Series: NOV 2022

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  • 15 Marks

AAA – Nov 2022 – L3 – SC – Q7 – Risk Management in Audits

Explain materiality, benchmarks, and factors affecting materiality determination in audits.

The audit plan and scope was presented to the Audit Committee of Deinde Limited for the year ended December 31, 2020. The external auditors of the company stated:

“We would estimate materiality using profit before tax for the full year. We would estimate our preliminary materiality based on expected results for the full year. We will perform a materiality re-assessment at year-end to confirm adequacy or otherwise of our preliminary materiality. We will report to the Audit Committee on all unadjusted misstatements greater than our established threshold unless they are qualitatively immaterial.”

Your uncle, who is a member of the Audit Committee, discussed this matter with you and requested that you explain the issue further.

Required:

a. Explain the concepts of materiality and performance materiality in an audit of financial statements.

(3 Marks)

b. Explain the benchmark for determining materiality. (5 Marks)

c. Discuss the factors that may affect the identification of an appropriate benchmark. (7 Marks)

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  • 15 Marks

AAA – Nov 2022 – L3 – SC – Q6 – Internal Audit and Corporate Governance

Discuss reasons for outsourcing internal audit, advantages/disadvantages, and functions that cannot be outsourced.

The Internal Audit Unit of Oluvia Bank Limited has been accused of collusion with staff in committing monumental fraud. The following types of fraud were found to be common:

  • Cheque suppression
  • Fraudulent bookkeeping to overstate income
  • Inflation of the worth of the company’s assets
  • Intercepting replaced customers’ cards
  • Fraudsters impersonating Senior Managers or Chief Executive Officer
  • Online banking fraud, such as phishing, malware attacks, and clone websites
  • Impersonating the owner of an account or using fake documents to open an account under someone else’s name (no proper Know Your Customer conducted)

The bank examiners came and were surprised at the level of fraud in the bank and requested management to address it urgently.

After the supervisory visit, the board of directors discussed the issue with the bank’s external auditors, who suggested that the bank could outsource the internal audit functions. The Board of Directors found this suggestion favorable and mandated the Managing Director to act swiftly and report back with details at the next board meeting.

Required:

a. Discuss the main reasons for outsourcing internal audit functions. (3 Marks)

b. Outline the advantages and disadvantages of outsourcing. (10 Marks)

c. Discuss which part of the internal audit function cannot be outsourced. (2 Marks)

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  • 15 Marks

AAA – Nov 2022 – L3 – SC – Q5 – Audit Planning and Strategy

Discuss professional skepticism, benefits of audit planning, audit strategy, and audit stages.

At the weekly meeting of an audit firm, it was reported that a new audit client (Salisa Limited) has just been won. An implementation team has been constituted with a manager as the head. At the meeting of the implementation team, the manager stated that there is a need for the team to work on the audit planning strategy; the contents of which will form the audit planning memorandum that will be presented to the audit committee. He stated further that a professional clearance has to be sent to the former auditor after which, a background check will be performed on the directors and other principal officers of the company. It is also believed that for proper risk assessment, there is a need to understand the business operations of the company. He stated further that the audit will be structured into both interim and final audits.

An experienced member of the team also mentioned the need for the auditor to adopt an attitude of professional skepticism. He emphasized that planning the audit will involve the whole engagement team to establish an understanding of the terms of the engagement as required by ISA 210, which will help establish an overall strategy for the audit. Developing the audit plan will include the nature, timing, and extent of planned risk assessment procedures, further audit procedures, and documentation of the overall audit strategy.

Required:

a. Explain professional skepticism. (2 Marks)

b. State how adequate planning can benefit the audit team. (3 Marks)

c. Explain and illustrate what the establishment of the overall audit strategy involves. (3 Marks)

d. Discuss the elements of interim and final audits.

(7 Marks)

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  • 20 Marks

AAA – Nov 2022 – L3 – SB – Q4 – Audit Planning and Strategy

Discuss audit sampling rationale, key decisions, advantages, sampling methods, and auditor actions in sample testing.

wo accountancy students from a University have been asked to write a term paper on “the reasons why external auditors resort to sampling when conducting the audit of a large entity.” The students are of the opinion that they do not understand why this should be the case, if auditors focus on their work.

They believe statistical sampling is not always good for auditing, especially when a population consists of a small number of large items. It may be appropriate to apply audit tests to the entire population as all the items in the population may not share common characteristics. Added to this, they do not agree that samples could be representative of the population and also reflect the characteristics of the population. There is therefore the risk that the auditors may not reach a correct decision as against when the entire population is tested.

Furthermore, they said that they were confused on how the auditors will work on samples in such a way that all items in the population will be given equal chance of being selected and the key decisions that need to be made for effective sample design.

As an ICAN Professional examination candidate who has just finished reading Audit Sampling (ISA 530), you now saw it as an opportunity to recall and explain what you have read. You are excited to explain the above to the students.

Required:

a. Highlight key decisions to be made to influence the sample size. (4 Marks)

b. Outline the advantages and disadvantages of using statistical sampling. (8 Marks)

c. Explain the sample selection methods that will give equal chance to all the items in the population. (3 Marks)

d. Illustrate what the auditors should do when performing procedures on the samples. (5 Marks)

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  • 20 Marks

AAA – Nov 2022 – L3 – SB – Q3 – Audit Reporting

Examines joint auditors' roles, options for audit disputes, acquisition processes, and reporting requirements.

During the audit of Kofo Plc in 2018, it was observed that there was an omission of liability to the tune of N2 billion. Upon investigation, it was discovered that the error was as a result of unrecorded liability relating to unremitted statutory taxes to the government in prior years. A compensating error was noticed in unsubstantiated investment and receivables balances schedule provided by the management.

The explanation provided by management for this error was that having noted this disparity, the internal audit team was commissioned to reconcile the ledger balances to establish the actual payment to be made to the government. The result of that exercise led to an initial adjustment of N500 million. However, upon further review by the Internal Audit and Risk Management team, the total disparity noted was N5 billion as opposed to the N2 billion initially noted. The reason being that the report with which the Internal Audit Team carried out the reconciliation was understated. Some liability balances were excluded from the report as a result of the approach used to set up the Information System (I.T) System. Therefore, the general command entered into the system to spool the report did not capture the entire transactions. To gain comfort, the audit team:

(i) Reviewed the reconciliation memo to have an understanding of management’s thought process;
(ii) Requested the updated spool of ledger balances from the I.T system;
(iii) Asked the Information Technology team to perform a walkthrough test of the transaction spool;
(iv) Requested the breakdown of the excluded balances and traced them to the supporting documents to which they relate; and
(v) Checked to see that there were no unusual remittances from the bank statements.

You are a member of the audit team which reviewed Kofo Plc’s compliance with International Standards on Auditing (ISA 250) on Non-Compliance with Laws and Regulations (NOCLAR).

Required:

a. Outline the audit procedures to be performed to help identify instances of non-compliance with laws and regulations. (5 Marks)

b. State what the auditor should do when they become aware of an issue of non-compliance with laws and regulations. (5 Marks)

c. State the types of policies and procedures the entity may implement to assist in the prevention and detection of non-compliance with laws and regulations. (4 Marks)

d. Discuss what the auditor should do under the following situations:

  • i. Reporting non-compliance to those charged with governance (2 Marks)
  • ii. Reporting non-compliance in the audit report (2 Marks)
  • iii. Reporting non-compliance to the authorities (2 Marks)

(Total 20 Marks)

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  • 20 Marks

AAA – Nov 2022 – L3 – SB – Q2 – Audit of Complex Entities

Evaluate auditors' responsibilities in fraud detection, financial misreporting, and appropriate audit procedures to mitigate misstatements.

The Financial Controller (FC) of Poki Limited made an observation on the draft engagement letter sent by the external auditors to the company, an extract of which is as stated below:

“The responsibility for safeguarding the assets of the company and for the prevention and detection of fraud, error, and non-compliance with laws or regulations rests with the company’s directors. In accordance with auditing standards, we shall endeavor to plan our audit so that we have a reasonable expectation of detecting material misstatements in the financial statements or accounting records (including any material misstatements resulting from fraud, error, or non-compliance with laws or regulations). However, because any internal control structure, no matter how effective, cannot eliminate the possibility that errors or irregularities may occur and remain undetected and because we use selective testing in our audit, we cannot guarantee that errors or irregularities, if present, will be detected. Accordingly, our audit should not be relied upon to disclose all such material misstatements or frauds, errors, or instances of non-compliance as may exist. The best safeguard against irregularities and fraud is a sound system of internal control.”

The FC accused the auditors of running away from their responsibilities of exposing to the owners of the company fraudulent financial reporting and misappropriation of assets. To him, what is the purpose of audit when fraud and errors could not be discovered? He has threatened to discuss with the Board of Directors and insists that the engagement letter will not be signed until those sections are removed. You are a senior member of the audit team.

Required:

a. Outline the objectives of auditors in relation to fraud. (6 Marks)

b. Explain fraudulent financial reporting and misappropriation of assets. (7 Marks)

c. State the procedures auditors should perform to identify the risks of material misstatement due to fraud. (7 Marks)

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  • 30 Marks

AAA – Nov 2022 – L3 – SB – Q1 – Group Audits

Evaluate the justification for joint auditors, present options for audit concerns, and prepare an appropriate report for disputed acquisition.

Mr. Johnson is the Senior Partner of Johnson, Odewole, Thomas & Co., Chartered Accountants. During the last audit of Mandarin Manufacturing Plc, which the firm did with Messrs Ark Professional Services (APS) for the year ended 30 September, 2020, Mr. Johnson expressed displeasure on some of the conclusions reached by APS on certain audit areas. The manager in charge of the audit at Johnson, Odewole, Thomas & Co. had drawn Mr. Johnson’s attention to matters marked “For Partner’s Attention.” Discussions with the corresponding partner of APS on these matters were considered unsatisfactory.

Mr. Johnson’s views differed significantly from those of the corresponding partner of APS. It was agreed to proceed to the board meeting where these disputed positions would be presented and discussed with the directors before a final decision was reached. Of significance is the acquisition of a property from a former staff member for the opening of a new branch warehouse. The acquisition process was hurried and exceeded the capital expenditure provisions for the period. Mr. Johnson’s team viewed the acquisition as a potential fraud on the company, while APS aligned with the director of finance, who considered it a normal transaction.

At the board meeting to discuss the financial statements, members were divided between the two audit firms’ views, leading the chairman to reschedule the meeting. He requested additional information on both parties’ positions and asked them to harmonize their views before the next meeting the following day.

Required:

a. Evaluate the justification or otherwise of an entity having joint auditors. (8 Marks)

b. Following the concerns of Johnson, Odewole, Thomas & Co., present the options available to the firm. (5 Marks)

c. Discuss the points on which the Chairman needs to base his decision, according to standard acquisition procedures. (7 Marks)

d. If the Chairman agrees with the position of Johnson, Odewole, Thomas & Co., determine the reporting requirement and draft an appropriate report for inclusion in the auditors’ report. (6 Marks)

e. Discuss the composition of items that could be marked “For Partner’s Attention” during the conclusion of an audit process. (4 Marks)

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  • 15 Marks

FM – Nov 2022 – L3 – Q7 – Corporate Governance and Financial Strategy

Analyze the Chairman's proposals to improve EPS and discuss methods to align stakeholder objectives.

The Chairman of Opeyemi plc, a company listed on the Alternative Investment Market, has circulated a memorandum to the company’s directors and senior managers which contains the following statements:

“Looking to the year ahead, there are a number of measures which I propose to increase the company’s earnings per share (EPS).

Payments to trade creditors should be made as late as possible, even if this means extending our credit beyond the terms allowed by our suppliers. The company currently runs a substantial overdraft, and this measure will cut the level of bank interest and charges.

Relatively high capital expenditure in recent years has resulted in substantial depreciation charges in the profit or loss account. All capital spending, including that on the Oloro II project – designed to reduce toxic emissions from the manufacturing plant – should be postponed except where such spending can be shown to be essential to current operations.

Staff pay should be frozen at this year’s level for the forthcoming year. The company’s sponsorship of the local charity events run by the Staff Social Club should also, regrettably, be ended.

By boosting profits and therefore EPS, these measures will help us to achieve the highest possible stock market capitalisation.”

Required:

a. Prepare a response to the Chairman’s proposals which examines the possible consequences of the proposals for the price of the company’s shares and for the company’s stakeholders. (9 Marks)

b. Discuss FOUR ways that encourage managers to achieve stakeholder objectives. (6 Marks)

(Total 15 Marks)

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  • 15 Marks

FM – Nov 2022 – L3 – Q6 – Dividend Policy

Analyze P/E ratios and calculate dividend cover for companies in the food retail sector.

Companies A, B, and C are in the food retailing sector of the stock market. The following key stock market statistics are provided.

Food Retailers: Ordinary Shares, Key Stock Market Statistics:

Company A B C
Share Price (₦) 2.10 1.80 2.30
Earnings per Share (₦) 0.30 0.25 0.35
Dividend per Share (₦) 0.18 0.15 0.25

Required:

a. Illustrating your answer by using data from the table above, define and explain the term P/E ratio, and comment on the way it may be used by an investor to appraise a possible share purchase. (8 Marks)

b. Using data in the above table, calculate the dividend cover for Companies C and B, and explain the meaning and significance of the measure from the point of view of equity investors. (7 Marks)

(Total 15 Marks)

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  • 15 Marks

FM – Nov 2022 – L3 – Q5 – Business Valuation Techniques

Calculate the equity value of APL using SVA and outline three methods for funding the MBO.

Aderupoko Plc (ADP), a large listed media group, has been the holding company of Adamu Publishers Limited (APL) since 2015. The publishing company (APL) is 100% owned by ADP since inception.

Recently, the directors of APL informed ADP’s board of their readiness to make a management buy-out (MBO) of APL. Accordingly, ADP’s board decided to value APL using the shareholder value analysis method (SVA). ADP’s board estimates that APL has a four-year competitive advantage over its competitors (to 30 September 2024) and the following data regarding APL’s value drivers and additional financial information has been collected:

Year to 30 September 2021 2022 2023 2024 2025+
Sales growth (%) 5% 4% 3% 2% 0%
Operating profit margin 8% 9% 10% 10% 10%
Incremental non-current asset investment (% of sales increase) 5% 6% 3% 2% 0%
Incremental working capital investment (% of sales increase) 6% 5% 4% 4% 0%

Financial Information:

  • Sales for the current year to 30 September 2020: ₦80 million
  • Annual depreciation (equal to annual replacement of non-current asset expenditure): ₦2.0 million
  • Par value of 6% debentures in issue (current market value ₦95.00, nominal value ₦100): ₦10.0 million
  • Short-term investments held: ₦0.8 million
  • Company tax rate: 20%
  • Current WACC: 10%

Required:

a. Calculate the value of APL’s equity using SVA.

(12 Marks)

b. Outline three methods by which APL’s directors might raise the funds necessary for the proposed MBO of the company. (3 Marks)

(Total 15 Marks)

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  • 6 Marks

FR – Nov 2022 – L2 – Q7b – Business Model Test

Explain the steps in applying the Business Model Test under IFRS 9.

b. Explain the basic steps in the application of the Business Model Test in IFRS 9. (6 Marks)

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  • 30 Marks

AA – Nov 2022 – L2 – Q1 – Audit Opinion and Standards

Explores the auditor's opinion, ISA 200 objectives, audit scope, and regulatory roles in auditing standards compliance.

In an accountancy class on “Audit Opinion in International Standards on Auditing”, Ado, a lecturer at ICAN University, was explaining to the students that the end product of external audit work is the auditor‟s opinion expressed on the financial statements. He stated that a general purpose financial statement was in compliance with the financial reporting framework designed to meet the common financial information needs of a wide variety of users.

The role of audit is to provide a high level of assurance to the users of the financial statements and that it is necessary for users to have confidence that consistent auditing standards have been applied to the audits of financial statements of companies. He went further to explain that the overall objectives of the independent auditor is to ensure that the conduct of an audit is in accordance with International Standards on Auditing. He concluded that the auditor‟s report shall include a section with the heading “Opinion” as stated below
Opinion
We have audited the financial statements of Inajit Plc set out on pages XXX to XXXX which comprise the statement of financial position as at year end date, and the statement of profit or loss and other comprehensive income, the statement of changes in equity and the statement of cash flows for the year then ended, the notes to the financial statements, including a summary of significant accounting policies. In our opinion, the financial statements give a true and fair view of financial position of Inajit Plc as at year end date, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Companies and Allied Matters Act 2020 and Financial Reporting Council Act,2011. At the end of the lecture a student in the class came to you for further explanation on the topic.
Required:
a. State the objectives of the independent auditor as stated in International Standards on Auditing. (5 Marks)
b. Outline what ISA 200 requires the auditor to do in relation to the audit of financial statements. (10 Marks)
c. Explain the scope of audit as described in the independent auditor’s report. (5 Marks)
d. Highlight the role of regulatory bodies in ensuring that audits are carried out in line with standards. (10 Marks)

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  • 20 Marks

AA – Nov 2022 – L2 – Q2a – Audit Documentation Requirements

Overview of audit documentation requirements per ISA 230, including reasons and required contents.

The International Standards on Auditing (ISA) 230 deals with the auditor’s responsibility to prepare audit documentation for an audit of financial statements.

Required:
a. State FIVE reasons for preparing audit documentation. (5 Marks)
b. Highlight the requirements of ISA 230 on audit documentation. (3 Marks)
c. State FIVE contents each of current and permanent files. (10 Marks)
d. Explain who owns audit working papers and why. (2 Marks)

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  • 20 Marks

AA – Nov 2022 – L2 – Q3 – Terms of Audit Engagement

Covers engagement letters, contents, benefits, and ISA 210 requirements for auditor appointment.

ISA 210, Agreeing the Terms of Audit Engagements, requires that the auditor needs to agree the terms of audit engagement prior to commencement of work.

Required:
a. What is an engagement letter? (2 Marks)
b. Highlight EIGHT major items expected to be found in a typical audit engagement letter. (8 Marks)
c. State FIVE advantages of an engagement letter. (5 Marks)
d. State FIVE requirements of ISA 210 with respect to the preconditions for accepting appointment as an auditor. (5 Marks)

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  • 20 Marks

AA – Nov 2022 – L2 – Q4 – Audit Evidence for Engineering Assets and Liabilities

Addressing audit evidence for engineering company assets and liabilities, including procedures for confirmations and plant disposals.

You are part of an audit team engaged on the audit of an engineering company which has a substantial amount of plant and machinery in its books. While reviewing the accounts, you also observed that there were some current assets and liabilities that may require external confirmations.

Required:

a. How would you establish the amount and level of audit evidence required for the current assets and liabilities? (5 Marks)

b. State which procedures will be applied to generate audit evidence in the following scenarios:

i. Confirming the accuracy of figures in the trade receivables account
ii. Confirming that the plant and machinery purchased in the year is actually in use during the year
iii. Ascertaining that the change in performance is in line with expectations
iv. Confirming the accuracy of the total receivable figures in the statement of financial position
v. Confirming contingent liability as to legal fees (5 Marks)

c. State the audit procedures you would take concerning the disposal of plant and machinery. (5 Marks)

d. State the requirements of ISA 505 concerning maintaining control over the external confirmation requests of current assets and liabilities. (5 Marks)

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  • 15 Marks

AA – Nov 2022 – L2 – Q5 – Internal Audit Necessity

Explanation on internal audit necessity, maintaining independence, and internal audit limitations.

In the apex bank‟s regulatory supervisory report to Dutse Bank Limited, the management has been directed to ensure institution of an Internal Audit Unit. Prior to this time, the bank believed that internal audit staff might be colluding with other staff to suppress information on fraudulent transactions and as such the desired result might not be achieved. Apart from this, it was considered that savings could be made from transport, hotel and other allowances to be paid to staff when on official assignments. The independent auditor had earlier mentioned the need for this in the audit report but management was of the view that it is acceptable to cross-train employees in different departments to be able to audit departments other than their own. In the opinion of management, this
will provide a more independent and unbiased view through checks and balances. The audit function they perform through multitasking will best add value to the progress of the organisation. It is also the belief of management that the basic processes of both accounting and auditing are similar. The two systems use essentially the same procedures and techniques of bookkeeping, computation and analysis. To them, accounting and auditing strive to ensure that the financial statements and records provide a fair reflection of the actual financial position of an organisation. Both activities are inter-related and go hand in hand, especially in setting up processes in the organisation, hence, there is no need for any Internal Audit Unit or duplication of efforts.
As the independent auditor of the bank, you were shown the regulatory supervisory report and you have been asked to make presentation to the Board of Directors on the necessity for the Internal Audit Unit in the bank.
Required:

a. Explain the need for the internal audit functions in an organisation. (5 Marks)
b. State the various measures that can be taken to protect the independence of internal auditors. (5 Marks)
c. Explain the weaknesses and limitations of internal audit. (5 Marks)

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  • 15 Marks

AA – Nov 2022 – L2 – Q6 – Audit Opinion in Financial Statements

Describe contents of audit opinion in financial statements as presented to an audit committee.

When prompted on a question at the presentation meeting to the audit committee of AMIRAH Plc, the Partner of OIO professional services stated that the end result of the statutory audit is general purpose financial statements on which audit opinion will be expressed. He explained that the auditor shall express an unmodified opinion when the auditor concludes his work, based on the audit
evidence obtained, that the financial statements as a whole are free from material misstatement and that the financial statements are prepared, in all
material respects, in accordance with the applicable financial reporting framework. However, if the external auditor is unable to obtain sufficient and appropriate audit evidence to conclude that the financial statements as a whole
are free from material misstatement, the auditor shall modify the opinion in the auditor’s report. In summary, the auditor’s opinion is a certification that accompanies financial statements after the examination of the books of accounts.
You are the manager in the firm and a member of the audit committee has requested for more explanation on the presentation by the partner.
Required:
a. Explain general purpose financial statements. (5 Marks)
b. Highlight to an audit committee member, the contents of audit opinion in financial statements. (10 Marks)

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  • 15 Marks

AA – Nov 2022 – L2 – Q7 – Audit Planning and Procedures Level: Level 2

This question covers audit planning considerations, benefits of planning, spreading audit work, and final audit procedures.

In order to ensure that an audit is carried out effectively and efficiently, the work needs to be planned, controlled and recorded at each stage of the program.
Required:
a. What matters must be taken into consideration when planning an audit? (3 Marks)
b. What are the benefits of adequate audit planning? (3 Marks)
c. What are the key benefits that would arise from spreading the audit work across interim and final audits? (4 Marks)
d. State FIVE audit procedures that are carried out at the final audit stage. (5 Marks)

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  • 1 Marks

FA – Nov 2021 – L1 – SA – Q4 – Accounting Concepts

This question relates to the ledger entry for a vehicle purchased on cash.

Success Motors bought three Toyota Jeeps on cash at the cost of N16,000,000. On debiting the vehicle account, the corresponding credit for the purchase will appear in the:
A. Sales day book
B. Purchase day book
C. Payable account
D. Cash book
E. Purchases account

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  • 1 Marks

FA – Nov 2021 – L1 – SA – Q2 – Financial Statements

This question tests the understanding of correct accounting principles.

Which of the following is a correct accounting principle?
A. Revenue should be supported by equity
B. There should be a balance in the account payable in order to measure total assets
C. Where total liabilities is zero, the assets are equal to equity
D. Total liabilities and equity are equal
E. Total assets can be less than liabilities and equity

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