Series: NOV 2014

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  • 15 Marks

AAA – Nov 2014 – L3 – SC – Q7 – Audit of IT Systems and Data Analytics

Evaluates factors influencing the use of CAATs in audit planning and identifies solutions to address audit trail loss.

CAATs

The availability of Computer Assisted Audit Techniques (CAATs) should be considered by auditors when planning the nature, extent, and timing of tests in an audit. Auditors must determine their testing strategies which will depend on their choice of either using a manual testing method or a computer-assisted method.

Required:

(a) Explain FIVE factors that will determine auditors’ choice of method of testing in the planning of an audit in a computer environment. (10 Marks)

(b) Identify FIVE solutions to loss of audit trail. (5 Marks)

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  • 15 Marks

AAA – Nov 2014 – L3 – SC – Q6 – Environmental and Sustainability Audits

Evaluates the risks and considerations of tendering for the audit of Lagos Leisure Ltd, including fee estimation and tender document components.

You are the senior audit manager for a medium-sized firm of accountants. Your firm has just lost two clients which have gone into receivership and has now been invited to tender for the audit of Lagos Leisure Ltd. The audit fees have been initially estimated at ₦200,000.

Lagos Leisure Ltd is a medium-sized manufacturing organisation which has existed for 35 years and has generally made consistent profits. However, in the last two years, profits have fallen by approximately 10% in each year, although the market sector in which Lagos Leisure Ltd operates is expanding. The company has also stated that they would like some consultancy support regarding business strategy in order to try and reverse the current profit downturn and have set aside ₦1m for this.

You have ascertained the following from a brief discussion with the Managing Director:

  1. There has been no investment in non-current assets in the last 10 years. The company was intending to start a program of investment two years ago but this was cancelled due to reduced profits, and maintenance and repair costs have increased significantly over the last year.
  2. Staff remuneration has been frozen, and there has been some discussion with unions as staff morale is very low and several staff have already left. So far, industrial action has been avoided.
  3. The Financial Director was dismissed three months ago and hasn’t been replaced; he is currently suing Lagos Leisure Ltd for unfair dismissal.
  4. The Managing Director is due to retire next year; a replacement has not yet been considered.
  5. There is an outstanding litigation as an employee is suing Lagos Leisure Ltd due to an accident in the workplace, and the authorities have written a detailed report about the case.

Your firm’s total fee income last year was ₦7m, including ₦500,000 from the lost clients.

Required:

(a) Discuss the advantages and disadvantages of tendering for the audit of Lagos Leisure Ltd, highlighting any key risks to your firm. (7 Marks)

(b) Although the initial estimate of the audit fee was ₦200,000, further work needs to be done before a figure could be included in the tender document. List the factors which should be taken into account when calculating this fee. (4 Marks)

(c) Outline the matters which should be included in the tender document if the firm decides to tender. (4 Marks)

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  • 15 Marks

AAA – Nov 2014 – L3 – SC – Q5 – Environmental and Sustainability Audits

Steps in the audit process to identify environmental issues and major social concerns in a company's social policy report.

Green Issues

Oil and Gas Limited is a company involved in the upstream petroleum activities in the Delta Region. The restiveness of the youth in this area of operation was a result of environmental degradation of the region. Your firm has just been appointed as the auditors to the company. During the preliminary planning stage of the audit, you realised that the environmental issues could have an impact on the financial statements.

Required:

(a) Enumerate EIGHT steps you would include in the audit process in order to highlight environmental issues that may be apparent in the client’s business.

(8 Marks)

(b) Identify SEVEN major social issues that an auditor will be concerned with in a company’s social policy report. (7 Marks)

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  • 20 Marks

AAA – Nov 2014 – L3 – SB – Q4 – Group Audits

Plan and control the group audit of the Cinnamon Group, assess subsidiary issues, and define the relationship with component auditors.

The Cinnamon Group is an international business made up of ten subsidiaries and a head office. You are the manager in charge at the firm undertaking the group audit, but there are separate local auditors for the Cayenne subsidiary in the United States, the Habenaro subsidiary in Mexico, and the Hybrid subsidiary in Columbia. You are aware of the following information:

  1. Hybrid Issues: Hybrid is a loss-making subsidiary with current year-end losses totaling ₦27 million. There are significant control problems, high levels of bad debts, and 25% staff turnover. The local auditors have stated their intention to give a qualified opinion for the year just ended due to material issues.
  2. Cayenne Financial Year Misalignment: Cayenne operates to a financial year ending October 2013, differing from the group’s December 2013 year-end.
  3. Habenaro Sale: Shortly after the year-end in January 2014, the Cinnamon Group announced the sale of Habenaro for ₦250 million, and this disposal is currently ongoing.
  4. Loan Guarantees: The Cinnamon Group is guaranteeing loans of approximately ₦100 million for its subsidiaries.

Required:

a. Set out how you would plan and control the group audit of the Cinnamon Group.
(5 Marks)

b. Consider the impact of each of the above issues on the group audit.
(10 Marks)

c. Explain the nature of the relationship between your firm and the auditors of the subsidiaries, making particular reference to the extent to which your firm may rely on the component auditors’ work and to the considerations involved where joint audits are conducted.
(5 Marks)

(Total: 20 Marks)

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  • 20 Marks

AAA – Nov 2014 – L3 – SB – Q3 – Review of Subsequent Events and Going Concern Assumptions

Identify going concern risks for Woes Limited and outline post-reporting date audit matters to assess its ability to continue as a going concern.

You are responsible for the audit of Woes Limited for the year-ended 31 December 2013. The principal activity of Woes Ltd is the provision of high-quality packaging services for manufacturing companies. The company was established three years ago and has significantly exceeded its growth targets in each of those years.

Historically, the packaging process was labour-intensive, but in September 2013, in an effort to reduce labour costs and increase efficiency, the company invested in an enhanced automated packing system. The investment was funded by a loan repayable in monthly instalments over four years. The loan covenant agreement includes a term specifying that the company’s debt: equity ratio should not exceed 1:1.

A comparison of the draft accounts for the year ended 31 December 2013 with the previous year indicates a significant increase in revenue with a small increase in profit. The company is currently trading in excess of its overdraft limit and is negotiating an increase in its facility with the bank. Management has prepared, in support of its negotiations, profit and cash flow forecasts based on the assumptions that the anticipated increase in efficiency, including a reduction in labour costs, will be achieved.

The company struggles to meet the weekly wage bill and has fallen behind in its payments to the tax authorities. It has also failed to comply with the terms of the lease in respect of the factory premises and has not paid the last three months’ instalments.

Required:

a. Identify and explain, from the information provided above, factors which indicate that Woes Ltd may not be a going concern. (10 Marks)
b. Outline the matters to which you would direct your attention in the period after the reporting date to determine whether Woes Ltd can continue as a going concern for the foreseeable future. (10 Marks)

(Total: 20 Marks)

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  • 20 Marks

AAA – Nov 2014 – L3 – SB – Q2 – Quality Control in Audit Firms

Communication brief for quality control and audit working papers with a Q&A session.

You have just joined the partnership of a small firm of Chartered Accountants, SMP Accountants & Partners, and have been asked to prepare a communication brief for distribution to all staff, which will then be followed by a presentation with a question-and-answer session. The communication brief required is regarding quality control procedures and audit working papers.

ISA 220 requires quality control procedures to be implemented at the engagement level, and ISQC 1 requires them to be implemented at the level of the audit firm. The partners are concerned that the firm’s quality control procedures may not be satisfactory as they have never been reviewed since they were first implemented five years ago. In addition, staff are able to read the policies and procedures in the staff manual, but there are currently no other ways in which the information is communicated to them.

Required:

a. Prepare a communication brief for distribution to all staff, which sets out: i. why quality control policies and procedures are necessary
ii. the areas that should be covered by quality control policies
iii. procedures that would be required to ensure that the policies are met.
(12 Marks)

b. Answer the following queries which were asked at the question-and-answer session:
i. What is the difference between a hot review and a cold review, and why are both necessary?
ii. Why is it so important that all audit reasons and justifications are documented in the working papers when it should be obvious from test results what the key issues are?
iii. Why do audit working papers have to be standardized since this inhibits auditors exercising their skills and experience in the most effective way?
(8 Marks)

(Total: 20 Marks)

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  • 30 Marks

AAA – Nov 2014 – L3 – SA – Q1 – Group Audits

Identify business risks, audit planning effects, and implications of acquisitions for the consolidated financial statements audit of Wasp Ltd.

You are an audit manager in Ruby & Co, a firm of Chartered Accountants. One of your audit clients, Wasp Ltd., provides satellite broadcasting services in a rapidly growing market.

In February 2014, Wasp Ltd. purchased Xstatic Ltd., a competitor group of companies. Significant revenue, cost, and capital expenditure synergies are expected as the operations of Wasp Ltd. and Xstatic Ltd. are being combined into one group of companies.

The following financial and operating information consolidates the results of the enlarged Wasp Ltd. group:

Year-end 31 December 2014 (Budget) 2013 (Actual)
Revenue ₦6,827m ₦4,404m
Cost of Sales (₦3,109m) (₦1,991m)
Distribution Costs and Administrative Expenses (₦2,866m) (₦1,700m)
Research and Development Costs (₦25m) (₦22m)
Depreciation and Amortization (₦927m) (₦661m)
Interest Expense (₦266m) (₦202m)
Loss Before Tax (₦366m) (₦172m)
Number of Subscribers 14.9m 7.6m
Average Revenue Per Subscriber (ARPS) ₦437 ₦556

In November 2014, Wasp Ltd. purchased MTbox Ltd., a large cable communications provider in Gambia, where your firm has no representation. The financial statements of MTbox Ltd. for the year ending 31 December 2014 will continue to be audited by a local firm of Chartered Accountants. MTbox Ltd.’s activities have not been reflected in the above estimated results of the group.

Wasp Ltd. is committed to introducing its corporate image into Gambia.

In order to sustain growth, significant costs are expected to be incurred as operations are expanded, networks upgraded, and new products and services introduced.

Required:

a. Identify and describe the principal business risks for the Wasp group. (9 Marks)

b. Explain what effect the acquisitions will have on the planning of Ruby & Co’s audit of the budgeted consolidated financial statements of Wasp Ltd. group for the year ending 31 December 2014. (10 Marks)

c. Explain the role of a Letter of Comfort as evidence in the audit of financial statements. (6 Marks)

d. Discuss how non-consolidated entities under common control affect the scope of an audit and the audit work undertaken. (5 Marks)

(Total 30 Marks)

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  • 15 Marks

FM – Nov 2014 – L3 – SC – Q7 – Foreign Exchange Risk Management

Address the calculation of potential exchange rate losses, money market hedging, and the advantages and disadvantages of forward contracts.

  1. Build Nigeria Plc. (BNP) is a giant construction company with head office in Kano, Nigeria. It is involved in construction of roads, dams, airfields, etc., in many parts of the country. Recently, the company won construction contracts across a number of African countries. One of the contracts is for the construction of a dam for a country in Central Africa whose currency is Central African Dollar (C$). The dam has now been completed, and the retention money of C$210,000,000 is due for settlement in one year’s time.
    The current spot exchange rate is C$40 = N1. Risk-free rate is 5% in Nigeria and 25% in the foreign country.
    The Chief Finance Officer (CFO) of BNP is worried about the above financial statistics and concluded that BNP will lose as much as N840,000 due to exchange rate movements between now and the end of the year when the retention money is received.

    Required:
    Explain, showing all relevant calculations, how the CFO arrived at the potential loss of N840,000. (4 Marks)

    b. In another contract in a country in the ECOWAS sub-region (with currency of W$), BNP expects the following payment and receipt in six months’ time:
    You are provided with the following financial data:

    • Spot exchange rate:
      N per W$1 = 1.4735 – 1.4755
    • Money Market Rates:
      Deposit % Borrowing %
      Nigeria 13.25
      West African Country 6.5

    Required:
    Show how BNP can make use of money market hedge to mitigate the foreign exchange risk inherent in the above payment and receipt. Show all workings and the necessary steps.

    (7 Marks)

    c. Discuss TWO advantages and TWO disadvantages of forward exchange contracts.

    (4 Marks)

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  • 5 Marks

FM – Nov 2014 – L3 – SC – Q6b – Financing Decisions and Capital Markets

Examine reasons for conflict of interest between shareholders and bondholders.

Discuss any FIVE reasons why conflict of interest may exist between shareholders and bondholders. (5 Marks)

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  • 10 Marks

FM – Nov 2014 – L3 – SC – Q6a – Treasury Management

Discuss transfer pricing and its implications for multinational companies with subsidiaries in foreign countries.

Nimega Plc is a Nigeria-based multinational company that has subsidiaries in two foreign countries. Both subsidiaries trade with other group members and with four third-party companies.

You are required to present SIX arguments for and FOUR arguments against centralized treasury management in a multinational organization.

(10 Marks)

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  • 20 Marks

MI – Nov 2014 – L1 – SB – Q6 – Business Process Technologies

This question explores the role of technology in enhancing business value and the steps to determine business values through technology strategy.

The initial principle identified from analysing the world’s regulations is Technology Strategy Orchestration. While most businesses around the world have established a technical awareness and dependency on technology, referred to as Directional Alignment, others have not integrated the business functions to reflect this relationship. The more organizations have visibility into how business processes rely on technology and the subsequent dependent relationships, the more likely business values will be identified and leveraged.

You are required to:
a. State and explain briefly THREE ways that technology may enhance businesses. (6 Marks)

b. State FOUR features of Directional Alignment. (6 Marks)

c. State FIVE steps to be followed in the determination of the business values provided by Technology Strategy. (8 Marks)

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  • 20 Marks

MI – Nov 2014 – L1 – SB – Q5 – Information Systems

This question covers different modes of data transmission and security vulnerabilities in data systems.

Data is converted to binary digits and forwarded to the desired location for the purpose of communication.

a. With the aid of diagrams, explain THREE data transmission modes. In each case, give ONE relevant example. (9 Marks)

b. State ONE difference between Parallel Data Transmission and Serial Data Transmission. (2 Marks)

c. In a tabular form, state TWO differences between Asynchronous Data Transmission and Synchronous Data Transmission. (4 Marks)

d. Enumerate FIVE attacks that could take place as a result of vulnerabilities of a computer system. (5 Marks)

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  • 20 Marks

MI – Nov 2014 – L1 – SB – Q4 – Information Systems

This question tests understanding of offline and online data processing techniques, with examples and characteristics.

The purpose of data processing is to make data presentable, meaningful, and useful for a particular purpose.

a. Name an example of an offline data processing technique and explain briefly FIVE of its characteristics. (11 Marks)

b.
i. Explain an online processing technique. (3 Marks)
ii. Identify TWO such techniques and explain briefly TWO characteristics of each. (6 Marks

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  • 20 Marks

MI – Nov 2014 – L1 – SB – Q3 – Cost-Volume-Profit (CVP) Analysis

This question involves break-even point, target profit, and the effect of cost changes on break-even.

A company that operates below break-even point year-after-year needs to be restructured.

a. What is break-even point? (2 Marks)

b. Elebu Nig. Plc. manufactures four products at its GBOOPA Plant in Olorungbebe Industrial Estate.

The company sold 450,000 units of its product at N60 per unit. Variable costs are N45 per unit, while the fixed cost incurred evenly throughout the year amounted to N2,916,000, which comprises of manufacturing costs of N1,800,000 and selling costs of N1,116,000.

You are required to calculate:
i. The break-even point in units and in value (5 Marks)
ii. The number of units that must be sold to earn an income of N225,000 before income tax (3 Marks)
iii. The number of units that must be sold to generate after-tax profit of N300,000 if the income tax rate is 40% (5 Marks)
iv. The number of units required to break-even if the fixed cost increases by 2.5% and variable cost increases by 5% (5 Marks)

 

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  • 20 Marks

MI – Nov 2014 – L1 – SB – Q2 – Costing Methods

This question requires preparing profit statements using the absorption costing approach.

LADUGBO Limited, a company which manufactures and sells a single product named BETA, has the following data relating to the year 2015:

Particulars N
Selling Price 45.00
Direct Material Cost 10.00
Direct Wages Cost 4.00
Variable Overhead Cost 2.50

The following forecasts of sales and production are expected during the first six months of 2015:

Particulars January-March April-June
Sales (units) 60,000 90,000
Production (units) 70,000 100,000
  • Fixed production overhead costs are budgeted at N400,000 per annum. Normal production level is 320,000 units per annum.
  • Variable selling and distribution cost is N1.50 per unit sold, while fixed administration cost is N240,000 per annum.

You are required to:
Prepare profit statements for each of the two quarters, in a columnar format, using the absorption costing approach. (20 Marks)

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  • 20 Marks

MI – Nov 2014 – L1 – SB – Q1 – Budgeting

This question focuses on defining working capital, explaining the working capital cycle, and calculating it based on given data.

a. Working capital is generally understood to mean the difference between current assets and current liabilities. Explain the term working capital cycle. (2 Marks)
b. List FIVE factors that determine the working capital requirements of a firm. (5 Marks)
c. GLORY Limited has provided you with the following data regarding next year’s budget that has just been presented to the board by the financial controller of the company:

Budgeted Average Amount Outstanding N
Inventory: Raw materials 480,000
Work-in-Progress 360,000
Finished goods 244,800
Receivables 600,600
Payables (422,400)
Budgeted Average Working Capital 1,263,000

The following are available daily averages:

Daily Averages N
Revenue 9,240
Cost of Sales 7,200
Purchases of raw materials 3,840

You are required to compute the working capital cycle based on the above figures. (13 Marks)

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  • 1 Marks

MI – Nov 2014 – L1 – SA – Q20 – Costing Methods

This question identifies the term used for output from a production process with little recoverable value.

The output from the production process with little recoverable value is referred to as:
A. Residue
B. Scrap
C. Waste
D. Good production
E. Left over

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  • 1 Marks

MI – Nov 2014 – L1 – SA – Q19 – Cost-Volume-Profit (CVP) Analysis

This question focuses on identifying the cost pattern that includes both fixed and variable components.

The cost behavioral pattern which shows element of fixed and variable components is:
A. Variable cost
B. Standard cost
C. Full cost
D. Semi-variable cost
E. Fixed cost

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  • 1 Marks

MI – Nov 2014 – L1 – SA – Q17 – Costing Methods

This question asks about the appropriate method for allocating overhead costs in product costing.

A method of product costing which aims to include, in the total cost of a product, an appropriate share of the organisation’s total overhead is:
A. Marginal costing
B. Activity-based costing
C. Differential costing
D. Absorption costing
E. Product costing

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  • 1 Marks

MI – Nov 2014 – L1 – SA – Q16 – Information Systems

This question tests knowledge of activities involved in sales order transaction processing.

In Sales Order Transaction Processing, the following activities are correct EXCEPT:
A. Customers’ file scrutiny
B. Order placed file enquiry
C. Stock file examination
D. Payment analysis
E. Verification of receivable file

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