Qualification Programme Examination Panelists Report. Final Examination (June 2016 Session) Paper I

Transcription

1 Qualification Programme Examination Panelists Report Final Examination (June 2016 Session) (The main purpose of the following report is to summarise candidates common weaknesses and make recommendations to help future candidates improve their examination performance.) (I) Section A Case Questions General Comments The candidates performance was not satisfactory. In general, most candidates showed insufficient comprehension of the case facts and understanding of the question requirements. Candidates did not answer in the context of the case facts and only in general terms. As a professional CPA, it is important to master the skills required to get a clear understanding of any business issues encountered and devise the proper and specific response. Specific Comments Question 1(a) 4 marks The question required candidates to propose and justify two possible benchmarks that may be appropriate for the determination of materiality for the audit of the Group for the year ended 31 December The candidates performance was fair. Most of the candidates were able to propose the relevant benchmarks but they were not able to provide the justification properly. In addition, candidates should have paid attention to the requirement as stated in the question that only two benchmarks should be proposed. In cases where more than two benchmarks were proposed, only the first two benchmarks were marked. Question 1(b) 4 marks The question required candidates to explain how the materiality should be communicated to the management and its impact on the audit. The candidates performance was not satisfactory. Candidates were not able to identify the specific question requirement and many of them copied irrelevant materials from the learning pack. Candidates did not understand the level of detail in relation to the determination of materiality that should be communicated to the management. They misunderstood that either nothing in relation to materiality should be communicated, or, at the other extreme, that all of details including how the materiality is calculated should be communicated. Final Examination (June 2016 Session) Page 1 of 7

2 Question 2 9 marks The question required candidates to explain the three different types of analytical procedures that will be performed during different stages of the audit. The candidates performance was satisfactory. Candidates were able to state the different types of analytical procedures that should be performed at different stages of the audit. However, some of the candidates were not able to explain the objectives of different analytical procedures and most of the candidates did not mention that the analytical procedures performed at the planning and completion stages were mandatory while the substantive analytical procedures performed at the completion stage were only suggested. Question 3 5 marks The question required candidates to identify and explain five areas that may indicate a higher risk of material misstatements at the financial statement level and/or assertion level. The candidates performance was average. Candidates were able to identify areas with a higher risk of material misstatements. A few candidates only stated the accounts without any further explanation. Some candidates did not read the question carefully and stated more than five areas. Again, in these cases, only the first five areas were marked. Question 4(a) 3 marks The question required candidates to advise as to the primary accounting reference date and reporting matters to the management. The candidates performance was not satisfactory. Candidates did not have sufficient technical knowledge of the topic tested and many of them copied irrelevant materials from the learning pack. Candidates did not know the concept of primary accounting reference date in the new Companies Ordinance and they wrongly referred to AGM, tax deadline, etc which were irrelevant. Question 4(b) 5 marks The question required candidates to advise the CFO of Big Era on whether Little Era as a Hong Kong incorporated private company is eligible to use SME-FRF and SME- FRS or HKFRS for Private Entities. The candidates performance was not satisfactory. They were not aware that for a licensed corporation that is a Hong Kong incorporated company, the auditor shall report whether the financial statements give a true and fair view pursuant to the Companies Ordinance requirements. Therefore, it would not be eligible for applying SME-FRF and SME-FRS which is exempted from the requirement for the financial statements to give a true and fair view. Final Examination (June 2016 Session) Page 2 of 7

3 Regarding the discussion on eligibility for using HKFRS for Private Entities, many candidates did not have a complete understanding about public accountability. The entities that have public accountability shall include those holding assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks. Question 5 5 marks The question required candidates to compute the theoretical share price. The candidates performance was fair. Most of the candidates were able to compute the theoretical share price correctly. However, some candidates carelessly mixed up the share price in year 4 and the share price today. A few candidates failed to apply the appropriate discount rate to estimate the share price in year 4. Question 6(a) 3 marks The question required candidates to demonstrate their knowledge to estimate the theoretical market price of the bond. The candidates performance was satisfactory. Most of the candidates were able to compute the bond price correctly and get full marks. Question 6(b) 5 marks The question required candidates to compute the holding period yield of the bond investment. The candidates performance was poor as only a few candidates were able to compute the holding period yield for the bond investment correctly and many candidates did not even attempt this part. Question 7(a) 2 marks The question required candidates to explain the difference between debt financing and equity financing from the point of issuers. The candidates performance was fair. Most of candidates were able to point out the benefit of a tax shield. Many candidates addressed this by illustrating the cheaper cost of debt. A few candidates were able to mention that the future cash flow of bond financing was relative certain and the issuing price was determined more effectively. Final Examination (June 2016 Session) Page 3 of 7

4 Question 7(b) 4 marks The question required candidates to explain the importance of the interest rate risk in the bond investment. The candidates performance was not satisfactory. Most of candidates failed to explain what interest rate risk is and were unable to suggest the appropriate adjustment of the bond investment strategy. Question 7(c) 4 marks The question required candidates to identify insider dealing activities. The candidates performance was satisfactory. Most of candidates were able to identify the insider dealing activities with detailed explanations. However, a few candidates misunderstood the public information of the announced profit and reached the wrong conclusion. Question 7(d) 2 marks The question required candidates to explain the criminal liabilities of a sponsor in the due diligence process. The candidates performance was fair. Many candidates understood the sponsors had criminal liabilities while some candidates were able to explain that the liabilities depend on whether approval was done knowingly or recklessly. Question 8(a) 4 marks The question required candidates to analyse the reason why the classification of the shareholder s loan as current or non-current is different between Big Era s and the shareholder s financial statements. The candidates performance was not satisfactory although the question was relatively straightforward. This reveals that the candidates lack a fundamental understanding of the concept behind current and non-current classification and the difference between the loan receivable and the loan payable. Question 8(b) 4 marks The question required candidates to explain the accounting treatment for Dr. Ding s discretionary bonus. The candidates performance was not satisfactory. Most of the candidates could list out the two recognition criteria based on HKAS 19 Employee Benefits, however, they lacked the critical analysis as to how to apply those criteria to the case. In addition, they were not aware that HKAS 19 contains further guidance about how to make a reliable estimate of the constructive obligation of paying the bonus. Final Examination (June 2016 Session) Page 4 of 7

5 Question 8(c) 12 marks The question required candidates to (i) advise whether Big Era should consolidate the investment fund of private equity managed by Little Era, based on the three control elements as stipulated by HKFRS 10 Consolidated financial statements; and (ii) identify the applicable disclosure requirements regarding the interest in the investment fund. The candidates performance was fair. Most of the candidates could discuss the first two control elements which are power and variable returns. The focus of the third element linkage between power and exposure is the principal-agent relationship for a fund manager in managing the investment fund while very few candidates included this concept. Nevertheless, around half of the candidates could properly draw the conclusion that the investment fund should not be consolidated. In respect of disclosure requirements, many candidates could identify those for unconsolidated structure entities based on HKFRS 12 Disclosure of interests in other entities, however, they did not discuss whether the investment fund is a structured entity. (II) Section B Essay Questions General Comments Overall performance was not satisfactory. Candidates were good in following the latest tax case development but were not familiar with traditional deduction rules like apportionment of expenses and the circumstances under which an income should be subject to salaries tax and profits tax. Also, candidates may not understand the possibility that an income could fall outside these two taxes. Specific Comments Question 9 4 marks The question required candidates to explain the s.70a error or omission claim application procedures. The majority of the candidates performed well, but many could not point out the correct provision to apply - s.70a - and still used Section 64 notwithstanding that the objection deadline had already lapsed. Final Examination (June 2016 Session) Page 5 of 7

6 Question 10(a) 2 marks The question required candidates to determine whether an unrealized loss on the revaluation of securities is deductible. Although most students correctly stated that the item was deductible, only a few could cite the relevant reason and authority. Question 10(b) 4 marks The question required candidates to apply s.16(2)(e)(ii) for an interest expense deduction claim. Most of the candidates understood s.16(1) and s.16(2), but were unable to apply one of the subsections under s.16(2) for an interest expense deduction claim. Question 10(c) 8 marks The question required candidates to apply s.16(1) for apportionment of interest expense. The candidates performance was disappointing as most could not grasp this fundamental principle of expense deduction rules. The use of assets or income method sounded like something very new to candidates. Candidates are encouraged to spend more effort studying this area as this is a commonly encountered issue in real life. Question 11 7 marks The question required candidates to discuss the different criteria that could be used to determine an income that should be subject to salaries tax or profits tax or neither of them. Very few candidates were able to lay out sensible arguments on both sides. Even though candidates may not be able to know all the related tax cases, they are expected to make sound judgement to state the possible criteria. It seems the training in this area was not sufficient and the overall performance was not satisfactory. Final Examination (June 2016 Session) Page 6 of 7

7 (III) Conclusions and Recommendations The candidates showed their hard work in a demanding examination for the CPA qualification. However, candidates had difficulties in questions relating to practical situations or in-depth analyses. They are recommended to expose themselves more to practice in addition to their revision of the study materials and past examination papers. Candidates should be aware that success in the CPA professional examinations requires hard work to become familiar with the examinable topics. They should familiarise themselves with different aspects and different practical scenarios of the topics during their studies. Final Examination (June 2016 Session) Page 7 of 7