Level: Level 3

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  • 20 Marks

STP – Feb 2007 – L3 – Q5 – VAT Apportionment

Explain VAT rules for goods on sale or return and input tax apportionment for taxable and exempt supplies.

a) Tanji Enterprises Ltd. operates a Fuel Filling Station and a huge Supermarket in Tamale within the same premises. A joint tax audit team from the LTU Office visited Tanji and noted that Tanji supplies taxable and non-taxable goods and services to customers but fails to notice the split distinction between these services. The VAT team therefore has disallowed some claims and apportioned others to reflect the true VAT claimable.

Required:
i. Explain the VAT rules for goods supplied on sale or return.
ii. Discuss the apportionment of input tax for taxable and exempt supplies.

(b).Required:

Discuss the VAT rules on the timing of supply for the following:

i. Goods or services applied to own use, gifted, or supplied under hire purchase or finance lease.

ii. Continuous or metered supplies like electricity.

iii. Goods supplied under a hire purchase agreement or finance lease.

iv. Goods or services supplied under rental agreements or periodic payments.

v. Ancillary supplies.

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  • 20 Marks

STP – Feb 2007 – L3 – Q4 – Employee Loan Taxation

Advise on tax implications of a $300M loan and bonus for Dr. Ababio, including relevant Tax Act provisions.

(a). Dr. Ababio discusses an engagement she recently accepted with an investment banker with you for advice. She indicates that one of the recruiting inducements that convinced her to accept the position is a $300M loan from her employer. She will receive the loan proceeds on her first day of work and must sign a note to repay the loan plus accrued interest in five equal annual installments.

The employer will forgive any amount of the unpaid debt if Dr. Ababio dies, becomes disabled, or is terminated from employment through no fault of her own. Dr. Ababio’s contract provides that the employer will pay an annual bonus equal to each loan repayment. The contract stipulates that the bonus must be applied to the repayment of her loan.

Required:
i) Advise Dr. Ababio on the implications, if any, of this engagement provisions.
ii) Discuss any three provisions in the Tax Act which will support the position the Commissioner will take in respect of the taxability or otherwise of this engagement provision.

(b). The Free Zone Act declares a 10-year tax holiday for Free Zone Operators. Sweet Entities Inc. desires to set up in the Free Zone enclave but requires an understanding of the practical tax concessions granted to free operators. To this effect, the Tax Director of Sweet Entities Inc. requires that you do a practical presentation of the flow of the corporate tax-exempt concession as extended to the operator. He therefore provides you with the following business forecast for the first 10-year period as follows.
All figures in $M

Year 1 2 3 4 5 6 7 8 9 10
Adjusted Profit 10 60 150 500 1,000 1,000 1,000 520 600 620
Capital Allowance 1000 600 300 150 50 20 20 600 340 200

Compute the tax position, if any, of Sweet Entities Inc. for the exempt period.

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  • 20 Marks

STP – Feb 2007 – L3 – Q3 – Venture Capital Taxation

Present tax concessions for Venture Capital Operators compared to traditional banks.

As part of the post qualification requirements of The Chartered Institute of Taxation, you have been invited to do a presentation on the topic “Venture Capital Fund” to a select group of business men, tax professionals, financial institutions and students.

Invitation
Members of the Ghana Institute of Taxation and the Institute of Bankers wish to use this opportunity to strengthen the cordial relationship subsisting between them and have therefore invited you to do a presentation on the tax effects of Venture Capital Operators as compared with that of the traditional financial institutions.

Required:
Please prepare a presentation as required under Invitation above clearly distinguishing between Tax concessions granted to a Venture Capital as compared with the Bank.

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  • 20 Marks

STP – Feb 2007 – L3 – Q2 – Employee Taxation

Outline Ghanaian tax and social security implications for a French employee working in Ghana under a Double Tax Treaty.

Mr. Nor Amid, the Human Capital Resource Person of Amanda Inc, an entity registered in France sends a brief note to you in respect of a duty tour of an employee as follows:
“Amanda is sending an employee to Ghana and I am hoping that you could provide guidance for Amanda. Our understanding is as that:

  • The employee is French and may be kept on the French payroll
  • The employee’s remuneration will be cross charged to Amanda in France and Ghana
  • The employee, according to French Tax Law, will be French for tax purposes
  • The employee will spend 40% or less of his time in France
  • The employee will spend between 40 to 60% of his time in Ghana and whilst in Ghana the employee will be accommodated in hotels, will have free use of car with fuel and free meal.
  • The employee will spend his time in Ghana from 7 to 25 days at a time depending on need.

Would you kindly provide us with a brief outline of the Ghanaian tax and social security implications for Amanda and the employee? Kindly note that Ghana has an operating ‘Double Tax Treaty’ with France.

Required:
(a). Please submit a memo to respond to the concerns raised by Mr. Nor Amid.

(b). Ghana has general tax-avoidance rules in the tax acts. Kindly discuss any three practice methods adopted by the Revenue Agencies to regulate transfer pricing between related parties?

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  • 20 Marks

STP – Feb 2007 – L3 – Q1 – Strategic Tax Planning

Advise on tax concerns and advantages of capitalizing profits as dividends for JoyCo Ltd.

(a). Mr. Joe Mensah, the MD of JoyCo Ltd is required to submit his company’s financial statement for the year 2006 to the Board next Tuesday. One particular item which Mr. Mensah intends to push for Board approval is a declaration of dividends consisting of a capitalization of profits to firm up member’s confidence in the earnings power of their investment in Joyco Ltd.

Mr. Joe Mensah has approached you with this strategy and requires that you advise on the tax concerns and advantages that capitalization of profits could have under the Internal Revenue.

Required:
Please advise Mr. Mensah as required above on this strategy.

(b). At a tax forum organised by the Chartered Institute of Taxation, a VAT representative submitted that “because of the right to deduct input VAT, VAT should be neutral for persons subject to VAT. A supplier of goods and services charges output VAT on sales and deducts input VAT on purchases, paying the balance to the VAT Service”

Mr. Anamang strongly objected to this simple statement and proposed a modification to it. He proposed “however, there is often a mismatch between theory and reality. VAT administrations for companies pose grave problems, but there are benefits in a VAT grouping scheme.

Required:
Kindly discuss any four VAT imposed problems that could be eliminated where group members are permitted to report a VAT transaction as a group rather than as a single taxable person.

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  • 20 Marks

STP – Aug 2012 – L3 – Q5 – Taxable Supplies

Determine when specified transactions become taxable supplies under Act 592.

a). Determine when the following items become taxable supplies under Act 592.

  1. Imported services
  2. Supplies made by a non-resident person
  3. Deposits given in respect of a supply
  4. Goods supplied on sale or return.

b). The need for Customs, Excise, and Preventive Service (CEPS) to examine goods imported has often been debated since the nature, description, quantity and quality of the goods are in most cases declared in many ways. This practice has its advantages and disadvantages.

Required:
Discuss any four major reasons to support the need for CEPS personnel to examine goods and their relevant documents before export or import.

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  • 20 Marks

STP – Aug 2012 – L3 – Q4 – International Employment Taxation

Advise on tax implications for employee transferred to Guinea.

(a). Hi Yaw,
We need your advice on a new development in our outfit concerning the payment of salary to one of our employee who has been assigned to our project in Guinea. We shall be paying him physically from here (Ghana) and surcharge this cost to our Guinea Office as that is where we want his cost to settle in.

Please kindly advise us on the tax implications as we do not want to pay double tax on this both in Ghana and in Guinea.

The employee is in the books (payroll) of the Ghana Office currently and is living in a house rented by the Ghana office. He has paid his tax up to date of his transfer.

Required:
Please advise as appropriate.

(b). A VAT validation team visited Otere Company Ltd., a VAT registered entity for a routine audit. The validating team found no significant VAT records to support Otere’s business activities and the monthly VAT return. The MD of Otere responded to questions posed by the VAT team leader that it is not his business to keep records for the VAT office at his own cost.
The MD further said that he keeps records as he finds useful for his business interests. ‘It is the business of the VAT office to keep records for VAT registered persons. Why should I pay the salaries of staff only to keep records for the VAT office?’ he opined

Required:
As leader of the VAT team, kindly discuss the position of the VAT Act with respect to the keeping of records for purposes of the VAT.

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  • 20 Marks

STP – Aug 2012 – L3 – Q3 – Tax Responsibilities

Advise BIC on VAT, corporate, expatriate, and withholding tax responsibilities.

Broadway International Contractors (BIC) won the bid to construct the George Bush highway for five years but was ill advised about the tax responsibilities in respect of the construction work.

The GRA conducted a tax audit on completion of the project and noted several weaknesses in BICs tax compliance requirements.

As Tax Consultant you have been approached by BIC to advise as appropriate on the tax effects of the work. In particular Broadway International Contractors would wish to receive advice on their
a) Basic VAT responsibilities (8 marks)
b) Basic corporate tax responsibilities (8 marks)
c) Expatriate Payroll liability (4 marks)
d) Withholding tax liability on payments receivable from the Ministry of Highways and payment for services? (2 marks)

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  • 20 Marks

STP – Aug 2012 – L3 – Q2 – Partnership Taxation

Compute chargeable income and tax payable for partners Nancy and Bouncy for 2010.

Nancy and Bouncy are equal partners in a hairdo practice. Partnership profit agreed with the GRA for year 2010 is GHc12,000.
a). Records however indicate that partnership profit was net of:

  1. Drawings of GHc600 each monthly period by Nancy and Bouncy;
  2. Household allowance of GHc150 per month paid by the partnership to each partner;
  3. Salary for each partner paid during the period was GHc200 p.m. on which a withholding tax of GHC per month is paid to the GRA;
    b). Nancy failed to account for GHc1,500 which she was to use to purchase driers for the saloon.
    c). To reciprocate Nancy’s gesture, Bouncy also withdrew GHc1,800 on the pretext of buying flyers for the saloon. She failed to account for the flyers or the amount. It has been agreed that they all should treat the amounts b) and c) above as exceptional drawings from the business.

Required:
Compute the chargeable income and tax payable by each partner for the 2010 year of assessment.
Hint:
Short formula for computing an individual’s annual tax payable for year 2010 is:
Tax = T + (Y – 16,200) × 25%, where
Tax = Total tax payable per annum on annual income earnings
T = tax paid on GH16,200.00 being part of the earnings which is GHC2,574.60
Y = Annual income earned.

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  • 20 Marks

STP – Aug 2012 – L3 – Q1 – Tax Computation

Compute tax liability for Jamaa Mining Company for 2008 and 2009 based on provided financials.

The profit and loss account of Jamaa Mining Company Ltd for the years ended December 2008 and 2009 are as tabled below:

Year Ended 31 December (all amounts in ‘000)
2009 GHC 2008 GHC
Turnover 309,000 430,000
Cost of Sales (164,000)
Gross Profit 145,000
General and Admin Exp (100,000)
Operating Profit 45,000
Other Income 5,300
Net Profit before tax 50,300
Income Tax provision 12,575
Transfer to Income Surplus 37,725
Income Surplus Account
Balance brought forward 46,945
Transfer from profit and loss account 9,220
Surplus carried forward 46,945

Notes:
2. Turnover is made up as follows
For year

2009 2008
Collected for year but included in prior year a/c 291,000
Interest income received for 18 months 0 18,000
309,000
  1. Cost of sales includes:

2009 2008
Withholding taxes paid 1,500 1,000
VAT unclaimed 6,000 8,000
Depreciation 43,000 25,000

4a. Gen and Admin expenses includes

2009 2008
Rent prepaid of 3,000
Rent outstanding 500 500

4b. Includes unrealized foreign exchange gain of but realized in 2009

2009 2008
2,000 2,000

The GRA has agreed a capital allowance of GHC20,000 for year 2009 and GHC15,000 for year 2008.

Required:
Please advise management of Jamaa Mining Company Ltd on the tax due to the GRA for the years 2009 and 2008.

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  • 15 Marks

CR – May 2015 – L3 – Q6 – Ethical Issues in Corporate Reporting

Analyze the financial reporting needs and efficiency challenges of not-for-profit organizations, including asset valuation at cost vs. fair value.

NICE & DICE

NICE & DICE is a large charity located in Abuja and set up to provide support and assistance to disadvantaged people in major cities. Most of the charity’s income comes from members of the public through direct cash collections and regular monthly payments from donors. The other source of funding comes from government bodies who give grants to support specific projects that are recognized as being beneficial to the public good.

The charity publishes a detailed annual report. Performance is described largely in terms of an analysis of income received and the manner in which it has been spent. The trustees are concerned that this type of analysis does not really reflect the performance of the charity. They would like to report performance in terms of the work done rather than in terms of cash inflows and outflows. They want donors to appreciate how efficient the charity is.

The statement of financial position of the charity is a typical one for a large organization. NICE & DICE owns numerous properties in Abuja, some of which have been owned for many years. These are shown at historical cost less depreciation. The trustees do not wish to revalue the properties because this will create the impression that the charity is wealthy and that it does not require further financial support.

Required:
(a) Prepare a report to the trustees of Nice & Dice advising them on the reasons why specialized entities are required to publish detailed information about their activities. (5 Marks)
(b) Analyze the problems of quantifying and reporting the efficiency of not-for-profit organizations such as Nice & Dice. (5 Marks)
(c) Discuss the decision of the trustees to value its properties at cost less depreciation rather than at fair value. (5 Marks)

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  • 15 Marks

CR – May 2015 – L3 – Q5 – Introduction to Corporate Reporting

Discuss the need for IFRS for SMEs and evaluate simplified recognition principles for reducing reporting burdens on Jossy Limited.

International Financial Reporting Standards (IFRS) for Small and Medium-Sized Entities (SMEs)

International Financial Reporting Standards (IFRS) for small and medium size entities (SMEs) was mandatorily adopted in Nigeria as at January 1, 2014. Entities that do not meet the IFRS for SME criteria shall report using Small and Medium Size Entities Guidelines on Accounting (SMEGA).

Jossy Limited has total costs excluding land of two-hundred million naira. Being a family business, the labor force totaled 150 workers with an annual turnover of N18 million. The management of this company sought your advice to have better understanding of some of the recognition and measurement principles of SMEs.

Required:
(a) Justify the need for IFRS for SMEs financial statements. (6 Marks)
(b) Assess the circumstances of Jossy Limited and advise on the principal recognition and measurement principles that will reduce the company’s reporting burden. (9 Marks)

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  • 20 Marks

CR – May 2015 – L3 – Q4 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Discuss implications of changes in accounting policy for intangible assets and demonstrate retrospective application in financial statements.

LIKELY EFFECT LIMITED

Likely Effect Limited has shown a sincere intention to be IFRS compliant. Among a number of events and transactions, there is the need to change the accounting policies of the company in trying to comply with a few other standards. As the Consultant of the company, your attention was drawn to the fact that prior to 2013, the company had capitalized training costs.

According to IAS 38, training cost is regarded as an internally generated intangible asset and cannot be capitalized. Therefore, there is the need for a change of accounting policy which must be applied retrospectively.

The training costs capitalized in 2012 was N6m while the total for periods before 2012 was N12m.
Training costs incurred in 2013 is N4.5m. Retained earnings were N600m and N649m at the beginning and end of 2012 respectively. The corporate income tax rate is 30% for the relevant periods. Additional information available is given below:

2013 (N’M) 2012 (N’M)
Income tax expense 24 21
Profit after tax 56 49
Share capital 50 50

Required:

(a) Advise the directors on the implication of the change in accounting standard relating to treatment of intangible assets and tax effect on the company. (5 Marks)

(b) Prepare statements of profit or loss and other comprehensive income and changes in equity showing a retrospective application of the change in policy. (7 Marks)

(c) Analyze the effects of the change in accounting policy on periods before 2013. (8 Marks)

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  • 20 Marks

CR – May 2015 – L3 – Q3 – Emerging Trends in Corporate Reporting

Analyze financial statements of two companies and discuss limitations of ratio analysis.

Real Expansion Plc is a large group that seeks to grow by acquisition. The directors have identified two potential entities and obtained copies of their financial statements. The accountant of the company computed key ratios to evaluate the performance of these companies relating to:

  • Profitability and returns;
  • Efficiency in the use of assets;
  • Corporate leverage; and
  • Investor-based decisions.

The computation generated hot arguments among the directors, and they decided to engage a Consultant to provide expert advice on which company to acquire.

Extracts from these financial statements are given below:

Required:

(a) As the Consultant to the company, carry out a financial analysis on the financial statements and advise the company appropriately. (15 Marks)

(b) State the major limitations of ratio analysis for performance evaluation. (5 Marks)

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  • 20 Marks

CR – May 2015 – L3 – Q2 – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Advise Alilerimba Limited on accounting for convertible bonds, revenue from handsets, and IAS 32 provisions.

The following transactions relate to Alilerimba Limited:

  1. Convertible Bonds
    • On July 1, 2011, Alilerimba Limited issued 400,000 convertible bonds with a 3-year tenure and a total fair value of N4 million, which is also the par value.
    • The bonds carried an interest rate of 16% per annum, payable annually in arrears, while similar bonds without the conversion option carried an interest rate of 19% per annum on the same date.
    • The company incurred 10% issue costs. If the investors did not convert to shares, the bonds would have been redeemed at par.
    • At maturity (June 30, 2014), all bonds were converted into 1 million ordinary shares with a nominal value of N4 per share. No conversions were allowed before maturity.
    • The directors are uncertain how to account for the bonds up to the date of conversion. They were informed that the effective interest rate, considering issue costs, was 24%.
  2. Revenue Recognition for Handsets
    • Alilerimba purchases handsets at N120,000 each and sells them to customers at N90,000, provided the customers also purchase prepaid credit cards.
    • Prepaid credit cards are sold for N12,600 each and expire after six months. The average unused credit per card at expiry is N1,800.
    • Selling costs for the handsets are estimated at N600 per unit.
    • Alilerimba also sells handsets to dealers for N50,000 each, invoicing them for this amount. Dealers are allowed to return the handsets until a service contract is signed by a customer. When a service contract is signed, the handset is given to the customer free of charge.
    • Dealers receive a commission of N168,000 per customer connection. Net of the handset cost (N90,000), Alilerimba pays N78,000 to dealers for each customer connection.
    • Handsets cannot be sold separately by dealers, and the service contract has a 12-month duration. Dealers do not sell prepaid phones, and Alilerimba earns monthly revenue from the service contracts.
    • The Chief Operating Officer, a non-accountant, has requested an explanation of the accounting principles and practices to apply for handset purchases and revenue recognition.
  3. Preference Shares
    • Alilerimba Limited issued 8% preference shares with a redemption feature that entitles holders to receive cash.

Required:

Advise the directors of Alilerimba Limited on:
(a) The accounting treatment for the convertible bonds. (12 Marks)
(b) The accounting principles and practices to apply for the purchase of handsets and recognition of revenue from customers and dealers. (6 Marks)
(c) The provisions of IAS 32 regarding the presentation in financial statements of financial instruments entitling holders to receive cash with a redemption feature. (2 Marks)

(Total: 20 Marks)

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  • 30 Marks

CR – May 2015 – L3 – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare a consolidated statement of financial position for Barewa Group as of 31 May 2013, considering acquisitions and adjustments.

Barewa Plc has two subsidiary companies and one associate. Since the adoption of International Financial Reporting Standards (IFRS) by companies listed on the Nigeria Stock Exchange, Barewa has been preparing its consolidated financial statements in accordance with the provisions of International Financial Reporting Standards (IFRSs).

The draft Statements of Financial Position of Barewa and its two subsidiaries as at 31 May, 2013 are as follows:

Assets Barewa (N’m) Megida (N’m) Mindara (N’m)
Non-current assets
Plant 2,650 2,300 1,610
Investments – Megida 3,000
Investments – Mindara 1,280
Associate (Calamari) 200
Available for sale 510 60 50
Total Non-current assets 7,640 2,360 1,660
Current assets
Inventory 1,350 550 730
Trade receivables 910 450 320
Cash and cash equivalent 1,020 1,000 80
Total Current assets 3,280 2,000 1,130
Total Assets 10,920 4,360 2,790
Equity and Liabilities
Share capital 5,200 2,200 1,000
Retained earnings 2,400 1,500 800
Other components of equity 120 40 70
Total equity 7,720 3,740 1,870
Non-current liabilities
Long-term loans 1,200 150 50
Deferred tax 250 90 30
Total non-current liabilities 1,450 240 80
Current liabilities
Trade payables 1,150 300 600
Current tax payables 600 80 240
Total current liabilities 1,750 380 840
Total Equity and Liabilities 10,920 4,360 2,790

The following information is relevant to the preparation of the group financial statements:

  • Acquisition of Megida Plc
    • Date of Acquisition: 1 June 2012
    • Barewa acquired 80% of the equity interest in Megida Plc.
    • At the date of acquisition, Megida’s retained earnings were N1.36 billion, and other components of equity amounted to N40 million.
    • There had been no new issuance of share capital by Megida since the acquisition date.
    • The consideration for the acquisition was N3 billion in cash.
    • The fair value of Megida’s identifiable net assets at acquisition was N4 billion, with the excess attributed to an increase in the value of non-depreciable land.
    • An independent valuation determined that the fair value of the non-controlling interest (NCI) in Megida on 1 June 2012 was N860 million.
    • Barewa’s policy is to measure NCI based on their proportionate share in the identifiable net assets of the subsidiary, not at fair value (full goodwill method).
  • Acquisition of Mindara Plc
    • Date of Acquisition: 1 June 2012
    • Barewa acquired 70% of the ordinary shares of Mindara Plc.
    • The consideration for the acquisition included:
      • An upfront payment of N1.28 billion.
      • A contingent consideration requiring Barewa to pay the former shareholders 30% of Mindara’s profits on 31 May 2014 for each of the financial years ending 31 May 2013 and 31 May 2014. This arrangement was valued at N120 million as of 1 June 2012 and remains unchanged. It has not been included in the financial statements.
    • The fair value of the identifiable net assets at acquisition was N1.76 billion. This included retained earnings of N550 million and other components of equity of N70 million.
    • There had been no new issuance of share capital by Mindara since the acquisition date.
    • The excess fair value of the net assets was due to an increase in property, plant, and equipment (PPE), which is depreciated on a straight-line basis over seven years.
    • The fair value of the non-controlling interest (NCI) in Mindara was N530 million on the acquisition date.
  • Investment in Calamari Plc
    • On 1 June 2011, Barewa acquired a 10% interest in Calamari Plc for N80 million. This was classified as an available-for-sale investment.
    • As of 31 May 2012, the value of this investment had increased to N90 million.
    • On 1 June 2012, Barewa acquired an additional 15% interest in Calamari for N110 million, achieving significant influence.
    • Calamari recorded profits after dividends of N60 million and N100 million for the financial years ending 31 May 2012 and 31 May 2013, respectively.
  • Equity Instrument Purchase
    • On 1 June 2012, Barewa purchased an equity instrument valued at 100 million pesos, classified as available-for-sale.
    • Relevant exchange rates:
      • 31 May 2012: N5.1 to 1 peso.
      • 31 May 2013: N5.0 to 1 peso.
    • The fair value of the instrument as of 31 May 2013 was 90 million pesos, reflecting an impairment that Barewa has not recorded.
  • Loan to a Director
    • A loan of N10 million to a director has been included in cash and cash equivalents.
    • The loan is repayable on demand with no specific repayment date.
    • The directors believe that this treatment complies with International Financial Reporting Standards (IFRS), as no IFRS explicitly prohibits showing the loan as cash.
  • Goodwill Impairment
    • There is no impairment of goodwill arising from the acquisitions.

Required

Prepare a consolidated statement of financial position for Barewa Group as of 31 May 2013.

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  • 15 Marks

AAA – May 2016 – L3 – Q6 – Audit Reporting

Discuss audit work and written representation letter for legal claims, outstanding balances, and investments.

Bob Removals Limited is a removals company. In the year ended December 31, 2015, the company made a trading profit of N800,000. You are the manager in charge of the audit.
The following issues have arisen:

(i) A customer is suing the company for N1 million for damage caused to antique furniture. The company is defending the claim and believes that the furniture was a reproduction as opposed to antique and therefore worth only N100,000.
(ii) A balance due from Safe Storage in respect of sub-contract work, of N300,000, has been outstanding for over six months. Your firm has been asked by Bob Removals’ accountant not to write to Safe Storage for direct confirmation of this amount as the latter company objects to such letters. You have been assured by the accountant that the relationship between the two companies is good and that the outstanding balance will be paid.
(iii) Bob Removals has recently invested in four new removal vans and is currently carrying out extensive refurbishment of its premises. As a result of this expenditure, the company has reached its overdraft limit of N500,000.

Required:

For each of the above issues:
a. State, with reasons, the audit work that you would expect to find when undertaking your review of the audit working papers for the year ended December 31, 2015.
b. Draft the relevant sections dealing with these issues of the written representation letter you would wish the directors to sign.

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  • 15 Marks

AAA – May 2016 – L3 – Q5 – Ethical Issues in Auditing

Identify and discuss fraud and error in the audit of Badagry Yachting and Marina.

Badagry Yachting and Marina (BYM) have a marina on the West Coast of Nigeria and a large sales operation dealing in yachts and speedboats. You are responsible for the audit of BYM and have found some potential causes of concern that could indicate fraudulent activity or financial misconduct within the company. In particular:

(i) 30% of the yachts on sale by BYM are supplied through one of the major international boating companies with a special finance arrangement deal. However, BYM have also obtained separate finance on these yachts, which are therefore in effect being ‘double financed’.
(ii) Ten yachts shown as assets by BYM cannot be located, with no explanation other than that they have not been sold. These yachts are worth approximately N50 million.
(iii) Long delays have occurred in performing reconciliations, with the last four months of reconciliations still not completed. At the time of the last reconciliation, material differences had been identified upon which no action appears to have been undertaken.
(iv) Sales have been overstated by N100 million in the current financial statements.
The finance director has been off sick with stress for the last five months and therefore has not been available to discuss any of the issues identified.

Required:

a. Explain the difference between fraud and error and how the issues shown here could be categorised as fraud or error. (6 Marks)
b. Discuss the role of management and the role of the auditor in the prevention and detection of fraud and error. (3 Marks)
c. Describe what steps you would take to further investigate and then report on the matters referred to above. (6 Marks)

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  • 20 Marks

AAA – May 2016 – L3 – Q4 – Audit Reporting

Review the suitability of proposed audit opinions for four audit clients and suggest necessary modifications.

You are the manager responsible for four audit clients of Globe & Co, a firm of Chartered Accountants. The year-end in each case is June 30, 2015.
You are currently reviewing the audit working paper files and the audit seniors’ recommendations for the auditors’ reports. Details are as follows:

a. Red Co. Limited is a subsidiary of Yellow Holdings Plc. Serious going concern problems have been noted during this year’s audit. Red will be unable to trade for the foreseeable future unless it continues to receive financial support from the parent company. Red has received a letter of support (‘comfort letter’) from Yellow Holdings Plc.
The audit senior has suggested that due to the seriousness of the situation, the audit opinion must at least be qualified ‘except for’. (5 Marks)

b. Edo Co Plc has changed its accounting policy for goodwill during the year from amortisation over its estimated useful life to annual impairment testing. No disclosure of this change has been given in the financial statements. The carrying amount of goodwill in the statement of financial position as at June 30, 2015, is the same as at June 30, 2014, as management’s impairment test shows that it is not impaired.
The audit senior has concluded that a modification to the opinion is not required but suggests that attention can be drawn to the change by way of an emphasis of matter paragraph. (6 Marks)

c. The directors’ report of Prompt Co Limited states that investment property rental forms a major part of revenue. However, a note to the financial statements shows that property rental represents only 1.6% of total revenue for the year. The audit senior is satisfied that the revenue figures are correct.
The audit senior has noted that an unmodified opinion should be given as the audit opinion does not extend to the directors’ report. (4 Marks)

d. Audit work on the after-date bank transactions of Twinkle Co Limited has identified a transfer of cash from Star Co. Limited. The audit senior assigned to the audit of Twinkle has documented that Twinkle’s finance director explained that Star commenced trading on July 20, 2015, after being set up as a wholly-owned foreign subsidiary of Twinkle.
The audit senior has noted that although no other evidence has been obtained, an unmodified opinion is appropriate because the matter does not impact on the current year’s financial statements. (5 Marks)

Required:
For each situation, comment on the suitability or otherwise of the audit senior’s proposals for the auditors’ reports. Where you disagree, indicate what audit report modification (if any) should be given instead.

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  • 20 Marks

AAA – May 2016 – L3 – Q3 – Internal Audit and Corporate Governance

Identify internal controls for managing risks at KAGM and explain related financial statement risks.

The Kuramo Art Gallery and Museum (KAGM) is in the centre of a city that is popular with tourists. About 65% of its income comes from admission fees and annual memberships, and about 30% of its income comes from sponsorship of special exhibitions by companies. Most of the remaining income comes from a small cafe and gift shop in the art gallery and museum.
Admission fees come from sales of tickets to daily visitors and from annual membership subscriptions from ‘Friends of KAGM’ who are entitled to free entry to the art gallery and museum at any time.
Day tickets can be purchased by credit card in advance, by a telephone ‘hotline’ or at KAGM’s website on the Internet. Alternatively, day tickets can be bought with cash or credit card at the ‘door’ on the day of the visit. Reduced prices are available for children, students, and individuals aged over 65, and there are also special reduced-price ‘family tickets’ for two adults and two children.
Sponsorship arrangements are agreed up to 18 months in advance. Some corporate sponsors, particularly transport companies (bus companies and railway companies) sell advertising to KAGM.
The management of KAGM have identified the following applicable risks that need careful attention. They believe that these risks should be managed actively.

(i) There is a failure to attract more visitors because of the poor condition of many of the paintings in the art gallery and of the items in the museum. Paintings must be restored regularly because their condition deteriorates. KAGM has just one specialist restorer, who is unable to keep up with the required volume of work. The management of KAGM recognise that investment in new items and the restoration of existing items is inadequate, but blame the lack of income for the problem.
(ii) Some corporate sponsorship agreements may not be invoiced due to poor communication between the sponsors, KAGM’s sponsorship managers, and the accounts department of KAGM.
(iii) Some sponsorship agreements are not invoiced at their correct amount. This happens often when a sponsor is also a company that provides advertising for KAGM. Normal practice is for these sponsors to deduct their advertising charges from the amount they pay to KAGM in sponsorship. However, the accounts department in KAGM is not given the details of these set-off arrangements.
(iv) Some of the cash received from day visitors at the door may be stolen (or lost, or used by management for business expenses) and does not reach KAGM’s cashier.
(v) The on-line booking system for buying tickets in advance on the KAGM website is not always available because the website is ‘down’.

Required:

(a) Describe appropriate internal controls to manage each of the applicable risks described above. (15 Marks)
(b) Explain the financial statement risks that arise from each of these applicable risks. (5 Marks)

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