect on amortization: Debt-servicing problem is aggravated when
short or medium term loan is committed to long-term projects with
amortization becoming due before projects are completed.
v. Provision of amenities: Rising external debt stock imposes a burden on
the future generation which will be required to pay taxes for the
purpose of servicing debt rather than the provision of amenities for
the benefit of taxpayers.
vi. Debt trap: Where there is wrong deployment of borrowed funds into
projects of low returns or non-self liquidating, it may be difficult for
the country to extricate itself from the burden of debt.

153
EXAMINER‟S REPORT
The question tests candidates‟ understanding of the concept of external debt, its causes
and effects on the rising level of external debt stock in Nigeria.

Majority of the candidates attempted the question while the pass rate was average. Those
who scored poorly did not have full grasp of the requirements of the question. In
particular, they failed to provide copious explanation of the consequences of the country‟s
debt profile on the level of external debt stock

Candidates are advised to make good use of ICAN Study Text as it contains vital
information on the topic. They should also read widely and intensively for effective
coverage of the syllabus.

MARKING GUIDE
MARKS MARKS
a. Definition ofExternal debt 1
Stating of any type of external debt @ 1 mark each 1
Stating of any sources of external debt @ 1 mark each 1 3

b. Causes of the rising External Debt stock.

Identificationof any three@ 1 mark each 3
Explanationof any three causes identified @ 1 mark each 3 6

Adverse consequences:
Stating of any three identification of any Adverse 3
consequence @ 1 mark each
Explanation of any three adverse consequence identified 3 6
Total 15

154
SOLUTION 6

Like every modern developing economy, the main macroeconomic objectives of the
Federal Government of Nigeria are:

i. Full Employment: The government pursues the goal of full

employment in order to generate substantial new employment
opportunities. That is a higher level of employment of productive
resources, especially to ensure that not less than 95 percent of the
economy‟s labour force is engaged in production activity. A higher
level of employment is associated with higher real national income
and a higher average standard of living.

ii. Price Stability: This is to curb inflation, deflation or price fluctuations

in the economy. Either inflation or deflation is inimical to economic
growth and development. For example, a sustained widespread rapid
increase in the prices of goods and services will lower standards of
living of fixed income earners, while fluctuations in prices will
discourage investment, lower employment and output levels as well
as reduce average standard of living.

iii. Economic Growth/Development: This refers to expansion of the

productive capacity of the economy for greater output of welfare–
enhancing goods and services. This is measured as a sustained
increase in real national income and per capita real income.

iv. External Balance/Balance of Payment Equilibrium: Government also

promotes balance of payments equilibrium which implies less reliance
on foreign goods and services, avoidance of debt and its burden and
increase in capital inflow in the forms of foreign direct investments
(FDIs) and portfolio investment.

v. Equitable distribution of income and wealth: To reduce the gap

between the rich and the poor, government uses progressive taxes,
direct transfer payments, and subsidies to redistribute income and
wealth.

vi. Poverty Reduction: This is to substantially reduce the number of people

wallowing in abject poverty and squalor in the country, the government
usually adopt a mix of economic policies and specific poverty–
alleviation strategies designed to create economic empowerment
opportunities for the poor masses. This is to enable them have access to
the goods and services they desire for higher standard of living.

155
EXAMINER‟S REPORT

The focus of the question is on the macroeconomic objectives of the Federal Government of
Nigeria, a key player in the country‟s economic environment.
Majority of the candidates attempted the question and the pass rate was above average.

Majority of the candidates were able to identify the relevant points while many of them
could not provide copious explanation of the points raised.

Candidates are advised to pay more attention to the materials on this aspect of the syllabus
in the ICAN Study Text for more insight.

MARKING GUIDE
Marks Marks
Identification of any five Macroeconomic objectives @ 1 mark 5
each.
Explanation of any five Macroeconomic objectives @ 2 marks 10 15
each
15
Total

156
SOLUTION 7

A number of factors have been responsible for the phenomena increase in the size
of government spending especially in Nigeria and the reasons for this can be listed
as follows:

a. Population growth: As population increases, the government requires

higher provision of social amenities; hence, government spending tends to
increase more and more. This is the case of Nigeria where population grows
rapidly which calls for the increase in government spending on social
amenities like pipe-borne water, electricity etc. in the country

b. Economic development goal: Nigerian government has the desire to

achieve rapid economic development for the country. The channel through
which this goal can be achieved is to increase government spending which
will stimulate higher level of productivity in all sectors of the economy.

c. Defence and security: There is the need on the part of the government to
increase its spending on equipment required by the armed forces in order
to provide strong defence and security for the entire citizenry against
internal or external aggression.

d. Increase in the general price level: The general prices of goods and services
have risen persistently and cost government more to provide the same
amenities than before. This implies that the level of inflation is moving up
in the country and is responsible for increase in government spending in
recent times.

e. Urbanization: The shift of the population from the rural to urban areas is
also responsible for increase in government spending in Nigeria. For
instance, the movement of federal capital from Lagos to Abuja has raised
government spending on construction and other projects on annual basis
from inception till date.

f. Costly political arrangement: Since Nigeria is practicing democracy, the

government spends more on yearly basis in maintaining democratic
institutions. Huge amounts are allocated to electoral agencies during
election into local, state and federal offices, many of which are duplicated

g. National crisis or war: National crisis or war always calls for a lot of funds
to be allocated to the provision of arms and ammunition. For instance, the
case of militancy in the Niger Delta and Boko Haram insurgency forced the
Nigerian government to increase its funding of the purchase of
sophisticated weapons to fight these insurgencies.

157
h. Industrialization or financing developmental projects: Nigerian government
is also embarking on developmental projects and technological acquisition,
which require large government spending.

EXAMINER‟S REPORT

The question requires candidates‟ understanding of factors responsible for the rapid
growth of government spending in Nigeria.
A good number of the candidates attempted the questionand the performance was below
average.

Many of the candidates misinterpreted the question by focusing on the different types of
development projects undertaken by the Federal Government of Nigeria. In general,
majority of the candidates demonstrated inadequate and shallow knowledge of this aspect
of the syllabus.

Candidates are advised to spend time to identify the requirements of any question and
should make use of ICAN Study Text and standard texts on Public Finance for better
understanding of this aspect of the syllabus,

MARKING GUIDE
Marks
i. Identification of any five factors @ 1 mark each 5
ii. Explanation of any five factors identify @ 2 marks each 10
Total 15

158
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

SKILLS LEVEL EXAMINATION – MAY 2017

MANAGEMENT, GOVERNANCE AND ETHICS

Time Allowed: 3 hours

INSTRUCTION: YOU ARE REQUIRED TO ANSWER FIVE OUT OF THE SEVEN

QUESTIONS IN THIS PAPER

SECTION A COMPULSORY QUESTION (30 MARKS)

QUESTION 1

Gbenga Alimi wants to establish a fast food restaurant in Koko, a state in

Naijaland. A well-known global fast food outfit in Naijaland has agreed to give
him a franchise to enable him operate the business in the state. However, the
Franchisor has requested the young man to present a good business plan to
determine the viability of the business in the state. Your consulting firm has been
engaged by the young man to:

Required:
a. Outline the contents of a business plan that would address the viability of the
proposed franchise fast food restaurant. (20 Marks)
b. With the aid of the appropriate graphical representation, you are required to
educate Gbenga Alimi on the four stages involved in the classical product life
cycle. (6 Marks)
c. Within the context of an organisation, distinguish between the following pairs:
i. Narrow and wide stakeholders
ii. Active and passive stakeholders (4 Marks)
(Total 30 marks)

SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THE THREE
QUESTIONS IN THIS SECTION (40 MARKS)

QUESTION 2
a. Johnson and Scholes suggested that there is a cultural web within an
organisation.
Required
Discuss the idea of cultural web and its interrelated elements in a way that
would assist a new employee to understand this concept in a business
organisation. (15 Marks)

159
b. As a professional accountant, explain any TWO ethical principles or
requirements you would consider in deciding whether or not to keep a
promise to maintain confidentiality with regards to information acquired from
a client in the ordinary course of business.
(5 Marks)
(Total 20 Marks)

QUESTION 3

Mallam Danladi is a civil servant who has won a sum of one hundred million Naira
in a lottery. Being a very conservative person who is averse to risks, Mallam
Danladi is contemplating putting the money in a fixed deposit account at an
interest rate of 14% per annum or into treasury bills at an interest rate of 18.5%per
annum. These two options are considered to be virtually risk free. Mr. Madoff, a
risk consultant, advised him to invest in the production of shea butter, coconut oil
and black soap, with a promise of 52% profit per annum. In an attempt to convince
Mallam Danladi to invest in the production of these items, Mr Madoff, tried to
educate Mallam Danlandi on the nature of risks and how to effectively monitor and
control them in ways that will ensure that business remains highly profitable.

Required:
a. Explain briefly the nature of risk in business to Mallam Danladi. (2½ Marks)
b. Discuss FOUR distinct means of controlling business risk. (10 Marks)
c. Explain briefly the purpose of monitoring risks in business. (3 Marks)
d. Discuss THREE ways of monitoring risks in business. (4½ Marks)
(Total 20 Marks)

QUESTION 4
a. With the aid of an appropriate diagram, explain how organisations and
management structures might change as business grows using Greiner‟s
growth model.
(10 Marks)
b. Explain briefly the concept of board diversity giving THREE examples of
categories of diversity. (5 Marks)
c. Explain THREE benefits of the diversity of the board of a large company
(3 Marks)
d. Discuss TWO limitations of board diversity (2 Marks)
(Total 20 Marks)

160
SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THE THREE
QUESTIONS IN THIS SECTION (30 MARKS)

QUESTION 5

a. Using ISO 31000 framework, show what an organisation might do to address

risk management challenges. (9 marks)

b. Explain THREE main elements of risk management contained in ISO 31000

framework. (6 Marks)
(Total 15 Marks)

QUESTION 6
a. Agency problems and conflicts are common in all organisations.
Required:
Explain the concept of agency problems and discuss FIVE types of agency
conflicts that might exist in an organisation. (8 Marks)

b. Tucker‟s Five Question Model can be employed in training new professional

accountants in ethics.
Required:
Explain the issues covered by the Tucker‟s Five Question Model. (7 Marks)
(Total 15 Marks)

QUESTION 7
Nolan Committee on standards in public life was set up to report on standards of
behaviour amongst politicians, civil servants and public bodies. Provide an
analysis of Nolan‟s‟ SEVEN Principles of Public Life. (15 Marks)
(Total 15 Marks)

161
SUGGESTED SOLUTIONS

162
SOLUTION 1

(a) Components of a business plan

i. Title page
The title page is to attract readers to the report and assist them in
finding the plan/report at a later date. It would typically include:
 Title (and any sub-titles) – this should define the plan/report
and ensure it is easily distinguishable from others
 Author
 Organisation‟s name
 Reference numbers (if any)
 Degree of confidentiality
 Date
You might also include some kind of unobtrusive artwork (such as the
logo of the relevant organisation) that relates to the plan/report
subject.

ii. Table of contents

A table of contents is a list of all the sections that are included in the
plan/report (in the same order in which they appear) plus relevant
page numbers.

iii. Introduction
The introduction prepares readers for the plan/report itself. It
provides information on such questions as why the plan/report has
been written and the questions it answers.

The introduction should:

 Make the subject of the plan/report clear;
 Clearly state its purpose; and
 Briefly explain the methods used to get the information provided.

iv. Executive summary

An executive summary is important because, for senior officers with
little time, it is one section they will surely read. It should be
succinctly, clearly and well written.
The executive summary should include:
 What the plan/report is about;
 The relevant problems;
 The conclusions arrived at; and
 Recommendations.

163
The primary idea of writing an executive summary is to give the
overall picture without including too much detail. A useful by-
product of writing an executive summary is that it provides an
opportunity to check that the plan/report itself is logical and
convincing.

v. Body of the plan/report

The body of the plan/report should be split into sections with logical
headings and sub-headings. These should reflect the groupings and
sub-groupings created during the planning and structuring phase.
The headings are essentially „signposts‟ that allow readers to
navigate to the relevant details in a logical fashion so as to further
investigate something they have read in the executive summary.
Typical components would include:
 Business description, which briefly explains:
 Overall mission and objectives;
 History and ownership;
 Products and services; and
 Operating/production plan.

 Business environment analysis (for example – PEST Analysis and

SWOT Analysis) that specifies the industry‟s background.

vi. Market analysis

Market analysis should articulate:
 Size, segmentation and growth/decline of market; and
 Marketing plan.

vii. Management summary

Management summary should highlight:
 Who the key management personnel are and their
backgrounds; and
 Organisation chart (summary only – more detail may be provided
as an appendix).

viii. Financial plan

Financial plan must include a summary of financial information. This
should include income statement, statement of financial position and
cash flow statement/ risk factors.

ix. Conclusions and recommendations

The conclusions and recommendations must follow logically from
the rest of the plan/report. When writing the conclusion and
recommendations section, the following should be considered:

164
 The conclusion and recommendations should follow logically
from the rest of the plan/report, i.e.
o Draw out the main point(s) of the plan/report and present a
considered judgement on them;
o Draw conclusions that are justified by the evidence and
facts contained in the body of the plan/report;
o Make recommendations based only on your discussions and
conclusion; and
o Does not introduce a new line of argument or material.
 Check the conclusions and recommendations against the
original objective of the plan/report.
 Make sure you have answered all key questions.
 Finish with the final impression you want to make.

x. Appendices/Bibliography
The appendices should include detailed information that a reader can
essentially do without in order to make sense of the main body of the
report. For example: calculations, examples, questionnaires and CVs.
They are essentially the bottom level of the logical pyramids you
constructed during the structuring phase.

In summary, appendices:
 Should be included only if absolutely necessary.
 Are non-essential for understanding the main arguments.
 Should be referred to somewhere in the body of the text, i.e.,
there must be a link.
 Are presented as the final item in the table of contents.

An alternative approach is to exclude appendices but invite the

reader to contact the author should they wish to see a copy of the
details. However, as a minimum, most business plans would include
the following two appendices:

 Detailed financial information – more details than in the financial

plan in the main body.
 CVs of key management – certainly those of board members, but
can also include those of other key management personnel

b. The „classical‟ product lifecycle

A „life cycle‟ is the period from birth or creation of an item to the end of its
life. Products, companies and industries all have life cycles. A product life
cycle begins with its initial development and ends at the time it is
eventually withdrawn from the market.

165
A life cycle is said to go through several stages. The „classical‟ life cycle for
a product, or even an entire industry, goes through four stages or phases:
i. Introduction;
ii. Growth;
iii. Maturity; and
iv. Decline.

Introduction phase. During this stage of a product life cycle, there is some
sales demand but total sales are low. Firms that make and sell the product
incur investment costs and start-up costs. Running costs are usually high.
The product is not yet profitable.

Growth phase. During the growth phase, total sales demand in the market
grows at a faster rate. New entrants are attracted into the market by the
prospect of high sales and profits. At an early stage during the growth
phase, companies in the market begin to earn profits.

Maturity phase. During the maturity phase, total annual sales remain fairly
stable. Prices and profits stabilise. The opportunity for more growth no
longer exists, although the life of the product might be extended, through
product updates.

More companies might seek to improve profits by differentiating their

products more from those of competitors, and selling to a „niche‟ market
segment.

Decline phase. Eventually, total annual sales in the market will start to fall.
As sales fall, so do profits too. Companies gradually leave the market. At
some point in time, it is no longer possible to produce and sell the product
at a profit, and the product is therefore discontinued.

166
A „classical‟ product life cycle is shown in the following diagram.

Not all products have a classical life cycle. Unsuccessful products never
become profitable. A business entity might be able to „revitalise‟ and
redesign a product, so that when it enters a decline phase, its sales
increases again, and it consequently goes into another period of growth
and maturity.

The length of a product life cycle can be long or short. A broad type of
product, such as a motor car, has a longer life cycle than particular types
of the product, such as a Volkswagen Beetle or a Ford Escort.
At each phase of a product‟s life cycle:
i. selling prices will be altered;
ii. costs may differ;
iii. the amount invested (capital investment) may vary; and
iv. spending on advertising and other marketing activities may change.

c. (i) Narrow and wide stakeholders

Evans and Freeman (1993) made a distinction between narrow and
wide stakeholders.
 Narrow stakeholders are those that are the most affected by the
actions and decisions of an organisation. Narrow stakeholder
groups for a company usually include shareholders, directors,
other management, employees, suppliers and those customers
who depend on the goods produced by the company.

167
 Wide stakeholders are those groups that are less dependent on
an organisation. Wide stakeholders for a company may include
customers who are not particularly dependent on the company‟s
goods or services, for example, the government and the wider
community (as distinct from local communities in which the
company operates, which may be narrow stakeholders).

(ii) Active and passive stakeholders

Mahoney (1994) made a distinction between active and passive
stakeholders.
i. Active stakeholders are those that are involved in the
company‟s activities and decisions. These stakeholders may
be a part of the company‟s normal decision-making and
operating processes, such as management and employees.
Other active stakeholders who are external to the company
may include, government regulators or environmental
pressure groups.

ii. Passive stakeholders are those stakeholders who are not

usually involved with a company‟s policy-making. They may
have a strong interest in what the company does, but they do
not want to get actively involved in its decision-making. The
government and local communities may be examples of
passive stakeholders.

EXAMINER‟S REPORT

The question tests candidates‟ ability to draw out a business plan and explain the
stages involved in the classical product life cycle with the aid of graphical
representation. It also tests their ability to distinguish different types of
stakeholders.

Being a compulsory question, all the candidates, except one, attempted the
question. Overall performance was below average. The commonest pitfall was the
general inability of candidates to draw a business plan and distinguish the
different types of stakeholders.

Candidates are advised to pay close attention to all the sections of the syllabus and
prepare adequately for future examinations.

168
MARKING GUIDE
MARKS
MARKS

a. Identifying the 10 components of business plan

@ 1 mark each
10
Explanation of each of the 10 points @ 1 mark
10
20

b. Construction of the product life cycle diagram

2
Identifying the four stages in a classical life cycle
diagram @ ½ mark each 2
Explanation of the four stages @ ½ mark each
2
6

c. Explanation of each of the four types of shareholders

4
@ 1 mark each
30

169
SOLUTION 2

a.
The cultural web of an organisation affects or determines the way in which
individuals understand the organisation in which they work. It consists of
what an organisation is about: what it does; its mission; and values.

The six inter-related elements of culture within an organization are:

i) Routines and rituals

These convey the ways things are done in an organisation. Individual
workers get used to established ways of doing things within the
organisation in which they work.

ii) Stories and myths

These are used to describe the history of an organisation and to suggest
the importance of certain individuals or events. They are usually passed
by the words of mouth and create an impression of how the organisation
got to where it is. It can be difficult to challenge such established myths
in ways that can facilitate a change of direction in the future.

iii) Symbols
These can be a representation of the nature of an organisation. Example
might be the brand on a company‟s car, the colour of an office or
building, a logo or a style of language.

iv) Power structure

Organisations are influenced by the individuals who are in positions of
authority or power. In many business organisations, power is obtained
by the occupation of a management position. However, it can also come
from personal influence, experience or expertise.

v) Control systems
Performance measurement and reward systems within an organisation
establish the view about what is important and what is not so important.
Individuals will focus on performance that earns rewards. For example,
it has been suggested that cash bonus systems help to create the profit
driven culture in investment banks.

vi) Organisation structure

The culture of an organisation is affected by its organisation and
management structure. For example, hierarchical and bureaucratic
organisations might find it difficult to adapt to change and are often
conservative in their outlook.

170
b.
i. The professional accountant might take the view that, having given a
promise, he/she must keep it. A promise is given with the intention of
keeping it and there are no conditions under which the professional
accountant should disclose the information to anyone else, without
the prior permission of the client. This would be an absolutist
view/principle of ethics.

ii. The accountant might give a promise not to disclose a piece of

confidential information to anyone else, but in giving his promise,
he/she might tell the client that there are certain circumstances in
which he might feel obliged to give the information to someone else
(and give an indication of what those circumstances might be, such as
legal reasons). In this situation, the accountant would be saying that
the right thing to do depends on the circumstances and situations.
This would be a relativist view/principle of ethics.

iii. Confidential information about a client can be disclosed if the client so

permits. Before disclosing the information, however, the accountant
should consider whether the disclosure might harm a third party.

iv. Confidential information must be disclosed if a court of competent

jurisdiction requires it.

v. The law might also require the disclosure of some confidential

information to the appropriate authorities. For example, firms of
accountants are required to disclose suspicions of money laundering
by a client to the appropriate authorities.

In addition, tax evasion is a crime and accountants are required to

report such evasions by clients to the authorities.

vi. Disclosure is also permitted when the accountant has a professional

right or duty, where such disclosure is not prohibited by law.

vii. Disclosure is also permitted, if such information is to protect the

interest of members of the public.

EXAMINER‟S REPORT

The question tests candidates‟ practical understanding of the idea of cultural web
and its relevance to employees in business entities. It also tests their ability to
identify some of the ethical principles that are relevant to the accounting
profession.

171
Almost 80% of candidate attempted the question and the overall performance was
less than average. Commonest pitfall was that many of the candidates did not
understand the question and as such could not answer it correctly.

Candidates are advised to pay attention to the Ethics component of the syllabus.

MARKING GUIDE
MARKS
MARKS
a. Definition of cultural web
3
Identifying the elements of cultural web
(1 mark for each any 6 points) 6
Explanation of each element
(1 mark for each 6 points) 6
15

b. Explanation of 2 ethical requirements @ 2½ marks each 5

20

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SOLUTION 3

a. The Nature of Risk: Risk is associated with the possibility that:

i. Things might go wrong;
ii. Future outcomes or events cannot be predicted with certainty;
iii. A range of different future outcomes might occur; and
iv. Events might turn out worse than expected.

A business risk threatens the health and survival of a business. The business
proposal by Madoff, for example, involves the risk that the projected profit of
52% per annum on the production of shea butter, coconut oil and black soap
might not be achieved. It also involves the business risk that Mallam Danladi
might record an outright loss.

b. Means of controlling risks are:

i. Diversification
This involves spreading of risk, which can be achieved by investing in a
range of different risk activities and build up a portfolio of different
business activities. This way, the business with less risk will compensate
for those with higher levels of risks.

ii. Risk Transfer

This involves the passing of risk to others. An example is insurance,
where risks are transferred to insurance companies which will indemnify
if the risk occurs.

iii. Risk Sharing

Collaborating with other individuals to jointly share the risk. The most
common includes joint venture and partnership. Here, all members
share in the cost, risk and reward.

iv. Hedging Risk

Creating a position or product that offsets an exposure to another risk. It
is mostly used in the financial market and is commonly associated with
management of financial risks, e.g. currency risks.

v. Risk Avoidance
This means not having any exposure to risk. This can be achieved by
staying out of or leaving business.

vi. Risk Retention

This is when the risk bearer decides to accept the risk with the
expectation of making a return.

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c. Purpose of monitoring risk in business

Risks should be monitored. The purpose of risk monitoring is to ensure that:

i. the processes and procedures for identifying risk are effective;
ii. there are internal controls and other risk management processes in
place for managing risks;
iii. risk management systems are effective;
iv. the level of risk faced by the entity is consistent with the policies on
risk that are set by the board of directors;
v. failures in the control of risk are identified and investigated; and
vi. weaknesses in risk management processes are identified and
corrected.

d. THREE ways of monitoring risks

There is no widely-accepted approach to the monitoring and management of
risk. Each business and non-business entity develops its own risk monitoring
and management structure according to its own needs and perceptions. The
following are some of the major approaches to risk monitoring.

i. Risk manager
Companies and other entities might appoint one or more risk managers.
A risk manager might be given responsibility for all aspects of risk.
Alternatively, risk managers might be appointed to help with the
management of specific risks, such as:
 Insurance;
 Health and safety;
 Information systems and information technology;
 Human resources;
 Financial risk or treasury risk; and
 Compliance (with specific aspects of the law or industry
regulations).
A risk manager is not a „line‟ manager and is not directly responsible
for risk management. His role is to provide information, assistance and
advice, and to improve risk awareness within the entity and encourage
the adoption of sound risk management practice.

The role of a risk manager might therefore include:

 Helping with the identification of risks;
 Establishing „tools‟ to help with the identification of risks;
 Establishing modelling methods for the assessment and
measurement of risks;
 Collecting risk incident reports (for example, health and safety
incident reports);

174
 Assisting heads of departments and other line managers in the
review of reports by the internal auditors;
 Preparing regular risk management reports for senior managers or
risk committees; and
 Monitoring „best practice‟ in risk management and encouraging the
adoption of best practice within the entity.

ii. Risk committees

Some entities establish one or more risk committees.
 A risk committee might be a committee of the board of directors.
This committee should be responsible for fulfilling the corporate
governance obligations of the board to review the effectiveness of
the system of risk management.
 A risk committee might be an inter-departmental committee
responsible for identifying and monitoring specific aspects of risk,
such as:
- strategic risks/business risks (or particular aspects of these
risks);
- operational risk (and internal controls);
- financial risk;
- compliance risk; and
- environmental risk.
Risk committees do not have management authority to make
decisions about the control of risk. Their function is to identify risks,
monitor risks and report on the effectiveness of risk management to
the board or senior management.
Internal auditors might be included in the membership of risk
committees. Alternatively, the internal auditors should report to the
risk committees.
Similarly, risk managers might be included in the membership of risk
committees or might report to the committees.
The board of directors should receive regular reports from these risk
committees, as part of their governance function to monitor the
effectiveness of risk management systems.

iii. Risk Auditing

Risks can be monitored through auditing. Risk auditing involves the
investigation by an independent person (the auditor) of an area of risk
management. A risk audit and assessment can be defined as „a
systematic way of understanding the risks that an organisation faces.
Because the range and types of risk are many and varied, risk
assessment and audit can be a complicated and involved process‟
(David Campbell in Student Accountant, March 2009).

175
It is important to recognise, however, that unlike an external audit, a
risk audit is not a mandatory requirement for companies (although
regulators do require companies in certain industries such as financial
services to carry out regular audits or stress tests).
 External auditors should monitor internal controls for financial
risks as part of their annual audit process. Internal auditors
might also carry out checks on internal financial controls.
 However, risk auditing can be extended to other aspects of risk,
such as operational risks, compliance risks and environmental
risks. The auditors might be a part of the internal audit function
or risk management function within the entity. Alternatively,
they might be external investigators and auditors from either an
accountancy/consultancy firm or a firm that specialises in the
audit of particular types of risk.

EXAMINER‟S REPORT

The question tests candidates‟ understanding of the nature of risk and the
distinctions between risk monitoring and risk controlling in business.

Over 90% of the candidates attempted the question and the overall performance
was above average. Their major pitfall was their inability to differentiate between
monitoring and controlling risks in business.

Candidates are advised to understand the distinctions between related concepts.

MARKING GUIDE
MARKS MARKS
a. Definition/explanation of risk 1
Explanation of Business Risk 1½
2½
b. identification of 4 means of controlling risks @ 1 mark
each 4
Explanation of each means of controlling risks @ 1½
marks each 6
10

c. Justification for risk Monitoring @ 1 mark each for 3

points 3

d. 1½ marks for each of the 3 ways of monitoring risks 4½

20

176
SOLUTION 4

a. Greiner‟s growth model

In the 1970s, Greiner suggested that an entity that grows in size goes
through a series of changes as it gets bigger. Each change occurs in
response to a „crisis‟, when the existing organisation and management
structure is no longer capable of handling a business as large as it has now
become.

Phase 1: Period of growth through creativity

The initial stage of a successful business entity is a period
of creativity and innovation. The entity is managed in an
entrepreneurial way and it is producing new products that
appeal to customers. As the entity grows, the
entrepreneurial method may be insufficient which leads
the organisation to a „crisis‟ of leadership.

Phase 2: Period of growth through direction

With a structured entity, formal systems are introduced such
as planning and control systems, accounting systems,
inventory control, production scheduling, communication and
IT systems, etc. The hierarchical management structure
becomes inefficient as the entity grows. Thereby, making
management control not to be effective as it used to be as top
management are far away from actual operations, which lead
to a „crisis of autonomy‟ between top management and local

177
management.

Phase 3: Period of growth through delegation

As the business continues to grow, central management has
to delegate authority to local managers. However, a crisis of
control may ensue as central management realises that it has
lost most of its authority.

Phase 4: Period of growth through co-ordination

As the entity continues to grow, activities of all local operating
divisions are consolidated for management use. However, the
reporting systems starts to create a bureaucratic bottleneck at
the head office which makes the local managers uncomfortable
in their operations and this leads to „crisis of red tape‟
involving too much form filling, report writing and
bureaucracy which leads to the final phase.

Phase 5: Period of growth through collaboration

To overcome the problem of red tape, the head office
management and local managers find ways to collaborate
more constructively. More emphasis is given to teamwork and
problem-solving and less emphasis on formal reporting
systems and accountability. Since no entity has gone beyond
Phase 5 of its development, Greiner suggested that it was too
early to predict whether there will be crisis at the end of
Phase 5.

b. Board diversity means having a range of directors that are different from
one another. Board diversity aims to cultivate a broad spectrum of
demographic attributes and characteristics.

Such attributes and characteristics include:

o Age;
o Race;
o Gender;
o Educational background;
o Professional qualification;
o Experience;
o Religion;
o Marital status;
o Personal attitudes; and
o Political affiliation.

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c. Benefits of board diversity

The benefits of diversifying the board of a large company include:

1. More effective decision making.

A diversified board should help reduce „groupthink‟ and hence result
in more objective decisions being made. It helps the board to
approach problems from a greater variety of perspectives and raise
challenging questions that will result in more vigorous debate;

2. Better utilisation of talent pool of NEDs

Traditionally, the search for Non-Executive Directors (NEDs) has been
restricted to candidates with similar backgrounds to existing members
of the board. Broadening the target population by diversifying the
board membership will foster better use of the available talent pool of
NEDs; and

3. Enhancement of corporate reputation

This will lead the company to become a more responsible corporate
citizen.

d. Limitations of board diversity are as follows:

i. Increased conflict and friction which may promote cliques or sub-

groups;

ii. Tokenism – Board minority may feel they are only there to „make up
the number‟ and fill up a quota. This may not allow them to take an
active role and contribute positively to decision making of the
board; and

iii. Decrease in quality of decision arrived at due to insufficient

business expertise of directors chosen on diversity criteria. The
business entity may not enjoy the best contribution or direction from
the board.

179
EXAMINER‟S REPORT

The question tests candidates‟ ability to use Greiner‟s Growth Model to explain how
organisational management structures might change in response to business
growth. It also tests their understanding of the nature, advantages and
disadvantages of board diversity.

About 30% of the candidates attempted the question and their overall performance
was below average.

Commonest pitfall was that many of the candidates could not correctly label
Greiner‟s Growth Model‟s diagram and explain the model adequately. In addition,
many candidates could not provide an adequate explanation of the nature,
advantages and limitations of board diversity.

Candidates should ensure that they are able to draw, label and inteprete diagrams
correctly. They should also endeavour to have a full grasp of the topics and issues
listed in the syllabus.

MARKING GUIDE
MARKS MARKS
a. Construction of Greiner‟s Diagram 5
Explanation of diagram 5
10
b. Explanation of board diversity 2
Mentioning any 3 categories of diversity 3
5
c. Benefits of board diversity
(1 mark each for any 3 points) 3

d. Limitation of board diversity

(mentioning any 2 points @ 1 mark each) 2
20

180
SOLUTION 5

a. ISO 31000 uses the 7Rs and 4Ts as framework for implementing risk
management system. Its purpose is to promote international
standardisation in risk management system.

The 7Rs are:

1. Recognition/identification of risk;
2. Ranking or evaluation of risk;
3. Responding to significant risk;
4. Risk treatment which includes to:
(a) Tolerate;
(b) Treat;
(c) Transfer; and
(d) Terminate the risks (4 Ts);
5. Resources control;
6. Reporting and monitoring risk performance; and
7. Review of risk management framework.

b. ISO 31000 suggests a framework for risk management that has three
main elements.

i. Risk Architecture
This consists of the roles and responsibilities for risk management
within the organisation and the risk reporting structure. Examples
are the roles of Internal Auditors, Risk Manager, Audit Committee,
Board and the Chief Executive Officer (CEO).

ii. Risk strategy

The risk strategy of the organisation should be specified, including
the risk appetite of the board. There should be a risk management
action plan and resources to support risk management activities.

iii. Risk protocols

These are the rules and procedures for implementing risk
management and the risk management methodologies that should
be applied. For example, there should be rules, procedures and
methodologies for risk assessments, risk responses, and incident
reporting.

181
EXAMINER‟S REPORT

The question tests candidates‟ practical understanding of ISO 31000 Framework

and its essential elements for risk management.

About 30% of the candidates attempted the question and their overall performance
was poor. Commonest pitfall was their inability to distinguish and explain the
three main elements of risk management contained in ISO 31000. They were also
unable to clearly explain what an organisation may do to manage risks.

Candidates are advised to pay attention to the details of all the topics in the
syllabus.

MARKING GUIDE
MARKS MARKS

a. State any 6 of the 7R‟s @ 1½ marks each 9

b. Identifying the 3 elements of ISO 31000 @ 1 mark each

3
Explanation of each of the 3 elements @ 1 mark each
3
6

15

182
SOLUTION 6

a. Agency problem is a conflict of interests inherent in any relationship where

one party is expected to act in another‟s best interest. In corporate entity, the
agency problem usually refers to a conflict of interest between a company‟s
management and the company‟s shareholders.

The managers, acting as agents for the shareholders or principals are

supposed to make decisions that will maximize shareholder‟s wealth even if it
is in the managers‟ best interest to maximise his own wealth.

The agency problem does not exist without a relationship between a principal
and an agent. The agency problems arise due to an issue with incentives. An
agent may be motivated to act in a manner that is not favourable for the
principal, if the agent is presented with an incentive to act in this way. The
agency problem may be minimised by altering the structure of compensation.
Agency conflict exists in organisation and may be experienced in the following
ways:

i. Moral hazard
A manager has an interest in receiving benefits from his or her position
as a manager. These include all the benefits that should come with a
status or position. These may include a company car, a private
chauffeur, use of a company airplane, lunches, attendance at
sponsored sporting events, etc. A manager‟s incentive to obtain these
benefits is higher when he has no shares, or only a few shares, in the
company;

ii. Effort level

Managers may work less hard than they would have if they were the
owners of the company. The problem will exist in a large company at
middle levels of management as well as at senior management level.
They may have different interests if, for instance, senior management is
given pay incentives to achieve higher profits but the middle managers
are not;

iii. Earnings retention

The remuneration of directors and senior managers is often related to
the size of the company rather than its profits. Management are more
likely to want to re-invest profits in order to make the company bigger
rather than pay out the profit as dividend;

iv. Risk aversion

Executive directors and senior managers usually earn most of their
income from the company they work for. They are, therefore, interested
in the stability of the company because this will protect their job and
their future income. This means that management might be risk-

183
averse. In contrast, shareholders might want a company to take bigger
risks; and

v. Time horizon
Shareholders are concerned about the long-term financial prospects of
their company. In contrast, managers might only be interested in the
short-term prospects. This is partly because they might receive annual
bonuses based on short-term performance.

b. The Tucker‟s Five Question Model for Ethical Decision Making in Business is
based on the view that the profit motive is justified and the purpose of
decision-making in business should be to make a profit. However, profit
should be made in an ethical way. In order to be ethically correct, business
decisions and actions should be legal.

The Tucker‟s Five Question Model involves asking five questions before
making a business decision. The five questions about business decisions are:

i. Is it Profitable? It must be noted that companies are owned by

shareholders and the primary reason for ownership is usually to
maximise profit;
ii. Is it legal? This is a general statement regarding the legality of
doing business;
iii. Is it fair? Fairness suggests an element of equality among
stakeholders;
iv. Is it right? Rightness relate to moral standard beyond the legal
standard. Rightness and fairness are similar; and
v. Is it sustainable or environmentally sound? Products are often
designed to meet environmental needs as a base for its competitive
advantage.

EXAMINER‟S REPORT

The (a) part of the question tests candidates‟ understanding of the nature and forms of
agency conflicts and problems. Part (b) tests their knowledge of Tucker‟s Five Questions
Model for Ethical Decisions Making in Business.

About 70% of the candidates attempted the question and overall performance was average.
Their commonest pitfall was their inability to identify and explain the nature and forms of
agency conflicts and problems. Besides, while many of them were able to identify Tucker‟s
five questions, they had problems explaining each of them.

Candidates are advised to pay attention to the issues discussed in ICAN Study Text.

184
MARKING GUIDE
MARKS MARKS

a. Introduction 3

Mentioning 5 agency conflicts @ ½ mark each 2½

Explaining 5 agency conflicts @ ½ mark each 2½

b. Explaining Tucker‟s Five Questions Model 2

Mentioning each of Tucker‟s Five Questions Model @

½ mark each 2½

Explaining each of Tucker‟s Five Questions Model @

½ mark each 2½

15

185
SOLUTION 7

a. Nolan‟s‟ principles of public life is a concept that applies to public sector

entities, not–for–profit entities and privately owned companies.

The principles were issued in United Kingdom by the Nolan‟s‟ committee on

standards of behaviours among politicians, civil servants and other public
sector bodies. They are meant to guide the conduct and activities of personnel
in diverse sectors of public life.

b. The Nolan‟s‟ Committee identifies seven principles that should guide the
activities of personnel in various sectors. These are:

i) Selflessness
Holders of public office should not make decisions that are in their
personal self-interest. Their decisions should be based entirely on a
concern for the interest of the public.

ii) Integrity
Holders of public office should not put themselves under any financial
obligations or other obligations to another individual or organization
that might influence how they act in the course of their duties.

iii) Objectivity
In awarding contracts or making recommendations, officeholders should
base their decisions on merit.

iv) Accountability
Officeholders are accountable to the public and should submit
themselves to public scrutiny.

v) Openness
Officeholders should be as open as possible about the decisions they take
and the reasons for those decisions. They should only withhold
information when this is in the interest of the public.

vi) Honesty
Officeholders have a duty to declare any conflicts of interest they might
have, and should take steps to resolve them whenever they arise.

vii) Leadership
Officeholders should promote and support these principles by setting an
example with their own behaviour and giving a lead to others.

186
EXAMINER‟S REPORT

The question tests candidates‟ knowledge of Nolan‟s Seven Principles of Public Life
and their ability to adequately explain each of the seven principles.

About 70% of the candidates attempted the question and overall performance was
above average. Their major pitfall was their inability to provide an in-depth
explanation of each of the seven principles of public life discussed by Nolan.

Candidates should ensure that they fully understand the details of all the concepts,
theories and principles discussed in ICAN Study Text.

MARKING GUIDE
MARKS MARKS
Introduction 1 1

Mentioning the 7 Principles @ 1 mark each 7

Explaining each of the 7 Principles @ 1 mark each 7 14
15

187