BSc (Hons) Banking and International Finance Cohort: BBIF/11/PT Aug / BBIF/12/FT (Aug 12 B1 & B2) & BBIF/12A/FT Examinations for 2014 2015 Semester I / 2014 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. All workings must be shown. 6. Total Marks: 100. This Question Paper is printed on BOTH SIDES. This Question Paper Contains 4 questions and 7 pages. Page 1 of 7
SECTION A: COMPULSORY QUESTION 1: (40 MARKS) PART A: (10 MARKS) The audit risk model can be stated as follows:- DR = AR (IRxCR) where DR = detection risk IR = inherent risk AR = Audit risk CR = control risk This representation illustrates that an increase in either IR or CR or a decrease in AR would decrease DR (all else being equal). How would you explain this result and how does an increase in either of the two types of risks (IR or CR) decrease another type of risk (DR). PART B: (24 MARKS) AMCO plc paid Rs 760 million to acquire two third of the ordinary shares of BECO plc on 1 st April 2012 when:- (i) BECO had an accumulated profit of Rs 90 million. (ii) The market value of BECO s Land was Rs 460 million. (iii) BECO s shares were quoted at Rs 0.92 per share. Page 2 of 7
The statements of financial position of both companies on 31 March 2014 are shown below:- Statements of financial position as at 31 March 2014 AMCOplc BECOplc Rs million Rs million ASSETS Non-current Assets Land at cost 400 100 Other tangible assets 720 450 Investments 780 60 Current Assets Inventories 544 240 Trade receivables 386 198 Cash at bank 42 15 Total Assets 2,872 1,063 Equity and Reserves Ordinary Share Capital 1,600 600 (Rs 0.50 shares) Share Premium 160 30 Accumulated Profit 691 210 Current Liabilities Trade Payables 349 194 Taxation 72 29 Total Equity and Liabilities 2,872 1,063 You are informed as follows: a. Receivables reported by AMCO include Rs 42 million due from BECO. Corresponding amount reported by BECO is Rs 18 million. Goods invoiced by AMCO at Rs 16 million are in transit. The remainder of the difference arose from cash in transit. Page 3 of 7
b. Rs 32 million of goods reported by BECO have been invoiced to it by AMCO. c. AMCO invoices BECO at cost plus a third. (i) Calculate the totalgoodwill arising on the acquisition of BECO plc. (4 marks) (ii) Prepare the consolidated statement of financial position of the AMCO group as at 31 March 2014. (20 marks) PART C: (6 MARKS) Black plc acquired 80% of the ordinary shares and 10% of the preference shares in Ben plc on 31 December three years ago when Ben s accumulated retained profits were Rs 45 million. During the year, Black sold Ben goods for Rs 8 million plus a mark-up of 50%. Half of these goods were still in stock at the end of the year. There was goodwill impairment loss of Rs 3 million, the statement of comprehensive income of the two companies for the year ended 31 December 2013 was af follows: Black plc Ben plc Rs 000 Rs 000 Sales Revenue 300,000 180,000 Cost of Sales (90,000) (90,000) Gross Profit 210,000 90,000 Operating Expenses (88,623) (60,000) Operating Profit 121,377 30,000 Dividends received ordinary shares 6,000 - Dividends received preference shares 450 - Profit before tax 127,827 30,000 Income tax expense (21,006) (9,000) Profit for the year 106,821 21,000 Prepare a consolidated statement of comprehensive income for the Black group for the year ended 31 December 2013. Page 4 of 7
SECTION B: ANSWER ANY TWO QUESTIONS QUESTION 2: (30 MARKS) PART A: (18 MARKS) (i) On1 st April 2012, Elias & Co Ltd acquires a new building for Rs 6 million to be used for administrative purposes. It has a useful life of 30 years. The building is available for use on the same date. Since the building is located in a development area, the company receives a government grant of Rs 1,200,000. Prepare necessary journal entries in the company financial statements as at 31 December 2012 and 2013 respectively assuming the gross method of recognising grant is used. (12 marks) (ii) Useful life of a wind-driven power station of entity E was initially estimated to be 16 years. When preparing the financial statements for a later period, it turns out that repairs are necessary more often than originally expected and there are more down-times than previously expected. As such, the useful life needs to be reduced. Assess whether the principle of consistency applies in the above situation in E s financial statements. If the principle does not apply, describe the accounting treatment required. PART B: (12 MARKS) (i) What is meant by an audit procedure and why is it important for audit procedures to be carefully worded? (ii) What is meant by an audit programme and what four steps should be included therein? Page 5 of 7
QUESTION 3: (30 MARKS) PART A: (19 MARKS) (i) (ii) What is meant by: a. Borrowing costs b. A qualifying asset (4 marks) A particular item of inventory is produced by Company X in large quantities on a repetitive basis. Production takes: a. 15 months b. 1 week Determine whether the item of inventory of Company X described above are qualifying assets according to IAS 23. (iii) It is discussed whether the CEO of Company Z is a related party of Company Z. Moreover, it is debated whether the following members of the CEO s family are close members of the CEO s family and related parties of Company Z a. His wife b. His adult daughter c. His wife s adult son of her first marriage Assess which of the persons mentioned above are close members of the CEO s family and which are related parties of Company Z. (9 marks) PART B: (11 MARKS) (i) What is meant by control environment? (ii) List five factors that the auditor must evaluate to understand the control environment. (5 marks) Page 6 of 7
QUESTION 4: (30 MARKS) PART A: (18 MARKS) (i) Samson Ltd purchased freehold land in 2009 for Rs 7,000,000. In 2011, the land was revalued at Rs 13 million. At 31 December 2013, the land was revalued to Rs 5 million Show relevant journal entries to record the purchase and subsequent revaluation of the land. (ii) Crestor Ltd has an item of plant with an initial cost of Rs 1 million. At the date of revaluation, accumulated depreciation amounted to Rs 550,000. The fair value of the asset, by reference to transactions in similar assets is assessed to be Rs 650,000. Journalize the above transactions. (iii) Selma ltd paid Rs 4,800,000 for a property, spent Rs 150,000 on demolishing a dilapidated building on it and Rs 55,000 on clearing the site. Rs 54,000 was paid as legal expenses related to the transfer of title and Rs 19,000 was realized on selling the bricks, timber and material salvaged from demolition. Identify the cost to be capitalized. PART B: (12 MARKS) Management fraud is a relatively rare event. However, when it does occur, the frauds can have a significant effect on shareholders, employees and other parties. International Standards of Auditing (ISA) 240 provides the relevant guidance for auditors. (a) What is the auditor s responsibility for detecting fraud? (b) Describe the three conditions that are generally present when fraud occurs. ***END OF QUESTION PAPER*** Page 7 of 7