Taxation · May 2018

ALHAJI TIJANI BELLO COMPUTATION OF PERSONAL INCOME TAX PAYABLE FOR 2015 YEAR OF ASSESSMENT Earned Income N N Salary - Standard Chartered Company Limited 1/1/2015 – 30/9/15 9/12 x N6,630,000 4,972,500 - Rehoco International Consulting 1/10/15 – 31/12/15 Salary – 3/12 x N9,600,000 2,400,000 Transport Allowance – 3/12 x N480,000 120,000 Rent Allowance – 3/12 x N660,000 165,000 2,685,000 Gross Emoluments 7,657,500 Add: Dividend Income (Gross) 1/1/2014 666,667 1/7/2014 800,000 1,466,667 Gross Income 9,124,167 Dividend (Gross) (1,466,667) 7,657,500 Less: Consolidated Relief Allowance - Higher of 1% x N7,657,500 or N200,000 + 20% x N7,657,500 1,731,500 Tax Exempted Items: Contribution to National Pension Scheme 615,000 Contribution to National Housing Fund Life Assurance Premium Chargeable Income 195,000 660,000 3,201,500 4,456,000 Personal Income Tax payable N 1st - N300,000 @ 7% 21,000 Next - N300,000 @ 11% 33,000 Next - N500,000 @ 15% 75,000 Next - N500,000 @ 19% 95,000 Next - N1,600,000 @ 21% 336,000 Next - N1,256,000 N4,456,000 @ 24% 301,440 Final Tax Payable 861,440

b. (i) Adjudication is the process of determining the correct amount of Stamp Duties payable on an instrument by the Commissioner of Stamp Duties. A document will be duly stamped after adjudication only when the applicable duty has been paid. 40

(ii) Benefits of Adjudication These include:

• It is the first step in disputing the Stamp Duties officer’s view of the correct amount of duty;

• It shows the genuineness of a document;

• It satisfies the statutory requirement; and

• It makes instrument once adjudicated, admissible for all purposes notwithstanding any objection as to the duty to be paid.

(iii) Fixed Duties These are duties that do not vary with the consideration for the document being stamped; e.g payment receipts, cheque leaves, proxy forms, guarantor forms, admission as solicitor or notary public.

EXAMINER’S REPORT The question tests candidates’ knowledge of the computation of Personal Income Tax and the provisions of Stamp Duties Act. Candidates had a good understanding of the question and performance was good, although some of them performed better in the computation of tax liability than in stamp duties. The commonest pitfall was the inability of the candidates to explain the provisions of Stamp Duties Act. Candidates are advised to cover all areas of the syllabus in future examinations. S/No. Marking Guide Marks Marks 1a. Salary – Standard Chartered Company Limited. 1/1/2015 – 30/9/15 9/12 x N6,630,000 2

- Rehoco International Consulting 1/10/15 – 31/12/15 Salary – 3/12 x N9,600,000 2 Transport Allowance – 3/12 x N480,000 2 Rent Allowance – 3/12 x N660,000 2 6 Gross Emoluments Add: Dividend Income 1/1/2014 1 1/7/2014 1 2 Gross Income 1 Consolidated Relief Allowance - Higher of 1% x N7,657,500 or N200,000 + 20% x N7,657,500 1 Pension 1 NHF 1 Life Assurance Premium 1 4 Chargeable Income 1 Applying Tax Table Rate 41 1st – N300,000 @ 7% ½ Next – N300,000 @ 11% ½ Next – N500,000 @ 15% ½ Next – N500,000 @ 19% ½ Next – N1,000,000 ½ Next – N1,256,000 ½ Tax payable 1 4

bi. Definition of adjudication 1½ Stamping 1½ 3 ii. Benefits (4 points at 1 mark each) 4 iii. Explanation of fixed duties 2½ Examples ½ 3 Total 30

(a) DASET DRINKS NIGERIA LIMITED Investment centre An investment centre is a division within an organisation where the manager is responsible not only for the costs of the division and the revenues, but also for decisions relating to investment in assets for the division. An investment centre manager usually has authority to purchase new assets, such as items of plant or equipment, and so should be responsible for the profit or return that the division makes on the amount that it has invested. The performance of an investment centre might be measured by calculating the profit as a percentage of the amount invested (The Return on Investments (ROI)). It could also be measured by considering the residual profit after making provision for cost of capital. An investment centre might include a number of different profit centres. For example, a company manufacturing cars and buses may have two investment centres: (1) car-making and (2) bus-making. Within the bus- making division, there could be several profit centres, each of these being a separate location or factory at which buses are manufactured and assembled. Profit centre A profit centre is a department or division within the organisation for which revenues as well as costs are established. The profit or loss that the centre makes is determined by measuring the costs of the products or services produced by the centre to the revenues earned from selling them. The following is an example of a summarised profit centre report: N’000 Revenues of the profit centre *** Costs of the units sold by the profit centre (***) Profit/(loss) of the profit centre ** A profit centre may consist of several cost centres. For example, a factory might be treated as a profit centre, and within the factory, the machining department, assembly department and finishing department could be three cost centres. Revenue centre A revenue centre is a department or division within the organisation for which revenues are generated. In a revenue centre, there is no measurement of cost or profit. Revenue centre managers will only need to have information relating to revenues and will be accountable for revenues 66 only. For example, the income accountant in a hospital is only responsible for recording and controlling the different incomes that are received from funding bodies or other sources (for example, private patients, donors, fundraising and so on). Cost centre A cost centre is a department or work group for which costs are established, in order to measure the cost of output produced by the centre. For example, in a factory, a group of machines might be a cost centre. The costs of operating the machines would be established, and a cost could then be calculated for each unit of product manufactured by the machines. In a cost centre, there is no measurement of revenue or profit.

(b) A divisionalised structure refers to the organization of an entity in which each operating unit has its own management team which reports to a head office. Divisions are commonly set up to be responsible for specific geographical areas or product lines within a large organization. When an organization has a divisionalised structure, some of the divisions may supply goods or services to the other divisions in the same organization. The division that sells goods or services to other divisions is referred to as selling division. While the division(s) that buy(s) the goods or services is (are) referred to as buying division(s). The problems likely to be associated with a divisionalised structure include:

i. The problem of acceptable transfer price between the selling and the buying division. A decision has to be made about what the transfer price should be for goods and services transferred from one division to another;

ii. Goal congruence – Each divisional manager may be pursuing goals that are good for his/her division but not in the best interest of the organization as a whole. For example, a divisional manager for a division that is an investment centre, may put off buying a needed non – current asset so as to improve his/her return on investment (ROI);

iii. Top management may lose control over the organization if they allow decentralization without accountability. It will be necessary to monitor divisional performance closely. The cost of such monitoring system may be high;

iv. Performance Measurement – How to evaluate the performance of the Divisional Managers may pose some problems; and

v. There may be duplication of functions and functional managers. Each division may have to set up its functional units with managers overseeing the functions. 67

(c) Ideal transfer Price: First, what is in the best interest of the company as a whole is determined. For each bottle of soft drink that the company produced and sold, the company makes additional contribution as follow: Soft drink Bottle Crown cork Company N N N N Selling price/Transfer price 100.0 3.0 0.30 Less: Variable cost of bottle 3.0 3.0 - Variable cost of crown cork 0.3 - 0.30 Variable additional processing costs (80 – (3 + 0.3) 76.7 - - 80.0 3.0 0.30 Contribution per unit 20.0 NIL NIL 20.0 If bottling division buys bottles and crown corks internally, the company, as a whole, will make N20.0/unit contribution even though it looks like bottle and crown corks divisions did not contribute anything to the overall contribution. However, if the bottling division buys bottles and crown cork at external market prices, the company, as a whole, also makes N20 contribution with soft drinks bottle and crown cork divisions making contribution as follows: Soft drink Bottle Crown cork Company N N N N Selling price/Transfer price 100.0 5.0 0.50 Variable cost (76.7 + 5 + 0.5) 82.2 3.0 0.30 Contribution 17.8 2.0 0.20 20.00 Ideal Transfer Prices: Since the external market price of bottles and crown corks are ₦5 and ₦0.5 respectively, and variable costs of production are ₦3 and ₦0.3 respectively, the ideal transfer prices are as follows: ▪ Bottles; from ₦3 to ₦5. In view of the current arguments of the divisional managers, ₦5, which is the external market price, will be the most ideal for evaluation of the divisional manger’s performance. ▪ Crown corks; from ₦0.3 to ₦0.5. In view of the current arguments of the divisional managers, ₦0.5, which is the external market price, will be the most ideal for evaluation of the divisional manger’s performance. 68

(d) Other qualitative factors the top management needs to consider in taking these decisions include: ▪ Will the external supplier be able to meet up with the quality that meets with the bottling division’s specifications? ▪ To protect the company’s brand, it is also very important to buy from the internal supplier rather than the external supplier; ▪ The company may not be able to control the external supplier as it can do with the internal suppliers; ▪ The external suppliers may not be able to meet up with the demand of the bottling division for bottles and crown corks, as the case may be, because they will have to satisfy their other customers as well; ▪ Market conditions: Would the bottle and crown cork divisions be able to produce and sell all their products in the external market? ▪ The need to encourage initiatives of the divisional managers; ▪ Loss of market shares if transfers are to be made internally using variable costs; and ▪ The level of exposure and experience of the divisional managers.

EXAMINER’S REPORT The question tests candidates’ understanding of the concept of performance evaluation in a divisionalised organisation and differentiate the various responsibility centres and the management problems that may be faced by the organisation. It also tests the candidates’ ability to apply the concept of transfer pricing in advising a company as well as relevant qualitative factors for decision making.

(a) Candidates are expected to explain and give at least, one example each of Investment Centre, Profit Centre, Revenue Centre and Cost Centres.

(b) A vivid explanation of the concept of divisionalisation as an organisational structure in identifying its basic features and problems associated with it.

(c) Candidates are expected to present data on the contributions made by the three divisions respectively, when cost-based (variable costs) and market- based transfer prices are used. This is to arrive at a conclusion and recommended prices for the divisions that will maximise the company’s profit and at the same time acceptable to divisional managers. They are also expected to identify and explain two qualitative factors that support the decision made in part c of the question. 69 About 20% of the candidates showed a good understanding of the various concepts tested in the question. The commonest pitfall of the candidates in answering the question was their inability to identify and explain the decision-making problems, authority and responsibilities of the respective centres. Candidates are advised to put in more extensive attention to details while reading and preparing for future examination.

MARKING GUIDE Description Marks Marks

(a) Definition and description of investment centre, profit centre, revenue centre and cost centre 1 mark each 4 Appropriate example for each 1 mark each 4 8

(b) Description of divisional structure 4 List of associated problems, at least 4 4 8

(c) Calculation of optimal result for the company as a whole: Contribution of each soft drink bottle, if bottle and crown cork are sourced internally 3 Contribution of each soft drink bottle, if bottle and crown cork are sourced from the external market 3 Determination of optimal decision (1 mark each) 2 Determination of ideal transfer price for bottles 1 Determination of ideal transfer price for crown corks 1 10

(d) Qualitative factors, at least 2 points at 2 marks each 4 30 70

(a) Substantive procedures that will be carried out to verify additions to non- current assets in 2016 include:

i. Obtain/prepare a schedule of additions for the period; ii. Check the authorisation of the expenditure to purchase these additions; iii. Confirm that the total additions reconcile with the movement between the opening and closing balances in the notes to the financial statements; iv. Inspect the purchase invoice or other documents as evidence of the cost of any addition, and confirm that these documents are in the company’s name; v. Verify the existence of the acquired non-current assets, by means of physical inspection where appropriate; vi. Check that the entries in the accounting records are correct, confirming the allocation of total expenditure between capital and revenue expenditure; and vii. Check for post-acquisition related or corroborative evidence such as cost of installation, insurance, servicing and maintenance of the asset.

(b) Substantive procedures that will be carried out to verify disposal of non- current assets in 2016 include:

i. Obtain/prepare a schedule of disposals for the period; ii. Check the authorisation of the disposals; iii. Verify that the cost and related accumulated depreciation have been removed from the accounting records; iv. Verify the calculation of the figure for the profit or loss on disposal, and verify that this figure has been correctly recorded in the accounting records i.e. asset account, accumulated depreciation account and disposal account; v. Discuss with management the possibility of unrecorded disposals of assets; and vi. Check for post-disposal related or corroborative evidence such as stoppage of costs for insurance, servicing and maintenance of the asset.

(c) The statutory books that the auditor is required to audit during the course of his audit engagements are:

i. Copies of directors’ service contracts and details of directors’ remuneration packages: the audit work to be performed on this area 96 should confirm that relevant legal disclosure requirements are complied with; ii. Minutes of board meetings and minutes of general meetings of the Company: The auditor should also audit the minutes of board meetings and minutes of general meetings of the company in the course of carrying out his audit engagements, especially to ensure that appropriate decisions are duly approved; iii. Register of directors and their interests in the shares and loan capital of the company: The register of directors and their percentage interest in the company should also be worked on during the course of carrying out the audit engagements; and iv. Register of members/shareholders: the register of all members and shareholders of the company should also be taken into consideration while carrying out the audit engagements to confirm members’ shareholdings.

EXAMINER’S REPORT The question is compulsory and tests in parts (a) and (b) substantive procedures to verify additions to and; disposals of non-current assets respectively. Part (c) tests candidates on statutory books. Almost all the candidates attempted the question. Candidates generally showed fair understanding of parts (a) and (b) hence performance was fair. The performance of candidates was poor in part (c). The short comings of candidates were mixing up of solutions to (a) and (b) and non utilization of study materials especially the Institute’s Study Text. Candidates are advised to study well, especially the Institute’s Study Texts when preparing for the Institute’s future examinations.

MARKING GUIDE Marks a. Substantive procedures to verify additions to assets 2 marks x 5 points (maximum) 10

b. Substantive procedures to verify assets disposals 2 marks x 5 points (maximum) 10

c. Statutory books to be audited 2½ marks x 4 points 10 30

a. Ministry of Land and Housing Preparation of Adjusted Cash Book for the period ended December 31, 2017 N’000 N’000 Balance b/d 21,500.00 Receipts Subvention 55,000.00 Interest from investment 3,501.68 Rent on property 11,300.35 Ground rent 16,801.00 Saving deposits interest 6,281.00 Grant from construction of estates 51,301.50 Deposit for land 19,000.60 163,186.13 184,686.13 Payments Personnel cost 36,801.00 Travel and transport 7,000.40 Telephone services 2,401.50 Repairs of property 4,868.25 Stationery 901.86 Provision of water for sale 14,300.60 Consultancy services 3,001.26 Training and staff development 1,001.56 Auditing and staff development 1,500.00 Entertainment and hospitality 500.00 Construction of estate 35,607.58 Construction of access roads 8,400.60 116,284.61 Balance c/d 68,401.52 Standing Order for insurance premium 201.50 Bank charges and commissions 144.25 345.75 Balance as per adjusted cash book 68,055.77

b. Bank Reconciliation Statement for the year ended December 31, 2017 N’000 N’000 Balance as per adjusted cash book 68,055.77 Add: Unpresented cheques 4,337.80 72,393.57 Less: Uncredited cheques 6.900.00 Expected balance in the bank 65,493.57 Less: Balance as per bank statement 39,560.60 Cash shortage 25,932.97 Other losses Deposit on land - 1,370 x N10,000 13,700.00 - 580 x N20,000 11,600.00 25,300.00 Less: Amount accounted for 19,000.60 6,299.40 Duplicated vouchers on construction 9,000.00 Falsification of bills for provision of water 3,561.80 Total Fraud committed 44,794.17

c. The statutory institutions that the suspicious case(s) of fraud in (b) above could be reported are:

i. The Chairman, Federal Civil Service Commission; ii. The Auditor - General for the Federation; iii. The Accountant - General of the Federation; iv. The Federal Ministry of Finance;

v. Independent Corrupt Practices and Other Related Offences Commission (ICPC); vi. Economic and Financial Crime Commission (EFCC); and vii. The Nigerian Police

d. According to the Financial Regulation 2502, a loss shall be charged as a personal advance against the officers responsible for the loss, pending a decision by the Federal Losses Committee. The officer in charge of the office in which the loss occurs shall take the following actions:

i. Report immediately to the Head of the Unit or Division by the fastest means if the loss occurs away from the Headquarters; ii. Report to Police if fraud or theft is suspected; iii. Initiate immediate action by completing Treasury Form 146 part 2 and forward it in quintuplicate to the Head of Unit or Division; iv. Ensure that if a weakness in the system of control or in security is established, measures have been taken to prevent a re-occurrence of the loss; and v. Ensure that accounting entries have been made for the loss.

e. The related offences that two of the statutory institutions can deal in this case include:

i. Falsification of bills for provision of water; ii. Duplication of vouchers for payment for the construction of estate; and iii. Fraudulent cash shortage. The above offences may lead to the following:

• Any public officer who is involved in contract inflation shall be surcharged, removed from schedule of duty, dismissed and prosecuted;

• If contract inflation involves the Tenders Board, all the members that approved the inflated contract shall be severally and collectively sanctioned;

• If a public officer fraudulently pays money for a job not executed, he shall be required to refund in full, the amount wrongly paid and shall be removed from the schedule. The matter shall be referred to EFCC for prosecution; and

• Any public officer involved in fraudulent cash shortage, shall be made to refund the cash shortage, removed from the schedule of duty and reported to the EFCC or the police for prosecution.

EXAMINER’S REPORT The question tests candidates’ knowledge and skills on the preparation of adjusted cash book and bank reconciliation statement with a view to detecting any fraud. It also tests the procedures to be taken in reporting fraud cases to the appropriate statutory institutions with identified offences. The question is compulsory and all the candidates attempted it. Candidates’ performance was below average. The major pitfall was their poor understanding of the question’s requirements. Candidates are advised to make use of the Institute’s Study Text and prepare very well for the future examination.

MARKING GUIDE MARKS MARKS a. Headings and Other items at ¼ except adjusted cash balance (28 ticks at ¼ mark per item) 7 Correct calculation of adjusted cash book balance 1 8 b. Headings and Other items except total fraud committed (15 ticks at 1/3 mark per item) 5 Correct calculation of total fraud committed 2 7 c. Any four statutory institutions at 1 mark each 4 d. Any four procedures at 1½ marks each 6 e. Any two offences at 2½ marks each 5 Total 30

Tosin Oguntona Computation of Assessable Incomes for 2013 and 2014 Assessment Years Dividend Income 2013 2014 N N Incomes Dividend income (Nigeria) 0 0 that are Dividend income (Foreign) 0 0 tax exempt. 0 0 Rental Income: Rent from building in Ibadan 630,000 720,000 Rent from building in Abuja 1,500,000 1,740,000 Rent from building in Oyo 420,000 520,000 Rent from building in Lagos 750,000 780,000 3,300,000 3,760,000 Less expenses: Repairs and maintenance 90,000 96,000 Water rate 40,000 50,000 Agent’s commission 96,000 108,000 Insurance less that of private residence 96,000 120,000 Assessable rent 2,978,000 3,386,000 Capital allowances (150,000) (180,000) Chargeable rent 2,828,000 3,206,000 Interest Income: Bank interest 360,000 420,000 42 SUMMARY Dividend income 0 0 Rental income 2,828,000 3,206,000 Interest income 360,000 420,000 3,188,000 3,626,000

EXAMINER’S REPORT The question tests candidates’ knowledge of the assessment of Investment Incomes. Candidates displayed a good understanding of the question. Candidates should pay attention to the treatment of Franked Investment Income.

Marking Guide Marks Dividend Income: Nigeria (½ mark x 2) 1 Foreign (½ mark x 2) 1 Total (½ mark x 2) 1 Rental Income: Ibadan building (½ mark x 2) 1 Abuja building (½ mark x 2) 1 Oyo building (½ mark x 2) 1 Lagos building (½ mark x 2) 1 Total of rental income (½ mark x 2) 1 Expenses: Repairs (½ mark x 2) 1 Water Rate (½ mark x 2) 1 Agent’s Commission (½ mark x 2) 1 Insurance (½ mark x 2) (½ mark x 2) 1 Assessable rent (½ mark x 2) 1 Capital allowances (½ mark x 2) 1 Chargeable rent (½ mark x 2) 1 Bank interest 1 Summary: Dividend income (½ mark x 2) 1 Rental income (½ mark x 2) 1 Interest income (½ mark x 2) 1 Total income (½ mark x 2) 1 Total 20 43 NWOKOCHA AND SONS BAKERY LIMITED

a. CALCULATION OF SALES VARIANCES

(i) Sales Price Variance Standard Actual Variance (Std. price x Act. qty) (Act. price x Act. qty) Product F N200 x 9,500 = 1,900,000 N220 x 9,500 = 2,090,000 190,000 F Product R N250 x 13,500 = 3,375,000 N260 x 13,500 = 3,510,000 135,000 F Product E N300 x 8,500 = 2,550,000 N320 x 8,500 = 2,720,000 170,000 F 7,825,000 8,320,000 495,000 F

(ii) Sales Volume Profit Variance Budgeted qty Actual Difference Profit Margin Variance (Actual qty) Product F 10,000 9,500 500 101.67 50,835 A Product R 13,000 13,500 -500 126.83 63,415 F Product E 9,000 8,500 500 144.78 72,390 A 32,000 31,500 500 59,810 A

(iii) Sales Mix Profit Variance Standard Mix Actual Mix Difference Profit Margin Variance (Std. proportion x Actual qty) Product F 10,000/32,000 x 31,500 = 9,844 9,500 344 101.67 34,974 A Product R 13,000/32,000 x 31,500 = 12,797 13,500 -703 126.83 89,161.49 F Product E 9,000/32,000 x 31,500 = 8,859 8,500 359 144.78 51,976 A 31,500 31,500 0 2211.49 F

(iv) Sales quantity Profit Variance Standard Yield Actual Yield Difference Profit Margin Variance (Budgeted qty) (Std. proportion x Actual qty) Product F 10,000 9,844 156 101.67 15,861 A Product R 13,000 12,797 203 126.83 25,746.49 A Product E 9,000 8,859 141 144.78 20,414 A 32,000 31,500 500 62,021.49 A Calculation of Standard Profit Margin Product Selling price (N) Direct Material (N) Direct Labour (N) Variable expenses (N) Fixed overhead (N) Profit Margin (N) F 200 (75) (12) (6) (5.33) 101.67 R 250 (90) (15) (7.50) (10.67) 126.83 E 300 (114) (18) (9) (14.22) 144.78 71

• OAR ∗= 𝐹𝑖𝑥𝑒𝑑 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 (𝐹𝑃𝑂𝐻) 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑀𝑎𝑐 ℎ𝑖𝑛𝑒 ℎ𝑜𝑢𝑟𝑠= 𝑁3,840,000 216,000 = N17.78/machine hr Where OAR = Overhead Absorption Rate Budgeted Machine hours per annum = (0.3hr x 10,000 x 12mths) + (0.6hr x 13,000 x 12mths) + (0.8hr x 9,000 x 12mths) = 216,000hrs Therefore, fixed overhead per unit for; Product F = 0.3hr x N17.78 = N5.33 Product R = 0.6hr x N17.78 = N10.67 Product E = 0.8hr x N17.78 = N14.22

(b) Budgeted Profit Monthly budgeted Sales N N F = 200 x N10,000 = 2,000,000 R = 250 x N13,000 = 3,250,000 E = 300 x N9000 = 2,700,000 7,950,000 Less Standard cost Material: F = 25 x 3 x N10,000 750,000 R = 30 x 3 x N13,000 = 1,170,000 E = 38 x 3 x N9,000 = 1,026.000 (2,946,000) Labour: F = 1.2 x 10 x N10,000 120,000 R = 1.5 x 10 x N13,000 195,000 E = 1.8 x 10 x N9,000 162,000 (477,000) Variable Expenses: N N F = 1.2 x 5 x N10,000 60,000 R = 1.5 x 5 x N13,000 97,500 E = 1.8 x 5 x N9,000 81,000 (238,500) Monthly Budgeted Fixed overhead N3,840,000 /12 (320,000) Budgeted Profit = 3,968,500

(c) Significance of mix variances in standard costing system. Variance analysis generally, is important for performance evaluation, cost control and management by exception. A firm operating a standard costing system calculates variances for each element of cost for which standards have been set. Increase in efficiency Mix variance analysis helps in increasing the efficiency as well as effectiveness of production; 72 Proper decisions Mixed variances are also helpful for taking proper decisions for deciding cost which will help management in reducing cost burden.

EXAMINER’S REPORT The question tests candidates’ understanding and knowledge of calculating sales price variances, sales volume variance, sales mix profit and the significance of mix variances in standard costing system. The points expected to be raised include evaluating individual performances between attained performance and desired performance, assigning responsibilities to individuals top management drawing their attention only to exceptional variances and increase in the efficiency of production, effective utilisation of resources, using the principle of management by exception. Candidates’ understanding of the question was not encouraging as most of them were using selling price instead of contribution margin. The candidates did not have good understanding of variance analysis. About 80% of them did not take into consideration the fixed cost element in determining the profit of each product. The commonest pitfalls could be traced to lack of knowledge and understanding of the topic. Candidates’ inability to calculate mix variance and the fact that they could not identify correctly whether the variances are favourable or adverse. Candidates should pay more attention to the nitty gritty of standard costing with emphasis on variance analysis and make better use of relevant text books on the topic, while preparing for future examinations.

MARKING GUIDE Marks Marks 2. ai. Computation of sales price variance 4 ticks at ½ mark each 2 ii. Computation of sales volume profit variance 4 ticks at ½ mark each 2 iii. Computation of sales mix profit variance 6 ticks at ½ mark each 3 iv. Computation of sales quality profit variance 6 ticks at ½ mark each 3 10

b. Determination of monthly budgets profit 18 ticks at 1/3 mark each 6

c. Discussion of significance of a mix variances Any 4 points out of 7 points at 1 mark each 4 20 73

(a) Sufficiency of Audit Evidence Deciding on whether existing audit evidence is sufficient is a matter of judgement by the auditor. The sufficiency (i.e. quantity) of audit evidence required will depend largely on the following:

i. The quality of that evidence. The quality will depend on the source of the evidence and its reliability; ii. The seriousness of the risk that the financial statements might not give a true and fair view. When this risk is high, more audit evidence will be required; iii. The materiality of the item; iv. The strength of the internal controls in the client’s accounting systems; and v. The sampling method that the auditor will use to obtain the audit evidence, the chosen method will affect the size of the audit sample that the auditor requires.

(b) Reliability of Audit Evidence There are a number of general principles set out in ISA 500 to assist the auditor in assessing the reliability of audit evidence. These can be summarised as follows:

i. Audit evidence is more reliable when it is obtained from independent sources outside the entity under audit. Bank balances confirmed by the bank itself is considered a more reliable source of audit evidence than the ones obtained from the entity’s accounting records; ii. Internally generated audit evidence is more reliable when the related controls are effective; iii. Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by inference. For example, observation of the operation of a control by the auditor is more reliable than inquiry about the operation of that control; iv. Audit evidence is more reliable when it exists in documentary form. This could be paper, electronic or other medium. For example, a written record of a meeting made at the time is more reliable than a subsequent oral representation of the matters discussed; v. Audit evidence provided by original documents or documents certified by the courts is more reliable than audit evidence provided by photocopies, documents that have been filmed or otherwise transformed into electronic form. This is because the reliability of those other forms may depend on the controls over their preparation and maintenance.

(c) Relevance of Audit Evidence There are a number of general principles set out in ISA 500 to assist an auditor in assessing the relevance of audit evidence. These can be summarised as follows: i. Relevance deals with the logical connection with, or bearing upon, the purpose of the audit procedure, and, where appropriate, the assertion under consideration. For example, relevance may be affected by the direction of testing, such as, when testing for overstatement in the existence or valuation of accounts payable, testing the recorded accounts payable may be a relevant audit procedure. On the other hand, when testing for understatement, testing the recorded accounts payable would not be relevant, but rather testing subsequent disbursements, unpaid invoices, suppliers’ statements and unmatched receiving reports may be relevant;

ii. A given set of audit procedures may provide audit evidence that is relevant to certain assertions, but not others. For example, inspection of documents related to the collection of receivables after the period end may provide audit evidence regarding existence and valuation, but not necessarily cut-off;

iii. Tests of controls are designed to evaluate the operating effectiveness of controls in preventing, detecting and correcting material misstatements at the assertion level. Relevant audit evidence would include identifying conditions that indicate performance of a control and deviation conditions. The presence or absence of those conditions can then be tested by the auditor; and

iv. Substantive procedures are designed to detect material misstatements at the assertion level. Designing substantive procedures includes identifying conditions relevant to the purpose of the test that constitute a misstatement in the relevant assertion.

EXAMINER’S REPORT The question tests the requirement of ISA 500 about audit evidence. About 90% of the candidates attempted the question. Candidates exhibited good understanding in parts (a) and (b) but poor understanding in part (c). Performance was relatively poor in part (c) The commonest pitfall was wrong interpretation of the requirements of the question and mix-up of solutions especially in parts (b) and (c). Candidates are advised to prepare very well for future examinations which would obviously translate to confidence in answering questions correctly.

MARKING GUIDE Marks a. Factors in determining sufficient audit evidence 2 marks x 3 points (maximum) 6

b. Principles to assess reliability of audit evidence 2 marks x 2 points (maximum) 4

c. Principles to assess the relevance of audit evidence 2½ marks x 4 points (maximum) 10 20 The Annual Budget for Imafidon Local Development Authority Happiness and Social Centres for the year ended December 31, 2019 Expenditure: N’million N’million Salaries (W I) 10.018 Wages (W II) 8.534 18.552 Rates (W III) 8.905 Power/Electricity (W III) 2.916 Rent 2.600 Artifacts for sale (W III) 3.360 Security Services 0.600 Other Supplies (W III) 2.573 Service Level Agreement 2.948 Total Expenditure 42.454 Income: Admissions (W IV) 9.911 Sales in the Centre (W IV) 5.736 Other Incomes (W IV) 1.554 Total Income 17.201 Net Expenditure 25.253 Working I: Details of Salaries Director Ministry of Happiness Social Officer Total N'million N'million N'million 2018 Salaries 4.800 3.000 7.800 2019 increment 0 0.088 0.088 2019 Salaries 4.800 3.088 7.888 National Insurance (12% of Salaries) 0.576 0.371 0.947 Pension Contribution (15% of Salaries) 0.720 0.463 1.183 Total 6.096 3.922 10.018 Working II: Details of Wages Happiness Assistants N'million 2018 Wages for the 5 Happiness Assistants N1.31million multiply by 5 6.550 2019 increment (2.60% of N6.550 million) 0.170 2019 Wages 6.720 Insurance (12% of N6.720 million) 0.806 Pension (15% of N6.720 million) 1.008 Overtime 0 Total 8.534 Working III: Expenditure N’million Rates (102% of N8.73 million) 8.905 Power/Electricity (108% of N2.70 million) 2.916 Artifacts for sale (120% of N2.80 million) 3.360 Other Supplies (1.025% of N2.51 million) 2.573 Working IV: Income N’million Admissions (110% of N9.01 m) 9.911 Sales in the Centre (120% of N4.78 m) 5.736 Other Incomes (105% of N1.48 m) 1.554

EXAMINER’S REPORT The question tests candidates’ ability to prepare a budget from a given historical data. Majority of the candidates attempted the question and their performance was fair. However, candidates’ major pitfall was their lack of understanding of the questions’ requirements. Candidates are strongly advised to be mindful of their workings and make use of the relevant information in the question. They should also be more skillful in budget preparation.

MARKING GUIDE MARKS MARKS Headings 1 Expenditure budget (10 items at ½ each) 5 Total expenditure 1 Income budget (3 items at ½ each) 1 ½ Total income 1 Net Expenditure 2 11 ½ Workings: W I Salaries 18ticksat ¼ mark each 4 ½ W II Wages 6ticks at1/3 mark each 2 W III Expenditure(4 ticks at ¼ mark each) 1 W IV Income(3 ticks at 1/3 mark each) 1 8 ½ Total 20

(a) Multiplicity of Taxes This is a tax regime under which various and similar types of taxes are imposed on taxpayers by different tiers of government. For instance, while the Federal Government imposed the Value Added Tax on consumption and made it applicable throughout the federation, some states, notably, Lagos State, introduced the sales tax based on the same principle as the former and made it applicable in Lagos State. The type of taxes introduced and collected by local governments vary from one local government to the other.

(b) Some of these taxes are: (i) Entertainment Tax; (ii) Road Tax; (iii) Permit for closure of streets; (iv) Refuse collection Tax; (v) Market taxes and levies; and (vi) Loading and offloading levies. (c)(i) Tax Incidence It is an economic term for the division of a tax burden between buyers and sellers. It does reveal the person that will pay the tax liability. For instance, if the government decides to impose an increased tax rate on cigarettes, the producers may increase the selling price by the full amount of the tax. If the consumers purchase cigarettes at the same amount after the price increase, it will be said that the tax incidence will fall entirely on the buyers.

(ii) Tax Burden This is the amount of income, property or consumption tax levied on an individual or business. Tax burdens vary depending on a number of factors including income level, jurisdiction, and current tax rates. Income tax burdens are typically satisfied by deductions from an individual’s pay slip each time he or she is paid.

(iii) Tax Impact This is the effect of a tax on the production or consumption of the product being taxed. For example, the tax impact of raising the levy on tobacco might be a reduction in tobacco sales.

(iv) Tax Shift This is also referred to as tax swap. It is a change in taxation that eliminates or reduces one or several taxes and establishes or increases others while keeping the overall revenue the same. 44

(v) Tax Effect This is a general term that describes the consequences of a specific tax scenario with respect to a particular tax-paying entity.

(d) Some of the tax provisions put in place by government to address multiplicity of taxes in Nigeria include but not limited to:

(i) Those laws that are not in the exclusive list can be legislated upon by state governments but it must be ensured that the liability of persons must be regulated to ensure tax or duty is not levied on the same by more than one State;

(ii) A House of Assembly when making laws for the local governments shall also regulate the liability of persons to ensure that same liability is not levied by more than one Local Government Council; and

(iii) Act 21, Taxes and Levies (Approved list for collection) 1998, which stipulates the collectible taxes by each tier of government is also an attempt to ensure that there is no multiplicity of taxes.

EXAMINER’S REPORT The question tests candidates’ knowledge of the general principles of taxation. Candidates’ performance was poor. The commonest pitfall was the poor knowledge of the multiplicity of taxes. Candidates are advised to pay attention to general principles of taxation in future examinations. S/No. Marking Guide Marks Marks 3a. Definition of multiplicity of taxes 1 Explanation 1 2 b. Types of multiple taxes ( 1 mark each subject to a maximum of 5 points) 5 c.(i) Tax incidence ( 1 mark each for definition and explanation) 2 c.(ii) Tax burden (1 mark each for definition and explanation) 2 c .(iii) Tax impact (1 mark each for definition and explanation) 2 c.(iv) Tax shift (1 mark each for definition and explanation) 2 c.(v) Tax effect (1 mark each for definition and explanation) 2 45

d. Multiplicity of taxes (11/2 marks for each tax provision subject to a maximum of 2 provisions 3 20 ADETOY NIGERIA LIMITED (a)

i. INCREMENTAL COST An incremental cost is an additional cost that will be incurred if a particular decision is taken. An incremental cost is a relevant cost provided that this additional cost is a cash flow,

ii. DIFFERENTIAL COST A differential cost is the amount by which future costs will be different, depending on which course of action is taken. A differential cost is therefore an amount by which future costs will be higher or lower, if a particular course of action is chosen. Provided that this additional cost is a cash flow, a differential cost is a relevant cost. Example: A company needs to hire a bus for the next six months. It has to decide whether to continue using a particular type of bus, which it currently rents for ₦25,000 each month, or whether to switch to using a bigger bus that will cost ₦36,000 each month. If it hires the bigger bus, it will be able to terminate the rental agreement for the current bus immediately. The decision is whether to continue with using the current bus, or to switch to the bigger bus. One way of analysing the comparative costs is to say that the bigger bus will be more expensive to rent, by ₦11,000 each month for six months. The differential cost of hiring the bigger bus for six months would therefore be ₦66,000.

iii. AVOIDABLE AND UNAVOIDABLE COSTS An avoidable cost is a cost that could be saved (avoided), depending whether or not a particular decision is taken. An unavoidable cost is a cost that will be incurred anyway.  Avoidable costs are relevant costs.  Unavoidable costs are not relevant to a decision. 74 Example: A company has one year remaining on a short-term lease agreement on a warehouse. The rental cost is ₦500,000 per year. The warehouse facilities are no longer required, because operations have been moved to another warehouse that has spare capacity. If a decision is taken to close down the warehouse, the company would be committed to paying the rental cost up to the end of the term of the lease. However, it would save local taxes of ₦56,000 for the year, and it would no longer need to hire the services of a security company to look after the empty building, which currently costs ₦240,000 each year. The decision about whether to close down the unwanted warehouse should be based on relevant costs only. Local taxes and the costs of the security services (₦296,000 in total for the next year) could be avoided and so these are relevant costs. The rental cost of the warehouse cannot be avoided, and so should be ignored in the economic assessment of the decision whether to close the warehouse or keep it open for another year.

iv. COMMITTED COST Committed costs are a category of unavoidable costs. A committed cost is a cost that a company has already been committed to or an obligation already made, that it cannot void by any means. Committed costs are not relevant costs for decision making. Example: A company bought a machine one year ago and entered into a maintenance contract for ₦240,000 per annum for three years. The machine is being used to make an item for sale. Sales of this item are disappointing and are only generating ₦150,000 per annum and will remain at this level for the next two years. The company believes that it could sell the machine for ₦250,000. The relevant costs in this decision are the selling price of the machine and the revenue from sales of the item. If the company sells the machine it would receive ₦250,000 but lose ₦300,000 revenue over the next two years – an overall loss of ₦50,000 75 The maintenance contract is irrelevant as the company has to pay ₦240,000 per annum whether it keeps the machine or sells it. Leases normally represent a committed cost for the full term of the lease, since it is extremely difficult to terminate a lease agreement.

v. SUNK COSTS Sunk costs are costs that have already been incurred (historical costs) or costs that have already been committed by an earlier decision. Sunk costs must be ignored for the purpose of evaluating a decision, and cannot be relevant costs. Example: A company must decide whether to launch a new product into the market. It has spent ₦1.9m on developing the new product, and a further ₦750,000 on market research. A financial evaluation for a decision whether or not to launch the new product should ignore the development costs and the market research costs, because the ₦2.65m has already been spent. The costs are sunk costs.

vi. OPPORTUNITY COSTS Relevant costs can also be measured as opportunity costs. An opportunity cost is a benefit that will be lost by taking one course of action instead of the next-most profitable course of action. Example: A company has been asked by a customer to carry out a special job. The work would require 50 hours of skilled labour time. There is a limited availability of skilled labour, and if the special job is carried out for the customer, skilled employees would have to be moved from doing another work that earns a contribution of ₦6,000 per labour hour. A relevant cost of doing the job for the customer is the contribution that would be lost by switching employees from other work. This contribution forgone (i.e 50 hours × ₦6,000 = ₦300,000) would be an opportunity cost. This cost should be taken into consideration as a cost that would be incurred as a direct consequence of a decision to do the special job for the customer. In other words, the opportunity cost is a relevant cost in deciding how to respond to the customer’s request. 76

(b) i. The relevant cost of labour is zero as no extra cost will be incurred as a result of this contract.

ii. The relevant cost of a material that is used regularly is its replacement cost. Additional inventory of the material must be purchased for use in this contract. The relevant cost of material X is therefore ₦1,800 per tonne i.e. ₦1,800 x 100 = ₦180,000 There is a relevant saving from using material Y from not having to pay the disposal cost of ₦240,000.

iii. As the company has already leased the storage unit for one year, the monthly rental cost is not relevant to the contract. However, the opportunity cost is the foregone rental income that the company would have made from the neighbouring business for the three months needed for this contract. i.e. 3 x ₦110,000 = ₦330,000.

iv. The fixed overhead is not relevant because there is no increment to fixed overheads expected as a result of this contract. Therefore the relevant overhead cost is just the variable part of ₦250 per hour x 2,000 hours = ₦500,000. So, the total relevant cost is ₦770,000 as follows: Description Relevant cost N Labour - Material X 180,000 Material Y (240,000) Storage 240,000 Storage 90,000 Overheads 500,000 Total 770,000 Conclusion: The contract should be accepted as it would make an incremental profit to the company, i. e, ₦1,230,000 (revenue of ₦2,000,000 less relevant costs of ₦770,000).

EXAMINERS REPORT The question tests candidates’ understanding of Relevant Costing as a tool for management decision making. Candidates are expected to demonstrate their knowledge on:

(i) Incremental cost, Additional cost, Relevant cost and extra unit produced; 77

(ii) Differential cost – comparison between two alternative costs; and

(iii) Sunk cost – past cost and irrelevant cost.

(iv) Committed cost – irrelevant, obligatory and committed expenses that must be paid. About 80% of the candidates who attempted the question scored 50% or above of the allocated marks. Commonest pitfall of the candidates who did not do well was their inability to identify the relevant cost especially on labour and opportunity cost. Candidates are advised to make better use of standard texts, such as the Institute’s Pathfinder past editions and Study Text.

MARKING GUIDE Marks Marks

(a) Discussion of each of the 6 concepts (2 marks each) 12

(b) i. Calculation of Total Relevant Cost 6 ii. Heading ½ iii. Advice/Accept ½ Iv Basis of Acceptance 1 8 20

(a) Limitations of Internal Control Systems

i. Human error may result in incomplete or inaccurate processing which may not be detected by control systems. ii. It may not be cost-effective to establish certain types of controls within an organisation. iii. Controls may be in place, but they may be ignored or overridden by employees or management. iv. Collusion: This means that two or more people work together to avoid a control, possibly for the purpose of committing fraud. Collusion may indicate that segregation of duties is ineffective.

(b) The problems that may arise when control systems rely excessively on the involvement of senior management in small entities include the following:

i. There may be lack of evidence as to how systems are supposed to operate. The auditor will need to rely more on enquiry than on review of documentation; ii. There may be lack of evidence of controls - how does the auditor know that the controls exist and are being applied?; iii. Management may override controls that are in place; iv. Management may lack the expertise necessary to control the entity effectively; v. There may not be an independent person within the management team as there would be within “those charged with governance” in a large entity; and vi. It is likely the auditor places a lower level of reliance on controls in a small entity, subsequently requiring the auditor to carry out a larger amount of substantive testing.

EXAMINER’S REPORT The question tests candidates on internal control systems. About 85% of the candidates attempted the question. Candidates have a fair understanding of the question and performance was therefore average. The commonest pitfall was poor interpretation of the requirements of the question occasioning repetition of solutions proffered in parts (a) and (b). Candidates should ensure they understand the requirements of a question properly before answering it in future examinations.

MARKING GUIDE Marks a. Limitations of internal control systems 2 marks x 4 points 8

b. Problems that may arise when control systems rely excessively on senior management in small entities 2 marks x 6 points 12 20

a. Agricultural Activity: This is the management by an entity of the biological assets for sale, distribution or for conversion into agricultural produce. This comprises such activities like raising live stock, forestry, annual or perennial cropping, cultivation of plantations, floriculture and fish farming.

b. Determination of fair value for a Biological Asset or Agricultural Produce: Section 14 of IPSAS 27 states that the fair value of an asset is based on its present location and condition. For instance the fair value of a barn of yams is the price of the yams in the market less the transport and other incidental cost of taking the yams to the market, which is an active market. However, where there exists no active market, the Standard recommends any or a combination of the following as reference point for determining the fair value.

i. The most recent market transaction price ii. Market price for similar assets with adjustment to reflect differences.

iii. The agricultural sector benchmark i.e. per hectare of crops, per kilogram of meat, etc.

c. Recognition of Biological Assets and Agricultural Produce: According to the Standard, an entity shall recognize a biological asset or agricultural produce ONLY when:

i. The entity controls the assets as a result of past events; ii. There is the probability that future economic benefits or service hitherto associated with the asset will flow into the entity; and iii. The fair value or the cost of the asset can be measured reliably.

d. Accounting Treatment of Gains or Losses

i. Gains or Losses Arising on Initial Recognition In accordance with Section 30 of the Standard, gains or losses arising on initial recognition of a biological asset or agricultural produce at fair value less costs to sell is included in surplus or deficit for the period in which it relates e.g. a gain or loss arising when a kid is given birth to or when crops are harvested.

ii. Gains or Losses from a Change in Fair Value Less Costs to sell Sections 32 of the Standard states that, gains or losses arising from a change in fair value less costs to sell of a biological asset is taken as surplus or deficit for the relevant period in which the gains or losses relate.

EXAMINER’S REPORT The question tests candidates’ knowledge on the contents and application of ’IPSAS 27’ with the accounting treatment and disclosures in relation to agricultural produce. Few candidates attempted the question and their performance was poor. Candidates’ major pitfall was their non-familiarity with IPSAS 27 and lack of proper preparation for the examination. Candidates are advised to make use of the Institute’s Study Text in preparing for future examination and also be familiar with International Public Sector Accounting Standards.

MARKING GUIDE MARKS MARKS

a. Explanation of the term “agricultural activity” 2 Any three component of agricultural activity at 1 mark each 3 5

b. Explanation of the fair value of an asset 2 Three reference points at 2 marks each. 6 8 c. Recognition of any two of Biological Assets and Agricultural produce by entity at 1½ marks each. 3

d. Gains or losses arising on initial recognition 1 Explanation of accounting treatment 1 Gains or Losses from a Change in Fair Value Less Costs to sell 1 Explanation of accounting treatment 1 4 Total 20

JOBI NIG. ENTERPRISES COMPUTATION OF ASSESSEABLE PROFITS FOR THE RELEVANT ASSESSMENT YEARS OLD BASIS Assessment Basis Assessable Year Period Profit N 2008 1/10/06 – 30/9/07 840,000 2009 1/10/07 – 30/9/08 (12/15 x N840,000) 672,000 2010 1/10/08 – 30/9/09 (3/15 x N840,000) +(9/12 x N630,000) 640,500 2,152,500 NEW BASIS Assessment Basis Assessable Year Period Profit N 2008 1/1/07 – 31/12/07 (9/12 x N840,000 + 3/15 x N840,000) 798,000 2009 1/1/08 – 31/12/08 12/15 x N840,000 672,000 2010 1/1/09 – 31/12/09 630,000 2,100,000 CESSATION Assessment Basis Assessable Year Period Profit N N 2013 1/1/13 – 31/12/13 190,000 2012 Higher of: 1/1/12 – 31/12/12 360,000 OR 1/1/11 – 31/12/11 480,000 480,000 670,000 46 CESSATION 2013 Assessment Year N Assessable Profit 1/1/13 – 31/12/13 90,000 Add: Bad debt recovered 120,000 210,000 Less: Cost of recovery 20,000 190,000

EXAMINER’S REPORT The question tests candidates’ knowledge of change of accounting date and back duty investigation. Candidates displayed good understanding of the question. The commonest pitfall was the inability of the candidates to put basis periods in the relevant years of assessment. Candidates are advised to study the placement of basis periods in the relevant years of assessment as this is a frequent examination area.

Marking Guide Marks Heading ½ Old basis: Basis Period 1 mark each for 2008, 2009 and 2010 3 Assessable Profit (1 mark each for 2008, 2009, 2010) 3 New basis Basis Period (1 mark each for 2008, 2009 and 2010) 3 Assessable Profit (1 mark each for 2008, 2009 and 2010) 3 Cessation Basis Period – 2013 1 - 2012 (1 mark each for 2 options) 2 Assessable Profit - 2013 1 - 2012 ( 1 mark each for 2 options) 2 Computation of 2013 Assessable Profit: Basis Period/Assessable profit ½ Bad debts recovered ½ Cost of recovery ½ Total 20 47

(a) Project management has nine key elements. The responsibilities of the project manager will be to manage each of these nine elements.

• Scope At the outset of the project, the project manager will define the scope of the project and set objectives. These will then need to be agreed with the Board of Directors before the project begins and form the basis for the overall project direction;

• Risk management The project manager will be responsible for identifying any major risk associated with the project (e.g. a supplier delivering late), and managing these risks through transferring risks to other parties, avoiding risks or accepting them and managing the consequences as they happen; 78

• Integration The project manager will need to develop plans for the development and implementation of the new systems. This will ensure that the process happens quickly and easily and uses the resources in the best way. To integrate the new system into the organisation, these plans will need to consider change in management issues. People have been using the old system for a while and will need to adapt to the change in approach. It may also mean changing job roles and working practices which could cause conflict and staff dissatisfaction if not effectively managed;

• Time Each of the activities will need to be defined and their duration estimated. They can then be sequenced and time schedules made, using techniques such as Gantt Charts or Network Analysis. This will help to ensure that the project is well organised and co-ordinated;

• Cost A budget for the project must be defined. This might be done through cost estimates from suppliers or by costing each specific element of the project individually. Throughout the course of the project, the project manager will need to monitor costs and take control action if costs are not in line with budget;

• Quality It is project manager’s responsibility to develop the Project Quality Plan which outlines expected quality of the new information and systems. They will need to monitor progress against this plan and ensure that the quality objectives are met. This will mean ensuring that the systems are developed by experienced suppliers and adequate testing is undertaken prior to the system going live;

• Resources This will involve the acquisition and effective management of staff, materials, buildings and equipment, and ensuring that each of these resources is adequately co-ordinated and managed;

• Communication Communication to all stakeholders will need to be undertaken on a regular basis. This will include reporting to the Board of Directors on progress, and agreeing with any major changes in the scope. 79 It will also involve good team communication and management to ensure team members remain motivated and committed to the project;

• Procurement The project manager will be responsible for procuring goods and services from external suppliers. This is likely to include the design and development of the new information system since ABC Limited has little in-house expertise; and

• Motivation Motivation is a key role in managing people for productivity, hence every team member should be given the opportunity to own the tasks assigned to him/her. The project manager is expected to provide the required enabling environment for team members to excel.

(b) The skills required by the project manager are as follows:

• Change management skills He/She will have to be skilled in understanding the people aspects of the change and helping to overcome resistance to change. This may involve knowledge of change management tools;

• IT skills Since the project is IT-based, some IT knowledge and ability will help the project manager to understand the key issues and negotiate effectively with suppliers;

• Leadership Leadership involves obtaining results through personal direction and influence. The project manager will need to be able to create a vision for the team, be assertive, inspire and motivate staff;

• People skills The project manager will need to understand the concerns and motivations of team members and to effectively manage them. This may involve the use of a suitable management style and understanding of approaches to motivation of staff. The aim will be to create a motivated and happy team that works well to achieve the project’s goals;

• Communication skills A key role of the project manager is communication with staff, suppliers or the Board of Directors. He/She will therefore have to be 80 able to use a variety of communication methods (i.e. presentations, meetings, reports, e-mails) and know when to use these appropriately and be skilled at using each;

• Problem-solving and decision-making skills There will inevitably be many decisions to be taken during the course of the project and problems to be overcome. The project manager needs to be an analytical thinker who will be able to solve problems as they arise and who is firm and decisive so that the project is not delayed;

• Negotiation skills Negotiation with suppliers and internal departments is an inevitable part of the process. The project manager will need to understand the basis of negotiation in order to ensure the best outcomes are achieved for the organisation. This may involve being able to understand leverage points over potential suppliers, to see the other parties’ perspective being firm and willing to walk away when the deal is not right; and

• Planning skills The project manager will need project planning skills, and need to be able to use project management software to make and monitor plans. Knowledge of techniques such as Gantt Chart and Network Analysis will facilitate this process. Some basic financial knowledge or expertise would be an asset to help with the budgeting and cost monitoring process.

EXAMINER’S REPORT The question tests candidates’ understanding of Project Management with emphasis on the roles/responsibilities and the skills required of a project manager. Candidates were expected to list the responsibilities of a project manager, discuss each of the responsibilities and also list the skills of a project manager describing each of the skills. The candidates showed lack of understanding of the requirements of the question. Performance was poor as about 50% of the candidates who attempted the question scored below 50% of the allocated mark. The inability of the candidates to differentiate between the role/responsibility of a project manager and that of ICT manager and not having clear understanding of 81 responsibilities and skills required by a project manager for successful implementation of programme/project is their major pitfall. Candidates are advised to understand the requirement of the question before attempting it. They need to cover the syllabus and practise questions and answer provided in the ICAN Pathfinder and Study Text.

MARKING GUIDE Marks

(a) 2 marks per responsibility identified and explained, maximum of 5 10

(b) 2 marks per relevant skill identified and explained, maximum of 5 10 20

a. Ethical matters worthy of consideration The ethical issues worthy of consideration as Joe Adams joins Maikai Airlines Limited which may especially affect actual and perceived independence include:

i. The seniority of the individual when he was on the assurance team (being an ex-partner) accentuates the risk;

ii. The position he has taken up at the client’s office - the risk is higher because he has taken up a top management position;

iii. The amount of future involvement he will have with the assurance team, as a member of the client’s staff. As finance director, he is responsible for the financial statements, thus, the risk is higher; and

iv. The length of time that has passed since he was on the assurance team. The longer the time period, the less significant the risk.

(b) The threats that could arise include:

i. Self-interest threat: the audit team coming for subsequent audits might be unwilling to give an unfavourable audit opinion because such could indirectly indict their ex-partner;

ii. Familiarity threat: the ex-partner had worked intimately with most of the staff in the firm especially the partners. With this relationship, the audit team may become sympathetic to the interests of the ex-partner; and

iii. Intimidation threat: the audit team could be influenced to accept the ex-partner’s opinion without suspicion because of his/her past exposure, position, experience and knowledge.

(c) Matters specified by the Code include:

i. The individual concerned must not be entitled to any benefits or payments from the firm, unless these are fixed or pre-determined arrangements;

ii. Amounts owed to the individual (for example, in the case of an ex- partner) must not be so significant that they could threaten independence;

iii. The individual must no longer take part or appear to take part in the firm’s business; and

iv. In respect of audit clients, a key audit partner should not accept a key management position with their audit client until at least two years after the conclusion of the audit.

EXAMINER’S REPORT Part (a) of the question is on ethical matters relating to Chartered Accountants in practice joining their audit clients, part (b) tests candidates on threats that may arise from (a) above and part (c) tests safeguards specified by the Code of Ethics on the threats that may arise from the above. About 65% of the candidates attempted the question. The candidates showed fair understanding in part (b), but poor understanding in parts (a) and (c). The observed shortcoming is their inability to interpret and relate scenarios to real life or practical situations. Candidates are advised to utilise their acquired skills to address issues in given scenarios. They should also make use of the Institute’s Study Text, when preparing for future examinations.

MARKING GUIDE MARKS a. Ethical matters 2 marks x 4 points 8

b. Threats 2 marks x 3 points 6

c. Safeguards 2 marks x 3 points (maximum) 6 20

a. ’Value-for-money’ (VFM) audit means using resources in the best way in order to achieve intended objectives. Value-for-money audit is the review of the financial transactions to confirm that an organisation has received adequate benefits for the money expended.

b. The three major components of ’Value-for-Money’ audit are:

i. Economy. This means spending money carefully, and not paying more than necessary for resources - materials, labour and other expenses.

ii. Efficiency. Efficiency means using resources in such a way that they produce the greatest possible amount of ’output’. It means getting more from the use of available resources. For example, efficiency in the use of an employee means getting a high rate of output for every hour or day worked.

iii. Effectiveness. Effectiveness means using resources in such a way as to achieve the desired objectives. Efficiency is of little value unless the output from the system is what the entity wishes to achieve.

c. The five steps towards a successful ’Value-for-Money’ audit are:

i. Initial analysis of projects areas for ’value for money’ audit through analysis of the annual budgets and other financial statements.

ii. Adequate planning, co-ordination and control in order to;

• Determine the annual programme of performance audit work, the staff and other resources needed to deliver on the programme;

• Ensure that appropriate attention is devoted to important areas, potential problems are identified and that the work is completed expeditiously; and

• Assist in the proper assignment of work to team members and the coordination of work performed by different audit teams.

iii. Introduction of the main study area to the auditee should cover the following:

• Purpose of the main study;

• Time schedule for the main study;

• Members of the audit team;

• The audit objective, audit question and assessment criteria;

• Methods that will be used to collect data;

• The information and support that will be requested from the auditee;

• The purpose of the auditee appointing a contact person; and

• The purpose of the exit meeting.

iv. Carrying out compliance test to test the strength of internal control in operation

v. Carry out substantive tests in order to:

• Ensure that resources (inputs) are obtained at the cheapest prices (Economy Test);

• Ensure that wastages are reduced to the barest minimum (Efficiency Test); and

• Ensure that resources were used in such a way as to achieve the desired objectives (Effectiveness Test).

vi. Reporting involves:

• The clearance of the report through reviews;

• Quality controls and exit meetings with the auditee; and

• Submission of the report to the Legislature, Government and/or the audited entities.

vii. Follow-up action involves:

• Processes that identify and document the audit impact;

• The progress the auditee has made in implementing audit recommendations; and

• Such processes that provide feedback to the auditor and to the Legislature.

d. The factors contributing to effective ’Value-for-Money’ audit are:

i. The independence of the auditor: He should be given free hand to do a good job. The auditor should not be under the control of management of the Organisation.

ii. The adequacy and scope of the auditor’s power: The authority of the auditor should be guaranteed. The auditor must be given adequate authority to discharge his responsibilities.

iii. The expertise and professionalism of the auditor and his staff: The auditor should be adequately trained, versatile and skillful at his job.

iv. The resources at the auditor’s disposal: There should be enough funds at the disposal of the auditor to carry out his assignment.

v. Freedom of reporting and the qualitative nature of reports: The reports, which the auditor transmits should be timely and promptly looked into so that effective decisions could be taken in order to comply with the Professional Audit Standards.

vi. Unrestricted access: Audits should be conducted with complete and unrestricted access to employees, property and records.

vii. Stakeholder support: The legitimacy of the audit activity and its mission should be understood and supported by a broad range of elected and appointed government officials, as well as the media and the citizens involved.

e. The precise roles of Internal Audit Unit in relation to ’Value-for-Money’ audit are to:

i. Guide against unreasonable or extravagant expenditure; ii. Ensure that sufficient funds are available to enable payment to be effected; iii. Ensure compliance with budgetary, civil service rules, financial memorandum, legislation and other legal requirements on payment; iv. Ensure that goods/services conform with the prescribed standards before payments; and v. Confirm whether or not the public sector organisation has committed its resources economically, efficiently and effectively.

EXAMINER’S REPORT The question tests candidates’ knowledge and skills in public sector audit; specifically on “Value-for-Money” audit (VFM), its components, audit steps, factors that influence VMA and the roles of internal audit unit in relation to VFM. Majority of the candidates attempted the question and their performance was below average. Candidates’ major pitfall was their inability to answer parts c, d and e of the question. Candidates are advised to make use of the ICAN Study Text as well as other relevant texts for future examinations of the Institute.

MARKING GUIDE MARKS MARKS a. Definition of ’Value-for- Money’ (VFM) audit 2½ b. Recognition of each of the three major components at 1 mark each 3 Explanation of each of the three major components at 1 mark each 3 6

c. Explanation of any five steps at ½ mark each 2½ d. Identification of any five factors at 1 mark each. 5 e. Explanation of any four precise roles of Internal Audit unit at 1 mark each. 4 Total 20

A. RULES THAT GUIDE THE RESIDENCE OF DIFFERENT CATEGORIES OF INDIVIDUALS Liability to income tax is often determined according to whether a person receiving income is resident in a state for a particular year of assessment. A taxpayer is therefore liable to the tax authority of the territory in which he is deemed to be resident for a year of assessment.

(i) An Individual whether in employment or whose only sources of income are unearned income is deemed to be resident for a year of assessment in the territory in which he has a place available for his domestic use in Nigeria on the first day of January of the assessment year, and does not include any hotel, rest house or other place at which he is temporarily lodging.

(ii) An Executor is deemed to be resident in the territory in which the deceased individual was last deemed to be resident or would have been deemed to be resident if the law had been in force prior to the death of his date.

(iii) A Trustee of any trust or settlement is deemed to be resident where all the income of the settlement or trust for a year of assessment arises. Where the income arises in more than one territory or where the tax authority cannot be determined, the Federal Inland Revenue Service Board is the tax authority.

(iv) Partners in partnership are deemed to be resident where the principal office or the place of the partnership is situated on the first day of that year or is first established during the year.

(v) A Village or an indigenous community is deemed to be resident in the territory in which the community is found.

(vi) An Itinerant worker is deemed to be resident where he is found in a year of assessment.

(vii) An individual not being a person assessable by FIRS (S, 2, 1(b) who holds a foreign employment on the 1st day of January in a year of assessment or who first becomes liable to income tax in Nigeria for that year by reason of his entering that employment during that year, shall be deemed to be resident for that year in the territory in which the principal office of his employer is situated on that day or on the day his foreign employment commences as the case may be.

(viii) An individual whose only source of earned income arising in Nigeria on the 1st day of January in a year of assessment is a pension, or who had a place or principal place on that day shall be deemed to be resident for that year in the territory in which that place or principal place of residence was situated on that day. 48 B. CONDITIONS FOR GRANTING CAPITAL ALLOWANCE Capital allowance is claimable only on the following conditions: (i) Capital expenditure must have been incurred in the basis period; (ii) The qualifying capital expenditure must have been put into use for the purpose of trade or business by the taxpayer; (iii) Ownership over the assets must not be in dispute; (iv) Assets must be in use as at the end of the basis period; and (v) Application for Acceptance Certificate must be made with the Federal Ministry of Industry where total value of additions to property, plant and equipment exceed N500,000; in any given year.

EXAMINER’S REPORT The question tests candidates’ knowledge of Tax Clearance Certificate and treatment of capital allowances. Candidates displayed a fair understanding of the question and performance was average. Some candidates could not fully match residency rules with individuals or group of individuals. Candidates are advised to pay attention to general principles regarding the taxation of individuals.

Marking Guide Marks Marks 5a. Rules that guide the determination of residence - Identification of the categories of individuals (1 mark each subject to a maximum of 5 categories) 5 - Explanation of the categories of individuals (1 mark each subject to a maximum of 5 categories) 5 10

b. Conditions for granting Capital Allowances (1st 2 conditions at 1½ marks each) 3 (3rd condition at 2 marks) 2 5 Total 15

(a) i. CLASSIC WEARS LIMITED Computation of Machine Limited Hours Machine I Machine II HRS HRS Sales Requirements: Trouser: 1,250 x 2 2,500 1,250 x 3 3,750 Jackets: 1,500 x 4 6,000 1,500 x 6 9,000 Skirts: 2,500 x 6 15,000 2,500 x 2 _______ 5,000 Total hours needed 23,500 17,750 Less: Total hours available 19,600 18,000 Deficit/Surplus (3,900) 250 Based on the above, machine 1 hours represent the limiting factor because the hours available are lower than required. 82

ii. Determination of Ranking Products Trouser Jacket Skirt Selling Price ₦2,300 ₦3,200 ₦2,480 Less: variable costs ₦1,800 ₦2,500 ₦1,700 Contribution ₦500 ₦700 ₦780 Machine hour required: Type I 2 4 6 Contribution per hour ₦250 ₦175 ₦130 Ranking 1st 2nd 3rd

iii. Determination of Production Plan Hrs per unit Hrs available Hrs Hrs Rem. ¾ Production Utilised After plan Production achieved T: 1,250 x 2 2 19,600 2,500 17,100 1,250 J: 1,500 x 4 4 17,100 6,000 11,100 1,500 S: (11,100 ÷ 6) = 1.850 6 11,100 11,100 NIL 1,850 Production Plan Trouser = 1,250 ; Jacket = 1,500 ; Skirt = 1,850 Workings Estimated production Estimated sales ÷ Estimated Selling Price Trouser = N2,875,000 ÷ N2,300 = 1,250 units Jacket = N4,800,000 ÷ N3,200 = 1,500 units Skirts = N6,200,000 ÷ N2,480 = 2,500 units

b. Computation of Optimum profit Trouser Jacket Skirt Total N N N N Unit (A) 1,250 1,500 1,850 Unit contribution (B) 500 700 780 Total Contribution (A x B) 625,000 1,050,000 1,443,000 3,118,000 Less Fixed Cost Block A Machine 980,000 Block B Machine 750,000 Block C Machine 370,000 2,100,000 Total optimum profit 1,018,000

EXAMINER’S REPORT The question tests candidates’ knowledge of Marginal Costing involving the application of limiting factors in the determination of optimum company’s profit. Candidates were expected to address the following points: 83

(a) Determination of machine I, as the limiting factor out of machines I and II for each product;

(b) Contribution per machine I hours for each product;

(c) Product ranking;

(d) Production hour’s utilised in producing each of the three products; and

(e) Units turned out for each product and optimum company’s profit. About 90% of the candidates attempted the question. About 50% of the candidates who attempted the question scored 50% or above of the allocated marks. Candidates’ commonest pitfall was that some of them took the requirements of units and Naira of sales as same and not able to calculate beyond the determination of contribution per hour. Candidates are advised to put in more effort while preparing for future examinations and pay more attention on this aspect of the syllabus.

MARKING GUIDE Marks Marks (a) Determination of Optimal Production

i. Computation of sales in units for each product 1 ii. Computation of machine limiting hours (Deficit/Surplus) - Machine I 1½ - Machine II 1½ - Machine Limitation 1 4 iii. Determination of contribution Trouser 1¼ Jacket 1¼ Skirt 1¼ Ranking ¼ 4 iv. Computation of machine time required: Machine time 1½ Production plan 1½ 3

(b) Computation of total profit from plan

i. Contribution 1¼ ii. Fixed cost 1¼ iii. Profit ½ 3 Total 15 84

(a) Major Controls to be put in place to minimise the risks inherent in Electronic Data Interchange (EDI) system include:

i. Controls over transmission of data: This is one of the controls to be put in place to minimise the risks inherent in EDI system. These include encryption, acknowledgement and authentication codes. Authentication codes are used so that senders and receivers of transmitted data have to authenticate their identity before data is transmitted and/or received. Encryption involves translating data into coded form of transmission and then re-translating it at the recipient’s end;

ii. Monitoring and checking of output: Another type of control to be put in place is monitoring and checking of output. There should be proper monitoring and checking of all outputs in an EDI system with only authorised persons having access to the output and ensuring reasonableness of the output at the receiving end;

iii. Virus protection system: There should also be a virus protection system to be put in place to minimise the risk inherent in Electronic Data Interchange system; and

iv. Contingency plans and back up arrangements.

(b) Features of EDI systems that may create additional problems for an Auditor include:

i. There is lack of paper audit trail where a transaction can be followed through the stages of its processing, by going from one paper document to another. With EDI, the system needs an electronic audit trail for transactions and the computer system should be able to provide one;

ii. Any computer failure may have an increased impact on the client’s operations, because there is an increased level of dependency on the computer systems in the organisation. General controls for Information Technology (IT) will therefore be extremely important;

iii. There are also security risks in the transmission of data. Unauthorised individuals may be able to read and/or corrupt transmitted data; and

iv. The risk of loss or corruption of data in the process of transmission of the data.

EXAMINER’S REPORT The question tests candidates on information Technology (IT) - Electronic Data Interchange (EDI). About 50% of the candidates attempted the question. Performance of candidates was generally below average apparently due to lack of understanding of the requirements of the question. The commonest pitfall was the wrong interpretation of the question. Candidates are advised to adequately cover the syllabus, make use of the Institute’s Study Text and specifically study the IT section for future examinations.

MARKING GUIDE Marks a. Controls to minimise risks in EDI system 2 marks x 4 points 8

b. Features of EDI system that may create problems for an auditor 2½ marks x first 2 points 5 1 mark x last 1 point 2 7 15

i. National Budget is a document containing statements of intended expenditure and expected revenue of the national government during a particular period, usually a year. It usually consists of the review of the performance of the budget of the preceding year, statements of objectives of the present budget, revenue estimates, estimates of recurrent and capital expenditures, as well as macroeconomic policy measures to be adopted to promote the realization of the stated objectives of the budget. Thus, a national budget is an instrument of control of government activities and a major management tool of the economy. b.i Surplus Budget: A surplus budget occurs when the government revenue is planned to exceed the proposed government expenditure. This may be secured by a reduction in government expenditure or an increase in taxation to broaden the revenue base of the government. A government will budget for a surplus to reduce inflation. Price stability is needed to encourage investment in the economy and to prevent further fall in the living standard of the people. b.ii Deficit Budget: A deficit budget occurs when the government revenue estimate is less than the proposed government expenditure. A deficit budget is usually adopted to stimulate economic growth. Government usually contracts both domestic and external loans to bridge budgetary gap. The process may lead to generation of employment opportunities, increase in national output and living standards.

c. Problems usually associated with the implementation of national budget include the following:

i. Delay in formulation, presentation and approval process by the Executive and the National Assembly Government expenditure loses its objective as government becomes more concerned with recurrent expenditure and less concerned with capital expenditure. Everything becomes haphazard and the economy remains stagnated.

ii. Lack of efficient database. There are a lot of uncertainties in the data used for the budget preparation. The projection of revenues accruing from oil export may not be forthcoming in view of price instability in the world market.

iii. The problem of inflation. Inflation tends to reduce the purchasing power of money. When the value of money is falling, budget implementation may run into problems. The revenue available will not be able to cover the expenditure.

iv. Human element. Lack of probity and accountability of government officials affect successful budget implementation. Specifically, widespread corrupt practices usually cause budget leakages resulting THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

(a) DIVIDENDS EXEMPTED FROM WITHHOLDING TAX These include:

(i) Dividends paid out of pioneer profit; (ii) Dividends paid by issue of bonus shares; (iii) Dividends from small companies in the manufacturing sector in the first five years of operation; 49

(iv) Dividends paid out of taxed petroleum profits; (v) Dividends from companies engaged in petrochemical and liquefied natural gas; (vi) Dividends received from investments in wholly export oriented businesses; (vii) Dividends received by a company from a country outside Nigeria and brought into Nigeria through government approved channels; and (viii) Dividends distributed by Unit Trust.

(b) COMPUTATION OF TRUSTEES SETTLEMENT ESTABLISHMENT OF MR. SALAM (DECEASED) 2016 YEAR OF ASSESSMENT N N Income 14,000,000 Capital Allowance (3,000,000) 11,000,000 Profit from other source: Rent (Gross) 8,000,000 19,000,000 Less Remuneration of Trustees 216,000 Discretionary payments 212,000 Trust expenses 116,500 Annuity 178,000 (722,500) Computed Income 18,277,500 Distribution to beneficiaries 5,483,250 Retained by the Estate 12,794,250 Total 18,277,500 Shola Bimbo Tiwa Total N N N N Share of Computed Income 2,741,625 1,827,750 913,875 5,483,250 Discretionary payments 60,000 72,000 80,000 212,000 2,801,625 1,899,750 993,875 5,695,250

WORKINGS 1. Trustees’ Remuneration = N18,000 x 12 = N216,000

2. Share of Income Shola = 3/6 x N5,483,250 = N2,741,625 Bimbo = 2/6 x N5,483,250 = N1,827,750 Tiwa = 1/6 x N5,483,250 = N 913,875 50

EXAMINER’S REPORT The question tests candidates’ knowledge of the provisions relating to the taxation of trust incomes. Candidates displayed a good understanding of the question. The commonest pitfall was the inability of the candidates to present the solution appropriately. Candidates are advised to pay attention to appropriate format in the taxation of trust incomes as given in the Institute’s study texts and pathfinders.

Marking Guide Marks 6a. Dividends exempted from Withholding Tax (First two points at 1½ mark each) (Third point at 2 marks) 5 b. Computation of amounts due to the beneficiaries Income ½ Capital Allowance ½ Total ½ Rent ½ Sub total of Income ½ Remuneration of Trustees ½ Discretionary payments ½ Trust expenses ½ Annuity ½ Total of expenses ½ Distribution to beneficiaries ½ Retained by the estate ½ Computation of amounts due to beneficiaries: Share of Computed Income 2 Discretionary payments 2 15 The company has just launched an innovative new product using a market skimming pricing policy. This means that the selling price of the product is high and thus, the product is only available to a small segment of the market that can afford to pay the high price for something that is unique and innovative. The four stages to the product life cycle of each of unit selling price and unit production cost are Introduction, Growth, Maturity and Decline. Unit Selling Price Introduction: The initial selling price will be high as this will quickly recover the development costs of the product. The High Net Worth customers will not be deterred from buying the product as it will be sold on the basis of its uniqueness rather than its price. Growth Stage: Unit selling price is likely to be reducing for a number of reasons. ● The product will become less unique as competitors use reverse engineering to introduce their versions of the product. ● The company may wish to discourage competitors from entering the market by lowering the price. ● The price needs to be lowered so that the product becomes attractive to customers in different market segments thus increasing demand to achieve growth in sales volume. Maturity Stage: As the product enters the maturity stage, the price will need to be lowered further, possibly by short-term one-off offers or discounts for multiple purchases so that the product continues to be financially viable for as long as possible. Decline Stage: When the product enters the decline stage, the price will be lowered to marginal cost or even lower in order to sell off inventories of what is now an obsolete product as it has been replaced by a more technologically advanced product. Unit Production Costs: Introduction: Production costs are also likely to change throughout the product’s life cycle. Initially, production costs may be high due to low volume of activity and the level of fixed costs being incurred to provide the production facility. In addition, the labour and related costs are likely to be high as the employees have not yet become experienced in making the product. 85 Growth Stage: Unit production costs are likely to reduce for the following reasons: ● Direct materials are being bought in larger quantities and therefore the company may be able to negotiate better prices from its suppliers thus causing unit material costs to reduce; ● Direct labour costs may be reducing if the product is labour intensive due to the effects of the learning and experience curves; and ● Fixed production costs are being shared by a greater number of units. The extent of the decrease in unit labour cost in particular, and its speed will depend on the complexity of the manufacturing process, its similarity to previous products, the experience and level of retention of the workforce. Maturity Stage: In the maturity stage, production costs per unit are likely to remain fairly constant because the learning period will have ended, the workforce will be experienced in producing and in handling the raw materials and operating the machinery. Costs are incurred to maintain manufacturing capacity, marketing and product enhancement cost to extend maturity Decline Stage: In the decline stage, production costs per unit may increase due to both lower volume and high workforce being less interested in a declining product and trying to learn new skills in relation to other products. Close attention to cost is needed as withdrawal decision might be expensive.

EXAMINER’S REPORT The question tests candidates’ understanding of product market life cycle, behavioural pattern with regards to unit selling price and unit production cost when market skimming pricing policy is used. Candidates are expected to explain, with reasons, the effect on unit selling price and unit production cost as the product goes through the four stages of its life cycle. About 70% of the candidates did not fully understand the requirements of the question and they left parts of the question unanswered thus loosing vital marks allocated. About 30% who attempted the question scored 40% or above of the marks allocated. Candidates’ commonest pitfall is their inability to fully provide solution to the question thereby leading to loss of marks. 86 Candidates are advised to work harder while preparing for future examinations by covering all aspects of the syllabus and make better use of the Institute’s Study Text, past edition of Pathfinder and relevant text books for future examinations.

Marking Guide Marks Marks Introduction 1 Price – relevant comments at the various stages 7 Cost – same as price 7 15 Five elements contained in an assurance engagement performed by an auditor are:

i. A three Party Relationship:

• Practitioner,

• Responsible Party,

• Intended Users. ii. subject matter; iii. suitable criteria; iv. evidence; and v. assurance report.

i. A three Party relationship:

• Practitioner – the individual providing professional services that will review the subject matter and provide the assurance e.g. the audit firm in a statutory audit;

• Responsible party – the person(s) responsible for the subject matter e.g. the Directors are responsible for preparing the financial statements to be audited; and

• Intended users – the person(s) or class of persons for whom the practitioner prepares the assurance report, e.g. the shareholders in a statutory audit.

ii. Subject matter: This is the data such as the financial statements that have been prepared by the responsible party for the practitioner to evaluate. Another example might be a cash flow forecast to be reviewed by the practitioner;

iii. Suitable criteria: This can be thought of as ’the rules’ against which the subject matter is evaluated in order to reach an opinion. In a statutory audit this would be the applicable reporting framework e.g. IFRS and company law;

iv. Evidence: Information used by the practitioner in arriving at the conclusion on which their opinion is based. This must be sufficient (enough) and appropriate (relevant); and

v. Assurance Report: The report (normally written) containing the practitioner’s opinion. This is issued to the intended user following the collection of evidence.

EXAMINER’S REPORT The question tests candidates’ knowledge of assurance engagement. About 90% of the candidates attempted the question. The understanding they showed was commendable and the performance was very good. The commonest pitfall in some cases was poor presentation which cost some candidates some marks. Candidates should imbibe and apply culture of good communication skills in future examinations.

MARKING GUIDE Marks Identification of each element 1 x 5 Explanation of each element 2 x 5 5 10 15

a(i) Examples of Exempted Goods from VAT These include:

• All medical and pharmaceutical products;

• Basic food items;

• Books and educational materials;

• Baby products; 51

• Plant, machinery and goods imported for use in the Export Processing Zone or Free Trade Zone, provided that 100% production of such company is for export otherwise tax shall accrue proportionally on the profits of the company;

• Plant, machinery and equipment purchased for utilization of gas in downstream petroleum operations;

• Tractors, ploughs and agricultural equipment and implements purchased for agricultural purposes;

• Exports relating to: i. Fertilizers locally produced, agricultural and veterinary medicine; and ii. Services exempted from VAT.

• Oil exports;

• Vegetable oil; and

• Motorcycle (CKD)/Bicycle (SKDs); and their spare parts. Services Excepted From VAT These include:

• Medical services;

• Services rendered by Micro finance banks and mortgage institutions;

• Plays and performances conducted by educational institutions as part of learning;

• Oil exported services

• Rent/lease of residential property;

• Life insurance; and

• Shared passenger-transport service available for use by the general public is now VAT exempt. This exemption is not applicable to hired or rented vehicles or transportation apparatus for private use like Uber, etc. a(ii) Zero-rated goods and services are products that are not subject to value added tax mainly due to their societal importance. For VAT purposes, these goods are zero-rated and do not have additional taxes levied on them. These include:

• Non-oil exports;

• Goods and services purchased by diplomats;

• Humanitarian donor funded project undertaken by NGOs, religious and social clubs or societies recognized by law and activities for not-for-profit organizations and in the public interest.

Note: On June 6, 2018, the Federal Executive Council (FEC) approved two Executive Orders and five Amendment Bills, which amended certain controversial tax provisions and those relating to VAT have been accommodated in the examples given above. 52

b. MAJOR DIFFERENCES BETWEEN VALUE ADDED TAX (VAT) AND WITHHOLDING TAX (WHT) VAT WHT i. An indirect tax A direct tax ii. Imposed on goods and services Imposed on incomes at source iii. Imposed at 5% Rate applicable is dependent on type of transaction iv. Backed by VAT Act 2004 (as amended) Backed by certain Sections of CITA 2004 and PIT (Amendment) Act 2011 v. Is governed only by Federal Inland Revenue Service Is governed partly by State Internal Revenue Service

vi. VAT is shared by the 3 tiers of government Withholding tax collected by state government is not shared by the 3 tiers of government

EXAMINER’S REPORT The question tests candidates’ knowledge of the principles of value added tax and withholding tax. Candidates displayed poor understanding of the question. The commonest pitfall was the candidates’ inability to succinctly articulate their points but resorted to long explanations. Candidates are advised to highlight their points when they are answering questions of this nature.

Marking Guide Marks Marks ai. Goods and services exempted from VAT

- Goods exempted (1 mark each for any 3 points) 3 - Services exempted (1 mark each for any 3 points) 3 6 ii. Zero-rated goods and services Definition 2 Examples – ½ mark each subject to a maximum of 2 points 1 3 b. Major differences between Value Added Tax and Withholding Tax VAT 1 mark each subject to a maximum of 3 points 3 Withholding Tax 1 mark each subject to a maximum of 3 points 3 6 Total 15 53 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA SKILLS LEVEL EXAMINATION – MAY 2018 PERFORMANCE MANAGEMENT Time Allowed: 31/4 hours (including 15 minutes reading time) INSTRUCTION: YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN QUESTIONS IN THIS PAPER

SECTION A: COMPULSORY QUESTION (30 MARKS) QUESTION 1 DASET DRINKS NIGERIA PLC. Daset Drinks Nigeria Plc. has been operating in the Nigerian food and beverages industry as an entity with three distinct factories across the country. One of the factories bottles soft drink while the other two produce bottles and crown corks for the soft drink factory. The company has recently been experiencing problems with its performance evaluation system across the three factories. Each factory manager is of the opinion that his factory is the one contributing the most to the overall performance of the company. In a recent management retreat, the guest speaker, a performance management expert, emphasised the need to develop Key Performance Indicators (KPI) for each of the factories and departments in the company. According to him, this will enhance performance evaluation of all the managers in the company and will also make performance management easier. He suggested that the company should adopt a divisional structure whereby each of the factories will become an autonomous division with responsibilities for investment, revenues, profits and costs. At the last Executive Management meeting, after the retreat, the company’s top management decided to adopt the recommendations of the guest speaker. The top management agreed transfer prices acceptable to each of the divisional managers and also the needs to decide whether the two factories manufacturing bottles and corks cocks could sell to external markets. The top management has mandated you, as the company’s management accountant, to supply necessary data that will assist them in taking appropriate decisions. 54 Financial data collected about the company’s operations are as follows: The costs and selling prices of the divisions are: Soft drink Bottle Crown cork ₦ ₦ ₦ Selling price (price on the external market) 100 5 0.50 Variable cost of production *80 3 0.30 Contribution 20 2 0.20 *This includes costs of bottle and crown cork. To produce one bottle of soft drink requires one bottle and one crown cork. The bottling division has the choice to buy its bottle and crown cork requirements from the external market. The variable costs of production for external sales and internal transfers are the same and bottles and crown corks are being transferred to the bottling division at these costs. For brand protection, the soft drink factory is not willing to buy bottles and crown corks from any external supplier.

Required:

a. Differentiate among an investment centre, a profit centre, a revenue centre and a cost centre, in a divisional organisation giving one example of each. (8 Marks)

b. Explain a divisional structure, stating the problems associated with this type of structure in an organisation. (8 Marks)

c. Advise the top management on the transfer prices that will maximise the company’s profit and be acceptable to the factory managers. (10 Marks) d. Discuss TWO qualitative factors that the top management needs to consider in taking these decisions. (4 Marks) (Total 30 Marks) 55

SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS (40 MARKS) QUESTION 2 Nwokocha and Sons Bakery Limited uses absorption costing technique in its accounting system. The company produces and sells three bakery products, namely four corner loaf (F), round corner loaf (R) and executive loaf (E) which are substitutes for each other. The following standard selling prices and cost data relate to these three products: Product Selling Price Direct materials per unit Direct labour per unit Variable expenses Per unit (N) per unit F 200.00 25kg at N3 per kg 1.2hrs at N10.00 per hr 1.2hrs at N5 /hr R 250.00 30kg at N3 per kg 1.5hrs at N10.00 per hr 1.5hrs at N5/ hr E 300.00 38kg at N3 per kg 1.8hrs at N10.00 per hr 1.8hrs at N5/hr Annual budgeted fixed production overhead was N3,840,000. The company policy is that overhead will be absorbed on a machine hour basis. The standard machine hour for each product and the monthly budgeted level of production and sales for each product are as follows: Product F R E Standard machine hour per unit 0.3 hr 0.6hr 0.8 hr Monthly budgeted production and sales (units) 10,000 13,000 9,000 Actual volumes and selling prices for the three products in a particular month are as follows: Product F R E Actual selling price per unit (N) 220 260 320 Actual production and sales (unit) 9,500 13, 500 8,500 You are required to:

a. Calculate the following variances for overall sales for the particular month:

i. Sales price variance; (2 Marks) ii. Sales volume profit variance; (2 Marks) iii. Sales mix profit variance; and (3 Marks) iv. Sales quantity profit variance. (3 Marks)

b. Determine the monthly budgeted profit for the company. (6 Marks)

c. Discuss the significance of mix variances in a standard costing system? (4 Marks) (Total 20 Marks) 56 QUESTION 3

a. Adetoy Nigeria Limited has been in business for more than a decade. The company distributes and sells children toys. The company has an Accounts Department that normally prepares monthly and yearly financial statements. The management of Adetoy has found this report adequate for its need over the years until recently when the company decided to be producing its own brand of toys with special orders from some of its customers. The management of Adetoy has been struggling on how to decide on the price to charge for special orders and whether to accept some large orders with a reduction in prices. The company’s production facility has enough capacity to meet all the orders. However, because of its full cost-plus pricing system, it has been rejecting some orders where the customers could not pay the price the company charges. As a result of this, the company has been losing some of its customers. To help the company look at its cost structure and provide management information for decision making, the company recently employed a management accountant. During the last management meeting, the management accountant informed management that the company has been losing its customers and potential profits because it has not been using relevant costs for its decisions. The management therefore asked the management accountant to explain the concept of relevant costs to inform the management more about this.

Required: In the context of relevant costs, explain the following:

i. Incremental costs; ii. Differential costs; iii. Avoidable and unavoidable costs; iv. Committed costs; v. Sunk costs; and vi. Opportunity costs. (12 Marks)

b. Deban Construction Limited is deciding whether or not to proceed with a one-off special contract for which it would receive a one-off payment of N2,000,000. Details of relevant costs are:

(i) The special contract requires 2,000 hours of labour at N600 per hour. Employees possessing the necessary skills are already employed by Deban Construction Limited but are currently idle due to a recent downturn in business;

(ii) Materials X and Y will be used, 100 tonnes of material X will be needed and sufficient quantity of material X is in inventory as the 57 material is in common use by the company. Original cost of material X in inventory was N1,500 per tonne but it would cost N1,800 per tonne to replace if used on this contract. Material Y is in inventory as a result of previous over-purchasing. The original cost of material Y was N500,000 but it has no other use. Material Y is toxic and if not used in this contract, Deban Construction Limited must pay N240,000 to have it disposed;

(iii) The contract will require the use of a storage unit for three months. The company has recently leased the unit for one year at a rental of N80,000 per month. The unit is not in use at present. However, a neighbouring business has recently approached Deban construction Limited offering to rent the unit from them for N110,000 per month; and

(iv) Overheads are absorbed at N750 per labour hour which consist of N500 for fixed overhead and N250 for variable overhead. Total fixed overheads are not expected to increase as a result of the contract. A trainee accountant has performed the following calculation which shows that the contract will cost N3,590,000 to deliver and concluded that the contract should therefore not be accepted for N2,000,000: Description Relevant cost N Labour: 2,000 hours x N600 1,200,000 Material X:100 tonnes x N1,500 150,000 Material Y: Original cost 500,000 Storage: 3 months x N80,000 240,000 Overheads: N750 x 2000 1,500,000 Total 3,590,000

Required: Calculate the relevant cost of the contract and advise whether the contract should be accepted or not on financial grounds. (8 Marks) (Total 20 Marks) QUESTION 4 ABC Limited is a medium-sized family-owned company, located in Lagos. It manufactures a range of high-quality electrical household goods as well as buying completed products for resale from a number of suppliers. It sells its products through a variety of outlets such as mail order catalogue companies, large stores, small retail outlets and directly to household customers. The company has many computer systems which were installed 10 years ago. However, the systems are not networked in terms of the information they hold about inventory, customers, sales and purchases information, as each department 58 is responsible for only its part of the system. For example, the accounting department keeps a regularly updated file on customers and orders placed, but this data is held separately from the data maintained by the sales department on customers. Although, the systems have proved adequate in the past for areas such as payroll, financial accounting and sales order invoicing, but do not meet the changing information requirements for management decision-making in a competitive market. For example, information relating to inventory levels is available to sales staff online, but is often out of date as the master-files are only updated on a weekly basis. Technical faults and breakdowns mean that the systems are often unavailable and customers are requested to try again later. Managers at all levels of the company are now clamouring for a change in the company’s information system and have therefore recommended to the directors to consider changing the systems. The directors, who also wish to expand the company within the whole country, have accepted this recommendation. They now want to appoint a temporary Project Manager to lead a small team responsible for the new systems development project. The directors of ABC Limited consider that the appointed Project Manager will be required only for a secondment period of approximately 12 months, while the systems development and installation are taking place. After the successful completion of the project, the appointee will return to his or her original position; however, the directors consider this to be an opportunity for a member of staff to gain excellent organisational, management and systems experience.

Required: a) Identify and describe the responsibilities of the Project Manager within ABC Limited. (10 Marks)

b) Discuss the skills that a Project Manager would require to successfully implement a major project involving the design and installation of the new computer system within ABC Limited. (10 Marks) (Total 20 Marks)

SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS (30 MARKS) QUESTION 5 Classic Wears Plc. manufactures three unique jeans wears for which the maximum revenue for the coming year is estimated as follows: N Trousers 2,875,000 Jackets 4,800,000 Skirts 6,200,000 59 Summarised unit cost data are as follows: Products Trousers Jackets Skirts N N N Direct material 1,000 900 700 Variable costs 800 1,600 1,000 Fixed costs 250 500 400 Total costs 2,050 3,000 2,100 The allocation of fixed costs was derived from last year’s production level and this may be reviewed, if current output plans are different. Estimated selling prices are: Products Price N Trouser 2,300 Jackets 3,200 Skirts 2,480 The products are processed on sewing machines housed in a building of three blocks. Block A contains type I machine which has an estimated maximum of 19,600 machine hours available in the forthcoming year with fixed overhead cost of N980,000 per annum. Block B contains type II machine of which 10,000 machine hours are estimated in the forthcoming year with a fixed overhead cost of N750,000 per annum. Block C also contains type II machine which also has an estimate of 8,000 machine hours available in the forthcoming year. The fixed overhead cost of N370,000 is estimated per annum for Block C. The required machine hours for one unit of output for each Jeans on each type of machine are as follows: PRODUCTS Trouser Jacket Skirt Type I Machine 2hours 4hours 6hours Type II Machine 3hours 6hours 2hours You are required to:

a. Determine the optimal production plan which Classic Wears Limited should adopt. (12 Marks)

b. Calculate the total profit that would be made, if the production plan in (a) above is adopted. (3 Marks) (Total 15 Marks) 60 QUESTION 6 Ben John (BJ) Limited produces light fittings, and has reputation for constant design innovation. As a result, its products are seen as highly fashionable, but have a short product market life cycle. The new product has been launched using market skimming pricing policy. The industry is highly competitive and only a small number of companies have survived in the industry and those that remain are constantly aiming to develop new products.

Required: Explain, with reasons, the likely changes that will occur in the unit selling price and in the unit production costs of the product as it moves through each of the four stages of its product life cycle of:

a. Introduction; b. Growth; c. Maturity; and d. Decline. (Total 15 Marks) QUESTION 7 Adrak Nigeria Limited produces five different products, and sells each product in a different market. The management accountant has obtained the following information about market size and market share for each product which consists of actual data for each of the last three years and forecasts for the next two years: 2016 2017 2018 2019 2020 Actual Actual Actual Forecast Forecast Product 1 (N’million) Total market size 50 58 65 75 84 Product 1 sales 2 2 2.5 3 3.5 Product 2 (N’million) Total market size 150 152 149 153 154 Product 2 sales 78 77 80 82 82 Product 3 (N’million) Total market size 40 50 60 70 80 Product 3 sales 3 5 8 10 12 Product 4 (N’million) Total market size 60 61 61 61 60 Product 4 sales 2 2 2 2 2 61 Product 5 (N’million) Total market size 100 112 125 140 150 Product 5 sales 4 5 5.5 6 6.5 In the current year, the market share of the market leader or the nearest competitor to the company has been estimated as follows: Market share of market leader or the company’s nearest competitor Market for: % Product 1 37 Product 2 26 Product 3 12 Product 4 29 Product 5 20

Required:

a. Using the Boston Consulting Group model, how should each of these products be classified? (71/2 Marks)

b. How will this analysis help the management of the company to make strategic decisions about its future products and markets (’product-market strategy’)? (71/2 Marks) (Total 15 Marks) 62 Formulae Learning curve Y = axb where Y= cumulative average time per unit to produce x units a = the time taken for the first unit of output x = the cumulative number of units produced b = the index of learning (log LR/log2) LR = the learning rate as a decimal Demand curve P = a – bQ b = 𝑐ℎ𝑎𝑛𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑝𝑟𝑖𝑐𝑒 a = price when Q = 0 MR = a – 2bQ The linear regression equation of Y on X is given by: Y= a + bX or Y - Y = b(x – X ) where b = 𝑪𝒐𝒗𝒂𝒓𝒊𝒂𝒏𝒄𝒆 𝑽𝒂𝒓𝒊𝒂𝒏𝒄𝒆 (𝑿) (𝑿𝒀) = ∑ Xn ∑ - 2 -( ∑( ∑ X ) ∑ 2 ) XYn YX a = Y - b X ∑Y = na + b∑X ∑X Y = a ∑X + b ∑X 2 63 Annuity Table Present value of an annuity of 1 i.e. 1 - (1 + r)-n r Where r = discount rate n = number of periods Discount rate (r) Periods (n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1 2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2 3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3 4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4 5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5 6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6 7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7 8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8 9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9 10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10 11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11 12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12 13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13 14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14 15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1 2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2 3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3 4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4 5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5 6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6 7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7 8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8 9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9 10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10 11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11 12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12 13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13 14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14 15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15 64 65 ADRAK NIGERIA LIMITED Boston Consulting Group Model (Matrix) Relative Market Share High Low

(a) A star is a product in a market that is growing quickly, where the company’s product has a large market share or where the market share is increasing. Product 3 appears to be a star. The total market is expected to double in size between Year 2016 and Year 2020. The expected market share in two years’ time is 15% compared with 7.5% in Year 2. Its market share in the current year is over 13%, which makes it the current market leader. Market Growth High Stars Question Marks Low Cash Cows Dogs 87 A cash cow is a product in a market that has little or no growth. The market share, however, is normally quite high, and the product is therefore able to contribute substantially to operational cash flows. Product 2 appears to be a cash cow. In the current year, its market share was over 53% and it is the market leader. A dog is a product in a market with no growth where the product has a low share of the market. Dogs are likely to be loss-making and its cash flows are probably negative. Product 4 appears to be a dog. The total market size is not changing, and the market share for product 4 is only about 3%. This is much less than the 29% market shares of the market leader. A question mark is a product with a low market share in a market that is growing fairly quickly. Product 1 appears to be a question mark. The total market is growing quite quickly, but the market share of Product 1 is about 4% and this is not expected to change. Product 5 also appears to be a question mark for the same reason.

(b) This model will help the company to decide on its strategy for the products it will sell. The company may therefore, decide as follows:

i. It should benefit from the cash flows generated by its only cash cow, i.e. Product 2;

ii. It should invest in its star, i.e. Product 3, with the objective that this will eventually become a cash cow;

iii. It should give serious consideration to abandoning its dog, i.e. Product 4, and withdrawing it from the market;

iv. It has to make a decision about its two question marks, i.e. Product 1 and Product 5. The main question is whether either of these products can become a star and cash cow. Additional investment and a change of strategy for these products might be necessary in order to increase market share; and

v. For all the products (with the exception of Product 4, if this is abandoned) the company should also consider ways of making the products more profitable. Techniques, such as value chain analysis, might help to identify cost savings. 88 ALTERNATIVE SOLUTION TO QUESTION 7 ADRAK NIGERIA LIMITED

a. PRODUCTS CLASSIFICATION USING BOSTON CONSULTING GROUP (BCG) MODEL Product 1 appears to be a question mark. A question mark is a product with a fairly low market share in a market that is growing fairly quickly. The total market is growing quite quickly, but the market share of Product 1 is about 4% (i.e. 3.5/84 x 100%) and this is not expected to change. Product 1 High Question Mark 17%, 0.11 Market Growth Low 10 1.0 0.1 High Relative Market Share Low Product 2 appears to be a cash cow. A cash cow is a product in a market that has little or no growth. The market share, however, is normally quite high, and the product is therefore able to contribute substantially to operational cash flows. In the current year, its market share was over 53% (i.e. 82/154 x 100%), and it is the market leader. Product 2 High Market Growth Cash cow Low 0%, 2.05 10 1.0 0.1 High Relative Market Share Low Product 3 appears to be a star. A star is a product in a market that is growing quickly, where the company’s product has a large market share or where the market share is increasing. The total market is expected to double in size between 2016 and 2020. The expected market share in two years’ time is 15% (i.e. 12/80 x 100%), compared with 7.5% (i.e. 3/40 x 100%) in 89 2016. Its market share in the current year is over 13% (8/60 x 100%), which makes it the current market leader. Product 3 High Star 20%, 1.25 Market Growth Low 10 1.0 0.1 High Relative Market Share Low Product 4 appears to be a dog. A dog is a product in a market with no growth, and where the product has a low share of the market. Dogs are likely to be loss-making and its cash flows are probably negative. The total market size is not changing, and the market share for Product 4 is only about 3% (i.e. 2/60 x 100%). This is much less than the 29% market share of the market leader. Product 4 High Market Growth Dog Low 0%, 0.11 10 1.0 0.1 High Relative Market Share Low Product 5 also appears to be a question mark. A question mark is a product with a fairly low market share in a market that is growing fairly quickly. The total market is growing quite quickly, but the market share of Product 5 is about 4% (i.e. 6.5/150 x 100%) and this is not expected to change. 90 % Trend Analysis 2016 Actual Market share of market leader 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 𝑚𝑎𝑟𝑘𝑒𝑡 𝑠𝑎𝑙𝑒𝑠𝑠ℎ𝑎𝑟𝑒 x 100 % % % % % % Product 1 4.00 3.45 3.85 4.00 4.167 37 Product 2 52.00 50.66 54.00 53.69 53.59 26 Product 3 7.5 10.00 13.33 14.29 15.00 12 Product 4 3.33 3.28 3.28 3.28 3.33 29 Product 5 4.00 4.46 4.46 4.29 4.33 20

EXAMINER’S REPORT The question tests candidates’ knowledge of Boston Consulting Group (BCG) model as it affects market performance of multi-products organisation and their ability to use the BCG model to make strategic decisions about future products and markets. The question expects the candidates to classify the products using all the quadrants in the BCG model viz STARS, CASH COWS, QUESTION MARKS and DOGS and ability to explain each. Candidates are also expected to use the classification of products to make strategic decision on future of the products and the market performance. About 60% of the candidates attempted the question out of which about 20% scored 50% or above of the marks allocated. The candidates’ commonest pitfall was their inability to correctly draw and interprete the BCG matrix. They were not able to calculate the trend analysis, in percentage form, which is necessary to determine the relative growth rate and market share. Candidates are advised to create time to study and read widely in preparing for future examinations and also make better use of the ICAN Study Text with other relevant study materials. Product 5 High Question Mark 8%, 0.22 Market Growth Low 10 1.0 0.1 High Relative Market Share Low 2017 Actual 91 2018 Actual 2019 Forecast 2020 Forecast

Marking Guide Marks Marks (a) Model (Matrix) 1½ % Trend Analysis 1 Star – Product 3 1 Cash cow – (Product 2) 1 Dog – Product 4 1 Question mark – Product 1 1 Question mark – Product 5 1 7½ Alternative Solution Model (Matrix) 1½ % Trend Analysis 1 Product 1 1 Product 2 1 Product 3 1 Product 4 1 Product 5 1 7½

(b) Any five points out of six at 1½ marks per point 7½ Total 15 92 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA SKILLS LEVEL EXAMINATION - MAY 2018 AUDIT AND ASSURANCE Time Allowed: 3¼ hours (including 15 minutes reading time) INSTRUCTION: YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN QUESTIONS IN THIS PAPER

SECTION A: COMPULSORY (30 MARKS) QUESTION 1 The following figures were supplied by a small business client to your firm regarding its non-current assets for the year ended 31 December 2016: GENERATING EQUIPMENT FURNITURE MOTOR PLANT & FITTINGS VEHICLES N N N N Non-current assets: Opening balance 400,000 3,637,000 247,000 1,450,000 Additions - 530,000 - - Disposal - - - (400,000) Closing Balance 400,000 4,167,000 247,000 1,050,000 Depreciation: Opening balance 160,000 873,000 59,800 859,000 Charge for the year 80,000 416,700 24,700 260,000 Charge on disposal - - - (236,966) Closing Balance 240,000 1,289,700 84,500 882,034

Required:

a. Identify FIVE substantive procedures you will carry out to verify additions to the assets in 2016. (10 Marks)

b. Explain FIVE substantive procedures for verifying disposal of assets during the year. (10 Marks)

c. Explain briefly FOUR of the statutory books that the auditor is required to audit in the course of his audit engagement in an entity. (10 Marks) (Total 30 Marks) 93

SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS IN THIS SECTION (40 MARKS) QUESTION 2 The auditor is required by ISA 500 to design and perform appropriate audit procedures for obtaining sufficient and appropriate audit evidence.

Required: a. Explain briefly THREE factors that an auditor will consider in determining what constitutes sufficient audit evidence. (6 Marks)

b. Explain briefly TWO principles that would assist an auditor in assessing the reliability of the audit evidence. (4 Marks)

c. Describe FOUR principles that would assist an auditor in assessing the relevance of audit evidence. (10 Marks) (Total 20 Marks) QUESTION 3 Internal Control Systems are never foolproof. All systems, no matter how effective they may appear to be, have several limitations.

Required: a. Discuss briefly FOUR limitations of internal control systems in an organisation. (8 Marks) b. Explain the problems that may arise when control systems rely excessively on the involvement of senior management in small entities. (12 Marks) (Total 20 Marks) QUESTION 4 Joe Adams was the engagement partner to Maikai Airlines Limited from 2012 to 2014. He retired from the firm of the Chartered Accountants and intends to join Maikai Airlines Limited as Finance Director. It is the policy of the firm to pay all partners in full when they disengage.

Required: a. Identify and explain FOUR ethical matters worthy of consideration as Joe Adams joins Maikai Airlines Limited. (8 Marks)

b. Discuss the THREE threats that could arise should Joe Adams join Maikai Airline Limited. (6 Marks)

c. Explain THREE matters specified by the Code of Ethics as safeguards in relation to this matter. (6 Marks) (Total 20 Marks) 94

SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS IN THIS SECTION (30 MARKS) QUESTION 5 Electronic Data Interchange (EDI) systems allow electronic transmission of business documents, such as purchase orders, invoices, payroll information, etc.

Required: a. Explain FOUR major controls to be put in place to minimise the risks inherent in EDI systems. (8 Marks)

b. Discuss THREE features of EDI Systems that may create additional problems for the auditor. (7 Marks) (Total 15 Marks) QUESTION 6 In an assurance engagement, an “assurance firm” is engaged by one party to give an opinion on a piece of information that has been prepared by another party.

Required: Identify and explain FIVE elements contained in an assurance engagement performed by an auditor. (Total 15 Marks) QUESTION 7 Auditors do not normally check 100% of transactions and balances that go into the production of financial statements. Auditors usually carry out a sampling test. ISA 530 distinguishes between statistical and non-statistical sampling approaches.

Required:

a. Explain THREE key factors the auditor has to take into consideration in designing a sample. (6 Marks)

b. Distinguish between statistical and non-statistical sampling approaches. (4 Marks)

c. State TWO advantages and TWO disadvantages of statistical sampling approach. (5 Marks) (Total 15 Marks) 95

(a) Three Key factors the auditor has to take into consideration in designing a sample according to ISA 530 are:

i. Considering the purpose of the audit procedure and the population from which the sample will be drawn - the auditor has to consider the purpose of the audit procedure and the population from which the sample will be drawn to arrive at a very good conclusion;

ii. Determining a sample size sufficient to reduce sampling risk to an acceptably low level and the sample must be representative of the entire population otherwise sampling risk would be high; and

iii. Selecting items for the sample in such a way that each sampling unit in the population has an equal chance of selection.

(b) i. Statistical sampling approach is a method of using random selection from a large population in order to make guesses as to what the whole population looks like. It is the sampling approach that involves selection and application of probability theory to the evaluation of the sample result and the measurement of sampling risk. Non statistical sampling approach is any sampling technique not based on probability theory, but on a judgement opinion by the auditor about the results of the sample. It is also known as judgment sampling.

(c) Advantages of Statistical Sampling are: ✓ Statistical sampling provides an objective, mathematically precise basis for the sampling process; ✓ There may be circumstances where statistical sampling is the only means of auditing efficiently, for example, in the case of very large populations of homogeneous Items, like transactions of large public enterprises; and ✓ The required sample can be calculated precisely. Disadvantages of Statistical Sampling are: ✓ It is essential that auditors are required to be trained and should have appropriate technical expertise, if the sampling technique is to be used effectively; ✓ Required training of staff may require an investment, and so additional costs; ✓ Sample sizes may be larger than under a non-sampling approach with attendant increase in audit time and costs; and ✓ There may be lack of consistent application of statistical sampling techniques across audit teams. Some auditors believe it is preferable to rely on the skill, experience and judgment of the auditor, rather than rely on mere statistical/mathematical models.

EXAMINER’S REPORT The question tests candidates’ understating of sampling approaches/techniques in auditing. About 80% of the candidates attempted the question. Candidates exhibited fair understanding of the requirements of the question, hence the performance was just average. The commonest pitfall observed was wrong interpretation of the requirements of the question thereby making them to answer the questions out of context. Candidates are advised to read and understand the requirements of a question well b THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA SKILLS LEVEL EXAMINATION - MAY 2018 PUBLIC SECTOR ACCOUNTING & FINANCE Time Allowed: 31/4 hours (including 15 minutes reading time) INSTRUCTION: YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN QUESTIONS IN THIS PAPER

SECTION A: COMPULSORY QUESTION (30 MARKS) QUESTION 1 It has become a very important task for Accounting Officers of Ministries, Departments and Agencies (MDAs) to pay more attention to and make regular checks on their corporation’s cash books and bank accounts. Internal control system is usually put in place to prevent the possibility of committing errors and fraud. This has been more challenging and requires all accounting officers to be more knowledgeable in the act of keeping records. Every organisation has to keep close watch on its bank account transactions to guide against fraud or the infiltration of extraneous entries. This is done through regular preparation of bank reconciliation statements. As a result of widespread internet fraud, the Accounting Officer of the Ministry of Land and Housing, Alhaji Maito Garba, has been concerned with the Ministry’s banking transactions. In recent times there have been challenges reconciling the Ministry’s banking transactions. There was no time the Ministry’s bank balance agreed with the cash book balance. However, there was no adequate information to suggest that there was fraud or misappropriation of funds. Nonetheless, Alhaji Maito Garba invited you to his office for professional advice. He informed you that the Director of Finance of the Ministry had been avoiding him on matters relating to the Ministry’s bank and cash positions. He also informed you that he was able to retrieve some of the finance department’s data which he handed over to you as detailed below: Transactions recorded in the books for the year ended December 31, 2017 N000 Subvention received 55,000.00 Interest from investment 3,501.68 Rent on property 11,300.35 Ground rent 16,801.00 Saving deposits interest 6,281.00 Grants for construction of estates 51,301.50 Deposits for land 19,000.60 Personnel costs 36,801.00 Travel and transport 7,000.40 Telephone services 2,401.50 Repairs of property 4,868.25 Stationery 901.86 Provision of water for estate 14,300.60 Consultancy services 3001.26 Training and staff development 1,001.56 Auditing and staff development 1,500.00 Entertainment and hospitality 500.00 Construction of estate 35,607.58 Construction of access roads 8,400.60 Cash book balance as at 1/1/2017 21,500.00 Preliminary investigations revealed the following information:

(i) 1,370 prospective land owners deposited N10,000 each, while 580 deposited N20,000 for high and low density areas of the estate respectively;

(ii) Included in the payments for the construction of estate were various duplicated vouchers amounting to N9 million;

(iii) The bank balance as per the statement on December 31, 2017 was N39,560,600;

(iv) Uncredited cheques amounted to N6.9million while unpresented cheques stood at N4,337,800;

(v) There were some falsifications in the bills for items bought for the provision of water. The total discrepancies amounted to N3,561,800; and

(vi) Standing order for insurance premium was N201,500 while bank charges and commissions amounted to N144,250.

Required:

a. Prepare an adjusted cash book. (8 Marks)

b. Prepare an appropriate reconciliation statement to show if any fraud was committed during the period (7 Marks)

c. Identify FOUR statutory institutions that the suspicious case(s) in

(b) above could be reported to. (4 Marks)

d. State the procedures the Ministry could follow to bring suspicious individuals to book in accordance with the Financial Regulation 2502. (6 Marks)

e. Explain the related offences that TWO of the statutory Institutions can deal with in this case. (5 Marks) (Total 30 Marks)

SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS (40 MARKS) QUESTION 2 The Local Development Authorities (LDAs) of Imafidion Council agreed to transfer their Social Centres for the purpose of adequate maintenance to the state government’s Ministry of Happiness. The state government accepted to take over the centres and therefore requested for their 2019 budget. The following were supplied by the Social Centres to the government through the Director of Accounts, Ministry of Happiness. Actual salaries, wages and overhead expenses (2018) N’Million N’Million Salaries 9.75 Wages 8.42 18.17 Rates 8.73 Power/Electricity 2.70 Rent 2.60 Artifacts for sale 2.80 Security services 1.00 Other supplies 2.51 Service level agreement 2.85 Promotion expenses 2.01 25.20 Total expenditure 43.37 Actual Income (2018) Admissions 9.01 Sales in the centre 4.78 Other incomes 1.48 Grant 1.00 Total Income 16.27 Net Expenditure 27.10 Other details provided include:

i. Salaries are made up as follows: Director Ministry of Happiness Social Officer Total N’Million N’Million N’Million Salaries 4.80 3.00 7.80 National insurance 0.48 0.30 0.78 Pension 0.72 0.45 1.17 Total 6.00 3.75 9.75

ii. The wages were for 5 employees (known as Happiness Assistants) paid on hourly basis with maximum of 20 hours per week at N1,260 per hour, plus over time bonus as follows: Salary N’Million Insurance N’Million Pension N’Million Total N’Million Happiness Assistant: 20 hours Per week at N1.260 per hour (52 weeks)

1. 31 0.131 0.20 1.641 For 5 Happiness Assistants 8.205 Overtime 0.230 8.435 The guideline for the budget has been given as follows:

i. Rent to remain as for last year since the lease would still be running for two years, but security service providers would charge only N0.6m next year;

ii. No festival would be planned for the following year and as a result there would be no promotion expenses and grant in the following year;

iii. Though same number of visitors would come to the centre, the rate of admission fees would go up by 10 percent for the following year;

iv. There would be an increase of 5% on other incomes. The budget for Artifact for sale would increase by the same proportion as the Sales in the Centre budget which would increase by 20%;

v. Power/electricity and rates would increase by 8% and 2% respectively while other supplies would increase by 2.5%;

vi. There would be 2.60% increase in wages, while the National Insurance contributions would increase to 12% of salaries instead of the current 10% and pension contribution would be 15% of salaries;

vii. Director of Finance, Ministry of Happiness would not be due for salary increment but the Social Officer would earn increment of N0.088m;

viii. There would be no overtime payment; and

ix. Service level agreement was fixed at N2.948m. You are required to prepare a proposed budget for Imafidon Local Government Authority Happiness and Social Centres for the year ended December 31, 2019 (use same format as in the Question). (Total 2O Marks) QUESTION 3 IPSAS 27 deals with the accounting treatment and disclosures in relation to agricultural practice.

Required:

a. Explain the term “agricultural activity.” (5 Marks)

b. Explain how the fair value of a biological asset or agricultural produce is determined. (8 Marks)

c. Identify TWO ways in which an entity should recognize a biological asset or agricultural produce. (3 Marks)

d. Explain the accounting treatment of gains or losses arising from a biological asset or agricultural produce. (4 Marks) (Total 20 Marks) QUESTION 4 In relation to public sector audit,

a. Define ’Value-for-Money’ audit (VFM). (21/2 Marks)

b. Identify and explain THREE major components of ’Value-for-Money’ audit. (6 Marks) c. Explain FIVE steps towards a successful ’Value-for-Money’ audit. (21/2 Marks)

d. Identify FIVE factors which contribute to an effective ’Value for Money’ audit. (5 Marks) e. Explain the precise roles of internal audit unit in relation to ’Value-for- Money’ audit of a Government Business Entity (GBE). (4 Marks) (Total 20 Marks)

SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS (30 MARKS) QUESTION 5 In government’s quest to optimally develop and efficiently manage available resources, national budgets are usually prepared to put economic development firmly on course.

Required:

a. Describe briefly a national budget. (3 Marks)

b. Explain briefly the implication of each of the following for the performance of the economy: i. A surplus budget ii. A deficit budget (4 Marks)

c. Explain FOUR problems to be encountered in the effective implementation of national budgets in Nigeria. (8 Marks) (Total 15 Marks) QUESTION 6 “The consequences arising from the continual accumulation of public debts in developing countries may discourage growth in such economies”.

a. Explain the term “public debt”. (5 Marks)

b. Write brief notes on FOUR factors responsible for the accumulation of public debt in developing countries. (10 Marks) (Total 15 Marks) QUESTION 7 One major role of government (Federal, State or Local) is to ensure probity and accountability in all its functions.

a. Explain FOUR conditions which could enhance the promotion of accountability in the public sector. (5 Marks)

b. Identify and explain FOUR principles guiding code of good practices on fiscal transparency. (10 Marks) (Total 15 Marks)