Qualification Programme Examination Panelists Report. Final Examination (June 2014 Session) Paper I

Transcription

1 Qualification Programme Examination Panelists Report Final Examination (June 2014 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 As in previous sessions, many candidates did not answer in the context of the case facts but answered only in general terms. They just copied and pasted their answers from the Learning Pack ( LP ) without proper elaboration/logical argumentation based on the case facts. Candidates should pay special attention to master the skills needed to apply the case facts in their answers. It is important for a future professional CPA to master the skills required to obtain a clear understanding of the business issues encountered. It is even more important to have an appropriate discussion and that all proposals are relevant and specific. The candidates performance in these aspects requires particular attention. Question 1 focused on two areas, first, application of financial ratios, and second, performance indicators. Many candidates were unable to explain the underlying reasons for the fluctuations in ratios despite the fact that there were clues as to the reasons in the case. This demonstrated that many candidates were unable to extract the relevant information from the case. With regard to the performance indicators, it appeared that the question itself was not a popular topic. The candidates' performance in Question 2 could be improved if they understand better the scope and the specific question requirements, e.g. some candidates forgot to discuss the accounting treatment of some hotel properties. It is also important for them to gain an understanding of the question requirement at the start before making suggestion on accounting treatment or consolidation adjustments, etc. The candidates' performance in Question 3 was limited by their practical experience in risk assessments and understanding of controls. As such, their answers to these topics were general and not specific. They however showed a good competence when discussing substantive auditing procedures. Final Examination (June 2014 Session) Page 1 of 6

2 Specific Comments Question 1(a) 15 marks This question required candidates to comment on the financial performance of LBH under the new management with reasons, based on the gross profit ( GP ) margin, profit before taxation ( PBT ) margin, return on capital employed ( ROCE ), debt to equity ratio and current ratio (current assets / current liabilities). The question also required candidates to comment on what other financial benchmarks that LBH could be compared against. A substantial number of candidates were unable to give correct definitions of debt equity ratio (including the non-interest bearing debts in debt) and ROCE (not using total assets less current liabilities as capital employed). Many candidates were unable to explain the fluctuations in gross profit margin and profit before taxation margin. The most worrying fact was that the majority (almost all) of the candidates were unable to give an account of the underlying reasons for the fluctuation in ratios. Question 1(b) 7 marks This question required candidates to discuss what aspects of a company could be measured or compared (other than the financial aspect) in benchmarking. This question also required candidates to suggest three non-financial performance indicators for LBH. Many candidates were unable to answer what aspects could be compared in benchmarking. It appeared that many candidates were unfamiliar with this topic. In answering the three non-financial performance indicators, a lot of candidates gave irrelevant answers such as indicators relating to innovation or R&D which were not related to the hotel industry. Question 1(c) 3 marks This question required candidates to suggest three ways to align the management s short-term interests with the company s long-term objectives. Many candidates performed well and were able to answer that a share option was one of the ways. However, many candidates missed out on the other relevant ways such as performance evaluation based on contribution to long term objectives and setting quality based targets. Question 2(a) 15 marks This question required candidates to analyse and explain the accounting treatments for (i) the classification of hotel properties, including guestrooms, restaurants, bars and shops in the financial statements of each of KHH s subsidiaries and the consolidated financial statements of KHH, (ii) the guestroom renovation programme rolled out by DSH, and (iii) the replacement of the interior wall of the shopping mall in DS Bangkok. Final Examination (June 2014 Session) Page 2 of 6

3 For Question 2(a)(i), the candidates performance was average. Some of them were unable to split portions of hotel properties (e.g. guestrooms, restaurants, bars and shops) into components for analyzing whether their nature would be considered as owner-occupied properties under HKAS 16 or operating leases under HKAS 17 or investment properties under HKAS 40. For those who were able to split the hotel properties into components for analysis based on each of KHH s subsidiaries and KHH group, they were unable to identify all of the hotel properties held by all of the subsidiaries of KHH group as set out in the case background information. Many candidates identified the hotel properties of DSH, WPH and GHM but forgot to mention those held by XHL and LBH. For Question 2(a)(ii), the candidates performance was not satisfactory. Many candidates briefly analysed and explained that the renovation costs incurred could be capitalized with reference to the general recognition criteria under HKFRSs. Approximately 1% of candidates were able to differentiate the accounting treatments for major spare parts and stand-by equipment from spare parts, and discuss the accounting treatments of component accounting under HKAS 16. For Question 2(a)(iii), the candidates performance was not satisfactory. Some did not attempt to answer this question. For those who did answer, they briefly stated whether the costs incurred for replacement would or would not be capitalized with reference to the general recognition criteria under HKFRSs, instead of analysing and explaining which party would account for the replacement costs and how this would be done based on the case background information. Question 2(b) 5 marks This question required candidates to discuss factors to consider regarding classification and accounting for hotel properties when preparing the consolidated financial statements of KHH. Candidates performance was not satisfactory. Many candidates stated that from the perspective of the consolidated financial statements, the hotel properties were classified as owner-occupied properties under HKAS 16 and any fair values recognized in financial statements of subsidiaries would be reversed. They failed to describe the basic consolidation principles, such as the principles that the classification of properties should be assessed based on a group basis as a single reporting entity and uniform accounting policies should be adopted, when preparing consolidated financial statements. Candidates were rarely able to discuss what specific consolidation adjustments should be made by each of the relevant subsidiaries of KHH Group for the purpose of KHH consolidated financial statements. Question 2(c) 5 marks This question required candidates to briefly explain why a company director owes a duty of skill and care, and give four examples under the new Hong Kong Companies Ordinance of company directors duty of skill and care related to financial reporting. Final Examination (June 2014 Session) Page 3 of 6

4 Candidates performance was average. Many candidates were able to give specific examples as required. However, candidates in general were unable to explain why a company director owes a duty of skill and care. Question 3(a) 8 marks This question required candidates to assess the risk of material misstatement of employee costs and related expenses and explain with examples how audit procedures, in terms of nature, timing and extent, would be different if the assessed risk level was high, compared with an assessment of normal risk in this area. Generally, candidates were able to extract relevant points from the case and assessed that the risk of material misstatement of employee costs and related expenses was high. However, many candidates were unable to explain how the audit procedures would be different in addressing a normal risk versus a high risk. Also, many candidates did not discuss the audit procedures in terms of nature, timing and extent although this should be considered in planning the audit procedures and it had already been highlighted in the question. Question 3(b) 6 marks This question required candidates to discuss the auditor s responsibility in communicating and reporting irregularities and non-compliance with laws and regulations (including fraud) identified during the course of the audit. Generally, candidates were able to identify the relevant standards. However, instead of discussing the auditor s responsibility in communicating and reporting irregularities and non-compliance with laws and regulations, some candidates discussed whether the auditors have the responsibility to detect fraud which was not the focus of this question. Candidates need to read examination questions very carefully. Question 3(c) 3 marks This question required candidates to list three typical internal controls with regard to employee costs and related expenses. Many of the controls mentioned by the candidates were too generic and not typical or specific enough to help prevent, or detect and correct, a material misstatement. Thus, many candidates were unable to get any marks for this question even if they had listed the controls. Question 3(d) 8 marks This question required candidates to use the facts from the case to explain the factors which would affect the risk assessment of related parties and transactions, and explain with examples the procedures the auditors would carry out to perform such a risk assessment. Final Examination (June 2014 Session) Page 4 of 6

5 Many candidates did not use the facts from the case and only copied the information from the Learning Pack to explain what factors would affect the risk assessment of related parties and transactions. Also, many candidates explained the audit procedures that would be carried out at the audit execution stage (e.g. arrange confirmations to related parties). However, these procedures were irrelevant to the risk assessment which should be performed at the audit planning stage this is an important concept that candidates should pay attention to. (II) Section B Essay Questions General Comments The examination intended to test the candidates tax knowledge from daily tax management to intensive tax knowledge for specific tax ordinance provisions. The general impression was that the candidates were aware of the relevant tax practices and tax ordinance provisions and were able to score some of the marks. However, the candidates were unable to handle some tricky points in which they could not find and copy directly from the Learning Pack. Also, it seemed that lots of candidates just jumped to conclusions without sufficient elaboration and the answers provided were not comprehensive enough and so marks were lost. Specific Comments Question 4(a) 4 marks This question required candidates to explain what is meant by Assess First Audit Later after the submission of the Profits Tax Return and recommend procedures to rectify the overstatement of assessable profits in the tax return filed. It was handled well. Question 4(b) 4 marks This question required candidates to discuss the tax treatment and related administrative procedures with the Inland Revenue Department for the royalty payments by XHL to EMSH. Many candidates did not mention the filing of a tax return and so and lost marks. Question 4(c) 11 marks This question required candidates to apply their knowledge to the taxability of interest income and deductibility of interest expenses. The results were poles apart. Some candidates were able to score very high marks while some candidates were apparently caught out by those tricky points and lost Final Examination (June 2014 Session) Page 5 of 6

6 marks. This demonstrated that the knowledge of the tax treatment of interest income and interest expenses of some candidates was not solid enough. Question 4(d) 6 marks This question required candidates to briefly describe the tax treatment of the increase in fair value of hotel properties and the gain on disposal of the ELN. Many candidates did not perform well in this question. Some seemed not knowing what ELN is but, as a professional accountant, he/she should be familiar with such kinds of financial instrument. Final Examination (June 2014 Session) Page 6 of 6