BSc(Hons)in Banking and International Finance. Cohort: BBIF/13B/ PT - BBIF/14B/FT. Examinations for Academic Year 2016

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1 BSc(Hons)in Banking and International Finance Cohort: BBIF/13B/ PT - BBIF/14B/FT Examinations for Academic Year Semester I / Academic Year 2016 Semester II MODULE: ACCOUNTING AND AUDITING PRACTICE MODULE CODE: ACCF 3121 DURATION: 2 ½ HOURS Instructions to Candidates: 1. This question paper consists of Section A and Section B. 2. Section A is compulsory. 3. Answer any two questions from Section B. 4. Always start a new question on a fresh page. 5. Total Marks: 100. This Question Paper contains 4 questions and 8 pages. This Question Paper is printed on BOTH SIDES. ACCOUNTING AND AUDITING PRACTICE- ACCF 3121 Page 1 of 8

2 SECTION A: COMPULSORY QUESTION 1: (40 MARKS) PART A: (10 MARKS) (i) List the four major evidence decisions that must be made on every audit. (ii) Identify the six characteristics that determine the reliability of evidence. (6 marks) PART B: (23 MARKS) Pike Ltd and Flip Ltd have produced the following statements of financial position as at 31 October 2015: Statements of financial position as at 31 October 2015 Pike Ltd Flip Ltd ASSETS Non-current Assets PPE 2,100, ,000 Investments 800,000 2,900, ,000 Current Assets: Inventories 880, ,000 Trades receivable 580, ,000 Cash and cash equivalents 400,000 1,860,000 8, ,000 Total Assets 4,760,000 1,188,000 Equity and Liabilities Equity Share Capital 2,400, ,000 Retained earnings 860,000 3,260, , ,000 Liabilities: Non-current liabilities Long term borrowing 400,000 - Current Liabilities: Trade payables 1,100, ,000 Bank overdraft - 1,100,000 80, ,000 Total Equity and Liabilities 4,760,000 1,188,000 ACCOUNTING AND AUDITING PRACTICE- ACCF 3121 Page 2 of 8

3 The following additional information is relevant to the preparation of the financial statements of the Pike group:- a) Pike Ltd acquired 80% of the ordinary share of Flip Ltd many years ago, when the retained earnings of Flip Ltd were Rs 72 million. Consideration transferred was Rs 800 million. Flip Ltd has performed well since acquisition and so far there has been no impairment to goodwill. b) At date of acquisition, the plant and equipment of Flip Ltd was revalued upwards by Rs 40 million, although this revaluation was not recorded in the accounts of Flip Ltd. Depreciation would have been Rs 32 million greater had it been based on the revalued figure. c) Flip Ltd bought goods from Pike Ltd upon which Pike Ltd earned a margin of 20%. At 31 October 2015, Flip Ltd inventories included Rs 180 million of goods purchased from Pike Ltd. d) At 31 October 2015, Pike Ltd had receivables of Rs 140 million owed by Flip Ltd and payables of Rs 60 million owed to Flip Ltd. e) The minority share of goodwill stood at Rs 18.4 million. Prepare the consolidated statement of financial position of Pike Ltd as at 31 October (23 marks) PART C: (7 MARKS) On 1 st July 2012, Rolly Ltd acquired 70% of the ordinary share capital of Small Ltd. There are no preference shares. The retained earnings of Small Ltd on 1 st July 2012 was Rs 2 million. ACCOUNTING AND AUDITING PRACTICE- ACCF 3121 Page 3 of 8

4 The outline income statements of the two companies for the year ended 30 June 2015 are as follows: Rolly Ltd Small Ltd Sales Revenue 624, ,000 Cost of Sales (267,400) (65,300) Gross Profit 356,600 43,700 Distribution costs (71,370) (5,100) Administrative Expenses (101,430) (10,500) Operating Profit 183,800 28,100 Dividend received from Small Ltd 14,000 - Profit before taxation 197,800 28,100 Taxation (51,200) (7,100) Profit for the year 146, The following information is also available:- a. During the year, Rolly Ltd sold goods to Small Ltd for Rs 8 million. These goods had cost Rolly Ltd Rs 5 million. At the year-end, one-half of the goods were still held by Small Ltd. b. Goodwill arising on consolidation has suffered no impairment losses. Prepare the consolidated statement of comprehensive income for the year ended 30 June (7 marks) SECTION B: ANSWER ANY TWO QUESTIONS QUESTION 2: (30 MARKS) PART A: (15 MARKS) (i) List five factors that affect the control environment. (ii) What is meant by the concept of reasonable assurance in terms of internal control? ACCOUNTING AND AUDITING PRACTICE- ACCF 3121 Page 4 of 8

5 (iii) State the five categories of control activities. PART B: (15 MARKS) Teddy plc s income statements for the years ended 31 December 2014 and 2015 and statements of financial position as at 31 December 2014 and 2015 are as follows: Income statements for the years ended 2014 and Revenue 207, ,000 Cost of Sales (101,000) (76,000) Gross Profit 106,000 77,000 Distribution expenses (22,000) (20,000) Administrative Expenses (20,000) (28,000) Operating profit 64,000 29,000 Interest payable (4,000) (4,000) Profit before taxation 60,000 25,000 Taxation (16,000) (6,000) Profit for the year 44,000 19,000 Statements of financial position as at 31 December 2014 and ASSETS Non-current Assets Property, plant and equipment Land and buildings 110, ,000 Plant and machinery 62, ,000 56, ,000 Current Assets: Inventories 24,000 25,000 Trade receivables 26,000 25,000 Cash at bank & in hand 19,000 69,000-50,000 Total Assets 241, ,000 EQUITY AND LIABILITIES Equity ACCOUNTING AND AUDITING PRACTICE- ACCF 3121 Page 5 of 8

6 Called-up Ordinary Share Capital 100, ,000 Retained earnings 56, ,000 57, ,000 Non-current liabilities Borrowings loan notes (10%) 40,000 40,000 Current Liabilities: Borrowings (all bank overdraft) - 2,000 Trade payables 37,000 34,000 Taxation 8,000 45,000 3,000 39,000 Total Equity and Liabilities 241, ,000 You are informed as hereunder:- There were no non-current assets disposals in either year. The amount of cash paid for interest equaled the expense in each year. Dividends were paid totaling Rs 18 million in each year. Included in cost of sales, distribution expenses and administrative expenses, depreciation was as follows: Land and buildings 6,000 10,000 Plant and machinery 10,000 12,000 Prepare the statement of cash flows for the business for year (15 marks) QUESTION 3: (30 MARKS) PART A: (20 MARKS) (i) What is a Related Party Transaction? (ii) Entity E sells 40% of its product to its major customer entity C. Assume the following scenario a) C does not belong to E s group b) C holds 35% of the shares of E and exercises significance influence over E. ACCOUNTING AND AUDITING PRACTICE- ACCF 3121 Page 6 of 8

7 Assess whether C is a related party in E s financial statements. (iii) What is meant by a Change in Accounting Estimate? (iv) Sesam Company purchased a computer system for Rs 7,400,000 on 1 st January It was depreciated based on a 7-year life and a residual value of Rs 1,800,000. On 1 st January 2015, Sesam revised these estimates to a total useful life of 4 years and a residual value of Rs 1 million. Prepare and explain Sesam s entry to record the 2015 depreciation expense. (8 marks) PART B: (10 MARKS) List five items which should be included in an Engagement Letter. QUESTION 4: (30 MARKS) PART A: (15 MARKS) (i) Briefly explain the accounting process relating to asset impairment. (ii) At the end of year 2015, Verma Company tests a machine for impairment. The machine has a carrying amount of Rs 20 million. It has an estimated remaining useful life of 5 years. Because of the unique nature of the machine, there is little market-related information on which to base a recoverable amount based on fair value. As a result, Verma determines the machine s recoverable amount should be based on value-in-use. To determine value-in-use, Verma develops an estimate of future cash flows based on internal company information, based on cash budgets and reflecting cash inflows from the machine and estimated costs necessary to maintain the machine in its current condition. Verma uses a discount rate of 8 per cent. Verma s analysis indicates that its future cash flows will be Rs 4 million each for the five years and it will receive a residual value of Rs 1 ACCOUNTING AND AUDITING PRACTICE- ACCF 3121 Page 7 of 8

8 million at the end of the five years. It is assumed that all cash flows occur at the end of the year. The present value interest factor for one rupee discounted at 8% for year-five may be taken to be In addition, the present value interest factor for a one rupee annuity discounted at 8% for five years may be taken to be (a) Compute the value-in-use for Verma s machine. (b) Calculate the impairment loss on the machine at the end of (3 marks) (c) Journalize the impairment loss and derive the carrying amount of the machine after recording the loss. (3 marks) PART B: (15 MARKS) (i) List five transactions and supporting records that would be considered accounting records. (ii) Define and give an example of recalculation and reperformance as an audit evidence technique. (6 marks) (iii) What are the four key characteristics of External Confirmation? ***END OF QUESTION PAPER*** ACCOUNTING AND AUDITING PRACTICE- ACCF 3121 Page 8 of 8