Nov 2022 Pathfinder Skills

THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF NIGERIA
PATHFINDER
NOVEMBER 2022 DIET
SKILLS LEVEL EXAMINATIONS
Question Papers
Suggested Solutions
Examiner‟s Reports
and
Marking Guides
117
FOREWARD
This issue of the PATHFINDER is published principally, in response to a growing

demand for an aid to:
(i) Candidates preparing to write future examinations of the Institute of

Chartered Accountants of Nigeria (ICAN);
(ii) Unsuccessful candidates in the identification of those areas in which they

lost marks and need to improve their knowledge and presentation;
(iii) Lecturers and students interested in acquisition of knowledge in the

relevant subject contained herein; and
(iv) The professional; in improving pre-examinations and screening processes,

and thus the professional performance of candidates.
The answers provided in this publication do not exhaust all possible alternative
approaches to solving these questions. Efforts had been made to use the
methods, which will save much of the scarce examination time. Also, in order to
facilitate teaching, questions may be edited so that some principles or their
application may be more clearly demonstrated.
It is hoped that the suggested answers will prove to be of tremendous assistance

to students and those who assist them in their preparations for the Institute‟s
Examinations.
NOTES
Although these suggested solutions have been published under the
Institute‟s name, they do not represent the views of the Council of the
Institute. The suggested solutions are entirely the responsibility of their
authors and the Institute will not enter into any correspondence on them.
1
TABLE OF CONTENTS
FOREWARD PAGE
1
FOREWARD
TABLE OF CONTENTS 2
FINANCIAL REPORTING 3 – 32
AUDIT AND ASSURANCE 33 – 54
PERFORMANCE MANAGEMENT 55 – 90
PUBLIC SECTOR ACCOUNTING & FINANCE 91 – 120
CORPORATE STRATEGIC MANAGEMENT & ETHICS 121 - 140
TAXATION 141 – 173
2
ICAN/222/Q/B1 Examination No.....................
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION – NOVEMBER 2022
FINANCIAL REPORTING
EXAMINATION INSTRUCTIONS
PLEASE READ THESE INSTRUCTIONS BEFORE THE COMMENCEMENT OF THE PAPER
1. Check your pockets, purse, mathematical set, etc. to ensure that you do
not have prohibited items such as telephone handset, electronic storage
device, programmable devices, wristwatches or any form of written
material on you in the examination hall. You will be stopped from
continuing with the examination and liable to further disciplinary actions
including cancellation of examination result if caught.
2. Write your EXAMINATION NUMBER in the space provided above.
3. Do NOT write anything on your question paper EXCEPT your

examination number.
4. Do NOT write anything on your docket.
5. Read all instructions in each section of the question paper carefully

before answering the questions.
6. Do NOT answer more than the number of questions required in each

section, otherwise, you will be penalised.
7. All solutions should be written in BLUE or BLACK INK. Any solution

written in PENCIL or RED INK will not be marked.
TUESDAY, NOVEMBER 15, 2022
DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO
3
FINANCIAL REPORTING
Time Allowed: 31/4 hours (including 15 minutes reading time)
INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT FIVE OUT OF SEVEN

QUESTIONS IN THIS PAPER
SECTION A: COMPULSORY QUESTION (30 MARKS)
QUESTION 1
There has been agitation to stop importation of containers from China, to

increase patronage of local industries. The Board of Favour PLC is planning to
acquire 75% controlling interests in either Grace Limited or Blessing Limited
which produce better and cheaper containers locally. As a trainee working in
Obokun Chartered Accountants, the Managing Partner has requested you to
carry out performance score cards of the companies using accounting ratios to
assess the viability of the acquisition.
Statement of comprehensive income for the year ended December 31, 2020:
Favour Plc Grace Ltd Blessing Ltd

N' 000 N' 000 N' 000
Revenue 250,000 100,000 100,000
Cost of sales (105,000) (30,000) (40,000)
Gross profit 145,000 70,000 60,000
Administrative expenses (39,000) (19,000) (27,000)
Profit before interest and taxation 106,000 51,000 33,000
Finance costs: Interest on 10% loan notes (6,000) (3,000) (30,000)
12% Preference share dividends (1,200) (600) (1,800)
Profit before taxation 98,800 47,400 1,200
Income tax expense (29,640) (14,220) (360)
Profit for the year 69,160 33,180 840
4
Statement of financial position as at December 31, 2020:
Favour Plc Grace Ltd Blessing Ltd

Assets: N' 000 N' 000 N' 000
Non-current assets:
Property, plant and equipment (PPE) at cost 680,000 330,000 350,000
Accumulated depreciation (90,000) (50,000) (60,000)
Carrying amounts 590,000 280,000 290,000
Current assets:
Inventories 100,000 90,000 160,000
Trade receivables 70,000 40,000 60,000
Bank 230,000 100,000 50,000
400,000 230,000 270,000
Total assets 990,000 510,000 560,000
Equity and liabilities:
Ordinary shares of N1.25 each 480,000 200,000 110,000
Retained earnings 323,160 237,180 12,840
Equity 803,160 437,180 122,840
Non-current liabilities:
10% loan notes 60,000 30,000 300,000
12% preference shares 10,000 5,000 15,000
70,000 35,000 315,000
Current liabilities:
Trade payables 109,640 34,220 90,360
10% loan notes interest 6,000 3,000 30,000
12% preference shares dividends 1,200 600 1,800
116,840 37,820 122,160
Total equity and liabilities 990,000 510,000 560,000
Additional Information:
(i) Inventories as at December 31, 2019 were N60 million, N30 million and
N50 Million and the current market prices, 30 kobo, 28 kobo and 10 kobo
for Favour Plc, Grace Limited and Blessing Limited respectively.
(ii) Purchases for cash within 365 days in the year 2020 were 10%, 20% and
40% of cost of sales for Favour Plc, Grace Limited and Blessing Limited
respectively.
Required:
a. Calculate the following ratios for Grace Limited and Blessing Limited.
i. Net profit margin
ii. Quick ratio
iii. Debt equity ratio
iv. Proprietary ratio
v. Earnings yield
vi. Net asset per share (10 Marks)
5
b. Draft a technical report titled „Performance Scorecard‟ of Blessing Limited
and Grace Limited and advise Favour Plc in which of the two companies it
should acquire 75% controlling interests. (10 Marks)
c. The Chief Financial Officer (CFO) of Favour Plc noted that the records of
Blessing Limited and Grace Limited are maintained using block chain
technologies.
Required:
Discuss the type of records that a company can maintain in blockchain and state
TWO benefits of making use of this technology. (10 Marks)
(Total 30 Marks)
SECTION B: OPEN-ENDED QUESTIONS (40 MARKS)
INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF THREE

QUESTIONS IN THIS SECTION
QUESTION 2
Financial statements and extract from the cashbook of Obudu Nigeria Limited
for the year ended December 31, 2020 are summarised below:
Obudu Nigeria Limited

Statement of profit or Loss for the year ended December 31, 2020
N’000
Revenue 169,314
Cost of sales (102,798)
Gross profit 66,516
Investment income 15,000
Expenses:
Depreciation (7,650)
Salaries and wages (4,712)
Other cash expenses (7,594)
Loss on disposal of equipment (2,061)
Interest expense (3,375)
Profit before taxation 56,124
Income tax expense (16,988)
Profit for the year 39,136
6
Statement of financial position as at December 31
2020 2019
Non-current assets: N’000 N’000
Property, plant and equipment 98,550 86,400
Current assets:
Inventories 21,308 11,363
Trade receivables 22,703 14,063
Cash and bank 5,940 7,088
Trade investments 675 1,238
149,176 120,152
Ordinary share capital of N1 each 28,125 22,500
Retained earnings 40,111 21,600
68,236 44,100
Non-current liabilities
8% loan notes 33,750 40,500
Current liabilities
Trade payables and accruals 35,375 30,240
Taxation 11,815 5,312
149,176 120,152

Cash book extract for the year ended December 31, 2020
Bank Cash
Receipts: N’000 N’000
Opening balance b/f 5,500 1,588

Receipts from customers 153,602 8,087
Sale of investment 563 -
Transfer from cash 4,500 -
Disposal of equipment 1,600 1,019
Proceeds from issue of shares 5,625 -
171,390 10,694
Payments:
Salaries and wages 2,000 2,712
Other expenses 5,462 2,132
Payment to trade suppliers 108,623 -
Purchase of motor vehicles 22,230 -
Dividends paid 9,000 -
Transfer to bank - 4,500
Interest paid 2,250 -
Tax paid 10,485 -
Redemption of 8% loan notes 6,750 -
Balance c/f 4,590 1,350
171,390 10,694
7
Other Information
(i) The 8% loan notes have been partly redeemed. It is expected that the full
redemption will be made in five years time.
(ii) A cash payment for insurance of N1million was omitted in the cash book
and other records.
(iii) The investments are not easily realisable.
Required:
a. Prepare the statement of cash flows for the year ended December 31, 2020
using the direct method in accordance with IAS 7. (9 Marks)
b. Prepare a statement of reconciliation of the operating profit to cash flow
from operations. (5 Marks)
c. Discuss the benefits of statement of cash flows information to users of
financial statements. (6 Marks)
(Total 20 Marks)
QUESTION 3
a. Food Plc has a subsidiary, Eba Limited. The statements of financial
position of the companies as at September 30, 2020 are presented below:
Food Plc Eba Limited
Assets: N’000 N’000
Non-current assets 536,000 258,000
Investment in subsidiary at cost 220,000 -
Current assets:
Inventories 88,500 92,000
Trade and other receivables 75,400 69,800
Bills receivables 30,000 -
Cash and bank 25,600 32,200
Due from Eba Limited 20,000 -
Total assets 995,500 452,000
Ordinary share capital 400,000 150,000
Share premium 50,000 -
Retained earnings 203,400 88,500
General reserve 105,600 64,600
10% Loan notes 100,000 50,000
Trade and other payables 96,300 46,900
Bank overdrafts 40,200 -
Bills payables - 40,000
Due to Food PLC - 12,000
Total equity and liabilities N995,500 N452,000
8
Additional Information:
(i) Food PLC acquired four hundred and eighty million shares in Eba Limited
two years ago when the balances in retained earnings and general
reserves were N60,000,000 and N48,000,000 respectively.
(ii) The fair value of non-controlling interests in Eba limited as at the
acquisition date was N158,000,000.
(iii) During the year, goods costing N80,000,000 to Food PLC were transferred
to Eba Limited. It is the policy of Food PLC to transfer goods at cost plus
25%. A quarter of these goods have been sold by Eba Limited at year end.
(iv) Part of the bills receivable have been discounted by Food PLC.
(v) The sum of N8,000,000 transferred by Eba Limited to Food PLC as part
payment for indebtedness was received after the reporting date.
(vi) An impairment test revealed a loss of N16,000,000 on the goodwill
arising on the acquisition of Eba Limited.
(vii) The carrying amount of the net assets of Eba Limited is N20,000,000 more
than the fair value at acquisition date. This was due to the loss in value
of the company‟s machinery occasioned by change in technology. The
machinery is depreciated at a flat rate of 15% on cost.
(viii) The nominal value of the ordinary shares of Food PLC are denominated in
50 kobo per share, while those of Eba Limited are 25 kobo each.
Required:
a. Prepare the consolidated statement of financial position of Food group as
at September 30, 2020. (15 Marks)
b. A gain from a bargain purchase may arise in the course of a business
combination and when this happens, the acquirer must review or reassess
the procedure used to measure certain items at the acquisition date.
Required:
c. Explain the term “Gain from a bargain purchase” and identify the three
items stipulated in IFRS 3 that must be reviewed. (5 Marks)
(Total 20 Marks)
QUESTION 4
IFRS is published subject to the appropriate level of IASB approval. This also
includes the opinions of any dissenting IASB members and basis of IASB
conclusions.
Required:
a. Describe SIX steps involved in the process of issuing International
Financial Reporting Standards (IFRS). (6 Marks)
b. Explain any TWO enhancing characteristics of financial information.
(2 Marks)
9
c. IFRS 9 - Financial Instruments, prescribes principles for reporting,
recognising and de-recognising financial instruments in the financial
statements of an entity.
Required:
Explain TWO classes of financial instruments in accordance with IFRS 9.
(4 Marks)
d. On January 1, 2020, an entity bought Lagos State Government Bond in
the capital market for N575,000,000. The principal amount of the bond is
N500,000,000 and it is redeemable at par on December 31, 2025. The
bond has a stated interest rate of 15% payable annually and an effective
interest rate of 12%.
Draft an amortisation schedule to indicate the amortised cost at the end
of each year and the journal entries at the end of December 31, 2025.
(8 Marks)
(Total 20 Marks)
SECTION C: OPEN-ENDED QUESTIONS (30 MARKS)
INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF THREE

QUESTIONS IN THIS SECTION
QUESTION 5
The Institute of Chartered Accountants of Nigeria (ICAN) prescribes ethical

behaviour for Chartered Accountants as well as fundamental principles, and
threats to these principles.
You are required to:

a. Explain briefly what is meant by professional behaviour and outlines
THREE threats that could affect the work of professional accountants.
(5 Marks)
b. IAS 38 prescribes the requirements for reporting intangible assets in the
financial statements of an entity.
Required:
i. Explain FIVE conditions under which development costs can be
recognised as intangibles in financial statements. (5 Marks)
ii. Highlight FIVE conditions, which should be considered to determine
The useful life in the amortisation of intangible assets in the
(Total 15 Marks)
10
QUESTION 6
a. IAS 33-Earnings Per Share (EPS) requires entities to calculate basic and
diluted earnings per share. However, diluted EPS and basic EPS will
usually differ when there are potential ordinary shares in existence.
Required:
i. Explain the term potential ordinary share giving THREE examples
as stated in IAS 33. (3 Marks)
ii. Describe the procedure for ranking when there are several types of
potential ordinary share in issue when calculating diluted EPS.
(3 Marks)
b. The following information relates to Jumai Nigeria Limited for the year
ended December 31, 2020.
Issued ordinary shares of 50k each N 3,000,000
Profit for the year N18,000,000
Average market price of shares during the year was N70 per share. The
potential financial instruments in existence in the company are detailed
below:
i. 800,000 options with exercise price of N52.50.
ii. 5% convertible bond of N6,000,000. Each bond is convertible in year
2025 into ordinary shares at the rate of 30 new shares for every N100
bonds.
iii. 200,000 8% convertible preference shares at N10 per share. Each
preference share is convertible in year 2024 at the rate of one ordinary
share for every 25 preference shares held.
The Company income tax rate is 30%.
Assume that all the options are exercised.
Required:
Rank the potential ordinary shares and calculate the diluted EPS for the
year ended December 31, 2020. (7 Marks)
c. EPS is probably the single most important indicator of an entity‟s

performance.
Required:
State THREE of the limitations of EPS. (2 Marks)
(Total 15 Marks)
11
QUESTION 7
a. Briefly explain SIX purposes of Conceptual Framework of the International

Accounting Standard Board (IASB). (9 Marks)
b. Explain THREE basic steps in the application of Business Model test in
IFRS 9. (6 Marks)
(Total 15 Marks)
SOLUTION 1
(a) Computation of relevant accounting ratios for Grace Limited & Blessing Limited
Grace Limited Blessing Limited
i. Net profit margin = 51,000 × 100 33,000 × 100
Profit before interest and tax × 100 100,000 100,000
Revenue = 51% = 33%
ii. Quick ratio/acid test = 230,000 – 90,000 270,000 – 160,000
Current assets – inventory 37,820 122,160
current liabilities = 3.70:1 = 0.90:1
iii. Debt to equity ratio = Long-term debt x 100 35,000 × 100 315,000 × 100
Total Equity 1 437,180 122,840
= 8.01% = 256.43%
iv. Proprietory ratio = Shareholder‟s fund 437,180 122,840
Tangible assets 510,000 560,000
= 0.86:1 or 86% = 0.22:1 or 22%
v. Earnings yield = EPS x 100 20.7 × 100 0.95 × 100
MPS 28 10
= 73.93% = 9.50%
Earnings per share (EPS) = PAT x 100 _ 33,180 × 100 840 x 100
No. of Ord Share 160,000 ord. 88,000 ord.
= 20.7 kobo = 0.95 kobo
vi. Net asset per share = __Net asset _ 437,180 122,840
No. of Ord Share 160,000 88,000
=273 kobo = 140 kobo
OR N2.73k OR N1.40k
12
(b) Obokun & Co.
(Chartered Accountants)
Lagos, Nigeria
FROM: Trainee Accountant TO: Managing Partner
November 15, 2021
SUBJECT: Analysis of financial performance scorecard of Blessing Limited

and Grace Limited
Further to the request to carry out performance scorecard of the above two
companies, using accounting ratios, to assess the viability of their acquisition,
the following findings have been made:
Profitability performance of the two companies
i. Based on the computed net profit margin of the two companies, the net
profit margin of Grace Ltd is 51% while that of Blessing Ltd shows 33%,
indicating that Grace Ltd is more profitable than Blessing Ltd.
ii. The profitability level of Blessing Ltd is seen to be too low. This was
probably due to poor control of overhead by Blessing Ltd since the two
companies almost have the same gross profit.
iii. In addition, the earnings yield of Grace Ltd is high, 73.93% while that of
Blessing Limited is 9.5%. This is an indication that Grace Ltd is likely to
provide shareholders of Favour Plc more returns than Blessing Ltd.
Liquidity position of the two companies
i. With reference to the computed quick ratio of the two companies, it can
be deduced that Grace Ltd is more liquid than Blessing Ltd. The quick
ratio of Grace Ltd is 3.7:1 while that of Blessing Ltd is 0.9:1.
ii. This indicates that Grace Ltd will be more comfortable in meeting its
short-term debt obligations than Blessing Ltd.
Gearing and solvency position of the two companies

i. Based on the computed debt to equity ratio, it is obvious that the gearing
level of Grace Ltd is better than that of Blessing Ltd. Grace Ltd‟s gearing
ratio is 8.01% which is within the acceptable range, while Blessing Ltd‟s
gearing ratio is 256.43%. This shows that Blessing Ltd is highly geared
and high risk to invest in.
13
ii. In addition, the proprietary ratio computed for the two companies
indicates that the shareholders in Grace Ltd would be more secured and
protected in the case of liquidation, compared to Blessing Ltd that has a
lower proprietary ratio of 22%. Furthermore, the net asset per share of
Grace Ltd is higher than that of Blessing Ltd, indicating that Grace Ltd is
more solvent and financially stable.
Conclusion
However, in view of the fact that Grace Ltd will be capable of utilising its
resources more efficiently and considering the fact that it is a highly profitable
company with a fairly suitable liquidity position we would advise that, the
directors of Favour Plc should acquire 75% interest in Grace Ltd.
Recommendations
Further information that may be useful to the board of directors of Favour Plc
when making acquisition decisions are:
i. In this case, the analysis has been made on the draft financial
statements. These may be unreliable or change when finalised. Audited
financial statements would add credibility;
ii. Other relevant information should be considered, for example profit
forecasts, cash budgets, capital expenditure budget and future
prospects;
iii. There would be need to ascertain current (fair) value of assets to be
acquired;
iv. The level of risks and uncertainties within the business industry should
be considered;
v. The purchase consideration and mode of payment for the acquisition
should also be considered;
vi. Tax implication should also be considered; and
vii. Competitive advantage; and management quality of the target entity.
Do not hesitate to contact me for any area of this report that requires further
clarification.
Thank you.
Trainee Accountant
(c) Types of records that are maintained in block chain

The following are the type of records that a company can maintain in block
chain:
i. Ledger: It is used to record financial and non-financial transactions in an
open, secured and decentralised ledger;
14
ii. Auditing records: It helps in keeping financial transactions transparent
and auditable;
iii. Inventory records: It makes the transaction records of inventory
accessible to authorised users at any time and location; and
iv. Banking records: It enables quick funds transfer, recording of financial
transactions accurately, recording smart contracts, protecting and
transferring ownership of assets, verifying people's identities and
credentials, and much more.
Benefits of making use of blockchain technology
The following are the benefits of blockchain technology:
i. It will benefit businesses by reducing costs, increasing traceability and

enhancing security;
ii. It allows for the encryption of data through blocks, which track the time
and date of a transaction;
iii. The technology could be used to make audit process more efficient,
because it would keep an accurate record of when a transaction
occurred and who authorised it; and
iv. It would limit the chances of an electronic record being altered.
Examiner’s report
Part (a) of the question tests the performance evaluation of two companies with
the aim of making acquisition decisions using ratio analysis, while part (b)
requires the candidates to discuss types of accounting records that can be
maintained using blockchain technologies and the benefits of the technology.
Majority of the candidates attempted the question and their performance was
below average.
Most candidates were able to calculate the ratios but could not carry out correct
evaluations using the ratios to arrive at the appropriate conclusions and make
relevant recommendations.
Candidates are advised to pay attention to all sections of the syllabus for better
performance in future examinations.
Marking Guide Marks Marks

a) - Stating name of companies 1
- Calculation of net profit margin 1½
- Calculation of quick/acid test ratio 1½
- Calculation of debt to equity ratio 1½
- Calculation of proprietory ratio 1½
- Calculation of earnings yield 1½
- Calculation of net asset per share 1½ 10
15
b) Technical report on performance scorecard
- Memo format for report 1
- Analysis of profitability performance 2
- Analysis of liquidity position 2
- Analysis of gearing and solvency position 2
- Conclusion of the report 1
- Recommendation 1
- Closing of the report 1 10
c) Types of Records and Benefit of Block chain

- Stating three (3) types of records 3
- Explanation of three(3) types records 3
- Stating two(2) correct benefits of blockchain 4 10
Total 30
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SECTION B
SOLUTION 2
(a) Obudu Nigeria Limited

Statement of cash flows for the year ended December 31, 2020 using the direct
method
Operating Activities: N'000 N'000
Cash received from customers (153,602 + 8,087) 161,689
Cash paid to suppliers (108,623)
Cash paid to employees (2,000 + 2,712) (4,712)
Cash paid for other expenses (5,462 + 2,132 + 1,000) (8,594)
Cash flows from operations 39,760
Interest paid (2,250)
Taxation paid (10,485)
Net cash flows from operating activities 27,025
Investing activities:
Proceeds from disposal of investment 563
Proceeds from disposal of equipment (1,600 + 1,019) 2,619
Purchase of motor vehicles by cash (22,230)
Net cash flows from investing activities (19,048)
Financing activities:
Proceeds from issue of shares 5,625
Redemption of 8% loan notes (6,750)
Dividend paid by cash (9,000)
Net cash flows from financing activities (10,125)
Net Increase in cash and cash equivalents for the year (2,148)
Cash and cash equivalents at the beginning (5,500 + 1,588) 7,088
Cash and cash equivalent at the end (4,590 + 1,350 - 1,000) 4,940
N’000
Note I – cash/bank balance in statement of financial position 5,940
Less – Omitted payment for Insurance (1,000)
4,940
17
(b) Obudu Nigeria Limited
Reconciliation of operating profit to cash flow from operation
Operating activities: N'000 N'000
Profit before taxation 56,124
Add (Less) Adjustments:
Insurance expenses omitted (1,000)
Investment income (15,000)
Interest expenses 3,375
Depreciation 7,650
Loss on disposal of equipment 2,061 (2,914)
Cashflows from operations before working capital 53,210
Working capital changes:
Increase in inventories (11,363 - 21,308) (9,945)
Increase in trade receivables (14,063 - 22,703) (8,640)
Increase in trade payables and accruals (35,375 - 30,240) _5,135 (13,450)
Cash flows from operations 39,760
Interest paid (2,250)
Taxation Paid (10,485)
Net cashflows from operating activities 27,025
(c) Benefits of statement of cash flows information to users of financial

statements
(i) Where the direct method is used in preparing the statement of cash
flows, it reveals information which are not available in any other
financial statement.
(ii) A statement of cash flows provides information which helps users to
evaluate changes in the net assets of an entity and in its financial
structure (including its liquidity and solvency).
(iii) It provides information that helps users to assess the ability of the
entity to determine the amount and timing of its cash flows in order
to adapt to changing circumstances and unexpected opportunities.
(iv) It is useful in assessing the ability of the entity to generate cash and
cash equivalents.
(v) It helps users of accounts to compare the performance of different
entities because unlike profits, comparisons of cash flows are not
affected by the different accounting policies used by different entities.
(vi) Historical cash flows are often a fairly reliable indicator of the
amount, timing and certainty of future cash flows.
(vii) The statement brings into sharp contrast the entity‟s earning capacity
with its spending activity.
(viii) Focus on cash flows explains the nature of the events which have
affected the cash movements.
18
Examiner’s report
The question tests the candidate‟s knowledge of the preparation of statements of
cash flows in accordance with the provisions of IAS7 and the benefits of the
statement to users of financial information.
Most of the candidates attempted the question and their performance was above
average.
The common pitfall was the inability of candidates to correctly account for the
cash payment relating to Insurance expenses which were omitted in the
cashbook.
The candidates should pay more attention to the preparation of final accounts
which also include preparation of statement of cash flows.
Marking guide Marks Marks

a) Preparation of statement of cash flows:
- Correct title of statement ¼
- Determination of cash flows from operating activities 3 4
3
- Determination of cash flows from investing activities 1¼

- Determination of cash flows from financing activities 1
- Determination of cash and cash equivalent 2 34 9
b) Reconciliation of operating profit to cash flow from operations

- Correct title of the reconciliation statement ¼
- Stating the profit before taxation ¼
- Adjustments on profit before taxation 1 34
- Determination of changes in working capital 2
- Determination of net cash flows from operating activities 3
4 5
c) Six benefits of Statement of Cash flows information: 6

Total 20
19
SOLUTION 3
(a) Food Plc

Consolidated statement of financial position as at September 30, 2020
Assets: N'000
Property plant and equipment (536,000+258,000 – 20,000+9,000) 783,000
Goodwill (Wk 3) _124,000
Total Non-current assets 907,000
Current asset:
Inventories (88,500+92,000-15,000) 165,500
Trade and other receivables (75,400+69,800) 145,200
Cash and bank (25,600+32,200) 57,800
Cash in transit (Wk 8) 8,000
Total current assets _376,500
Total assets 1,283,500
Equity:
Ordinary shares of 50k each 400,000
Share premium 50,000
Retained earnings (Wk 6) 205,600
General reserves (N105,600 + 80% of N16,600) 118,880
774,480
Non-controlling Interest (Wk 5) 165,620
Total equity 940,000
10% Loan notes (100,000+50,000) 150,000
Trade and other payables (96,300+46,900) 143,200
Bank overdraft 40,200
Bills payables (Wk 7) 10,000
Total current liabilities 193,400
Total liabilities 343,400
Total equity and liabilities 1,283,500
Working notes
Wk 1: Group structure
Food Plc ---------------80% (480m/(150m/0.25))--------------- Eba Limited
NCI = 20%
20
At Rep. Post-
Wk 2: Net asset of subsidiary Date At Acq. Date Acq.
N'000 N'000 N'000
Ordinary share 150,000 150,000 -
Retained earnings 88,500 60,000 28,500
General reserves 64,600 48,000 16,600
Fair value adjustment:
Property (20,000) (20,000) -
Depreciation 9,000 -___ 9,000
292,100 238,000 54,100
Excess Depreciation 15 100 × N20,000 × 3 years = N9000
Wk 3: Determination of goodwill on acquisition

N'000 N'000
Fair value of consideration transfer:
Cost of Investments 220,000
NCI at fair value 158,000
378,000
Less: Net Assets of Subsidiary at acquisition (238,000)
Goodwill at acquisition 140,000
Impairment (16,000)
Goodwill at reporting date 124,000
Wk 4: Unrealised profit N'000

URP = 80,000 x 3/4 x 25% 15,000
Wk 5: Valuation of NCI N'000
NCI at acquisition (Wk 3) 158,000
Add: Share of post-acquisition profit (20% of 54,100) 10,820
Impairment of goodwill (20% x 16,000) (3,200)
165,620
Wk 6: Consolidated retained earnings N'000
Food PLC 203,400
Add: Share of post-acquisition profit (80% x 37,500) 30,000
Unrealised profit (Wk 4) (15,000)
Impairment of goodwill (80% x 16,000) (12,800)
Consolidated retained earnings 205,600
21
Wk 7: Consolidated Bill Payables N'000
Bills receivables - Food PLC (30,000)
Bills payables - Eba Limited 40,000
Consolidated Bills Payables 10,000
Wk 8: Consolidated cash in transit N'000

Due from Eba Limited 20,000
Due to Food Plc (12,000)
Cash in Transit _8,000
(b) Explanation of Gain from a bargain purchase (Negative Goodwill)

and the three items that must be reviewed
A bargain purchase is a business combination in which the calculation of
goodwill leads to a negative figure. When this happens the acquirer must
reassess whether it has correctly identified all the assets acquired and all
the liabilities assumed and must recognise any additional assets or
liabilities that are identified in that review.
Under IFRS 3, the acquirer must then review the fair value used to measure
the amounts to be recognised at the acquisition date for all the following:
i. The identifiable assets acquired and liabilities assumed;
ii. The non-controlling interest in the acquired company (if any); and
iii. The consideration transferred.
Any amount remaining after applying the above requirements is
recognised as a gain in profit or loss on the acquisition date.
Examiner’s report
The question is on preparation of consolidated statement of financial position
and it tests candidates‟ knowledge of simple group involving treatments of
goodwill, cash-in-transit and fair value adjustments.
average.
The common pitfalls was their inability to correctly calculate goodwill and
determine the net assets of the subsidiary. Also most candidates could not
explain the term gain from bargain purchase and items required for the review
of the gain from bargain purchase as stated under IFRS3-Business
Combinations.
Candidates are advised to pay more attention to International Financial

Reporting Standards (IFRS) that relates to group financial statements for better
performance at this level of the Institute‟s examination in the future.
22
a) Preparation of consolidated statement of financial position
- Stating correct title of financial statement ¼
- Presentation of non-current assets 1 34
- Presentation of current assets 1¼
- Presentation of equity 1 34
- Presentation and evaluation of non-controlling interest 1½
- Presentation of non-current liabilities 3
4
- Presentation of current liabilities 1½

- Calculation of net assets of subsidiary at reporting and
acquisition dates 2½
- Calculation of goodwill on acquisition 1¾
- Calculation of consolidated retained earnings 1¼
- Calculation of unrealised profit in inventory ¼
- Determination of group structure ½ 15
b) Gain from bargain purchase

- Correct explanation of gain on bargain purchase 2
- Stating three (3) items which must be reviewed when gain from
bargain purchase arises 3 5
Total 20
SOLUTION 4
(a) Steps involved in the process of issuing International Financial Reporting

Standards (IFRS) are:
i. A subject is identified as being appropriate for a new or revised
standard;
ii. Consider the ways in which the IASB Conceptual Framework is
applicable to the issue;
iii. National accounting rules and practice are studied and there is an
exchange of views with national standards setters;
iv. An advisory group is established to give advice to the IASB;
v. A discussion document is issued by the IASB for public comment;
vi. After receiving comments on the discussion document, the IASB issues
an exposure draft (subject to the appropriate level of IASB approval).
The Exposure Draft also includes the opinions of any dissenting IASB
members, and the basis for the IASB‟s conclusions;
vii. All comments on the Exposure Draft and discussion documents are
considered; and
viii. An approved IFRS is published (subject to the appropriate level of
IASB approval).
23
(b) Enhancing characteristics of financial information
i) Comparability
Comparability is the qualitative characteristic that enables users to
identify and understand similarities in, and differences among, items.
Information about a reporting entity is more useful if it can be
compared with similar information about other entities and with
similar information about the same entity for another period or
another date. Consistency is related to comparability but is not the
same. Consistency refers to the use of the same methods for the same
items, either from period to period within a reporting entity or in a
single period across entities. Consistency helps to achieve the goal of
comparability.
ii) Verifiability
This quality helps assure users that information faithfully represents
the economic phenomena it purports to represent.
• Verifiability means that different knowledgeable and independent
observers could reach consensus that a particular depiction is a
faithful representation.
• Quantified information need not be a single point estimate to be
verifiable. A range of possible amounts and the related
probabilities can also be verified.
iii) Timeliness:
This means having information available to decision-makers in time
to be capable of influencing their decisions.
iv) Understandability:
Information is made understandable by classifying, characterising
and presenting it in a clear and concise manner. Financial reports are
prepared for users who have a reasonable knowledge of business and
economic activities and who review and analyse the information
diligently.
(c) Classifications of Financial Instruments in accordance with IFRS 9

(i) A Financial asset is measured at amortised cost if:
 The financial asset is held within a business model in which the
intention is to hold financial asset to collect contractual cash flows;
 Each group or portfolio is being classified as held to collect and or
to sell or other; and
 Assets are classified as being held to collect, if it evaluates the
appropriateness of the classification through testing against past
activities.
24
(ii) Fair value through other comprehensive income
Within a business financial model, a financial asset is measured at
fair value through other comprehensive income if:
 The assets are held when the objective of business model is
achieved by collecting contractual cash flows and selling financial
assets; and
 The terms of the contractual agreement of the financial assets give
rise to cash flows on a specified date that is wholly for payments of
principal and interest outstanding on the principal.
(iii) Fair Value through profit or loss
 It is the normal default classification for financial assets, which are
applicable to all financial assets except they are to be measured at
amortised cost or fair value through other comprehensive income;
and
 This classification includes financial assets held for trading purposes
and derivatives unless they are properly designated for hedging
arrangements.
(d) Amortisation Schedule
Amortisation schedule indicating amortised cost at the end of each year

Amortised Effective
Year Cash Amortised cost carried
cost brought Interest at
Ended received forward
forward 12%
N N N N
2020 575,000,000 69,000,000 75,000,000 569,000,000
2021 569,000,000 68,280,000 75,000,000 562,280,000
2022 562,280,000 67,473,600 75,000,000 554,753,600
2023 554,753,600 66,570,432 75,000,000 546,324,032
2024 546,324,032 65,558,884 75,000,000 536,882,916
2025 536,882,916 64,425,950 575,000,000 26,308,866
The journal entries at the end of December 31, 2025 will be as follows:
Dr. Cr.
N N
Cash 575,000,000
Balance as per amortisation table 26,308,866
Investment in Lagos State Government Bond 536,882,916
Investment income 64,425,950
Being entries on amortisation of Lagos State
Government bond
25
Examiner’s report
The parts (a) and (b) of the question is on International Accounting Standards
Board (IASB) requirements which relates to process of issuing International
Financial Reporting Standards (IFRS) and the enhancing characteristics of
financial information. While part (c) and (d) dealt with classes of financial
instrument under IAS 9 as well as preparation of amortisation schedule of
government bonds.
Most candidates attempted parts (a) and (b) of the question while majority did
not attempt parts (c) and (d), on Financial Instruments.
The performance of the candidates in this question was below average probably
due to their poor performance in the parts (c) and (d).
Candidates are advised to pay more attention to all areas of the syllabus for
better performance in future examinations.

a) Steps involved in issuing IFRS
6
b) Enhancing characteristics of financial information:
- Stating two enhancing characteristics of financial
information 1
- Explaining two enhancing characteristics of financial
information 1 2
c) Classes of financial instruments under IFRS 9:

- Stating classes of financial instrument 1
- Explaining of two classes of financial instrument 3 4
d) Preparation of amortisation schedule:

- Stating relevant headings for the amortisation schedule 1¼
- Calculation of amortised cost carried forward for the years
2020 to 2025 5½
- Journal entries for the year ended 2025 1¼ 8
Total 20
SOLUTION 5
(a) Professional behaviour denotes that members must comply with relevant
extant laws and regulations of the Institute of Chartered Accountants of
Nigerian (ICAN) and that members of the Institute should avoid any action
which discredits the profession. Members should behave with courtesy and
consideration towards all with whom they come into contact with in
professional capacity.
26
Fundamental threats to these principles
The fundamental threats to the principles of professional behaviour are as
follows:
 Self interest threat may occur as a result of the financial or other interests
from family members or immediate close friends;
 Self-review threat occurs when a previous judgement needs to be re-
evaluated by members responsible for that judgement, that is, where a
member maintains books of account of an entity, he may not be willing to
find fault with the financial statements derived from those records;
 Advocacy threats occur when a Chartered Accountant provides false or
misleading information in advocating for an entity. A Chartered
Accountant may often need to promote the entity‟s position by providing
financial information. As long as the information provided is neither false
nor misleading, such actions would not create advocacy threat.
 Familiarity threat occurs when a Chartered Accountant becomes too
sympathetic in the course of carrying out his or her professional duty as a
result of interest from family members and close associates; and
 Intimidation threats occur when a member, in the process of performing
his or professional duty is intimidated or influenced by fear, such a
member entertains fear when he or she works with aggressive clients.
(b) i) Under IAS 38, the conditions under which development costs can be
recognised as intangible assets in the financial statements are:
 It is technically feasible to complete the development project;

 The company intends to complete the development of the asset and
then use or sell it;
 The asset that is being developed is capable of being used or sold;
 Future economic benefits can be generated. This might be proved by
the existence of a market for the asset‟s output or the usefulness of
the asset within the company itself;
 Resources are available to complete the development project; and
 The development expenditure can be measured reliably (for example,
via costing records).
ii) The following are the factors to be considered in determining the useful
life for the amortisation of an intangible asset, in the financial
statements:
 The expected usage of the asset by the entity and whether the asset
could be managed efficiently by another management team;
 Typical product life cycles for the assets and public information on
estimates of useful lives of similar assets that are used in a similar
way;
 Technical, technological, commercial or other types of obsolescence;
27
 The stability of the industry in which the asset operates and changes
in the market demand for the products or services output from the
asset;
 Expected actions by competitors or potential competitors;
 The level of maintenance expenditure required to obtain the expected
future economic benefits from the asset and the entity‟s ability and
intention to reach such a level;
 The period of control over the asset and legal or similar limits on the
use of the asset, such as the expiry dates of related leases; and
 Whether the useful life of the asset is dependent on the useful life of
other assets of the entity.
Examiner’s report
The question tests ICAN code of professional behaviour and provisions of IAS38
on Intangible Assets.
Most candidates attempted the question but their performance was below
average.
The common pitfalls were as follows:
 Inability to correctly states the conditions under which development costs
can be recognised as intangible assets in the financial statement; and
 Some candidates could not explain what is meant by professional
behaviour and state the threats that could affect such behaviour.
Candidates are advised to read relevant professional accounting journals and

pay special attention to accounting standards that are relevant at this level of
the Institute‟s examination for better performance in future.

a. - Correct explanation of professional behaviour 2
- Stating three (3) threats to professional fundamental principles 3 5
b.(i) Explanation of five (5) conditions under which development cost

can be recognised as intangible assets 5
(ii) Stating five (5) conditions which should be considered to

determine the useful life in the amortisation of Intangible assets 5
Total 15
28
SOLUTION 6
a i. Potential ordinary share
A potential ordinary share is a financial instrument or other contract that
may entitle its holders to ordinary shares at some time in the future.
Three examples of potential ordinary shares are:
 Financial liabilities or equity instruments that are convertible into new
ordinary shares at some time in the future, such as convertible
debentures, convertible preference shares, etc.;
 Share options and warrants. Options and warrants are financial
instruments that give the holders the right, but not the obligation, to
purchase new ordinary shares at some time in the future at a fixed price;
and
 Shares that will be issued if certain contractual conditions are met, such
as contractual conditions relating to the purchase of a business.
ii. Procedure for ranking potential ordinary share
 When there are several types of potential ordinary shares in issue, they
should be ranked in order of dilution, with the most dilutive potential
ordinary shares ranked first;
 In order to carry out the ranking the earnings per incremental share is
found for each potential ordinary share. This is the earnings adjustment
that would be necessary, divided by the number of shares that would
come into being if the shares were included in the calculation of diluted
EPS; and
 The money options and warrants always rank first as they increase the
number of shares in the calculation without affecting the earnings.
Jumai Nigeria Limited

b i. Ranking Potential Ordinary Shares
Increase Increase in Earnings per Ranking
in number of incremental
earnings shares
N N
i. Options 0.00 200,000 (wk 1) 0.00 1st
ii Convertible bonds:
5% of N6,000,000 300,000
Less tax at 30% (90,000)
210,000
N6,000,000 x 30/100 1,800,000 2nd
210,000 1,800,000 0.12 (wk 2)
iii Preference shares:
8% of N2,000,000 × 0.7 112,000
112,000
200,000 shares x 1/25 8,000 14.00 (wk 3) 3rd
8,000
29
Jumai Nigeria Limited
ii) Calculation of EPS
Earnings Number of EPS
shares
N N
Basic EPS 18,000,000 6,000,000 3.00
Options 0 200,000
Diluted EPS options only 18,000,000 6,200,000 2.90 Dilutive
Convertible Bonds 210,000 1,800,000
**DEPS options and Bonds 18,210,000 8,000,000 2.28 Dilutive
Convertible pref shares 112,000 8,000 2.29 Not Dilutive
18,322,00 8,008,000
The diluted earnings per share is 2.28
Workings:
Wk 1 Cash received 800,000 × N52.50 = N42,000,000
Shares purchasable = N42,000,000 ÷ N70 = 600,000 shares
Dilutive number of shares = (800,000 - 600,000) = 200,000 shares
Wk 2 Convertible bonds = 210,000 ÷ 1.800,000 = 0.12
Wk 3 Preference share = 112,000 ÷ 8,000 = 14

**DEPS is diluted earnings per share
c) Limitations of EPS
(i) Not all entities use the same accounting policies. It may not always
be possible to make meaningful comparison between EPS of different
entities.
(ii) EPS does not take account of inflation, therefore growth in EPS over
time might be misleading.
(iii) EPS measures an entity‟s profitability, but this is only part of an
entity‟s overall performance. An entity‟s cash flows can be just as
important as its profit (and more essential to its immediate survival).
Changes in the value of assets that is holding gains can also be an
important part of performance for some entities.
(iv) Diluted EPS is often described as an early warning to investors that
the returns on their investment may fall sometimes in the future.
However, diluted EPS is based on current earnings, not forecast
earnings. This means that it may not be a reliable predictor of future
EPS.
(v) EPS is not a complete tool for investment analysis as it cannot provide
information on liquidity position of the entity.
30
Examiner’s report
The question is on provisions of IAS 33-Earnings Per Share (EPS) and it also,
tests candidates‟ knowledge of computation of diluted EPS and limitation of EPS
as a means of determining an entity‟s performance.
Most candidates attempted the question, but performance was poor.

Majority of the candidates could not explain and state the types of potential
ordinary share, while others could not calculate the diluted earnings per share
for options, convertible bonds and preference shares.
Candidates are advised to pay more attention to all sections of the Institute‟s
syllabus, for better performance in future examinations.
ai) Explanation of the term potential ordinary shares 1½
- Stating three (3) examples of potential ordinary shares 1½ 3
ii) Description of three procedures of ranking potential ord. shares 3

b) Correct ranking of potential ordinary shares:
Options 1
Convertible bonds 1
Convertible preference shares 1½
Calculation of diluted EPS for the year:
Options 1½
Convertible bonds 1
Convertible preference shares 1 7
c) Correctly stating three (3) limitations of EPS as means of
evaluating entity‟s performance:
Presentation of solution ½
Three (3) limitations 1½
2
Total 15
SOLUTION 7
Purpose of Conceptual Framework of International Accounting Standards

Boards (IASB)
a) The purposes of Conceptual Framework of the International Accounting

Standard Board (IASB) are to assist:
i. In the development of future international standards;
ii. In the review of the existing standards;
iii. National standard setters in development of national standards;
iv. Preparers of financial statements in the application of international
standards;
31
v. In dealing with topics that are not yet covered in the international
standards;
vi. Auditors in forming opinion as to whether financial statements
conform with the international standards;
vii. Users of financial statements to interpret the information in the
financial statements prepared in accordance with the international
standards; and
viii. Those who are interested in the work of IASB with information about
its mode of operations and approaches to the formulation of
international standards.
b) Basics Steps in the Application of Business Model Test in IFRS 9

The steps in the application of business model tests under IFRS 9 are as
follows:
i. Sub-dividing where necessary loans and receivables into different
groups or portfolios based on the way they are managed;
ii. Objective identification of the entity, which is used in the course of its
business to manage each group or portfolio;
iii. Classification for each group or portfolio of financial assets as being
held to collect, and held to sell; and
iv. The appropriateness of the classification will be evaluated through
back-testing of past activities, for the assets classified as held to
collect.
Examiner’s report
The question tests candidates‟ knowledge of Conceptual Framework issued by
International Accounting Standards Board (IASB) and the applications of
Business Model Test for various classes of financial instruments under IAS 9.
Most candidates attempted the question and performance was average.

The candidates performed very well in part(a) of the question which is on
purpose of Conceptual Framework but performed badly in part (b) that requires
them to explain steps in the application of Business Model Test under IAS 9.
Candidates are advised to pay more attention to accounting standards on

financial instruments and other relevant standards at this level of the Institute‟s
examination for better performance in future.
Marking guide Marks

a. Explanation of six (6) purposes of Conceptual Framework of
International Accounting Standards Board (IASB) 9
b. Explanation of three (3) basic steps in the application of business

model test in IFRS 9 6
Total 15
32
ICAN/222/Q/B2 Examination No...........................
AUDIT AND ASSURANCE
1. Check your pockets, purse, mathematical set, etc. to ensure that you do not
have prohibited items such as telephone handset, electronic storage device,
programmable devices, wristwatches or any form of written material on you
in the examination hall. You will be stopped from continuing with the
examination and liable to further disciplinary actions including cancellation
of examination result if caught.
3. Do NOT write anything on your question paper EXCEPT your

examination number.
5. Read all instructions in each section of the question paper carefully before
answering the questions.
6. Do NOT answer more than the number of questions required in each section,
otherwise, you will be penalised.
7. All solutions should be written in BLUE or BLACK INK. Any solution written
in PENCIL or RED INK will not be marked.
WEDNESDAY, NOVEMBER 16, 2022
33
AUDIT AND ASSURANCE

INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT FIVE OUT OF THE SEVEN

QUESTION 1
In an accountancy class on “Audit Opinion in International Standards on
Auditing”, Ado, a lecturer at ICAN University, was explaining to the students
that the end product of external audit work is the auditor‟s opinion expressed on
the financial statements. He stated that a general purpose financial statement
was in compliance with the financial reporting framework designed to meet the
common financial information needs of a wide variety of users.
The role of audit is to provide a high level of assurance to the users of the
financial statements and that it is necessary for users to have confidence that
consistent auditing standards have been applied to the audits of financial
statements of companies. He went further to explain that the overall objectives
of the independent auditor is to ensure that the conduct of an audit is in
accordance with International Standards on Auditing. He concluded that the
auditor‟s report shall include a section with the heading “Opinion” as stated
below
Opinion
We have audited the financial statements of Inajit Plc set out on pages XXX to
XXXX which comprise the statement of financial position as at year end date,
and the statement of profit or loss and other comprehensive income, the
statement of changes in equity and the statement of cash flows for the year then
ended, the notes to the financial statements, including a summary of significant
accounting policies.
In our opinion, the financial statements give a true and fair view of financial
position of Inajit Plc as at year end date, and its financial performance and cash
flows for the year then ended in accordance with International Financial
Reporting Standards and the requirements of the Companies and Allied Matters
Act 2020 and Financial Reporting Council Act, 2011.
At the end of the lecture a student in the class came to you for further
explanation on the topic.
34
Required:
a. State the objectives of the independent auditor as stated in International
Standards on Auditing. (5 Marks)
b. Outline what ISA 200 requires the auditor to do in relation to the audit of
c. Explain the scope of audit as described in the independent auditor‟s
report. (5 Marks)
d. Highlight the role of regulatory bodies in ensuring that audits are carried
out in line with standards. (10 Marks)
(Total 30 Marks)
INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF

THE THREE QUESTIONS IN THIS SECTION
QUESTION 2
The International Standards on Auditing (ISA) 230 deals with the auditor‟s
responsibility to prepare audit documentation for an audit of financial
statements.
Required:
a. State FIVE reasons for preparing audit documentation. (5 Marks)
b. Highlight the requirements of ISA 230 on audit documentation. (3 Marks)
c. State FIVE contents each of current and permanent files. (10 Marks)
d. Explain who owns audit working papers and why. (2 Marks)
(Total 20 Marks)
QUESTION 3
ISA 210, Agreeing the Terms of Audit Engagements, requires that the auditor
needs to agree the terms of audit engagement prior to commencement of work.
Required:
a. What is an engagement letter? (2 Marks)
b. Highlight EIGHT major items expected to be found in a typical audit
engagement letter. (8 Marks)
c. State FIVE advantages of an engagement letter. (5 Marks)
d. State FIVE requirements of ISA 210 with respect to the preconditions for
accepting appointment as an auditor. (5 Marks)
(Total 20 Marks)
35
QUESTION 4
You are part of an audit team engaged on the audit of an engineering company
which has a substantial amount of plant and machinery in its books. While
reviewing the accounts, you also observed that there were some current assets
and liabilities that may require external confirmations.
Required:
a. How would you establish the amount and level of audit evidence required
for the current assets and liabilities? (5 Marks)
b. State which procedures will be applied to generate audit evidence in the

following scenarios:
i. Confirming the accuracy of figures in the trade receivables account

ii. Confirming that the plant and machinery purchased in the year is
actually in use during the year
iii. Ascertaining that the change in performance is in line with
expectation
iv. Confirming the accuracy of the total receivable figures in the
statement of financial position
v. Confirming contingent liability as to legal fees (5 Marks)
c. State the audit procedures you would take concerning the disposal of
plant and machinery. (5 Marks)
d. State the requirements of ISA 505 concerning maintaining control over

the external confirmation requests of current assets and liabilities.
(5 Marks)
(Total 20 Marks)
INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF THE

THREE QUESTIONS IN THIS SECTION
QUESTION 5
In the apex bank‟s regulatory supervisory report to Dutse Bank Limited, the
management has been directed to ensure institution of an Internal Audit Unit.
Prior to this time, the bank believed that internal audit staff might be colluding
with other staff to suppress information on fraudulent transactions and as such
the desired result might not be achieved. Apart from this, it was considered that
savings could be made from transport, hotel and other allowances to be paid to
staff when on official assignments. The independent auditor had earlier
mentioned the need for this in the audit report but management was of the view
that it is acceptable to cross-train employees in different departments to be able
to audit departments other than their own. In the opinion of management, this
will provide a more independent and unbiased view through checks and
36
balances. The audit function they perform through multitasking will best add
value to the progress of the organisation.
It is also the belief of management that the basic processes of both accounting
and auditing are similar. The two systems use essentially the same procedures
and techniques of bookkeeping, computation and analysis. To them, accounting
and auditing strive to ensure that the financial statements and records provide a
fair reflection of the actual financial position of an organisation. Both activities
are inter-related and go hand in hand, especially in setting up processes in the
organisation, hence, there is no need for any Internal Audit Unit or duplication
of efforts.
As the independent auditor of the bank, you were shown the regulatory
supervisory report and you have been asked to make presentation to the Board
of Directors on the necessity for the Internal Audit Unit in the bank.
Required:
a. Explain the need for the internal audit functions in an organisation.
(5 Marks)
b. State the various measures that can be taken to protect the independence
of internal auditors. (5 Marks)
c. Explain the weaknesses and limitations of internal audit. (5 Marks)

(Total 15 Marks)
QUESTION 6
When prompted on a question at the presentation meeting to the audit
committee of AMIRAH Plc, the Partner of OIO professional services stated that the
end result of the statutory audit is general purpose financial statements on which
audit opinion will be expressed. He explained that the auditor shall express an
unmodified opinion when the auditor concludes his work, based on the audit
evidence obtained, that the financial statements as a whole are free from
material misstatement and that the financial statements are prepared, in all
material respects, in accordance with the applicable financial reporting
framework. However, if the external auditor is unable to obtain sufficient and
appropriate audit evidence to conclude that the financial statements as a whole
are free from material misstatement, the auditor shall modify the opinion in the
auditor‟s report. In summary, the auditor's opinion is a certification that
accompanies financial statements after the examination of the books of accounts.
You are the manager in the firm and a member of the audit committee has
requested for more explanation on the presentation by the partner.
37
Required:
a. Explain general purpose financial statements. (5 Marks)
b. Highlight to an audit committee member, the contents of audit opinion in
(Total 15 Marks)
QUESTION 7
In order to ensure that an audit is carried out effectively and efficiently, the
work needs to be planned, controlled and recorded at each stage of the
program.
Required:
a. What matters must be taken into consideration when planning an audit?
(3 Marks)
b. What are the benefits of adequate audit planning? (3 Marks)
c. What are the key benefits that would arise from spreading the audit work
across interim and final audits? (4 Marks)
d. State FIVE audit procedures that are carried out at the final audit stage.
(5 Marks)
(Total 15 Marks)
SOLUTION 1
(a) The objectives of the auditor are formally specified in ISA 200 as:
i. To obtain reasonable assurance about whether the financial statements
as a whole are free from material misstatement, whether due to fraud or
error, thereby enabling the auditor to express an opinion on whether the
financial statements are prepared, in all material respects, in accordance
with the applicable financial reporting framework; and
ii. To report on the financial statements, and communicate as required by

the ISAs, in accordance with the auditor‟s findings.
(b) In relation to the audit of financial statements, ISA 200 requires the auditor
to:
i. Comply with all ISAs relevant to the audit;
ii. Comply with relevant ethical requirements;
iii. Plan and perform an audit with professional scepticism;
iv. Exercise professional judgement in planning and performing an audit;
and
v. Obtain sufficient and appropriate audit evidence to allow him to obtain
reasonable assurance
38
(c) The scope of an audit as described in the independent auditor‟s report
contains the following points:
i. An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the financial statements;
ii. The procedures selected depend on the auditor‟s judgment, including
the assessment of the risks of material misstatement in the financial
statements, whether due to fraud or error;
iii. In making those risk assessments, the auditor considers internal control
relevant to the entity‟s preparation and fair presentation of the
financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the entity‟s internal control;
iv. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by
management; and
v. Assessment and evaluating the overall presentation of financial
statements.
(d) The role of regulatory bodies in ensuring that audits are carried out in line
with standards normally includes the following:
i. Offering professional qualifications for auditors, to provide evidence
that auditors possess a minimum level of technical competence;
ii. Establishing procedures to ensure that the professional competence of
auditors is maintained. This includes matters, such as:
 Ensuring that audits are performed only by „fit and proper‟
persons, who act with professional integrity;
 Requiring that the members carry out their audit work in
accordance with appropriate technical standards (for example, in
accordance with International Standards on Auditing, known as
ISAs);
 Ensuring that auditors remain technically competent and up to
date with modern auditing practice (for example, by following a
programme of continuing professional development);
 Providing procedures for monitoring and enforcing compliance by
its members with the rules of the regulatory body. These include
rules and procedures for the investigation of complaints against
members and the implementation of disciplinary procedures where
appropriate
 Maintaining a list of registered auditors which is made available to
the public; and
 Such a system is referred to as a system of self-regulation. In such
a system, the regulation of auditors is carried out by their own
professional bodies.
39
The government may appoint a public body with similar responsibilities
to a self-regulating professional body.
The public body may, therefore, establish rules and procedures for:
i. Approving/authorising individuals to perform audit work;
ii. Ensuring that authorised auditors have the necessary minimum
skills and knowledge to carry out their audit work to a proper
standard; and
iii. Handling complaints and taking disciplinary measures against
auditors, where appropriate.
In addition, Statutes (e.g. CAMA) establish that certain individuals are

ineligible to act as an external auditor in the context of a given company,
even if they are members of an appropriate regulatory body. These
exclusions are designed to help to establish the independence of the
auditor. In line with section 403 of CAMA 2020, the following individuals
are prohibited from acting as the auditor of a company:
i. An officer or servant of the company;
ii. A person who is a partner of or in the employment of an officer or
servant of the company; or
iii. A body corporate.
Examiner’s report
This question which is in four parts, tests the candidates‟ knowledge of the
requirements of the International Standards on Auditing (ISAs)
This being a compulsory question, all the candidates attempted it, but the
performance was poor.
The candidates‟ commonest pitfall was their inability to explain the

requirements of the International Standards on Auditing (ISAs)
Candidates are advised to read the ISAs because of their importance in relation
to the audit of financial statements.
40
a) Stating the objectives of the independent auditor as stated in
International Standards on Auditing
-3 marks for “to obtain assurance of financial statements being free 3
from material misstatement for the auditor‟s opinion”
- To report and communicate on financial statements as required by
ISAs 2 5
b) Outlining what IAS 200 requires the auditor to do in relation to
the audit of financial statements
2 marks each, subject to a maximum 5 requirements of ISA 200 10
c) Explanation on the scope of audit as described in the

independent auditor’s report
1 mark each, subject to a maximum 5 points 5
d) Highlighting the role of regulatory bodies in ensuring that

audits are carried out in line with standards
- 2 marks for setting professional qualification for auditors 2
- 1 mark each for self-regulatory role by the professional bodies,
subject to a maximum of 4 points 4
- 1 mark each for regulation by government, subject to a
maximum of 4 points 4 10
Total 30
SOLUTION 2
a) Audit documentation is the record of auditing procedures and documents

applied, evidence obtained and conclusion reached by the auditor, in the
audit engagement or process.
Audit documentation
i. Can be used as a defence, if the auditor is ever accused of negligence;
ii. Makes the review of the audit work easier;
iii. Represents a better level of quality control over an audit;
iv. Shows auditors in later years how the audit was conducted;
v. Can be used as a training tool for junior auditors;
vi. Ensures that members of the audit team are accountable for their work;
and
vii. Assists to keep a record of all matters of continuing importance to
future audit.
41
b) ISA 230 requirements
The auditor should prepare, on a timely basis, audit documentation that
provides:
i. A sufficient and appropriate record of the basis for the audit report;
and
ii. Evidence that the audit was performed in accordance with ISAs and
applicable legal and regulatory requirements.
c) Current audit files contain information that relate to a specific audit

engagement. Examples are:
i. Management accounts for the current period;
ii. List of major schedules of balances;
iii. Management letter;
iv. Letter of representation;
v. Audit queries and their dispositions;
vi. Audit adjustments;
vii. Current period‟s audited financial statements;
viii. Circularisation letters and responses;
ix. Extract of minutes of board meetings held during the period;
x. Current period‟s management budget and estimates;
xi. Audit programme;
xii. Audit planning materials like audit plan, risk assessment and
materiality threshold;
xiii. Audit checklists; and
xiv. Copy of letter of engagement.
Contents of a permanent audit file include:
i. Certificate of incorporation;
ii. Memorandum and articles of association or any other legal
constitution;
iii. Organisation structure and management profile;
iv. List of branches and addresses;
v. List of banks and locations;
vi. Copy of letter of engagement;
vii. Copies of audited financial statements to date;
viii. Copies of important agreements entered into by the company or
entity;
ix. List of directors;
x. List of major shareholders or members of the entity;
xi. Summary of the history and development of the entity; and
xii. Summary of the accounting system and other operational procedures.
42
d) Owners of audit working papers
Audit working papers are owned by the auditors. The auditor, in a
statutory audit, is performing in a principal capacity and not as an agent.
If any legal issue arises from his audit, he has to defend himself, hence
ownership of the working papers is appropriate.
The working papers do not form part of the accounting records of the
client, and do not belong to the client. Auditing standards require the
auditor to ensure that working papers are kept safe and their contents are
kept confidential. Information therefore should only be made available to
third parties in accordance with ethical guidelines and legal requirements.
Examiner’s report
The question tests the candidates‟ understanding of the requirements of ISA 230
on audit documentation.
About 80% of the candidates attempted the question. Performance of the
candidates was fair in parts(c) and (d) which relate to the contents of current
and permanent files, and ownership of audit working papers, respectively but
was poor in parts (a) and (b) which asks for the reasons for audit
documentation, and requirements of ISA 230 on audit documentation,
respectively.
The major pitfall of the candidates was their inability to explain the provisions
of the International Standards on Auditing (ISA).
Candidates are advised to study the ISAs and also make use of the Institute‟s
Study Text and Pathfinder.

a) Stating the reasons for preparing audit documentation
1 mark each for a reason for preparing audit documentation,
b) Stating the requirements of ISA 230 on audit documentation

1½ marks each, subject to a maximum of 2 requirements of ISA
230 on audit documentation 3
c) Stating the contents of current and permanent files

1 mark each, subject to a maximum of 5 contents of current file 5
1 mark each, subject to a maximum of 5 contents of permanent
file 5 10
d) Explanation of ownership of audit working papers

1 mark for stating the auditor is the owner of audit working
papers 1
1 mark for stating the reason in respect of the above 1 2
Total 20
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SOLUTION 3
a) An engagement letter is a mandatory requirement which sets out the legal

relationship between a professional firm and its client.
It should be provided before any work is undertaken as it sets out key

information, including the scope of the contract.
b) An engagement letter should include details of the following:

i. The objective and scope of the audit;
ii. The responsibilities of the auditor;
iii. The responsibilities of management;
iv. Identification of the underlying financial reporting framework;
v. Reference to the expected form and content of any reports to be issued;
vi. Any restriction of the auditor‟s liability when such possibility exists;
vii. The expectation that management will provide written representation;
viii. The basis on which fees are computed and any billing arrangements;
ix. A request for management to acknowledge receipt of the engagement
letter and to agree to its terms;
x. Arrangements concerning the involvement of other auditors and
experts; and
xi. The planning and performance of the audit.
c) Advantages of an engagement letter include:

i. It helps to dissect responsibilities in the sense that the management is
responsible for the preparation of financial statements, whereas the
auditor is responsible to ensure that these financial statements have
not been misstated;
ii. It prevents risk of misunderstandings with client;
iii. It makes the client better informed and educated on the nature and
scope of the audit;
iv. The information contained in the engagement letter assists in planning
the audit; and
v. It serves as a means of avoiding legal liability for claims that auditors
did not perform the assignment as promised.
d) Five requirements of ISA 210 with respect to the preconditions for

accepting appointment as an auditor include:
i. Establishing if the financial reporting framework to be used in the
preparation of the financial statements is acceptable;
ii. Obtaining the agreement of management that it acknowledges and
understands its responsibility for the preparation of the financial
statements and internal controls to ensure that the financial
statements are not materially misstated;
iii. Ensuring no limitation of scope is imposed by management that
would disable auditor‟s opinion;
44
iv. Providing the auditor with all relevant and requested information and
unrestricted access to all personnel by management or those charged
with governance; and
v. Ensuring that management agrees to their responsibilities.
Examiner’s report
The question tests candidates‟ understanding of the provisions of ISA 210-
Agreeing the Terms of Audit Engagements.
About 80% of the candidates attempted the question but the performance
was fair in parts (a) and (b) and poor in parts (c) and (d).
The major pitfall of the candidates was their inability to state the
preconditions for accepting an appointment as an auditor as stated in ISA
210.
Candidates should study the requirements of relevant ISAs and cover the
entire syllabus when studying for future examinations.
Marking guide Marks

a) Explanation of an engagement letter
2 marks for explaining and identifying major items in an engagement 2
letter
b) Highlighting major items in a typical engagement letter

1 mark each, subject to a maximum of 8 major items in the engagement
letter 8
c) Stating the advantages of an engagement letter

1 mark each, subject to a maximum of 5 advantages of engagement
letter 5
d) Stating the preconditions for accepting appointment as an auditor

1 mark each, subject to a maximum of 5 requirements of ISA 210 for
preconditions for accepting any appointment 5
Total 20
SOLUTION 4
a. The factors that determine the amount and level of audit evidence for the
current assets and liabilities include the:
i. Effectiveness of internal control measures put in place;
ii. Materiality of the items of current assets and liabilities;
iii. Effectiveness of the accounting system;
iv. Reliability of the enterprise staff and management;
v. Consistency of the evidence;
45
vi. Sampling method applied to obtain audit evidence;
vii. Professional judgement by the auditor on evidence gathering
process; and
viii. The level of risk that the financial statements might not give a true
and fair view.
b. The procedures that will be applied to generate audit evidence in the
following scenarios are as follows:
i) Trade receivables account

Accuracy of the figures in the accounts can be confirmed by
obtaining confirmation from external/third parties. Direct
confirmation involves asking customers to provide written
confirmation directly to the auditors of their account balances with
the client entity.
ii) Purchase of plant and machinery in the year

 Obtain/prepare a schedule for the additions.
 Check the authorisation of the expenditusre to purchase these
additions.
 Confirm that total additions reconcile with the movement between
the opening and closing balances in the notes to the financial
statements.
 Inspect a purchase invoice or other documents as evidence of the
cost of any additions and confirm that the documents are in the
company‟s name.
 Verify the existence of the acquired plant and machinery by means
of physical inspection, where applicable.
 Check that entries in the accounting records are correct, confirming
the allocation of total expenditure between capital and revenue
expenditure.
iii) Change in performance

This can be ascertained to be in line with expectation by comparing
budgets with actual performance in the period. Analytical review
procedures will identify unusual variation between the budget and actual.
This could help management to identify areas where the variations

occurred and assist in necessary investigation to know the reason(s) for
such variations, whether expected or abnormal.
iv) Accuracy of the total receivable figures in the statement of financial

position
The auditors need to be satisfied that the presentation and disclosure of
the total trade receivables is correct. This can be done by:
 Agreeing the list of receivable ledger balances (on which he based his
substantive procedures) with the financial statements figure;
46
 Correct disclosure and classification of receivables in the financial
statements;
 Conduct cut-off tests between credit sales procedures and trade
receivables; and
 Checking that due provision is made for doubtful receivables.
v) Contingent liability as to legal fees

 Ascertain the approach taken by the client‟s management to identify
contingencies on legal fees.
 Review minutes of the board meeting where such matter was discussed
and approved.
 Review the client‟s correspondence with lawyers and invoices for legal
services.
 Consider direct confirmation from lawyers of matters handled on behalf
of the entity under audit.
c. Procedures for disposal of plant and machinery include:

i. Obtaining or preparing a schedule of disposals for the period;
ii. Checking or the authorisation of the disposals;
iii. Confirming cost and the accumulated depreciation figures of the
items have been removed from the accounting records;
iv. Verifying the calculation of the figure for the gain or loss on disposal
and verify that this figure has been correctly recorded in the ledger;
and
v. Discussing with management, the possibility of unrecorded disposals
of assets.
d. The requirements of ISA 505 concerning the external confirmation requests

of current assets and liabilities
The auditor should maintain control over the confirmation process in the:
i. Identification of the member or members of the audit team
responsible for controlling the external confirmation process, the
resources assigned and the timing of the related procedures;
ii. Selection of items for which external confirmations will be requested;
iii. Design and preparation of the confirmation requests;
iv. Communication of the confirmation requests to the appropriate
confirming party;
v. Consideration of the results (responses, non-responses and
exceptions) of confirmation requests; and
vi. Evaluation of the evidence obtained from the confirmation requests.
47
Examiner’s report
The question which is in four parts tests the candidates‟ knowledge on audit
evidence and the requirements of ISA 505 on external confirmation regulation.
About 20% of the candidates attempted the question. The performance was
poor.
The candidates‟ major pitfall was the candidates‟ inability to generate audit
evidence in given scenarios.
Candidates are advised to study very well for future examinations by covering
the entire syllabus. They should also make use of the Institute‟s Study Text and
Pathfinder.
Marking guide Marks

a) Stating the amount and level of audit evidence required for
current assets and liabilities
1 mark each for stating the amount and level of audit evidence,
b) Stating the procedures to be used and applied to generate

audit evidence in the following scenarios:
(i) Confirming the accuracy of figures in the trade receivables
account 1
(ii) The plant and machinery purchased in the year is actually
in use during the year 1
(iii) Ascertaining that the change in performance is in line with
expectation 1
(iv) Confirming the accuracy of the total receivables figures in
the statement of financial position 1
(v) Confirming contingent liability as to legal fees 1 5
c) Stating the audit procedures concerning disposal of plant

and machinery
1 mark each for any of the 5 procedures for the disposal of plant
and machinery 5
d) Stating the requirements of ISA 505 concerning control over

external confirmation requests of current assets and
liabilities
1 mark each for any of the 5 requirements of ISA 505 for external
confirmation request 5
Total 20
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SOLUTION 5
a) The need for internal audit function include:

i. Monitoring of internal control: The establishment of adequate internal
control system is a responsibility of management and is an important
aspect of good corporate governance. Because the internal control
system needs to be monitored on a continuous basis, large companies
are likely to establish internal audit function to assist management in
this role. Internal audit is therefore usually given specific responsibility
by management for reviewing internal controls, monitoring their
operation and recommending improvements via reports to those
charged with governance;
ii. Examination of financial and operating information: This may include
the review of the means used to identify, measure, classify and report
such information or specific inquiry into individual items, including
detailed testing of transactions, balances and procedures;
iii. Review of the economy, efficiency and effectiveness of operations. This
could include a review of non-financial controls;
iv. Review of compliance with laws, regulations and other external
requirements and with internal requirements, such as management
policies and directives; and
v. Special investigations into particular areas such as suspected fraud.
b) Measures to protect internal audit independence include:

i. Reporting lines - The internal auditor should report to the audit
committee or those charged with governance;
ii. Deciding the scope of internal audit work - The scope of work carried
out by the internal auditors should not be decided by the Finance
Director or line management responsible for the operations that
might be subjected to audit. This is to avoid the risk that the internal
auditors might be assigned to investigation of non-contentious areas
of the business. The scope of internal audit work should be decided
by the Chief Internal Auditor or by the audit committee.
iii. Rotation of internal audit staff - Internal auditors should not be
allowed to become too familiar with the operations that they audit or
the management responsible for them. To reduce the familiarity
threat, internal auditors should be rotated regularly, say every three
to five years, and at the end of this period, they should be assigned to
other audit assignments within the entity;
iv. Appointment of the head of internal audit - The head of internal
auditor should not be appointed by a senior executive who may have
some self interest in wishing to appoint an internal auditor that can
easily be controlled. Instead, the audit committee should be
responsible for appointing a new head of internal audit, subject
perhaps to approval by the board of directors;
v. Designing internal controls - The internal auditors should not be
responsible for the design of internal controls within the entity. If they
did, they would then be auditing their own work, which will amount
49
to a self review threat and this is unacceptable. Senior management
in accounting and finance or line management should have
responsibility for the design and implementation of internal controls,
taking advice where appropriate from the external auditors when
control weaknesses are identified during the external audit; and
vi. Professionalism- It is advisable to appoint someone who is
professionally qualified to head the internal audit function to assist in
maintenance of independence.
c) Weaknesses and limitations of internal audit

Since internal audit is not a regulatory requirement, there is no
requirement for internal auditors to be professionally qualified for the work
they do (although there may be a professional institute or association of
internal auditors). It is therefore a matter for the entity setting up the
internal audit function what qualifications or experience it requires of the
members of its internal audit team.
In contrast, the external auditor must comply with regulations set by

government and his professional body covering technical and professional
standards and qualifications. However, internal auditors who are members
of a professional body (such as the ICAN) will need to comply with the
requirements of that body in any work that they do.
Limitations to having an internal audit unit include:
i. The cost of having one; and
ii. The problems that may arise with ensuring the independence of the
internal auditors.
Examiner’s report
The question tests candidates‟ knowledge of internal audit functions,
weaknesses and limitations of internal audit, and independence of the auditors.
About 85% of the candidates attempted the question but the performance was
just fair.
Some of the candidates were not able to explain the weaknesses and limitations
of internal audit.
Candidates should endeavour to cover all relevant areas of the syllabus in their
preparations for subsequent examinations.
50
Marking guide Marks
a) Stating the need for internal audit function
1 mark each for any of the 5 needs for internal audit function 5
b) Stating the measures to be taken to protect the

independence of the internal auditors
1 mark each for a measure to protect auditors independence,
c) Stating the weaknesses and limitations of internal audit

1 mark each for any of the 5 points on weakness and limitations of
internal audit 5
Total 15
SOLUTION 6
a. General purpose financial statements

In line with ISA 700, the Auditor‟s Report on Financial Statements, general
purpose financial statements are financial statements prepared in
accordance with a general-purpose framework, that is designed to meet
the common financial information needs of a wide range of users.
The financial reporting framework may be a fair presentation framework or

a compliance framework. The term “fair presentation framework” is used
to refer to a financial reporting framework that requires compliance with
the requirements of the framework.
b. The contents of audit opinion in financial statements to the audit

committee. The auditor is required to evaluate whether:
i. He has obtained sufficient, appropriate audit evidence as to whether the
financial statements are free from material misstatement;
ii. Uncorrected misstatements are material individually or in aggregate;
iii. The financial statements have been prepared in accordance with the
requirements of the applicable financial reporting framework (which for
a “fair presentation framework” will include evaluating whether the
financial statements give a true and fair view and in particular whether:
 The financial statements adequately refer to or describe the
applicable financial reporting framework;
 The financial statements adequately disclose the entity‟s significant
accounting policies;
 The significant accounting policies are appropriate and consistent
with the applicable financial reporting framework;
 Accounting estimates are reasonable;
 The information in the financial statements are relevant, reliable,
comparable and understandable;
51
 The financial statements provide adequate disclosures; and
 The terminology used in the financial statements is appropriate.
Examiner’s report
The question tests the candidates‟ understanding of general purpose financial
statements and contents of audit opinion.
About 20% of the candidates attempted the question and the performance was
poor.
The candidates‟ major pitfall was lack of understanding of general-purpose

financial statement.
The candidates should study well for the examinations making use of the
Institute‟s Study Text and other relevant materials.

a) Explanation of general purpose financial statements 3
Explanation on general purpose financial statements
Explanation on fair presentation framework 2 5
b) Highlighting the contents of audit opinion in financial

statement to an audit committee member
2 marks each, subject to a maximum of 5 contents of the audit
opinion 10
Total 15
SOLUTION 7
a. The following matters should be taken into consideration in planning an

audit:
i. Preliminary work to be done before the audit proper;
ii. Review of previous years‟ working papers;
iii. Review of changes in relevant legislation and auditing or accounting
practice guidelines;
iv. Analytical review of management accounts, interim accounts, etc.;
v. Review of changes in the business or its management;
vi. Review of changes in systems or accounting procedures;
vii. Timing requirements;
viii. Extent of preparation by the client of analyses, schedules and
summaries;
ix. Use of internal audit;
x. Degree of reliance on internal controls;
xi. Rotational testing and verification;
xii. Joint auditors, if any; and
xiii. Review of relevant business or enabling environment.
52
b. Benefits of adequate audit planning include:
i. Helping the auditor to devote appropriate attention to important
areas of the audit;
ii. Helping the auditor to identify and resolve potential problems;
iii. Helping the auditor to organise and manage the audit engagement so
that it is performed in an effective and efficient manner;
iv. Assisting in the selection of staff with appropriate experience and the
proper assignment of work to them; and
v. Allowing for the direction and supervision of staff and review of their
work.
c. The key benefits that would arise from spreading the audit work
across interim and final audits include:
i. More flexible resource planning within the firm – the planning of the
interim audits is typically more flexible than the timing of final audit.
This helps reduce demand for audit staff during “busy season”
(traditionally the first few months of a calendar year when many
clients require their final audit to take place);
ii. Earlier identification of significant matters;
iii. Shareholders and other users receive audited financial statements
earlier;
iv. Increased audit efficiency; and
v. Suitability for large and dynamic organisations, making the
conclusion of the final audit faster.
d. Audit procedures that are carried out at the final audit stage
include:
i. Reviewing the audit evidence collected;
ii. Reviewing the final version of the financial statements;
iii. Checking the quality control;
iv. Communicating with those charged with corporate governance;
v. Holding audit clearance meeting;
vi. Reviewing subsequent events;
vii. Carrying out analytical review; and
viii. Obtaining third party confirmations, such as bank letters and trade
receivable confirmations for review and proper analysis.
Examiner’s report
The question which is in four parts tests the candidates‟ understanding on audit
planning, spreading audit work across interim and final audits, and the audit
procedures that are carried out at the final stage.
About 60% of the candidates attempted the question, but performance was
average.
The candidates‟ commonest pitfall was their inability to state audit procedures
that are carried out at the final audit stage.
53
The candidates are enjoined to prepare well for the Institute‟s examinations by
making use of ICAN Study Text and Pathfinder.
Marking guide Marks

a) Stating the matters to be taken into consideration when planning an audit
1 mark each, subject to a maximum of 3 consideration in planning an audit 3
b) Stating the benefits of adequate audit planning 3

1 mark each, subject to maximum of 3 benefits of adequate planning
c) Stating the key benefits of spreading the audit work across interim
and final audits 4
1 mark each, subject to a maximum of 4 key benefits for spreading the audit
work across interim and final audits
d) Stating the procedures that are carried out at the final audit stage
1 mark each, subject to maximum of 5 procedures 5
Total 15
54
ICAN/222/Q/B4 Examination No....................
PERFORMANCE MANAGEMENT
programmable devices, wristwatches or any form of written material on you
in the examination hall. You will be stopped from continuing with the
examination and liable to further disciplinary actions including cancellation
of examination result if caught.
3. Do NOT write anything on your question paper EXCEPT your examination
number.
8. A formula sheet and discount tables are provided with this examination
paper.
WEDNESDAY, NOVEMBER 16, 2022
55
PERFORMANCE MANAGEMENT

QUESTION 1
Koliwi Limited is a company that builds innovative and environmentally friendly

housing. Their houses use high quality materials and the unique patented
energy saving technology used in the houses has been the result of the
company‟s own extensive research in the area.
Koliwi Limited is planning to expand into another country and has been asked
by a prominent person in that country for a price quotation to build them a
house. The Board of Directors believes that securing the contract will help to
launch their houses in the country and have agreed to quote a price for the
house that will exactly cover its relevant cost.
The following information has been obtained in relation to the contract:
(1) The Chief Executive and Marketing Director recently met with the potential
client to discuss the house. The meeting was held at a restaurant and
Koliwi Limited provided food and drinks at a cost of ₦37,500.
(2) 1,200 kg of Material Z will be required for the house. Koliwi Limited
currently has 550 kg of Material Z in its inventory purchased at a price of
₦5,800 per kg. Material Z is regularly used in its houses and has a current
replacement cost of ₦6,500 per kg. The resale value of the Material Z in
inventory is ₦3,500 per kg.
(3) 400 hours of construction workers‟ time are required to build the house.
Koliwi Limited construction workers are paid an hourly rate of ₦2,200
under a guaranteed wage agreement and currently have spare capacity to
build the house.
(4) The house will require 90 hours of the engineers‟ time. Koliwi Limited
engineers are paid a monthly salary of ₦475,000 each and do not have any
56
spare capacity. In order to meet the engineering requirement for the house.
Koliwi Limited can choose one of two options:
(i) Pay the engineers an overtime rate of ₦5,200 per hour to perform
the additional work.
(ii) Reduce the number of engineers‟ hours available for their existing
job, for the building of Product Y. This would result in lost sales of
Product Y.
Summary details of the existing job the engineers are working on:
Information for one unit of Product Y
Sales revenue ₦486,000
Variable costs ₦336,500
Engineers‟ time required per unit 30 hours
(5) A specialist machine would be required for 7 weeks for the house to be
built. Koliwi Limited has 4 weeks remaining on the 15 week specialist
machine rental contract that cost ₦1,500,000. The machine is currently not
in use. The machine can be rented for an additional 15 weeks at a cost of
₦1,525,000. The specialist machine can only be rented in blocks of 15
weeks.
Alternatively, a machine can be purchased for ₦16,000,000 and sold after

the work on the house has been completed for ₦14,000,000.
(6) The windows required for the house have recently been developed by
Koliwi Limited and use the latest environmentally friendly insulating
material. They produced the windows at a cost of ₦3,495,000 and are
currently the only ones of their type. They were planning to exhibit the
windows at a house building
conference. The windows would only be used for display purposes at the
conference and would not be for sale to prospective clients.
Koliwi Limited has had assurances from three separate clients that they
would place an order for 25 windows each if they saw the technology
demonstrated at the conference. The contribution from each window is
₦1,045,000. If the windows are used for the contract, Koliwi Limited would
not be able to attend the conference. The conference organisers will charge
a penalty fee of ₦150,000 for non-attendance by the Company. The Chief
Executive of Koliwi Limited can meet the clients directly and still secure the
orders for the windows. The meetings would require two days of the Chief
Executive‟s time. The Chief Executive is paid an annual salary of
₦41,400,000 and contracted to work 260 days per year.
(7) The house to be built requires 400kg of other materials. Koliwi Limited
currently has none of these materials in its inventory. The total current
purchase price for these other materials is ₦600,000.
57
(8) Koliwi Limited fixed overhead absorption rate is ₦3,700 per construction
worker hour.
(9) Koliwi Limted normal policy is to add 12% mark-up to the cost of each
house.
Required:
a. Produce a schedule that shows the minimum price that could be quoted for
the contract to build the house. Your schedule should show the relevant
cost of each of the NINE items identified above. You should also explain
each relevant cost value you have included in your schedule and why any
values you have excluded are not relevant. (21 Marks)
b. Explain TWO reasons why relevant costing may not be a suitable approach
to pricing houses in the longer term for Koliwi Limited. (4 Marks)
c. Recommend, with justifications, a pricing strategy for Koliwi Limited to use

to price the innovative, environmentally friendly houses when they are
launched in the new country. (5 Marks)
(Total 30 Marks)

QUESTION 2
Ibezi Nigeria Limited manufactures and sells three products A, B and C.
The company is recently considering the introduction of an activity-based
costing approach to facilitate efficient cost allocation, as well as achieve
improvement in cost accuracy and reduction.
Under Activity based wrong approach, direct materials and direct labour are
allocated to products and indirect costs are apportioned using cost pools which
represent the time activity areas. The Traditional costing approach uses the two
direct cost categories and a single indirect cost pool where overheads are
allocated using direct labour hours.
58
The following information is provided for the next period.
Product Product Product
A B C
Production and sales (units) 120,000 75,000 30,000
Direct material cost N190 N180 N160
Direct labour hours 6 8 7
Machine hours 4 8 9
Number of production runs 15 30 75
Number of component receipts 45 75 360
Number of production orders 45 30 75
Direct labour is paid at N8 per hour. Variable overhead is paid at N34 per unit
for Product A, N44 per unit for Product B and N38 per unit for Product C.
Fixed overhead costs in the period are expected to be as follows:
N Cost Driver
Set up 1,260,000 Production Runs
Machine 8,100,000 Machine Hours
Goods inwards 2,520,000 Company Receipt
Packaging 1,800,000 Production Order
Engineering 1,620,000 Production Order
15,300,000
Required:
a. Calculate the unit costs of each product using:
i. Traditional Cost approach, based on direct labour hourly rate.
(5 Marks)
ii. The ABC method. (5 Marks)
b. The company considered the pricing of the three products where sales
prices have remained uncertain as shown in the table below:
Product A Product B Product C
Prob. N Prob. N Prob. N
0.5 300 0.6 350 0.5 450
0.3 360 0.3 400 0.4 440
0.2 390 0.1 420 0.1 430
Compute the expected unit sales prices for the three products and the
total profit or loss for each product that will arise from the
implementation of the ABC approach and the traditional costing method.
(7 Marks)
59
c. State reasons why activity based costing approach may be preferred to
traditional absorption costing approach in a modern manufacturing
environment. (3 Marks)
(Total 20 Marks)
QUESTION 3
High Tech plc is a manufacturer of computer applications (apps) and has
contracts to supply the components to contractors operating throughout the
West African region.
Set out below is a part of the Master Budget for the component for the month of
April 2021.
Budget for April 2021

N N
Sales 3,000 batches of apps at N80.00 240,000
Direct materials 225,000kg at N0.40 per kg 90,000
Direct labour 5,000 hours at N12.00 per hour 60,000
Variable Overhead (absorbed on direct Labour hours) 15,000
Fixed overhead (absorbed on output) 30,000 195,000
Profit 45,000
High Tech plc uses absorption costing to arrive at product cost. Annual fixed
overhead budget for the year ending April 2021 is N360,000 and the normal
annual output is expected to be 36,000 batches.
Early in May 2021, these results were available to operating managers:
INCOME STATEMENT ACCOUNT FOR APRIL 2021

N N
Sales of 2,800 batches 225,000
Direct materials 210,000 kg at a cost of 88,000
Direct labour 4,400 hours at a cost of 52,000
Overhead: Variable 12,000
Overhead: Fixed 36,000
188.000
Profit 37,000
Required:
a. Prepare a full standard cost card per batch showing contribution margin.
(4 Marks)
b. Calculate all relevant variances and prepare a report reconciling
budgeted and actual contribution for April 2021. (12 Marks)
Outline FOUR factors to be taken into consideration by the management
of the company before deciding whether or not to investigate any
60
particular variance shown on the April Report prepared in (b) above.
(4 Marks)
(Total 20 Marks)
QUESTION 4
Ukachi and Sons limited has two operating divisions, X and Y, which are
treated as profit centres for the purpose of performance reporting.
Division X makes two products, Product A and Product B. Product A is sold to

external customers for ₦248 per unit. Product B is a part-finished item that is
sold only to Division Y.
Division Y can obtain the part-finished item from either Division X or from an
external supplier. The external supplier charges a price of ₦220 per unit.
Department Y produces Product C which is sold at a mark up of 25% of cost
which is the company sales policy.
The production capacity of Division X is measured in total units of output,

Products A and B. Each unit requires the same direct labour time. The costs of
production in Division X are as follows:
Cost Element Product A Product B
N N
Variable cost 184 192
Fixed cost 76 76
Total unit cost 260 268
Required:
a. i. What is an optimal transfer price or price range for Product B?
(3 Marks)
ii. What would be the optimal transfer price for Product B if there is
spare production capacity in Division X? (3 Marks)
iii. What would be the optimal transfer price for Product B if Division X is
operating at full capacity due to a limited availability of direct
labour and there is unsatisfied external demand for Product A?
(5 Marks)
b. The following additional information relate to business activities in the two

divisions.
Particular Dept. X Dept. Y
Product A: Production / Sales units 150,000
Product B: Production of part finished items 100,000
Product B: Procurement from external suppliers 80,000
Product C: Sales 180,000
Investment Capital N40 million N50 million
Cost of Capital 15% 15%
61
Required:
i. Prepare an operating statement showing the optimal profit the
Divisions can generate in the period when operating at full
capacity with no spare capacity. (4 Marks)
ii. Using the return on investment and residual income approaches
Provide a comparative analysis of the performance of the divisions
provided for the period. (5 Marks)
(Total 20 Marks)

QUESTION 5
Zinko Limited is launching a new, innovative product onto the market and is
trying to decide on the right launch price for the product. The product‟s
expected life is three years. Given the high level of costs which have been
incurred in developing the product, Zinko Limited wants to ensure that it sets its
price at the right level and has therefore consulted a market research company
to help it do this. The research, which relates to similar but not identical
products launched by other companies, has revealed that at a price of ₦60,
annual demand would be expected to be 250,000 units. However, for every ₦2
increase in selling price, demand would be expected to fall by 2,000 units and
for every ₦2 decrease in selling price, demand would be expected to increase by
2,000 units.
A forecast of the annual production costs which would be incurred by Zinko

Limited in relation to the new product are as follows:
Annual production (units) 200,000 250,000 300,000 350,000

₦ ₦ ₦ ₦
Direct material 2,400,000 3,000,000 3,600,000 4,200,000
Direct labour 1,200,000 1,500,000 1,800,000 2,100,000
Overheads 1,400,000 1,550,000 1,700,000 1,850,000
Required:
a. Calculate the total variable cost per unit and total fixed overheads.
(3 Marks)
b. Calculate the optimum (profit maximising) selling price for the new product
and calculate the resulting profit for the period.
Note: If P = a + bx; then, MR = a - 2bx. (7 Marks)
62
c. The sales director is unconvinced that the sales price calculated in (b) above
is the right one to charge on the initial launch of the product. He believes
that a high price should be charged at launch so that those customers
prepared to pay a higher price for the product can be „skimmed off‟ first.
Required:
Discuss the conditions which would make skimming a more suitable pricing
strategy for Zinko Limited and recommend whether Zinko Limited should
adopt this approach instead. (5 Marks)
(Total 15 Marks)
QUESTION 6
Kolawole Limited (KL) manufactures equipment for metal testing. It also

manufactures the electronic testing equipment.
The company has a well-established cost and management accounting system.
The cost accounting system records the actual manufacturing costs for the
electronic chips and the testing equipment, and also produces standard unit
costs for the purposes of budgeting and variance analysis. The management
accountant of KL is pleased with the management information system that is in
place within the company, and is particularly proud of the budgetary control
reporting system that provides monthly control reports to the board within one
week of the end of each month.
The market for metal testing equipment is growing at a reasonable rate, but
there are three other competitors in the market. Competition between them is
strong and consequently profit margins are fairly low at the moment, KL is
operating at a profit. KL‟s senior management are not sure what any competitor
might do next, although they suspect that at least one of them may be in
financial difficulty. KL‟s sales director is certain that although low prices are one
factor in the buying decisions of customers, customers are much more concerned
about the quality, reliability and functional features of the equipment that KL
produces.
At a recent board meeting, the board made two important decisions. The first
was a decision not to invest in new equipment for manufacturing electronic
chips that would significantly reduce the water and energy consumption in the
production process. This decision was taken because the discounted cash flow
return on investment was considered insufficient.
The second decision was an agreement that costs would need to be reduced to
improve profitability. In relation to this, the board decided that employees in the
manufacturing units should be empowered more, and should be given some
authority to take decisions affecting production operations.
63
The board also discussed the current lack of sufficient strategic information
within KL. They were aware that the decision not to invest in the new equipment
had not taken into consideration the probability of rising water and energy costs
in the future, and they felt they needed more information to help them predict
the long-term prospects for their industry.
Required:
a) Explain the difference between strategic, tactical and operational
information, and give examples of each that should be used by a company
such as Kolawole Limited. (10 Marks)
b) Discuss why it will be important for Kolawole Limited to monitor non-

financial aspects of performance as well as financial performance. (5 Marks)
(Total 15 Marks)
QUESTION 7
A producer of high quality executive motor cars has developed a new model
which it knows to be very advanced both technically and in style, compared to
the competition in its market segment.
The company's reputation for high quality is well-established and its servicing
network in its major markets is excellent. However, its record in timely delivery
has not been so good in previous years, though this has been improving
considerably.
In the past few years, it has introduced annual variations/improvement in its

major models. When it launched a major new vehicle some six years ago, the
recommended retail price was so low in relation to the excellent specification of
the car that a tremendous demand built up quickly and a two-year waiting list
for the car developed within 6 months. Within three months a second-hand
model has been sold at an auction for nearly 50% more than the list price and
even after a year of production a sizeable premium above list price was being
obtained.
The company considers that, in relation to the competition, the proposed new
model will be attractive as was its predecessor six years ago. Control of costs is
very good so that accurate cost data for the new model are on hand. For the
previous model, the company assessed the long-term targeted annual
production level and calculated its prices on that basis. In the first year
production was 30% of that total.
For the present model, the company expects that the relationship between first-
year production and longer-term annual production will also be about 30%,
though the absolute levels in both cases are expected to be higher than
previously.
64
The senior management committee, of which you are a member, has been asked
to recommend the pricing approach that the company should adopt for the new
model.
Required:
a. List the major pricing approaches available in this situation and discuss
in some detail relative merits and demerits to the company of each
approach in the context of the new model. (10 Marks)
b. Recommend which approach you would propose, giving your reasons.

(5 Marks)
(Total 15 Marks)
65
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
change in price
b
change in quantity
a = price when Q = 0
MR = a – 2bQ
The linear regression equation of Y on X is given by:
Y = 𝑎 + 𝑏𝑋
𝑛 𝑋𝑌 − ( 𝑋)( 𝑌)
where b = 2
𝑛 𝑋 − 𝑋 2
𝑦 𝑏 𝑥
a = −
𝑛 𝑛
Coefficient of determination (r2)

2
𝑛 𝑋𝑌 − 𝑥 𝑌1
r2 = 2 2
(𝑛 𝑋 − 𝑋 2 (𝑛 𝑦 − 𝑋 2
66
The Miller-Orr Model
1
3 3
x Transaction Cost x Variance of Cash flows
4
𝑆𝑝𝑟𝑒𝑎𝑑 = 3 x
Interest rate as a proportion
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
67
68
SOLUTION 1
a.
₦ Note
Food and drink at meeting - 1
Material Z 7,800,000 2
Construction workers - 3
Engineers 448,500 4
Specialist machine 1,525,000 5
Windows 150,000 6
Other materials 600,000 7
Fixed overhead - 8
Profit margin - 9
Total relevant cost 10,523,500
Notes
1) The food and drink costs are sunk. The meeting with the client has already
occurred and therefore the costs are not relevant.
2) Material Z is regularly used by KL. The 550kg currently in inventory will

need to be replaced and therefore should be valued at replacement cost.
₦6,500 × 550kg = ₦3,575,000. The remaining 650kg required for the
contract is not owned by KL and therefore will need to be purchased at the
replacement cost.
₦6,500 × 650 = ₦4,225,000. The total relevant cost is ₦7,800,000.
3) The construction workers have spare capacity to complete the work and are
employed under a guaranteed wage agreement. Construction workers will
be paid whether or not they work on the contract. Therefore, the cost is not
relevant.
4) Engineers are salaried and this is not an incremental cost. However, they
are currently at full capacity and do not have time within their normal
hours to complete the 90 hours of work required. The engineer‟s additional
time should be valued at opportunity cost. If overtime is paid, the cost
would be 90 hours× ₦5,200 = ₦468,000.
Alternatively, switching engineers from their existing job.

90 hours/30 hours to produce a unit = 3 units valued at contribution per
unit ₦149,500 = ₦448,500.
The lower cost of the two options is ₦448,500 and this is the relevant cost.
5) The first rental period is part-way through and the payment of ₦1,500,000
has already been made. Therefore, this is a sunk cost and not relevant. In
order to obtain the machine for the required seven week period another 15
week standard rental agreement would have to be entered into, therefore
the relevant cost is ₦1,525,000.
69
If the machine was to be purchased, the relevant cost would be
₦2,000,000 (sales price less resale value). The lower relevant cost of the
two options is to rent the machine for another rental period at
₦1,525,000.
6) The cost to produce the windows has already been incurred and is
therefore sunk and not relevant.
If KL uses the windows for the building and misses the conference, the
sales will not be lost. The chief executive will visit the clients at a later
date to secure the sales. Therefore, there is no incremental loss in
contribution. The chief executive‟s time is not relevant as he is paid an
annual salary and would receive this irrespective of the visit to the
clients.
However, should the windows be used for the building, KL would not be
able to attend the conference and be liable to pay the non-attendance fee
of ₦150,000.
7) 400kg of other materials are required for the building. The incremental
cost is ₦600,000.
8) Fixed costs are not relevant as they will be incurred irrespective of

whether the contract is taken or not.
9) Profit mark-up is not relevant as KL is producing a minimum price

quotation to exactly cover the relevant cost.
b. When quoting a minimum price for the contract, relevant costing

principles are being used. Only relevant costs i.e. those that change as a
direct result of the contract decision are included in the quoted cost.
The minimum price will result in KL making neither a profit nor a loss.
This is not a sustainable pricing policy in the longer term as it does not
include a contribution to the fixed costs of the organisation.
Relevant costing does not include a profit margin. This is not suitable for
KL in the longer term as the company is planning to expand into different
countries and investors will also require a return on their investment.
c. Market skimming would be a suitable pricing strategy to launch the

houses in the new country. Market skimming charges a high price for the
product initially where the product is unique and there are significant
barriers to entry for competitors. The price is reduced as new competitors
enter the market with a similar product. The strategy aims to maximise
the profit from the product.
70
The high quality materials and unique energy saving technology used in
the houses should command high prices from customers keen to have a
house with this technology. The house that consumers are willing to pay a
high price for, together with the barrier to competitors of the new energy
saving technology, make KL‟s product suited to the market skimming
pricing strategy. This market skimming approach will allow KL to recover
the research and development costs incurred to develop the energy
saving technology.
Marking guide
Marks Marks Marks
1 a. Minimum Price Schedule (12 ticks at 1 mark 12
Justification statements (9 ticks at
1 mark) 9 21
b. Reasons for relevant costing (2 points at 2
marks each) 4
c. - Correct Recommendation 2
- Any 2 Justifications at 1½ marks 3 5 30
Examiner’s report
This question tests candidates‟ knowledge of price setting using Marginal
Costing, Absorption Costing and Relevant Costing criteria and pricing method for
new innovative products and projects
The question was well attempted by the candidates because it is a compulsory

question.
The pitfall noticed in their performance includes candidates‟ inability to

decipher the costs that are relevant and non-relevant costs. Also candidates‟
inability to know that skimming pricing strategy will best be adopted in the type
of situation Koliwi Limited finds itself in the production of special, innovative
and environmental friendly project. It is recommended that candidates
preparing for ICAN future examination read the ICAN Study Text.
71
SOLUTION 2
a) i. Unit cost using Traditional approach:
A B C
N N N
Material 190 180 160
Labour 48 64 56
Variable overhead 34 44 38
Overhead 60 80 70
Unit Cost 332 368 324
Workings:
Total overhead = N15,300,000

= 6 x 120,000 = 720,000
= 8 x 75,000 = 600,000
= 7 x 30,000 = 210,000
1,530,000 hours
Direct labour hourly rate = N15,300,000 = N10/hour
1,530,000

Direct Labour hours per unit 6 hours 8 hours 7 hours
Direct Labour hourly rate (N) 10 10 10
Unit overhead cost N60 N80 N70
Labour cost at ₦8 per hour N48 N64 N56
ii. Unit cost of Production using ABC approach in overhead absorption

Unit Cost of Product (ABC Approach)
A B C
N N N
Material 190.000 180 160
Labour 48 64 56
Value OH 34 44 38
Overhead 35.83125 66.57 200.25
Unit Cost 307.83125 354.57 454.25
72
Workings:
Computation of total activity volumes:
Product Direct Material Machine Company Production Production
Quantity Labour Cost Hours Receipt run Order
a 120,000 720,000 22.800,000 480,000 45 15 45
b 75,000 600,000 13,500,000 600,000 75 30 30
c 30,000 210,000 4,800,000 270,000 360 75 75
Total 1,530,000 41,100,000 1,350,000 480 120 150
Overhead cost per activity (cost driver rate)
Activity Overhead Cost Overhead

Allocated Cost Driver Activity Absorption
per period
N Rate (N)
Set up 1,260,000 Production run 120 10,500 per cost
Machine 8,100,000 Machine hours 1,350,000 6
Goods inwards 2,520,000 Company receipts 480 5,250
Packaging 1,800,000 Production order 150 12,000
Engineering 1,620,000 Production order 150 10,800
N15,300,000
Allocation of Overhead to Product Activity (Computation of Overhead cost per

unit using ABC Approach)
Activity Cost A B C Total
Driver Cost
Rate
120,000 75,000 30,000
N N N N
Sep up:
15 product runs 10,500 157,500 157,500
30 product runs 10,500 315,000 315,000
75 production run 10,500 787,500 787,500
Total 157,500 315,000 787,500 1,260,000
Machine:
480,000 machine hours 6 2,880,000 2,880,000
600,000 machine hours 6 3,600,000 3,600,000
270,000 machine hours 6 1,620,000 1,620,000
Total 2,880,000 3,600,000 1,620,000 8,100,000
Good Include:
45 receipts 5,250 236,250 236,250
75 receipts 5,250 393,750 393,750
360 receipts 5,250 1,890,000 1,890,000
Total 236,250 393,750 1,890,000 2,520,000
73
Packaging:
45 production order 12,000 540,000 540,000
Total 540,000 360,000 900,000 1,800,000
Engineering:
486,000 324,000 810,000 1,620,000
Total 4,299,750 4,992,750 6,007,500 15,300,000
Unit cost of overhead N35.83125 N66.57 N200.25
i. Expected Sales Price

Price Pr Expected Price Pr Expected Price Pr Expected
Selling Price Selling Price Selling Price
N N N N N N
300 0.5 150 350 0.6 210 450 0.5 225
360 0.3 108 400 0.3 120 440 0.4 176
390 0.2 78 420 0.1 42 430 0.1 43
336 372 444
ii. Profit Computation using Traditional Costing Approach

A B C
N N N
Unit Sales Price 336 372 444
Unit Cost 332 368 324
Unit Profit 4 4 120
Quantity 120,000 75,000 30,000
N480,000 N300,000 N3,600,000
Profit Computation Using ABC Approach

A B C
N N N
Unit Sales Price 336 372 444
Unit Cost 307.83125 354.57 454.25
Unit Profit/(cost) 28.16875 17.43 (10.25)
Quantity 120,000 75,000 30,000
Total Profit 3,380,250 1,307,250 (307,500)
74
c. Why ABC is preferred to traditional approach
ABC is preferred traditional costing due to the following reasons:
i. The traditional absorption costing method uses a single basis to absorb fixed
overhead costs even if the overhead costs are not related to the basis used.
ii. ABC groups overhead costs into cost pools and assigns a suitable cost driver to each
cost pool. By so doing, overheads are absorbed on basis that best reflect the manner in
which they were incurred.
iii. ABC uses multiple absorption basis unlike traditional absorption costing method that
uses a single basis of absorption.
iv. ABC provides useful information about the activities that drive
overhead costs.
v. ABC provides information that could be relevant to long-term cost

control and long-term product pricing.
vi. ABC approach shows a more realistic costing approach.
Examiner’s report
This question tests candidates‟ understanding of ABC approach in overhead
absorption and cost based pricing in situation of uncertainty. The question was
well attempted due to its familiarity. Performance by candidate is above
average.
The pitfall noticed was wrongful computation of unit sales price of products due
to wrong adoption of the probabilities needed in the computation of sales price.
Candidates are hereby encouraged to carry out their revision using the ICAN
study text when preparing for Examination.
Marking guide
Marks Marks
(a) i. Unit Cost using Traditional Method (25

ticks at 5 ticks for one mark) 5
ii. Unit Cost using ABC method (40 ticks at 8
ticks for 1 mark) 5 10
(b) - Computation of Selling Price and total

profit per product for ABC and traditional
method (21 ticks at 3 ticks per mark) 7
Importance of ABC over Traditional
(c)
approach. (Any 2 points at 1½ marks)
3 10
Total 20
75
SOLUTION 3
a) Workings
Budgeted material usage 225,000/3,000 = 75 kg per unit
Budgeted labour hours 5,000/3,000 = 1.666hrs per unit
Budgeted variable overhead rate: 15,000/5,000 = N3.00 per direct
labour hr.
Budgeted fixed overhead absorption 30,000/3,000 = N10.0 per unit
Standard specification per unit:

₦ ₦
Selling price 80
Variable costs
Direct materials (75 x N0.4) 30
Direct labour (1.666 x N12) 20
Variable overheads (1.666 x N3) 5 55
Contribution 25
Less fixed overheads 10
Profit 15
b) Workings
Actual production = 2,800 batches
Actual material cost: 88,000/210,000 =N0.42 per kg
Actual labour cost 52,000/4,400 = N11.82 per hour.
Summary of Variances (excluding Volume variances)

Comparison of Budget v Actual (both for 2,800 units)
Detailed Variances:
Material Price
(SP – AP) x AQ
(0.4 – 0.42) x 210,000 (4,000)A
Material usage
(SQ – AQ) x SP
(210,000 – 210,000) x £0.40 -
check (4,000)A
76
Labour Rate
(SR – AR) x AH
(12 – 11.82) x 4,400 800F
Labour Efficiency
(SH – AH) x SR
(4,667 – 4,400) x £12 = 3,200F
check 4,000F
Variable Overhead Efficiency
(SH – AH) x SR
(4,667 – 4,400) x £3.0 800F
Variable overhead expenditure

(AH x SR) – Actual cost
(4,400 x 3) – 12,000 1,200F

2,000F
Fixed overhead expenditure

(budgeted cost – actual cost)
30,000 – 36,000 (6,000)A
Sales Margin Price Variance
Actual Revenue – Budgeted revenue for actual level of output
225,000 - 224,000 1,000F
Sales Margin volume variance

(Actual units – Budgeted units) x standard contribution per unit
(2,800 – 3,000) x N25.00 (5,000)A
Fixed Overhead Capacity Variance = SC (BH – AH)

N6 (5,000 – 4,400)
= N3,600A
77
Fixed Overhead Efficiency Variance = SC (AH – SHAP)
 2,800 5,000 
N6 4,400  X
 3,000 1 
= N1,600F
Fixed Overhead Volume Variance = N3,600A + N1,600F

= N2,000A
ii. Reconciliation of Budgeted contribution and Actual Contribution for April 2021
Budgeted Contribution (N25 x 3000 batches) 75,000

Sales variance: Sales Price variance 1000F
Sales quantity margin 5000A (4000)
variance
Standard profit 71,000
Standard cost variance
Favourable Adverse
Direct material price variance N4000
Direct Material usage variance
Direct labour rate variance 800
Direct labour efficiency variance 3200
Variable overhead expenditure variance 800
Variance overhead efficiency variance 1200
Total 6000 4000 2000F
Actual Contribution 73,000
c) FACTORS TO CONSIDER BY MANAGEMENT BEFORE INVESTIGATING VARIANCE

i. Size of the variance: generally, the cause of the variance is more likely to be
significant if the variance is large. This is a matter of materiality and management
may need to determine what is material.
ii. Favourable or adverse variance: significant favourable or adverse variance may

need to be investigated. However, adverse variance tends to require more
investigation than favourable variances because of the impact of adverse
variances on profit.
iii. Probability that the cause of the variance will be controllable: whether or not to
investigate a variance will depend on management‟s expectation that the cause of
the variance will be controllable.
iv. Cost and benefit of the control action: investigating a variance has a cost in
terms of management‟s time actual cost incurred. A variance should not be
investigated unless the expected benefits outweigh the cost.
78
v. Reliability and accuracy of the figures.
vi. Possible interdependencies of variances
vii. The inherent variability of the cost or revenue trends in variances.
Examiner’s report
This question tests candidates‟ understanding of standard costing, variance
computation and reconciliation of Budgeted Contribution with Actual
Contribution. Many candidates attempted the question. Being a familiar
question, performance was high and encouraging.
The pitfall was in candidates failing to compute capacity and efficiency variance
preferring to determine the volume variance only.
It is advised that candidates read the questions thoroughly in order to provide
solution that fulfil the requirement of the question and familiarise themselves
with the ICAN study text.
Marking guide
3. Marks Marks
a. Standard Cost Card (8 ticks at ½ mark) 4

B i. Computation of variances and
preparation of reconciliation statements
(24 ticks at ½ mark) 12
ii. Any four considerations at 1 mark for
each consideration 4
Total 20
SOLUTION 4
(a) i. OPTIMAL TRANSFER PRICE OR PRICE RANGE FOR PRODUCT B

Since the only consumer of product B is Division Y, the minimum transfer
price should be set at marginal cost less any cost savings due to internal
sales.
The variable cost per unit of product B is N192, hence the minimum
transfer price should be set at N192 per unit of B.
The maximum transfer price per unit for B would be the price that the
external supplier charges Division Y, which is N220.
Hence, the optimal transfer price per unit would lie between a minimum of
N192, and a maximum of N220.
79
ii. OPTIMAL TRANSFER PRICE FOR PRODUCT B IF THERE IS SPARE CAPACITY
If Division X has spare production capacity, then the units of product B
have no opportunity cost and should be transferred to Division Y at
variable cost less any cost savings due to internal sales. The transfer price
would therefore be N192 per unit.
iii. OPTIMAL TRANSFER PRICE FOR PRODUCT B IF DIVISION X OPERATES AT

FULL CAPACITY
If Division X is at full capacity and would forego sales of product A to
suppy product B to Division Y, then the units of product B would have to be
transferred at marginal cost less any cost savings plus the contribution
forgone on sales of product A.
The contribution per unit of A is N64 (i.e. N248 – N184). Thus, the optimal
transfer price would be N192 + N64 = N256.
(b)ii. OPERATING STATEMENT
Division X Division Y
N N
Sales Sales
Product A to external parties Product C (N256 x 1.25 x 57,600,000
(150,000 x N248) 37,200,000 180,000)
Product B to Division Y 25,600,000
(100,000 x N256)
62,800,000 57,600,000
Variable costs Costs
Product A (150,000 x N184) 27,600,000 80,000 @ N220 17,600,000
Product B (100,000 x N192) 19,200,000 100,000 @ N256 25,600,000
46,800,000 43,200,000
Contribution 16,000,000
Fixed costs
Product A (150,000 x N76) 11,400,000
Product B (100,000 x N76) 7,600,000
19,000,000
Profit /(Loss) (3,000,000) Profit/(Loss) 14,400,000
80
ii. COMPARATIVE ANALYSIS OF PERFORMANCE
Division X Division Y
N N
Profit /(loss) (3,000,000) 14,400,000
Investment 40,000,000 50,000,000
% %
ROI -7.5% 28.80%
Cost of capital 15% 15%

N N
Profit/(loss) -3,000,000 14,400,000
Charge on capital employed 6,000,000 7,500,000
Residual Income (RI) (9,000,000) 6,900,000
Due to the transfer price policy of operating at full capacity, Division X is not
able to charge a share of its fixed costs to division Y, hence Division X is
operating at a loss of N3million while Division Y with no fixed overhead cost
implication is operating at a Profit of N14.4 million.
The ROI for division X is therefore negative of N3million for its investors while
Division Y generates a 28.80% returns per Naira invested.
Division X generates a residual loss of N9million while Division Y

generates a residual income of N14.40 million. The cost of capital for
both Divisions is the same at 15% but Division Y has a higher investment
base.
Examiner’s report
The question tests candidates‟ understanding of transfer pricing and divisional
performance appraisal. This is a familiar question that should have attracted
high performance from the candidates.
However, candidates‟ performance was average due to lack of understanding of

Transfer pricing in situations of spare capacity and where there is limited
resources.
Candidates are hereby encouraged to study the ICAN Performance Management

Manual and indeed other Management Accounting text books to widen their
scope of understanding and knowledge of transfer pricing and divisional
performance evaluation when preparing for future ICAN examination.
81
Marking guide
4. Marks Marks
(a)i. Optimal transfer price 3

ii. Optimal transfer price
when there is space capacity 3
iii. Optimal transfer price under limited

resources 5 11
Operating Statement
(b)i.
(12 ticks for 4 marks) 4
ii. Computation of ROI and residual income
(10 ticks at ½ mark) 5 9
Total 20
SOLUTION 5
a) Variable cost per unit

Material cost =₦2,400,000/200,000 = ₦12 per unit
Labour cost = ₦1,200,000/200,000 = ₦6 per unit
Variable overhead cost using high-low method:
(₦1,850,000 - ₦1,400,000)/(350,000 - 200,000) = ₦3 per unit
₦
Direct material 12
Direct labour 6
Variable overhead 3
21
Fixed cost = ₦1,400,000 - (200,000 x ₦3) = ₦800,000
b) Optimum price
Find the demand function
Demand function is P = a + bx, where:
P = Price per unit
x = quantity
b = ∆P/∆x = -2/2000 = -0.001
Therefore P = a - 0.001x
Find value for „a‟ by substituting the known values for P and x:
60 = a - (0.001 x 250,000)
a = 310
(Note: This is the maximum selling price, that is, the price at which no
quantity will be demanded.)
82
Therefore P = 310 - 0.001x
Identify marginal cost (MC)
MC = unit variable = ₦21
Identify total revenue (TR)
TR = (P)(x) = (310 - 0.001x)(x)
= 310x - 0.001x2
Identify marginal revenue (MR)
MR = dTR/dx = 310 - 0.002x
Equate MC and MR to find x

21= 310 - 0.002x
x = 144,500
Substitute x into demand function to find P
P = 310 - (0.001 x 144,500) = ₦165.50
Calculate profit
Total contribution = 144,500 x (₦165.50 - 21) = ₦20,880,250
Fixed cost (800,000)
Profit ₦20,080,250
c) Market skimming
As the sales director suggests, market skimming is a strategy which
initially charges high prices for the product in order to take advantage of
those buyers who want to buy it as soon as possible, and are prepared to
pay high prices in order to do so.
If certain conditions exist, the strategy could be a suitable one for Zinko
Ltd. The conditions are as follows:
- Where a product is new and different, so that customers are prepared

to pay high prices in order to gain the perceived status of owing the
product early. All we know about Zinko Ltd‟s product is that it is
„innovative‟, so it may well meet this condition.
- Where products have a short life cycle this strategy is more likely to be
used, because of the need to recover development costs and make a
profit quickly. Zinko Ltd‟s product does only have a three-year life
cycle, which does make it fairly short.
- Where high prices in the early stages of a product‟s life cycle are
expected to generate high initial cash inflows. If this is the case here,
then skimming would be useful to help Zinko Ltd cover the high initial
development costs which it has incurred.
83
- Where barriers to entry exist, which deter other competitors from
entering the market, as otherwise, they will be enticed by the high
prices being charged. These might include prohibitively high
investment costs, patent protection or unusually strong brand loyalty.
According to the information we have been given, high development
costs were involved in this case, which would be a barrier to entry.
- Where demand and sensitivity of demand to price are unknown. In

Zinko Ltd‟s case, market research has been carried out to establish a
price. However, this information is based on the launch of similar but
not identical products, so it is not really known just how accurate it
will be.
Examiner’s report
This question tests candidates‟ understanding of using high-low method in
analysing costs as well as using derived cost data in computing optimum selling
price under situation of imperfect competition. It also tests candidates‟
knowledge of condition that will make skimming price policy more suitable for
the company in the prevailing situation.
Candidates attempt on this question was high. However, performance was

average. The pitfall was candidates‟ inability to compute the profit maximising
selling price to determine the profit for the period.
Candidates are encouraged to use effectively ICAN Study Text when preparing
for future examinations of the Institute.
Marking guide
5. Marks Marks
(a) Total unit variable costs and total fixed

cost (6 ticks at ½ mark) 3
(b) Optimum Selling Price and resulting

profit (14 ticks at ½ mark) 7
(c) Skimming Price conditions
(Any 2 points at 2½ marks) 5
Total 15
84
SOLUTION 6
a) Strategic, tactical and management information are classifications of

information that distinguish the purposes for which that information is
used. The classifications can also be used to distinguish the type of
information that is used at different levels in an organisation with a
hierarchical management structure.
Managers at all levels need information to make business decisions. The

nature of information required varies according to the level of
management and the type of decision. Kolawole Limited (KL) has a
management information system that should generate information for
decision making at the strategic, tactical, and operational levels of
management.
Strategic information
Strategic management needs strategic information. This is information
that helps strategic managers to make long-term plans, assess whether
these plans will be met, review existing strategies, and make changes or
improvements. Strategic information has the following characteristics:
i. If is often information about the organization as a whole or a large

part of it
ii. It is usually in summary form, without much detail
iii. It is generally relevant to the longer-term
iv. It is often prepared on ah-hoc basis
v. It may be qualitative or quantitative in nature
For KL, relevant strategic information example would include information

about competitors in the market. It appears that a competitor may be in
financial difficulty; it may be useful for KL to know more about this
and the reasons why the competitor may be in difficulty. It would also be
useful to have information about how rival organisations may respond to
any competitive initiative by KL.
The management of KL would also benefit from strategic information

about technological developments in the industry, the possibility of rising
water and energy prices, or even the possibility of government action to
discourage excessive energy use by business organisations.
Tactical information
This is information reported to middle managers for the purpose of
planning and budgetary control. Tactical information is used to decide
85
how the resources of the organisation should be used, and to monitor how
well they are being used. The features of tactical information are:
i. It is usually information about individual departments or operations

ii. It is usually in summary form, but in greater detail than strategic
information
iii. It is generally relevant to the short term and medium term
iv. It is often produced on a routine and regular basis
v. It consists mainly of quantitative information
Tactical information examples include both non-financial and financial

information. Examples of tactical information include budgets, variance
reports for control purposes, efficiency and capacity ratios and summary
information about quality failures (re-working of faulty items and items
returned under warranty) and on-time deliveries.
Operational Information
Operational information is needed to enable supervisors and front line
managers to organize and monitor operations and to make on-the-spot
decisions whenever operational problems arise. Operational information
may be needed by employees to process transactions in the course of their
regular work.
The features of operational information are:

i. It is usually information about specific transactions, jobs, or tasks
ii. It may be summarized at a work group level but is more detailed than
tactical information
iii. It is generally relevant to the short term
iv. It is usually about transactions, jobs, and tasks on a daily basis
v. It consists mainly of quantitative information
Examples of operational information include detailed information about

throughput times, machine failures and downtime, bottlenecks,
complaints, quantities of rejected items and so on.
b) Importance of non-financial measures - The quality and reliability of the

equipment that KL produces could both potentially be critical success
factors for KL because they are likely to be important in customers'
buying decisions.
By performing well in these areas, KL should be better placed to sustain

its financial performance than if it performs badly in them. For example,
if it provides its customers with high quality, reliable equipment, this
should ensure a high level of customer retention, which should in turn
help it maintain its revenues.
86
In this way, there would seem to be a strong link between non-financial
performance and financial performance.
Importance of financial measures: However, it is also important that KL

continues to monitor its financial performance, because there is no
guarantee that favourable non-financial performance will necessarily
translate into favourable financial performance. For example, although
KL‟s equipment may be very reliable, if it is significantly more expensive
than competitors‟, customers may choose to buy the competitors‟
equipment instead.
Also, the directors have already highlighted the importance of reducing

costs in order to improve profitability. This identifies the importance of
monitoring financial performance, in order to assess how successfully KL
is reducing its costs and improving profitability.
Combination of measures – KL‟s profit margins are known to be low, as a

result of the intense competition in the market. This reinforces the need to
monitor aspects of its financial performance (such as costs and margins).
However, it is equally important to monitor whether sale and market
share are increasing or decreasing in this competitive market, and how
KL is performing in relation to the other critical success factors which will
affect customers buying decisions.
Examiner’s report
The question tests candidates‟ knowledge of strategic, tactical and operational
management, and features of information needed in each level. It also tests
candidates‟ understanding of the importance of financial and non-financial
information in evaluating organisations performance.
The question was well attempted by candidates. Performance of candidates was

adjudged high. The only pitfall observed was candidates‟ concentration on
definitions of the 3 levels of information without highlighting the differences.
Candidates are advised to read the questions thoroughly before attempting

them. They are also advised to use at all time ICAN Study Text in their revisions.
87
Marking guide
6. Marks Marks
a. -Differences between strategic, tactical

and operational information
(3 points each at 1 mark per point at
each level 9
- Examples
(1 example for each level of information
at 1/3 mark per example)
1 10
- Importance of both financial and non-
b.
financial indicators
(1 point for each type of information at
2½ marks)
5
Total 15
SOLUTION 7
(a) The following are the major pricing approaches which may be used in
this situation:
(i) - Price skimming
- Penetration pricing
(ii) Price skimming

This involves charging a high price relative to competitors. The
advantage is that the contribution earned per unit is high. The
potential disadvantage is that market share will be restricted. In
this situation this restriction in market share would be beneficial
in the early stages since it is expected that production in the first
year is to be restricted. This would also avoid charging too Iow a
price as happened previously. It would be necessary to advertise to
promote the technological and style advantages to potential
customers which would help to justify the higher price.
(iii) Penetration pricing

Here the aim is to charge a lower price than competitors in order to
obtain a high market share at an early stage in the product life
cycle. The advantage is that a lower price will encourage people to
'try out' a new product rather than keeping with a familiar 'existing'
product. This incentive would appear unnecessary in this case on
two counts. Firstly, the reputation of the company is well
established and the car's predecessor was well received six years
ago.
88
Secondly, the car is very advanced both technically and in style
compared with the competition. This 'non-price' advantage may be
sufficient to encourage people to choose this vehicle.
The main advantage of penetration pricing - a high market share -

would be a disadvantage for this particular car since it could result
in excess demand in the first year, a waiting list and further
damage to reputation regarding delivery.
Another disadvantage of charging a low price is the small

contribution generated on sales. It may be necessary to charge a
lower price at a later stage if a superior quality competitor comes
on to the market.
In this case there is a further pricing option which is to charge a

price at a similar level to that of competitors. The better technology
and style of the car would act as selling features which could result
in increased market share which would be a disadvantage in the
early stages when production capacity is restricted.
Advantages are that market share may be obtained without

offering a discount against competitors' prices and that a price
similar to competitors' will not 'rock the boat'. A low price could
start a 'price war' which could be very damaging.
(b) In this situation the approach proposed is to charge a high price relative
to competitors in the first year and a price similar to that of competitors in
later years because:
(i) It enables a high contribution to be earned per car in the first year
to compensate for the higher average cost caused by volume being
lower and to aid recovery of development costs.
(ii) It is likely to match demand with production, i.e. low in first year
and increasing thereafter.
iii) High prices in the first year should prevent excess demand and
waiting.
(iv) A high initial price may make it easier to boost market share in the
second year when prices are reduced.
89
Examiner’s report
This question tests candidates‟ knowledge of pricing new products and in this
situation, pricing of technically advanced products. Candidates attempt on the
question was very high.
Performance was above average. The pitfall was candidates‟ inability to list the
two pricing methods and stating the merits and demerits of the two pricing
strategies. Candidates are encouraged to always read the questions before
attempting same in order not to stray away from the requirements of the
question.
Marking guide
7. Marks Marks
a. - List of pricing approach

(2 price strategy at 2 marks each) 4
- Merit (Any one merit for each strategy

at 1½ marks) 3
- Demerit (Any one demerit for each Y

strategy at 1½ marks) 3 10
2
- Recommendation
b.
- Justification (Any two points at 1½ marks)
3 5
Total 15
90
PUBLIC SECTOR ACCOUNTING & FINANCE

have prohibited items such as telephone handset, electronic storage

number.

THURSDAY, NOVEMBER 17, 2022
91
PUBLIC SECTOR ACCOUNTING & FINANCE


QUESTION 1
Akanga Local Government of Babulu State constructed a large Liquefied

Petroleum Gas (LPG) Station located at its headquarters as an investment
property. The purpose is to enhance its internally generated revenue (IGR) so as
to complement revenue allocation from the federation account. The LPG station
was leased to Home-Use Limited, a Government Business Enterprise (GBE), at a
lease rental of N8 million payable yearly in advance, commencing from January
1, 2017 to December 31, 2020. The associated finance cost was 10% per annum,
when calculating the annual rentals.
The LPG station had a fair value of N28million at the inception of the lease, with
a residual value of N4million at the end of the lease period. Included in the
terms of the lease agreement was that the lessee, Home-Use Limited, reserves
the right to maintain the gas station throughout the period of the lease.
Depreciation is charged on the LPG station on a straight line basis. The
accounting year end of Home-Use Limited is December 31.
Required:
a.i. Show how the lease will be treated in the financial statements (extract) of
the lessee, Home-use limited, for the years 2017, 2018, 2019 and 2020.
(14 Marks)
ii. IPSAS 13-Leases, is formulated to prescribe for the lessor and the lessee
the appropriate accounting policies and disclosures to apply in relation to
finance and operating leases.
You are required to identify THREE features of an operating lease and

FIVE features of a finance lease. (8 Marks)
b. IPSAS 16-Investment property: is any property held by a government

body for the purpose of earning rentals or for capital appreciation, or
both.
You are required to state FOUR examples of investment property and
FOUR disclosures that should be made when an investment property is
stated at revalued amount. (8 Marks)
(Total 30 Marks)
92

THE THREE QUESTIONS INTHIS SECTION
QUESTION 2
IPSAS Board (IPSASB) adopted a due process for the development of

International Public Sector Accounting Standards.
Required:
a. Identify FIVE stages of IPSASB due process. (5 Marks)
b. Enumerate FIVE observations by United Nations on government
accounting system in developing countries and identify FIVE
characteristics of a good public sector accounting system as contained in
the United Nations manual on government accounting. (10 Marks)
c. Automated Accounting Transaction Recording and Reporting System
(ATRRS) is an ICT based accounting software application, which facilitates
the input of accounting transactions, reconciliations and generation of
standard accounting reports that meet the treasury requirements.
Identify FIVE benefits of the ATRRS accounting software. (5 Marks)

(Total 20 Marks)
QUESTION 3
a. In the course of writing Medium-Term Expenditure Framework (MTEF)
report, a lot of issues relating to states in the federation were integrated
into the report.
Required:
i. Identify FIVE key information contained in the MTEF. (5 Marks)
ii. Identify the FIVE requirements of the Fiscal Responsibility Act as
it affects time lag for preparation of MTEF the notifying the
National Assembly. (3 Marks)
iii. State THREE documents that should accompany the estimates of
revenue and expenditure of the Nigeria‟s annual budget. (3 Marks)
b. A responsible government owes the duty to provide estimates of revenue

and expenditure as contained in the constitution and other enabling Acts.
Required:
i. Discuss the term „fiscal transparency‟. (4 Marks)
ii. Identify and explain THREE codes of good practices and transparency
in line with IMF code of good practices as related to the Nigerian
government. (3 Marks)
(Total 20 Marks)
93
QUESTION 4
a. Nun Local Council Development Area (LCDA) of Bayelsa State has a
population of about 1,548,412, citizens based on the last census carried
out a year ago. An annual population growth rate of 6% and a 1% rural-
urban migration in the past years has been estimated for Nun LCDA.
The following additional information relate to the LCDA:
i. The population strata show:
 Adult Men - 50%
 Adult women - 20%
 Children - 30%
ii. 90% of adult men and 80% adult women are taxable with a flat tax
of N800 per month.
iii. The LCDA has a Central Market Building that is let out to traders
with rent as detailed below:
 2 floors of warehouses - N8million/ floor per annum

 300 lock-up shops - N120,000/ shop per annum
 150 sheds - N82,000/shed per annum
iv. The market opens for 28 days in a month.

v. It is estimated that 17,200 hawkers trade in the market on daily
basis and are charged N200 per day for 25 days in the month
while the market also witnesses 1,500 additional hawkers on each
of the 3 market days in a month.
vi. There are 2,411 houses which are charged local tenement rate of
N1,000 per annum.
vii. The overhead costs for the LCDA in year 2020 are detailed below:
N
Motor vehicle maintenance 540,000
Drainage cleaning 185,000
Transport and travelling 140,000
Office maintenance 128,000
Hotel accommodation 223,000
Utility services 200,000
Others 240,000
viii. Inflation factor is estimated at 25%.
Required:
a. Prepare revenue budget and overhead cost budget of Nun LCDA for the
year ended December 31, 2021. (15 Marks)
94
b. Enumerate FIVE functions of the Ministry of Finance, Budget and
Planning. (5 Marks)
(Total 20 Marks)

THREE QUESTIONS INTHIS SECTION
QUESTION 5
a. The principles of fiscal federalism is concerned with the design of fiscal

constitutions. It is how taxing, spending and regulatory functions are
allocated among governments and how inter-governmental transfers are
structured.
Required:
Differentiate between the crowding-in effect and crowding-out effect of
fiscal policy. (5 Marks)
b. The total amount of money borrowed by government directly or through

any of the authorised agencies is known as public debt.
Required:
Explain FOUR ratios that can be used for measuring debt sustainability of a
country and one shortcoming of each ratio. (10 Marks)
(Total 15 Marks)
QUESTION 6
Otunba Local Government wishes to boosts its revenue generation and SIX
possible capital investments have been identified. However, the Local
Government only has access to a total of N6,200,000. The projects may not be
postponed until a future period. After the projects end, it is unlikely that similar
investment opportunities will occur.
Expected net cash flows are:
Year
0 1 2 3 4 5
Project N’000 N’000 N’000 N’000 N’000 N’000
A (2,460) 700 700 700 700 700
B (1,800) 750 870 640 - -
C (1,750) 480 480 630 730 -
D (1,800) 620 620 620 620 -
E (1,800) 400 500 600 700 400
F (1,500) 350 820 820 - -
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Projects A and E are mutually exclusive while all the projects are believed to be
of similar risk to the Local Government‟s existing capital investments. Any
surplus funds may be invested in the money market to earn a return of 9% per
year. The money market may be assumed to be an efficient market. The Local
Government‟s cost of capital is 12% per year.
Required:
a. Calculate the expected net present value for each project, and rank the
projects. (8 Marks)
b. Assuming the projects are divisible, calculate the Profitability Index for
each project, and rank the projects to determine how the money would be
best invested. (6 Marks)
c. Explain briefly why the rankings in (b) differ from that in (a) above
(1 Mark)
(Total 15 Marks)
QUESTION 7
External debt does not constitute a burden when optimally deployed and the
return on investment is sufficient to meet maturing obligations as at when due,
while servicing of the domestic economy is not undermined.
Required:
a. Enumerate and explain THREE ratios or indicators commonly used to
determine the extent of indebtedness of a country. (6 Marks)
b. Identify and explain SIX reasons for borrowing. (9 Marks)
(Total 15 Marks)
SOLUTION 1
a. i. Home-Use Limited
Statement of profit or loss (extracts) for the years ended December 31, 2017,
2018,2019 and 2020
N‟000
1/01/2017 Lease rental 8,000
31/12/2017 Depreciation expense 6,000
31/12/2017 Interest expense 2,000
1/01/2018 Lease rental 8,000

31/12/2018 Interest expense 1,400
1/01/2019 Lease rental 8,000

31/12/2019 Interest expense 740
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1/01/2020 Lease rental 8,000
31/12/2020 Interest expense 140
Home-Use Limited
Statement of financial position (extracts) as at December 31, 2017, 2018, 2019 & 2020
N‟000
2017 Non-current assets
Carrying value of LPG Station (28,000-6,000) 22,000
Lease obligation (28,000 – 8,000) 20,000



Lease obligation (8,140 - 8,000 + 14) 154
Workings:
Year Capital b/f Rental Capital Interest at Capital c/f
payment outstanding 10%
N‟000 N‟000 N‟000 N‟000 N‟000
2017 28,000 (8,000) 20,000 2,000 22,000
2018 22,000 (8,000) 14,000 1,400 15,400
2019 15,400 (8,000) 7,400 740 8,140
2020 8,140 8,000 140 14 154
ii. Features of operating lease are:

 Ownership is not transferrable;
 Risks and rewards incidental to ownership resides with the lessor;
 Lease contains no bargain option;
 Lease term does not cover the major part of the asset‟s economic life;
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 Present value of minimum lease payment does not cover substantially
the assets value;
 It is not specialised nature;
 The assets is easily replaceable;
 Lessee does not bear the lessor‟s cancellation loss;
 No option to extend rental at lower than market value; and
 Gains or losses from the fluctuations in the fair value of the residual
value does not accrue to the lessee
Features of finance lease are:

 Ownership is transferrable to the lessee;
 Risks and rewards incidental to ownership resides with the lessee;
 It carries the option to purchase the asset at a lower value than the fair
value;
 The lease term is for the major part of the economic life of the assets even
if ownership is not transferred;
 At the inception of the lease, the present value of the minimum lease
payments cover substantially at least the fair value of the leased assets;
 The leased assets are of specialised nature that only the lessee can use
without major modifications;
 Other assets cannot easily replace the leased assets;
 If the lessee can cancel the lease, the losses associated with the
cancellation are born by the lessee;
 The lessee has the ability to continue the lease for a secondary period at a
rent substantially lower than the market rent; and
 Gains or losses from the fluctuations in the fair value of the residual
accrue to the lessee.
b.i. Examples of investment property are:

 Land held by a government hospital for capital appreciation, which
may be sold at a beneficial time in future;
 Land held for a currently undetermined future use;
 A building owned by the reporting entity (or held by the reporting
entity under a finance lease);
 A building that is vacant but is held to be leased out to less than one or
more operating leases on a commercial basis to external parties; and
 Property that is being constructed or developed for future use as
investment property.
ii. Disclosures that should be made when an investment property is stated at

a revalued amount are:
 The effective date of their valuation;
 Whether an independent valuer was involved;
 The methods and significant assumptions applied in estimating the
assets‟ fair values;
 The extent to which the assets‟ fair values were determined directly by
reference to observable prices in an active market or recent market
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transactions at arm‟s length terms, or were estimated using other
valuation techniques;
 The revaluation surplus, indicating the change for the period;
 The sum of all revaluation surpluses for individual items of investment
property within that class; and
 The sum of all revaluation deficits for individual items of investment
property within that class.
Examiner’s report
Part (a i) of the question tests candidates‟ knowledge on how lease will be
treated in the financial statements (extract) of the lessee while part (a ii)
requires the candidates to identify the features of operating lease and finance
lease. Part (c) of the question also tests candidates‟ knowledge on the examples
and disclosure requirements of investment property (IPSAS 13).
As a compulsory question, all the candidates attempted the question and their
performance was average.
The common pitfalls were the inability of the candidates to calculate the amount
of the lease rentals that will be treated in the financial statements (extract) of
the lessee and state the features of operating and finance leases. Also
candidates were unable to state examples and disclosure requirements of
investment property.
Candidates are advised to have adequate knowledge of the relevant provisions

of International Public Sector Accounting Standards (IPSAS) and to make use of
Pathfinder and Study text of the Institute for better performance in the
Institute‟s future examinations.
Marking guide
Marks Marks
a..i. Statement of profit or loss (extracts)
Title ½
Calculation of lease rental, depreciation expense and interest
expense of 2017 1½
expense of 2018 1½
expense of 2019 1½

expense of 2020 1½
Statement of financial position (extracts) as at 31 December
Title ½
Calculation of carrying value of non-current assets for 2017,
2018, 2019 and 2020 1
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Calculation of lease obligation under non-current liabilities for
2017, 2018, 2019 and 2020 1
Workings 5 14
ii Features of operating lease and finance lease
Three features of operating lease 3
Five features of finance lease 5 8
b. Four examples of investment property 4
Four disclosure requirements when an investment property is
stated at revalued amount 4 8
Total 30
SECTION B
SOLUTION 2
(a) The IPSASB adopts a due process for the development of IPSASs that
provides the opportunity for comment by interested parties including
IFAC member bodies. Auditors, preparers (including finance ministries),
standards setters and individual are priorities.
The IPSASB‟s due process for projects normally, but not necessarily takes
the following stages:
i. Study of national accounting requirements and practice and
exchange of views about the issues with national standard-setters;
ii. Consideration of pronouncement issued by:
 The International Accounting Standard Board (IASB);
 National standard setters, regulatory authority and other
authoritative bodies;
 Professional accounting bodies; and
 Other organisations interested in financial reporting in the
public sector.
iii. Formation of Steering Committees (SC). Projects Advisory Panels
(PAPs) or sub-committees to provide input to the IPSASB on a
project;
iv. Publication of an exposure draft for public comment usually for at
least four (4) months. This provides an opportunity to those
affected by the IPSASB‟s pronouncements for comments before
they are finalised and approved by the IPSASB. The exposure draft
will include a basis for conclusion;
v. Consideration of all comments received within the comment period
on discussion documents and exposure drafts, to make modifications
to the proposed standards as considered appropriate in the light of
the IPSASB‟s; and
vi. Publication of an IPSAS which includes a basis for conclusion that
explains the steps in the IPSASB‟s due process and how the IPSASB
reached its conclusions.
100
(b) Some observations on government accounting system in developing
countries by United Nations manual
The general features of government accounting system as published by
the United Nations are as follows:
i. Unlike the advanced countries, where research work has been
documented and published, the records of general practice in the
developing countries are difficult to obtain;
ii. Relatively, little effort has been given to social government
accounting and budgetary control system;
iii. Accounting procedures in government departments, which reflect
complicated systems of checks and balances, tend to impair the
efficacy and timeliness of the accounting information and statistics
produced;
iv. Government accounting is seen mainly as an accountability device
for public receipts and expenditure. Efficiency, effectiveness and
economy of the operations tend to be neglected;
v. Bookkeeping or administrative legal compliance procedures are
more common than modern accounting approaches;
vi. Accounting tends to be identified with expenditure control. The
fact is that expenditure is subject to multiple checks;
vii. The amount of paper work is much, but no efficiency,
accountability or financial control is achieved;
viii. The accounting data upon which government budgets and plans
are based are frequently inaccurate and incomplete; and
ix. Financial reports are delayed and generally in arrears. They
consequently become obsolete at the point of implementation.
Characteristics of a good system of public sector accounting as published

by the United Nations (UN).
The characteristics are as follows:
i. Comply with constitutional, statutory and other legal requirements
of the relevant country;
ii. It must be related to budget classifications. Budgetary and
financial management must be closely integrated;
iii. It must be maintained in a manner that will clearly identify the
objects and purposes for which funds have been received and
expended and the executive authorities who are responsible for
custody and use of funds in programme/budget implementation;
iv. Maintain records in a way that will facilitate audit by external
review authorities and readily furnish the information needed for
effective audit;
v. Be developed in a manner that will permit administrative control
of funds;
vi. It must be developed so that it effectively discloses the economic
and financial results of programme operations, including the
sources of revenue, identification of costs and determination of the
101
operating results of government programmes and organisation;
and
vii. It must be maintained in a manner that will provide financial data
useful for economic analysis and identification of governmental
transactions and also assist in the development of the country‟s
accounts.
(c) Benefits of the ATRRS Accounting software are:

i. Familiarise the workforce with the use of IT equipment at an early
stage of Government Integrated Financial Management
Information System (GIFMIS) implementation, which would enable
a smoother transition to the GIFMIS software;
ii. Potentially reduce training period and requirement for GIFMIS;
iii. Potentially reduce GIFMIS implementation cost;
iv. Shorten business process re-engineering period (i.e. it is faster to
transit from a semi-automated process than a manual process;
v. Facilitates ease of reconciliation of the various bank accounts; and
vi. Ensure that clean and accurate data will be available for migration
to GIFMIS.
Examiner’s report
Part (a) of the question tests the candidates‟ knowledge of the five stages of
IPSASB due process for development of standards. Part (b) tests the candidates‟
knowledge of the United Nations‟ observations and recommendation on features
of good system of public sector accounting in the developing countries, as
contained in the United Nations Manual on Government Accounting. Part (c)
tests the candidates‟ knowledge on the benefits of Automated Accounting
Transactions Recording and Reporting System (ATRRS).
Few of the candidates attempted the question and performance was below
average.
The common pitfalls were the inability of the candidates to differentiate

between developing countries and advanced countries. Most of the observations
provided by the candidates are for advanced counties as against of developing
countries. Also the candidates were unable to identify some benefits of the
ATRRS accounting software
Candidates are advised to make use of the Pathfinder and Study Text of the
Institute for better performance in the Institute‟s future examinations.
102
Marking guide
Marks Marks
a. Five stages of IPSASB adoption of the due process 5
b. Five observations on government accounting system in 5
developing countries
Characteristics of a good system of public sector accounting as
contained in a United Nations manual on government 5 10
accounting
c. Five benefits of the ATRRS accounting software 5
Total 20
SOLUTION 3
(a) i. The MTEF contains the following information:

 A macro-economic framework setting out the three financial years, the
underlying assumptions, and an evaluation and analysis of the macro-
economic projection for the preceding three financial years;
 Fiscal strategy document setting out:
- Federal government‟s medium-term financial objectives; and
- The policies of the federal government for the medium term relating to
taxation, recurrent expenditure borrowings, lending and investment
and other liabilities;
 The strategies, economic, social and developmental priorities of
government for the next three financial years;
 An explanation of the finance objectives, strategic, economic, social and
developmental priorities and fiscal measures;
 An expenditure and revenue framework, which will set out:
- Estimates of aggregate revenue for the federation for each financial
year, based on the pre-determined commodity reference price
adopted and tax revenue projections;
- Aggregate expenditure for each of the next three financial years;
- Minimum capital expenditure projection for the federation for each
of the next three financial years; and
- Aggregate tax expenditure projection for the federation for each of
the next three financial years;
 A consolidated debt statement indicating and describing the fiscal
significance of the debt liability and measures to reduce the liability; and
 A statement on the nature and fiscal significance of contingent liabilities
and quasi-fiscal activities and measures to offset the crystallisation of
such liabilities.
ii. Requirements of the Fiscal Responsibility Act as it affect time lag for
preparation of MTEF and notifying the National Assembly are:
 A copy of the underlying revenue and expenditure profile for the
next two years;
103
 A report setting out actual and budgeted revenue and expenditure
with a detailed analysis of the performance of the budget for the 18
months up to June of the preceding financial year;
 A fiscal target broken down into monthly collection targets;
 Measures of cost, cost control and evaluation of result of
programmes financed with budgetary resources;
 A fiscal target document derived from the underlying medium–term
expenditure framework, setting out the following relevant targets
such as inflation rate, fiscal account balances and any other
development deemed appropriate; and
 A fiscal risk document evaluating the fiscal and other related risks to
the annual budget and specifying measures to be taken to offset the
occurrence of such risks.
iii. Documents that should accompany the estimates of revenue and expenditure
of the Nigeria‟s annual budget are:
 A macro-economic framework;
 A fiscal strategy paper;
 An expenditure and revenue framework;
 A consolidated debt statement; and
 A statement on contingent liabilities.
b. i. Fiscal transparency
This is the aspect of accountability, which requires government to carry
out all aspects of budgeting responsibilities with openness, trust, basic
values and ethical standards without hiding anything from the public.
Where a government has something to hide, public reporting is more
likely to be infrequent, unreliable and less comprehensive in order to hide
material facts.
ii. IMF code of good practices and transparency

 Clarity of roles and responsibilities: The government sector should be
separated from the rest of the public sector and from the rest of the
economy. Also, policy and management roles within the public
sector should be clearly stated and publicly disclosed;
 Open budget process: There should be clear procedures for budget
execution, monitoring and reporting. The budget preparation
should be guided by well-designed macroeconomic and fiscal
policy objectives;
 Public availability of information: The public should be provided
with comprehensive information on past, current and projected
fiscal activity on major fiscal risks. The central government should
publish information on the level and composition of its debts and
financial assets, significant non-debt liabilities and natural
resource assets. Fiscal information should be presented in a way
that facilitates policy analysis and promotes accountability; and
 Assurances of integrity: These should include that:
104
 Fiscal data should meet accepted data quality standards
and budget forecasts and updates should reflect recent
revenue and expenditure trends, underline macroeconomic
development;
 Data in fiscal reports should be internally consistent and
reconciled with relevant data from other sources. Major
revisions to historical fiscal data and any changes to data
classification should be explained;
 Ethical standards of behaviour for public servants should be
clear and made public;
 Purchases and sales of public assets should be internally
audited and audit procedures should be open to review;
 Fiscal information should be independently scrutinised. All
public finances and policies should be subject to scrutiny by
national audit body or an equivalent organisation that is
independent of the executive; and
 The national audit body or equivalent organisation should
submit all reports, including its annual report to the
legislature and publish them.
Examiner’s report
Part (a) of the question requires candidates to identify the key information to be
contained in the Medium – Term Expenditure Framework (MTEF). Part (b)
requires candidates to identify requirements of Fiscal Responsibility Act as it
affects time lag for preparation of MTEF, notifying the National Assembly and to
outline the documents that should accompany the estimates of revenue and
expenditure of the annual budget. Part (c) of the question requires the
candidates to discuss the term „fiscal transparency‟ and also to identify and
explain codes of good practices and transparency in line with IMF code of good
practices as related to the Nigerian government.
Few candidates attempted the question and performance was below average.
The common pitfalls were the inability of the candidates to identify the key
information to be contained in MTEF, requirements of Fiscal Responsibility Act
as it affects time lag for preparation of MTEF, discuss the term „fiscal
transparency‟ and explain codes of good practices and transparency in line with
IMF code of good practices as related to the Nigerian government.
Candidates are advised to read widely and ensure they have adequate knowledge of
relevant provisions of MTEF and other international provisions on codes of good
practices and transparency. Pathfinder and Study Text of the Institute are
relevant learning materials on this aspect of the syllabus for better performance in
future examinations.
105
Marking guide
Marks Marks
a. Identification of five key information to be contained in an MTEF 5
b. i. Identification of five requirements of Fiscal Responsibility Act as it
affects time lag for preparation of MTEF and notifying the National
Assembly 5
ii. Three documents that should accompany the estimates of revenue
and expenditure of the annual budget 3 8
c. i. Explanation of „fiscal transparency‟ 4
ii. Identification any three codes of good practices 1½
Explanation any three codes identified 1½ 7
Total 20
SOLUTION 4
a. i.
Nun Local Council Development Area, Bayelsa State
Revenue budget for the year ended December 31, 2021
Revenue Note N N
Revenue generated from tax: 1
Adult men: 7,019,585,280
Adult women: 2,495,852,544
Total taxable income 9,515,437,824
Rent LCDA property: 2
Warehouses 16,000,000
Lock-up shops 36,000,000
Sheds 12,300,000
Total rent from LCDA property 64,300,000
Fees from market hawkers: 3
Regular hawkers 1,032,000,000
Other hawkers 134,640,000
Total fees from market hawkers 1,166,640,000
Tenement rate:
Tenement rates collected on houses 2,411,000
Total revenue budget 10.748,788,824
ii. Nun Local Council Development Area, Bayelsa State

Overhead cost budget for the year ended December 31, 2021
Note N
Motor vehicle maintenance 5 675,000
Drainage cleaning 231,250
Transport and travelling 175,000
Office maintenance 160,000
Office accommodation 278,750
Utility services 250,000
Others 300,000
Total overhead cost budget 2,070,000
106
Workings
1 Population
Current population with 6% growth (1.06 X 1,548,412) 1,641,317
Less: 1% Rural-urban migration (.01 X 1,641,317) 16,413
Total population of Nun LCDA 1,624,904
Revenue generated from tax N
Adult men: (50% of 1,624,904 X .9 X 800 X 12) 7,019,585,280
Adult women: (20% of 1,624,904 X .8 X 800 X 12) 2,495,852,544
Total taxable income 9,515,437,824
2 Rent on local government property N

Warehouses (2 x 8,000,000) 16,000,000
Lock-up shops (300 x 120,000) 36,000,000
Sheds (150 x 82,000) 12,300,000
Total rent from LCDA property 64,300,000
3 Fees from market hawkers: N

Regular hawkers (17,200 x 200 x 25 X 12) 1,032,000,000
Other hawkers (18,700 x 200 x 3 X 12) 134,640,000
Totalfees from market hawkers 1,166,640,000
4 Tenement rates N
Tenement charges collected on houses (2,411 x 1,000) 2,411,000
5 Overhead cost N
Motor vehicle maintenance (540,000 X 1.25) 675,000
Drainage cleaning 185,000 X 1.25) 231,250
Transport and travelling (140,000 X 1.25) 175,000
Office maintenance (128,000 X 1.25) 160,000
Office accommodation (223,000 1.25) 278,750
Utility services (200,000 X 1.25) 250,000
Others (240,000 X 1.25) 300,000
Total overhead cost 2,070,000
b. The functions of the Ministry of Finance, Budget and Planning are as

follows:
i. Developing reasoned economic assumptions and forecasts;
ii. Issuing budget guidelines to the ministries and extra-ministerial
departments;
iii. Acting as the liaison between the presidency, ministries and extra-
ministerial departments during the budget preparation;
iv. Compiling total revenue and expenditure estimates;
v. Drafting the budget speech;
vi. Supervising and controlling the implementation of the budget;
vii. Monitoring and evaluating the performance of programmes funded
through the government budget;
viii. Assessing the impact of the budget on the economy;
107
ix. Developing formats of returns aimed at ensuring cost effectiveness in
the use of government resources; and
x. Carrying out research on budget utilisation and the attainment of
national or state objectives.
Examiner’s report
Part (a) of the question tests candidates‟ knowledge of the preparation of
revenue and overhead cost budgets. Part (b) tests the functions of the Ministry
of Finance, Budget and Planning.
Majority of the candidates attempted the question and performance was

average
The common pitfalls were the inability of the candidates to prepare revenue and
overhead cost budgets and identify the functions of the Ministry of Finance,
Budget and Planning.
Candidates are advised that they should ensure they have adequate knowledge of
the relevant provisions on the preparation of revenue and overhead cost budgets and
other regulations relating to public sector account for better performance in the
Institute‟s future examinations. The Pathfinder and Study Text of the Institute
are relevant learning materials on this aspect of the syllabus.
Marking guide
Marks Marks
a. Preparation of revenue budget
Title 1¼
Calculation of components of total revenue budget 2¾
Calculation of total revenue budget ½
Workings 3½
Preparation of overhead budget
Title 1
Calculation of components of total overhead budget 4
Workings 2 15
b. Functions of the Ministry of Finance, Budget and Planning
Five functions 5
Total 20
SOLUTION 5
a. Crowding-in effect: If public expenditure has positive or stimulating
influence on private consumption, that is, personal consumption and
investments, then we have crowding - in effects, which include:
i. Fiscal policy may crowd-in private investment, resulting in positive

externalities in some cases. For example, if an increase in public
investment is so effective in making people to believe that a boom may
108
come soon, many firms are likely to invest more. Consequently, other
firms will increase their investments. This is a desirable outcome of the
crowding-in effect, which comes from the positive effect on people‟s
attitude regarding future economic conditions;
ii. It is important for the efficacy of fiscal policy that public spending,
especially public investment, produces a profitable outcome for private
agents. If a public investment project makes private firms more
productive, then crowding-in effect occurs; and
iii. In such situation, government may only stimulate a small number of

private firms and/or industries. However, because of the crowding-in
effect, this policy may produce more investment in the whole economy.
Crowding-out effect: Public expenditure can have positive and negative

effect or influence on private sector, if the public expenditure has
negative or restrictive influence on private consumption especially on
investments, we have crowding - out effect which include:
i. When governments borrow to pay for a stimulus, this drives up
borrowing costs for households and firms, reducing the amount of
consumption and investment;
ii. Crowding-out effect reduces the effectiveness of expansionary

policies aimed at increasing the total demand for a nation's output;
iii. An increase in the interest rate depresses investment and hence

income. This offsetting effect is called the crowding-out effect in
the sense that an increase in public spending crowds out private
investment; and
iv. A situation when increased interest rates lead to a reduction in

private investment spending, it dampens the initial increase of
total investment.
b. Ratios that can be used for measuring debt sustainability of a country

and their shortcomings are:
i. External debt service to export ratio
The debt-to-exports ratio is defined as the ratio of total
outstanding debts at the end of the year to the economy‟s exports
of goods and services for any one-year. This ratio can be used as a
measure of sustainability because an increasing debt-to-exports
ratio over time, for a given interest rate, implies that total debt is
growing faster than the economy‟s basic source of external income,
indicating that the country may have problems meeting its debt
obligations in the future.
109
Shortcomings
 Countries that use external borrowing for productive
investment with long gestation periods are more likely to
exhibit high debt-to-exports ratios. But as the investments
begin to produce goods that can be exported, the country‟s
debt-to-exports ratio may start to decline. So, for these
countries, the debt-to-exports ratio may not be too high
from an inter-temporal perspective, though in any given
year it may be perceived as large.
 Some countries may benefit from highly concessional debt
terms, while others may pay high interest rates. For such
countries to better capture the implied debt burden in terms
of the opportunity cost of capital, it is useful to report it and
analyse the average interest rate on debt. We may also
need to the present value of debt by discounting the
projected stream of future amortisation payments including
interest, with a risk-neutral commercial reference rate.
ii. Debt to GDP ratio

The debt-to-GDP ratio is defined as the ratio of the total
outstanding external debt at the end of the year to annual GDP.
By using GDP as a denominator, the ratio may provide some
indication of the potential to service external debt by switching
resources from production of domestic goods to the production
of exports. Indeed, a country might have a large debt-to-
exports ratio but a low debt-to-GDP ratio, if exports comprise a
very small proportion of GDP.
Shortcomings
 While the debt-to-GDP ratio is immune to export-related
criticisms that mainly focus on the differing degree of
value added in exports and price volatility of exports, it
may be less reliable in the presence of over-or under-
valuations of the real exchange rate, which could
significantly distort the GDP denominator.
 Also, as with the debt-to-exports ratio, it is important to
take account of the country‟s stage of development and
the mix of concessional and non-concessional debt.
iii. Ratio of present value of debt to fiscal revenue

This is defined as the ratio of future projected debt-service
payments discounted by market-based interest rates (a risk-
neutral commercial reference rate) to annual fiscal revenue.
This ratio can be used as a measure of sustainability in those
countries with a relatively open economy facing a heavy fiscal
burden of external debt. In such circumstances, the
government‟s ability to mobilise domestic revenue is relevant
and will not be measured by the debt-to-exports or debt-to-GDP
110
ratios. An increase in this indicator over time indicates that the
country may have budgetary problems in servicing its debts
Shortcomings
 Fiscal policy can be swayed by politics and placating voters,
which can lead to poor decisions that are not informed by
data or economic theory.
 If monetary policy is not coordinated with fiscal policy
enacted by governments, it can undermine efforts as well
iv. Ratio of debt service to exports

This ratio is defined as the ratio of external debt-service
payments of principal and interest on long-term and short-term
debt to exports of goods and services for any one-year.
The debt-service-to-exports ratio is a possible indicator of debt
sustainability because it indicates how much of a country‟s
export revenue will be used up in servicing its debt and thus,
also, how vulnerable the payment of debt service obligations is
to an unexpected fall in export proceeds. This ratio tends to
highlight countries with significant short-term external debt.
A sustainable level is determined by the debt-to-exports ratio
and interest rates, as well as by the term structure of debt
obligations. The latter may affect credit worthiness because the
higher the share of short-term credit is in overall debt; the
larger and more vulnerable is the annual flow of debt-service
obligations.
Shortcomings
 The amortisation payments on short-term debt are typically
excluded from debt service and the coverage of private
sector data can often be limited, either because the
indicator is intentionally focused on the public sector or
because data on private debt service are not available.
 A debt-service-to-export ratio not corrected for the import
intensity of exports is biased downward for economies with
a higher propensity to export.
v. Ratio of international reserves to short-term debt

This ratio is a pure liquidity indicator that is defined as the
ratio of the stock of international reserves available to the
monetary authorities to the short-term debt stock on a
remaining-maturity basis. This could be a particularly useful
indicator of reserve adequacy, especially for countries with
significant, but not fully certain, access to international capital
markets.
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The ratio indicates whether international reserves exceed
scheduled amortisation of short-term, medium-term, and long-
term external debt during the following year; that is, the extent
to which the economy has the ability to meet all its scheduled
amortisations to non-residents for the coming year, using its
own international reserves.
It provides a measure of how quickly a country would be forced

to adjust if it were cut off from external borrowing, for example,
because of adverse developments in international capital
markets.
Shortcomings
 A large stock of short-term debt relative to international
reserves does not necessarily lead to a crisis as being
portrayed by the ratio. Many advanced economies have
higher ratios of short-term debt to reserves than many
emerging economies, which have shown vulnerability to
financial crisis.
 The ratio assumes that measured international reserves
are indeed available and can be used to meet external
obligations; this has not always been true historically.
Examiner’s report
Part (a) of the question tests candidates‟ knowledge on the difference between
the crowding – in effect and crowding – out effect of fiscal policy while part (b)
tests candidates‟ knowledge on the ratios that can be used for measuring debt
sustainability of a country and one shortcoming of each ratio.
Few of the candidates attempted the question and performance was below
average.
The common pitfalls were the inability of the candidates to differentiate

between the crowding – in effect and crowding – out effect of fiscal policy. Also,
the candidates were unable to explain the ratios that can be used for measuring
debt sustainability of a country and one shortcoming of each ratio,
Candidates are advised to make use of Pathfinder and Study Text of the Institute
for better performance in the Institute‟s future examinations.
112
Marking guide
Marks Marks
a. Discussion of crowding-in effect
Definition 11/2
Explanation of any two of the effects 1
Discussion of crowding-out effect
Definition 11/2
Explanation of any two of the effects 1 5
b. Ratios that can be used for measuring debt

sustainability of a country and one shortcoming of
each ratio
Identification of any four ratios 2
Explanation of the four identified ratios 4
Identification of any one shortcoming of the identified
ratios 4 10
Total 15
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SOLUTION 6
Otunba Local Government
(a) Calculation of Net Present Value (NPV) for each project
Project A Project B Project C Project D Project E Project F
DF
Year (12%) CF DCF CF DCF CF DCF CF DCF CF DCF CF DCF
N‟000 N‟000 N‟000 N‟000 N‟000 N‟000 N‟000 N‟000 N‟000 N‟000 N‟000 N‟000
-
0 1 -2,460 -2,460 -1,800 -1,800 1,750 -1,750 -1,800 -1,800 -1,800 -1,800 -1,500 -1,500
1 0.893 700 625.1 750 669.75 480 428.64 620 553.66 400 357.2 350 312.55
2 0.797 700 557.9 870 693.39 480 382.56 620 494.14 500 398.5 820 653.54
3 0.712 700 498.4 640 455.68 630 448.56 620 441.44 600 427.2 820 583.84
4 0.636 700 445.2 0 0 730 464.28 620 394.32 700 445.2 0 0
5 0.567 700 396.9 0 0 0 0 0 400 226.8 0 0
NPV 63.5 18.82 -25.96 83.56 54.9 49.93
Ranking 2 5 6 1 3 4
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(b) Profitability Index (PI)
Project A B C D E F
N‟000 N‟000 N‟000 N‟000 N‟000 N‟000
Outlay 2,460 1,800 1,750 1,800 1,800 1,500
NPV 63.5 18.82 (25.96 83.56 54.90 49.93
PI = NPV
Outlay 0.0258 0.0105 (0.0148) 0.0464 0.0305 0.0333
Ranking 4 5 6 1 3 2
Project to be invested based on Profitability Index

Project Initial Investment NPV
N‟000 N‟000
D 1,800 83.56
F 1,500 49.93
E 1,800 54.90
Sub-Total 5,100 188.39
B (Note) 1,100 11.50
Total 6,200 199.89
NB
Project A, which is the 4th Project in ranking will not be selected because it is
mutually exclusive with project E that is already selected. We will now select the
next project in ranking, which is project B. Only N1,100,000 is left for investment in
project B. Project B requires a total investment of N1,800.000. However, since the
projects are said to be divisible, the available amount of N1,100,000 will be
invested in project B and the NPV will be a proportion of total NPV for project B.
Thus, 1,100,000/1,800,000 X 18.82 = N11,500,000.
(c) The rankings differ from (a) because NPV is an absolute measure whereas the
profitability index is a relative measure that takes into account the different
investment cost of each project. Also, the main difference between NPV and
profitability index is that the PI is represented as a ratio, so it does not indicate the
cash flow size.
Examiner’s report
Part (a) of the question tests candidates‟ knowledge of the calculation of net
present value of projects and their ranking while part (b) asks the candidates to
calculate the Profitability Index (PI) and rank the projects to determine how the
fund available would be best invested. Pat (c) requires the candidates to state why
the rankings in (b) differ from that in (a).
above average.
The commonest pitfalls were the inability of the candidates to calculate Profitability
Index (PI) and rank the projects accordingly. Also, candidates could not state the
reason why rankings under Net Present Value (NPV) and Profitability Index (PI)
differ.
117
Candidates are advised to make use of the Pathfinder and Study Text of the
Institute for better performance in the future‟s examinations.
Marking guide
Marks Marks
a. Calculation of net present value of projects A – F 61/2
Ranking 11/2 8
b. Calculation of profitability index for projects A – F 11/2
Ranking based profitability index 11/2
Decision on the projects to invest using profitability index 11/2
Decision on the mutual exclusive projects to invest on 1
/2
Determination of how the balance of the total outlay should be 1 6
invested
c. Explanation on the reason why ranking between NPV and PI 1

approach to project appraisal differs.
Total 15
SOLUTION 7
a. There are four major ratios or indicators commonly used to determine the extent of
indebtedness of any country. These ratios are explained briefly below:
i. External debt service to export ratio: This relates total external debt
service to export of goods and services. It reflects the level of export
earnings committed to servicing external debts. Since external debts
are denominated in foreign currency, then servicing and repayment
must be in foreign currency, which can only be procured through
export earnings;
ii. External debt stock to export ratio: The ratio relates to the availability
of foreign exchange earnings in the economy. It is an important
indicator since foreign exchange is needed to pay off foreign debts. It
reflects the extent to which total exports of goods and services can be
used to liquidate external debt outstanding. The movement in this
ratio is an indicator of the nation‟s debt service capacity;
iii. External debt stock to nominal gross domestic product ratio: This ratio
measures the extent to which total domestic output can be deployed
to wipe out total outstanding external debt obligations. The higher
this ratio the greater the degree of external debt burden; and
iv. External debt service to nominal gross domestic product ratio. This
ratio relates to the proportion of total domestic output set aside for
servicing external debt. The ratio will be rising where total domestic
output is falling.
The higher these ratios the greater are the debt burden. However, it is
important to emphasise that debt service ratios should be interpreted with
118
caution because the ratio will be relatively low if the country continues to
default in debt service payment.
b. General reasons for borrowing

The following are some of the reasons that have been advanced to justify the
need for a country to borrow:
i. Huge and persistent budget deficit: The government borrows when its
expenditure is greater than its revenue (budget deficit), especially
after its taxing capacity has been stressed to the limit;
ii. Balance of payments disequilibrium: Excessive reliance on foreign
resources to sustain domestic production processes, and on foreign
goods and services beyond the nation‟s foreign exchange earning
capacity may lead government into contracting debt obligations;
iii. Rapidly increasing population: In most developing countries,
population is growing faster than the level of national output. The
need arises for government borrowing to expand public enterprises
and public utilities to cater for the welfare of the people;
iv. Implementation of development programmes: To promote economic
development usually require provision of new and upgrading of
existing social and economic infrastructural facilities, like roads,
railways, electricity, schools and hospitals. The tax revenue of
government may be insufficient to execute such projects, hence the
resort to government borrowing;
v. Economic instability: A stable economy naturally provides an enabling
environment for economic growth and development. Public debt of
the internal type may be contracted to control inflation, while both
internal and external borrowing may be used to stimulate economic
activities during economic depression;
vi. Natural disasters: Government has the responsibility to provide relief
to the victims of earthquake, flood, fire disasters, famines, sectarian
violence and other natural calamities. Government borrowing may be
justified because such occurrences are never expected or budgeted
for.
vii. Fluctuations in government revenue: Most countries operate mono
product economies, depending on only one (or very few) export
product for foreign exchange earnings. A sudden poor performance of
such product in the international market would reduce income
considerably and adversely affect budget implementation. Any
country that finds itself in such a situation may have no option than to
borrow to bridge the financial resource gap;
viii. War-time borrowing: Financial resources needed to prosecute wars
are usually beyond the capacity of the government. Hence, the need
to borrow arises to avoid devastating consequences of defeat; and
ix. Debt servicing: New debt with favourable terms and conditions may
be undertaken to service old debts thereby reducing the burden of
debt on the economy.
119
Examiner’s report
Part (a) of the question tests candidates‟ knowledge of the ratios or indicators
commonly used to determine the extent of indebtedness in a country while part (b)
asks the candidates to identify and explain reasons for borrowing.
Few candidates attempted the question and their performance was average.
The common pitfalls were the inability of the candidates to identify and explain any
three ratios or indicators commonly used to determine the extent of indebtedness in
a country. Also, the candidates were unable to identify and explain the reasons for
borrowing.
Candidates are advised to make use of the Pathfinder and Study Text of the Institute
for better performance in the Institute‟s future examinations.
Marking guide
Marks Marks
a. Ratios commonly used to determine the extent of
indebtedness of a country
Identification of the three ratios 3
Explanation of any three ratios identified 3 6
b. Reasons for borrowing

Identification of the six reasons for borrowing 3
Explanation of six reasons identified for borrowing 6 9
Total 15
120
ICAN/222/Q/B6 Examination No.........................

CORPORATE STRATEGIC MANAGEMENT & ETHICS
have prohibited items such as telephone handset, electronic storage

number.

THURSDAY, NOVEMBER 17, 2022
121
CORPORATE STRATEGIC MANAGEMENT & ETHICS


QUESTION 1
Aziko Brothers Limited is a company that engages in the manufacture and sale of
Fast-Moving Consumer Goods (FMCG) in Nigeria. The company manufactures
detergent, cosmetics, pasta, confectioneries, and food seasoning. The profit of the
company has experienced a steady average growth of 15% annually in the last ten
years of operation. This growth was in part fuelled by the success of its flagship
product, Goodlife detergent, which is currently a household name in Nigeria. This
product contains an active ingredient developed by the company‟s Research and
Development Department. This active ingredient enables Goodlife to clean clothes
more deeply without affecting the colour and texture of fabrics than any other
brand in the market.
However, some competitors have been able to replicate the deep cleaning effect of
Goodlife detergent in their respective brands, thus eating into the market share of
Goodlife. Consequently, Aziko Brothers Limited experienced, for the first time in
decades, a decline in its profit, relative to the previous year. To maintain and
improve the company‟s future performance, management of Aziko Brothers Limited
decided to pursue the following growth strategies:
 Acquisition of a 1,000 hectares farmland for growing palm fruits and the
establishment of a palm oil/palm kernel processing plant for the production
of palm kernel oil, an active ingredient in the production of detergent and
cosmetics:
 Acquisition and refurbishment of an abandoned cement factory to exploit an
opportunity in the cement market created by a sharp decline in the
production capacity of the largest producer of cement in the country and
increase in demand due to population growth; and
 Diversification into the production of washing machines through the
acquisition of Aqua Electronics Limited, a manufacturer of electrical
appliances.
122
Required:
a. i. In the light of the above scenario, explain the term diversification
(2 Marks)
ii. Identify factors that signal to a firm the time to pursue diversification
strategy. Given these signals for diversification, draw conclusions on
the need for Aziko Brothers Limited to diversify. (6 Marks)
b. Drawing from the success of Goodlife detergent, advise Aziko Brothers
Limited on the benefits of adopting innovation as a growth strategy.
(6 Marks)
c. Identify and explain the types of diversification being proposed by Aziko
Brothers Limited. (4 Marks)
d. Advise the management of Aziko Brothers Limited on the role of accountants
in the business strategy formulation and implementation process.
(12 Marks)
(Total 30 Marks)

QUESTION 2
ABC Confectioneries, makers of a well-known brand of biscuits recently received a
consignment of vital raw materials to produce its flagship brand - Shortbread
Biscuits. However, due to poor handling during the delivery process, the raw
materials became contaminated, which led to a change in the materials‟ colour and
texture. The quality control department of ABC confectioneries, however, passed
the materials as good, leading to their subsequent use in the production of
Shortbread Biscuits. This led to massive complaints of food poisoning by customers.
Citing this as reason, many of the company‟s wholesalers who took the company‟s
products on credit, started defaulting in payments. Demand for Shortbread biscuits
dropped. All financial indices show that the company may not be able to meet its
financial obligation to its creditors.
You have been engaged by ABC Confectioneries to advise management on effective
risk management, to avoid the future occurrence of such an incident.
a. Using the Turnbull report as framework, identify and present to the
management of ABC confectioneries the categories of risks to which the
company was exposed because of the contamination of the raw materials.
(12 Marks)
b. Advise the management of ABC Confectionaries on ways of embedding risk
awareness in the firm‟s corporate culture. (8 Marks)
(Total 20 Marks)
123
QUESTION 3
Mrs. Eze was appointed the Chief Executive Officer (CEO) of a mining company that
recently suffered reputational damage due to unethical practices of the immediate
past board of directors. Part of Mrs. Eze‟s goal is to reposition the company as an
organisation that is ethical in its practices and can be trusted. To achieve this goal,
the CEO is trying to convince members of the board of directors of the connection
between organisational culture and corporate ethical behaviour. She intends to
introduce a new set of corporate culture that will support ethical behaviour among
members of staff.
Required:
a. Prepare a position paper on the connection between organisational culture
and ethical behaviour. (6 Marks)
b. Using the Johnson and Scholes cultural web, advise Mrs. Eze on key
elements of organisational culture. (10 Marks)
c. Suggest to the board steps to be taken to create culture that supports ethical
behaviour of employees. (4 Marks)
(Total 20 Marks)
QUESTION 4
Consequent upon the recent lockdown to curtail the spread of the covid 19
pandemic, Oxede& Co. (Chartered Accountants) is thinking of transforming into a
virtual organisation. Advise the management of Oxede& Co. On the:
a. Meaning and characteristics of virtual organisations (10 Marks)

b. Advantages and disadvantages of transforming into a virtual organisation.
(10 Marks)
(Total 20 Marks)

QUESTION 5
Corporate governance disclosure has become a major requirement in today‟s
business environment. Firms are increasingly becoming obliged to disclose even
information that are not mandatory for them to divulge.
124
Required:
a. Illustrate how corporate governance disclosure can enhance firm
performance. (10 Marks)
b. Identify the principles of disclosure and communication of corporate
governance statements. (5 Marks)
(Total 15 Marks)
QUESTION 6
A friend of yours owns an evaporated milk manufacturing plant which produces

Mountain Milk, the fastest selling brand currently controlling over 50% of market
share. He is hoping to increase its currently high profit and market share from the
sale of Mountain Milk. Market growth rate for evaporated milk is at an all-time high
of 10%.
Using the Classical Product Lifecycle as framework, advise your friend on:
a. Product lifecycle stages of a consumer good like evaporated milk. (4 Marks)
b. Likely current stage of Mountain Milk in the product lifecycle. (3 Marks)
c. Appropriate marketing strategies for Mountain Milk, using the marketing
mix. (8 Marks)
(Total 15 Marks)
QUESTION 7
Andrew is a newly qualified chartered accountant employed as an Accountant in
the Treasury department of Teller Bank. Taqua is the Head of Treasury Department.
One of the leading depositors of the bank is Oxede Trading Company (OTC) whose
Financial Controller, Tony, always collect over-riding commission on all deposits
made by the Company to the bank.
Andrew observed that this over-riding commission was not reported to OTC. The
over-riding commission was deducted from the interest due to OTC, so it did not
affect the cost of the fund to the bank. Andrew tried to convince Taqua to stop this
act, but he retorted that the payment of over-riding commission was necessary to
ensure that the Treasury Department met its target.
Andrew is expected to make all his reports to Management through his HOD,
Taqua. Despite this situation, Andrew decided to expose this to the board. The
bank has no policy on this issue.
125
Required:
a. Explain the process Andrew should take to inform the board of this issue.
(2 Marks)
b. Discuss the issues that Andrew should consider before embarking on his
intended action. (9 Marks)
c. Based on the scenario, advise with reasons whether Andrew should embark on
his planned action. (4 Marks)
(Total 15 Marks)
SECTION A:
SOLUTION 1
a. i. Diversification is the strategy of selling new products in new markets.

There are two types of diversification:
 Concentric diversification: where the new productsand markets are
related in some way to existing products and markets.
 Conglomerate diversification: where both the new products and

markets are unrelated to existing ones.
ii. Signals for diversification are:

 For as long as opportunities for profit and growth exist in current
market, firms should not be in a hurry to diversify:
 Diminishing opportunities and stagnating or consistently reducing

sales in the current market. This should normally serve as a signal
to diversify. From the given scenario, the decline in profit made
from the detergent business is a signal for Aziko Brothers Limited
to diversify;
 When the new business can expand into industries whose

technologies and products complement existing businesses. This
justifies the diversification into the production of washing
machines and palm kernel oil;
 When the business can leverage existing competencies and

capabilities by expanding into businesses where the same resource
strengths are key success factors and valuable competitive assets;
 Where diversification into closely related businesses opens new
avenues for cost reductions. This also justifies diversification into
palm kernel oil production; and
 When the company has a powerful and well-known brand name

whose goodwill can be transferred to the products of other
126
businesses and thereby used as a lever for driving up the sales and
profits of the other businesses. The company can leverage on the
popularity of the Goodlife brand to achieve success in the cement
and washing machine businesses, thus justifying the
diversification.
Conclusion: From the above, it can be concluded that it is time for
Aziko Brothers Limited to diversify. Also, there are good chances
that the company will achieve success in the new lines of business.
b. From the given scenario, the company achieved success in the detergent
business from the innovation output of its research and development
department. From this, one can identify the following as benefits of adopting
innovation as a growth strategy:
i. Product renewal: Output of innovation can lead to modification and

improvement of product design, efficiency, and attributes for
enhanced customer satisfaction. This is particularly useful to maintain
and improve sales and lengthen the product‟s life cycle;
ii. Product adaptation: Innovation could help in the modification of the
product for adaptation into new markets. For example, a detergent
may start off as useful only for handwashing but later be modified to
be useable for machine wash to meet the need of that segment of the
market;
iii. Developing new products: The output of innovation through invention
may be the development of a new product. Such a product may
become successful throughout its life; and
iv. Developing New Technology: This could also be an output of
innovation. Ground-breaking technologies in biochemistry,
communication, data storage, etc, could put a firm on the path of
long-term success.
c. Aziko Brothers Limited pursued the following diversification strategies:

i. Concentric diversification: The diversification into palm kernel oil and
washing machine production are examples of concentric diversification;
and
ii. Conglomerate diversification: This involves diversification into
unrelated businesses. From the scenario, diversification into the
production of cement is an example of conglomerate diversification.
d. The following are roles of accountants in the formulation and

implementation of corporate strategies:
i. Design and implementation of models for recording financial

transactions and preparation of financial reports and accounts.
ii. Design and implementation of models for providing financial
information to support accurate drafting, implementation, monitoring,
127
controlling and measurement of strategy performance in a timely
manner. These models include budgets and budgetary controls,
capital investment appraisal, discounted cash flow(DCF) analyses etc;
iii. Assist the R & D and marketing departments in new product screening
and new product development and marketing decisions;
iv. Strategic investment appraisals which involve a strategic and
financial assessment of proposed investment projects;
v. Provision of reporting system for marketing function through
management information on customers, channels of distribution and
product profitability;
vi. Working in conjunction with the marketing department to assess the
effectiveness of marketing initiatives and the marketing mix; and
vii. Identification and measurement of added value throughout the entire
value chain.
Examiner’s report
This compulsory scenario based 30-mark question from the Strategic Management
section of the syllabus tests diversification and innovation as growth strategies, and
the roles of accountants in strategy formulation and implementation.
Virtually all the candidates attempted this question.
Performance was below average, as less than 50% of the candidates scored less
than 50% of the marks obtainable.
 The common pitfall was inability of many candidates to:

 Identify factors indicative of the need for diversification;
 Benefits of adopting innovation as a growth strategy; and
 The role of accountants in strategy formulation and implementation.
Skills level candidates should pay particular attention to applying their knowledge
to simple scenarios, as this is the distinguishing feature between foundation and
skills levels of the examination.
Marking guide
Topics Number Marks per Total
of points point
a i Definition 1 1 2
Types of diversification 1 1
ii Indicators of the need for
diversification 3 11/2 41/2
Conclusion 1 11/2 11/2
b Benefits of innovation strategy 3 2 6
c Types of diversification pursued
by Aziko Brothers Limited 2 2 4
d Role of accountants in strategy
formulation and implementation 6 2 12
Total 30
128
SOLUTION 2
a. Using the Turnbull Report as framework, the following are risks faced by ABC
confectionaries:
i. Market Risk: Risks associated with changes in market prices. From the
scenario, there exist no evidence of a change in market prices because
of the contamination. However, due to the fear of consuming
contaminated product, the demand for shortbread shrank. Thus, there
is a market risk;
ii. Credit Risk: Risks of losses from bad debts or delay by customers in
settling debts. The complaints by customers led to a rise in default
rates by wholesalers. As such there exists a credit risk in the
incidence;
iii. Liquidity Risk: Risks that companies will be unable to meet financial
obligations when they arise. The level of exposure of the firm to this
risk is high because of the decline in sales occasioned by the
contamination incident;
iv. Technology Risk: Risks that arise due to change in technology. From
the given scenario, there is no indication that the company may or
will be exposed to technology risk because of the contamination
incident;
v. Legal Risk: Risks such as regulatory risk arising from failure to comply
with laws and regulations and risk of losses from legal actions and
lawsuits. From the given scenario, even though no breach of laws or
regulation was mentioned, legal risk could arise from lawsuits
instituted by customers who suffered food poisoning due to
consumption of shortbread biscuits;
vi. Health, Safety and Environmental Risk: Risks associated with the
health and safety of stakeholders such as employees, customers,
suppliers, visitors, community etc. From the given scenario, there is
health risk in respect of the customers who consumed shortbread
biscuits and employees who handled the contaminated input;
vii. Reputation Risk: Risks of damage to the reputation of the firm and
brand with customers and the public. The scenario shows that the
contamination could damage the reputation of the firm and its
product brand with customers and the public; and
viii. Business Probity Risk: Risks from loss due to failure of the firm to act
in an honest way. From the scenario, the firm failed to act in an
honest way by intentionally using contaminated inputs.
b. To embed risk awareness into an organisation‟s corporate culture is to

ensure that thinking about and controlling risk is a natural and regular part
of employees‟ behaviour. To accomplish this:
i. There should be reporting systems in place for disclosing issues
relating to risk. There should be sharing of risk-related information;
ii. Managers and other employees should recognise the need to disclose
information about risks and about failures in risk control;
129
iii. There should be a general recognition that problems should not be
kept hidden. Bad news should be reported as soon as it is identified.
The sooner the problems are identified, the sooner control measures
can be taken(and the less the damage and loss);
iv. To create a culture in which problems are disclosed, there must be
openness and transparency. Employees should be willing to admit to
mistakes;
v. Openness and transparency will not exist if there is a „blame‟ culture;
vi. Individuals should not be criticised for making mistakes if theyown up
to them promptly; and
vii. The attitude should be that problems with risks will always occur.
When they do happen, the objective should be to take measures to
deal with the problems. Mistake should be analysed to find solutions
and prevent a repetition of the problem. Risk management should be
a constructive process.
Examiner’s report
This scenario-based question on Risk Management tests categorisation of
risk, using the Turnbull framework, and ways of embedding risk awareness
in a firm‟s corporate culture.
About 70% of the candidates attempted this question, however, performance
was below average, as many candidates scored less than 50% of the marks
obtainable.
Some candidates could not apply the Turnbull framework to the scenario,
while some do not know how to embed risk awareness into a firm‟s corporate
culture.
Candidates are enjoined to develop the key skill of applying professional

knowledge to practical situations.
Marking guide
Topics No. of Mark per Total

points point
a. Turnbull Framework 8 11/2 12
b. Embedding risk awareness in 4 2 8
corporate culture
Total 20
130
SOLUTION 3
a. Culture is a set of dominant beliefs, attitudes, values, and norms that are
shared by a group of people. Organisational culture therefore is a set of
beliefs, values, and norms that are shared by individuals in an organisation.
Ethics connotes a set of moral principles that govern a person‟s behaviour
and is concerned with the question of rightness and wrongness of an action.
Thus, there is a link between organisational culture and ethical behaviour

because a people‟s culture shapes their beliefs, norms, and values. These
links are:
i. Organisational culture guides employees when faced with ethical

dilemmas;
ii. Organisations whose cultures support unethical and risky behaviour
stand the risk of damaging their reputation; and
iii. Organisational culture and ethics are psychologically linked and
mutually reinforcing. Hence, organisations must put in place cultures
that support ethical behaviour among all employees including
management and board members.
b. The cultural web is made up of six interrelated elements of culture. These are:
i. Routines and rituals: ways in which things are generally done in the
organisation;
ii. Stories and myths: History of how the organisation got to its present
level and the heroic efforts of its past members. Such information is
mostly transmitted via oral tradition;
iii. Symbols: These are representations of the nature of the organisation
such as logo, office building,etc;
iv. Power structure: Organisations are influenced by individuals who are
in positions of power. In some organisations however, power could
come from influence, accomplishments, and expertise.
v. Organisational structure: The culture of an organisation is affected by
its organisation and management structure. Hierarchical and
bureaucratic organisations might find it particularly difficult to adapt
to change and are often conservative in their outlook; and
vi. Control systems. Performance measurement and reward systems
within an organisation establish the views about what is important
and what is not so important. Individuals will focus on performance
that earns rewards. For example, it has been suggested that cash
bonus systems help to create the profit-driven culture in investment
banks.
131
The cultural web within a company shapes its corporate posture.
c. Steps to be taken to create corporate culture that supports ethical behaviour
are:
i. Leadership by example: Corporate culture usually begins at the top.
Board members, management and other leaders within the
organisation should set the stage for ethical behaviour through their
ethical conducts. This sends a positive message to other employees;
ii. Creation and communication of organisation‟s corporate codes of
ethics: Sending a clear message to employees about what the firm
sees as the organisation‟s ethical standard as reflected in its
documented corporate codes of ethics sends a positive signal;
iii. Ethical training programmes: Organising training programmes for
employees on ethical behaviour sends a strong positive signal that
will raise the ethical standard of the organisation;
iv. Reinforcing Ethical behaviour: This could be achieved through the
inclusion of ethical behaviour in the employee appraisal process. Also,
employees who imbibe high ethical standard should be openly
rewarded and those who fall below expectation sanctioned; and
v. Whistleblowing: Firms should encourage employees to report
unethical behaviour and protect those who make such reports.
Examiner’s report
This question on Ethics tests:

Connection between organisational culture and ethical behaviour; Application of
Johnson and Scholes Cultural Web to organisational culture; and
Creation of organisational culture to support ethical behaviour by employees.
Only a few candidates attempted this question. Performance was poor, as many
candidates did not know how to create organisational culture to support ethical
behaviour by employees.
Candidates and trainers should develop skills to apply principles and concepts to
situations.
Marking guide
points point
a. Connection between ethical 2 3 6
behaviour and
organisational culture
b. Johnson and Scholes‟ 5 2 10
cultural web
c. Steps involved in creating 4 1 4
corporate culture that
supports ethical behaviour
Total 20
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SOLUTION 4
a. The meaning of virtual organisation should have the following defining

points:
i. Virtual organisations, also known as digital organisations, network
organisation or modular organisations are boundary less
organisations with no identifiable physical existence;
ii. It consists of individuals working from physically dispersed
workplaces
iii. Virtual organisations are driven by information and communication
Technology (ICT) infrastructure such as mobile devices and the
internet;
iv. Such organisation might not actually have any employees; and
v. The ICT is the backbone of virtual organisations.
Characteristics of virtual organisations are:

i. Flat organisation structure such as matrix structure;
ii. Dynamic and flexible to changes in the business environment;
iii. Communication between members is mostly informal;
iv. Makes possible people from various backgrounds and discipline to
work together in multidisciplinary virtual teams;
v. Vague organisational boundaries;
vi. Work from Home (WFH); and
vii. Customers/clients-focused.
b. Advantages of virtual organisation are:

i. saves time;
ii. It reduces travel expenses;
iii. It eliminates lack of access to needed experts;
iv. Makes it possible to form virtual teams regardless of the location and
proximity of each member;
v. Allows dynamic team membership which makes it possible for
individuals to work in different teams, in some cases simultaneously;
vi. Employees can be assigned to multiple concurrent teams;
vii. Effective communication among team members through
viii. Facilitates Work-Life Balance; and
ix. Makes it possible to hire needed talents, regardless of their location or
even country of residence.
Disadvantages of virtual organisation are:

i. Lack of physical interaction can cause loss of synergy that comes with
face-to-face interaction;
ii. Lack of verbal and non-verbal cues could hamper effective
communication;
iii. Limited room for informal interactions that physically working
together brings;
133
iv. Could lead to security and regulatory breaches; and
v. Could lead to reputational risk arising from lack of physical presence.
Examiner’s report
This Strategic Management question tests meaning, characteristics, and
advantages and disadvantages of virtual organisations.
About 80% of the candidates attempted this question. Performance was above
average. However, some candidates could not fully state the characteristics of a
virtual organisation.
Candidates are enjoined to ensure that they fully comprehend all aspects of the
syllabus.
Marking guide

points point
a Definitions of virtual
organisations 5 1 5
characteristics of virtual
organisations 5 1 5
b Advantages 6 1 6
Disadvantages of virtual
organisations 4 1 4
Total 20
SOLUTION 5
a. The influence of corporate governance disclosure on firm performance is made

apparent from the angle of its importance to companies. This includes:
i. Transparency: Corporate governance disclosure ensures transparency.
Improved transparency enables investors to make more informed
decisions, thus reducing the possibility of misuse or manipulation of
investors‟ funds.
ii. Prevention of financial and economic crises: With adequate disclosure,
better and more informed decisions are made. Also, the incidence of
malpractice among board members and other stakeholders within the
firm is reduced. Notable firms such as Enron went into crisis due to
inadequate corporate governance disclosures.
iii. Elimination of insider trading and window dressing: Full disclosure
prevents those with privileged information from misusing it for
personal gains. It also prevents the incidence of window dressing and
manipulation of accounts.
134
iv. Allows investors to make informed decisions: Sentiments about mistrust
and speculation by investors are reduced, leading to improved investor
confidence. This will contribute positively to the success of the firm‟s
growth strategy through access to needed funds from the financial
market.
v. Reduction of market volatility: One of the causes of volatility in the
financial market is lack of transparency. With adequate corporate
governance disclosures, market uncertainties are reduced.
vi. Corporate governance disclosure could enhance firm reputation which,
in turn, will enhance its performance. Inadequate corporate governance
disclosure can impinge negatively on the company‟s integrity which
could adversely affect performance.
vii. Improved disclosure enables shareholders to exercise their ownership
rights thus enhancing firm performance monitoring.
viii. Lack of transparency on application of environmental and ethical
standards could give the public a wrong impression of the firm‟s
operations.
ix. It serves as a deterrent to fraud and corruption.
b.
i. Reliability. Reliable information is information that is sufficiently
accurate for investors to trust when making their investment decisions.
ii. Understandability. One of the criticisms of International Financial
Reporting Standards (IFRSs) is that financial reporting in accordance
with IFRSs can be very complex, and some investors might not properly
understand the information that they provide. Many investors support
the idea that companies should provide information about themselves
in a narrative form, in addition to providing financial statements.
iii. Timeliness. In the financial markets, „timely‟ often means „communicated
as soon as possible‟. Information should be made available to all
investors as soon as possible after it becomes available.
iv. Availability. When information is disclosed by companies, it should be
equally available to all investors.
v. Divulged through Convenient Channels. Information should be made
available by convenient channels of communication. Companies should
be encouraged to make it available in electronic form to investors who
want to receive it in that form. For example, companies should use their
web sites for making disclosures.
vi. The opportunities for exploiting confidential information to make a
personal profit should be minimised. By making information available
to investors quickly, opportunities for insider dealing would be
reduced.
135
Examiner’s report
This Corporates Governance question on how corporate governance disclosure
enhances performance, and principles of disclosure and communication of
corporate governance.
Very few candidates attempted this question. Performance was below average.
A number candidates could not link corporate governance disclosure with firm
performance, thus losing valuable marks.
Candidates are advised to study well all aspects of the syllabus when preparing for
future examination.
Marking Guide
points point
a. Impact of corporate
governance disclosure on firm
performance 5 2 10
b. Principles of disclosure and
communication of corporate
governance statement 5 1 5
Total 15
136
SOLUTION 6
N Maturity Phase
Introduction Growth Phase
Phase
Decline Phase
Time
a. Stages of consumer goods in the product lifecycle are:
i. Introduction phase. During this phase:

 There is some demand, but total sales are low;
 Firms that make and sell the product incur investmentcosts;
 Start-up costs and running costs are high; and
 The product isnot yet profitable.
ii. Growth phase. During the growth phase:

 Total sales demand in the market grows at a faster rate than
the introduction phase.
 New entrants are attracted into the market by the prospects of
high sales and profits.
 At an early stage during the growth phase, companies in the
market begin to earn profits.
iii. Maturity phase. During the maturity phase:
 Total annual sales remain stable;

 Prices and profits stabilise;
 The opportunity for more growth no longer exists, although the
life of the product might be extended, through product
updates.
 More companies might seek to improve profits by
differentiating their products more from those of competitors
and selling to a „niche‟ market segment.
137
iv. Decline phase. Eventually:
 Total annual sales in the market will start to fall;
 As sales fall, so too do profits;
 Companies gradually leave the market; and
 At some point in time, it is no longer possible to produce and
sell the product at a profit, and the product is therefore
discontinued by the last of the companies that makes it.
b. From the given scenario, Mountain milk is likely to be at the growth stage of
the product lifecycle. This is because
i. It is currently in a high growth market with a market growth rate of
10%; and
ii. Huge profit is currently being made from the sale of mountain milk
c. Using the marketing mix, the following are strategies that can be adopted to
improve the market performance of Mountain milk:
i. Product: This refers to the features of a product and its quality. During
the growth stage, new flavours and varieties of Mountain milk can be
introduced to satisfy the needs of various categories of customers. For
example, the introduction of low-fat milk for health-conscious
customers. Also, product quality should be maintained and possibly
improved upon;
ii. Price: This is the selling price of the product. Effort must be made to
ensure that product prices are competitive, relative to that of
competing products. The producers must of Mountain milk must be
careful not to raise prices too high above those of competitors;
iii. Place: The channel through which the product gets to customers. The
producers of Mountain milk might consider innovative channels such
as door-to-door distribution and online marketing to maintain and
improve market share; and
iv. Promotion: The way in which products are advertised and promoted.
At the growth stage of the product lifecycle, manufacturers of
Mountain milk should continue investing in brand building and
aggressive advertisement and publicity to maintain and increase the
product‟s market share.
138
Examiner’s report
This is a Strategic Management question which tests application of product
life cycle to place a product and using a marketing mix to develop a
marketing strategy.
More than 90% of the candidates attempted this question and performance
was good.
The few candidates who performed poorly mixed up the features of the
various phase of the product lfe cycle, and some could not identify the phase
of the product on the product life cycle.
Candidates are advised to prepare well for future examinations.
Marking guide

points point
a. Stages of product life cycle of
consumer goods 4 1 4
b. Current stages of Mountain
Milk in the product life cycle 3 1 3
c. Appropriate marketing strategy
using the marketing mix 4 2 8
Total 15
SOLUTION 7
a. Andrew should embark on whistle blowing.

Whistleblowing means reporting suspicion of illegal or improper behaviour to
a person in authority. Oftentimes, the regular reporting lines must be ignored
to reach the person in authority.
b. Andrew should consider the following before embarking on the whistle

blowing exercise:
i. Are all the facts correct? Could he have misunderstood the overriding
commission? Or has Andrew drawn a wrong conclusion about it?
ii. Is there sufficient evidence for blowing the whistle?
iii. Double check the facts of the situation without emotions;
iv. Consider discussing the matter with an independent confidential third
party such as professional help line;
139
v. Think about the impact that blowing the whistle may have on the
whistle blower‟s career;
vi. Will the result of being victimised or bullied outweigh the benefit of
blowing the whistle?
vii. Double check Teller Bank‟s policy and whistle blowing procedures in
the staff manual. Andrew should ensure he follows the process, if any;
viii. Establish whether there is scope to discuss the matter confidentially
with the Human Resources Department of Teller Bank;
ix. Is there an internal audit department which could be made aware of
the issue and take ownership of the findings and follow it up?
x. Consider if there is a legal or professional obligation to report, such as
NOCLAR.
c. Based on the scenario I advise that Andrew should embark on his planned
action because:
i. The payment of over-riding commission without the knowledge of OTC is
unethical and illegal;
ii. Andrew has a professional obligation under the ICAN code of

professional conduct to report such illegal activities to appropriate
authorities; and
iii. Payment of over-riding commission in this context, is an unfair

competitive practice.
Examiner’s report
This scenario-based question is on whistleblowing procedure.
More than 80% of the candidates attempted this question. General performance was
below average.
Most of the candidates were able to identify the concept as whistleblowing, but
many could not state the steps to take in whistleblowing. These steps are important
to protect the whistle-blower in societies rife with corruption.
Whistleblowing is an important ethical concept in societies fighting corruption, so

all budding accountants should be well grounded in it.
``
Marking guide
points point
a Identification and
definition of
whistleblowing 1 2 2
b Factors to be considering
before whistleblowing 9 1 9
c Whether whistleblowing is
the appropriate option 4 1 4
Total 15
140
TAXATION
programmable devices, wristwatches or any form of written material on you in
the examination hall. You will be stopped from continuing with the
examination and liable to further disciplinary actions including cancellation of
examination result if caught.

number.
7. All solutions should be written in BLUE or BLACK INK. Any solution written in
PENCIL or RED INK will not be marked.
8. Tax and Capital Allowances rates are provided with this examination paper.
TUESDAY, NOVEMBER 15, 2022
141
TAXATION

QUESTION 1
AbdulRamon Limited is an agricultural company which commenced business on

February 1, 2020. It is engaged in plantations, cattle ranching and poultry
business, and prepares its financial statements to October 31 of every year. Its
recent financial statements showed the following results:
Period/year ended October 31 2020 2021

Revenue: N’000 N’000
Plantation crops - 36,000
Cattle ranching proceeds 29,000 42,000
Poultry (sale of eggs and spent layers) 21,000 39,000
Gross revenue 50,000 117,000
Deduct:
Deduct: expenses:
Preliminary expenses 132 132
Purchases: Cockerels 8,000 12,000
Animal feeds 6,000 7,500
Wages and salaries 2,000 4,200
Depreciation 492 900
Office rent 360 0
Drugs and vaccines for animals 120 130
Interest on bank loan 580 650
General expenses 62 75
Increase in closing inventories (animals and crops) for
resale (400) (600)
Net profit 32,654 92,013
Other information:
Preliminary expenses amounted to N1,0526,000 and it is to be written off in equal
amounts over a period of eight assessment years, commencing from the period
ended October 31, 2020.
142
The break-down of the preliminary expenses is as follows:
N
(i.) Stamp duties and registration expenses 108,400
(ii.) Cost of initial clearing and cultivation of land for plantation 70,000
(iii.) Gratification to local chiefs and heads of families, so as to
attract labourers to the farm 500,000
(iv.) Cost of labour and technical expertise on the first planting

operation on plantations 56,060
(v.) Cost of nursery plant purchased from Federal Ministry of
Agriculture 191,540
(vi.) Cost of nursery plant from the Institute of Agricultural Research
and Training (IART) 130,000
1,056,000
The following details were extracted from the company‟s register of property, plant
and equipment:
Description Cost (N) Date of purchase

Motor vehicle 2,040,500 February 2, 2020
Office furniture 355,000 February 2, 2020
Agric tractor 1,037,000 November 7, 2021
Equipment used in spraying plantation 70,000 December 1, 2020
Building (administrative block) 2,081,000 January 9, 2021
There was no disposal of any asset within the period.
You are required to compute:
a. The capital allowances for the relevant assessment years. (10 Marks)
b. The adjusted profits for the relevant assessment years. (10 Marks)
c. The income tax liabilities for the relevant assessment years. (10 Marks)
(Total 30 Marks)
143

QUESTION 2
a. Mr. Zakari incorporated Zaki Limited on October 1, 2016, but the company
did not commence business until March 2017. The company prepares its
audited financial statements to February 28, every year. However, due to
disruption of business activities arising from the COVID-19 pandemic, the
company ceased business on April 30, 2020.
The adjusted profits for the relevant years are as follows:

N
Year ended February 28, 2019 20,000,000
Year ended February 28, 2020 5,000,000
Period ended April 30, 2020. 100,000
Required:
Given the provisions of the Finance Acts 2019 and 2020, determine the:
i. Basis periods for the relevant years of assessment. (9 Marks)

ii. Assessable profits for the relevant years of assessment. (3 Marks)
b. Stamp duties had been one of the underutilised sources of revenue for the
Nigerian Government until the recent amendments introduced by the
Finance Act 2019 which expanded the scope of dutiable instruments.
Required:
i. List FIVE each of chargeable transactions under:
 Ad-valorem instruments
 Fixed duty investments (5 Marks)
ii. List THREE instruments exempted from stamp duties? (3 Marks)
(Total 20 Marks)
144
QUESTION 3
The Federal Government is committed to diversifying the sources of government
revenues by significantly increasing tax to gross domestic product (GDP) ratio,
among other things. The attainment of this laudable objective will require an
overhaul of the government‟s tax policy which is a key function of the Ministry of
Finance.
Nigerian tax system, like any tax system, is a tripartite structure which comprises
the tax policy, tax laws and tax administration.
Required:
a. Explain FIVE specific objectives the National tax policy is designed to
achieve. (5 Marks)
b. Explain the following terminologies:
i. Tax policy (5 Marks)

ii. Tax laws (5 Marks)
iii. Tax administration (5 Marks)
(Total 20 Marks)
QUESTION 4
Capital allowance can be defined as a relief that is claimable by a taxpayer who

incurs qualifying capital expenditure (QCE) during a basis period in respect of
assets in use for the purpose of trade or business at the end of the basis period. It is
granted in lieu of depreciation charged which is treated as non-allowable expense
for tax purposes.
Required:
a. Explain THREE types of capital allowances claimable by a taxpayer.
(6 Marks)
b. Big City Enterprises Limited is a trading company located in Lokoja, Kogi
State of Nigeria. It commenced trading on January 1, 2020 and makes up its
accounts to June 30, every year.
145
For tax purposes, the adjusted profits of its first two years of operation are as
follows:
₦’000
January 1, 2020 to June 30, 2020 8,500
July 1, 2020 to June 30, 2021 22,400
It acquired property, plant and equipment as follows:

₦‟000
Date Assets purchased Cost
January 2, 2020 Motor vehicle 8,400
April 1, 2020 Office equipment 2,300
September 7, 2020 Furniture and fittings 1,200
The company achieved a revenue of N26,000,000 for the first six months after
commencement of business. Due to favourable business climate, its revenue
increased to N102,000,000 in the year ended June 30, 2021.
Required:
i. Determine the basis periods for assessment and capital allowances.
(4 Marks)
ii. Compute the income tax payable for the relevant assessment years.
(ignore minimum tax computation). (8 Marks)
iii. Explain the meaning of “in use” in relation to the second schedule of
Companies Income Tax on Capital Allowance. (2 Marks)
(Total 20 Marks)

THE THREE QUESTIONS IN THIS SECTION
QUESTION 5
a. E-commerce presents a major challenge for tax administrators, given the often
multi-jurisdictional nature of the transactions and the potential anonymity of
the parties.
It is, therefore, crucial to give the subject a critical examination through the
lenses of relevant statutes.
146
Most often, the terms “e-business and “e-commerce” are used intercheageably,
however, they are not synonymous.
Required:
Explain FIVE differences between “e-commerce and “e-business. (5 Marks)
b. The law requires all taxpayers to obtain taxpayers identification number (TIN)
which shall be dislayed on all documents by the taxpayer in all business
transactions with other companies, individuals, government and government
agencies. This number shall be used for the purpose of filing tax returns.
You are required to:

i. State the major objectives of taxpayers identification number (TIN)?
(5 Marks)
ii. State the list of items required to be contained in the returns to be filed
by companies with the Federal Inland Revenue Service (FIRS). (5 Marks)
(Total 15 Marks)
QUESTION 6
Personal income tax is imposed on individuals who are in employment, self-

employment, partnerships, etc. In Nigeria, the taxation of individuals is guided by
the provisions of Personal Income Tax Act Cap P8 LFN 2004 (as amended).
Required:
a. Explain “employment”, “vocation” and “profession”. (6 Marks)
b. Explain “cash emoluments” and “benefits-in-kind”. (2 Marks)
c. Explain THREE general rules for quantifying “benefits-in-kind” in respect of:
i. Use of assets, owned, acquired, rented or hired by the employer

(3 Marks)
ii. Provision of residential accommodation by the employer (2 Marks)
iii. Provision of domestic staff by an employer (2 Marks)
(Total 15 Marks)
QUESTION 7
Withholding tax is a tax deducted from the payments made to a taxable person
pending the determination of the final tax liability.
It has enabled the government to keep track of incomes of taxpayers from whom
withholding tax has been deducted. The credit notes issued to taxpayers by the
Revenue have been useful in defraying the total tax liability.
147
a. What levels of government are the ultimate beneficiaries of withholding tax?
(3 Marks)
b. State FIVE items in the withholding tax returns/payment schedule. (5 Marks)
c. What are the penalties for late remittance and non deduction of withholding
tax from payments due to taxpayers? (3 Marks)
d. In which currency is withholding tax deducted paid over to the Revenue and
what is the role of the Central Bank of Nigeria in the process? (4 Marks)
(Total 15 Marks)
148
NIGERIAN TAX RATES
1. CAPITAL ALLOWANCES
Initial % Annual %
Building Expenditure 15 10
Industrial Building Expenditure 15 10
Mining Expenditure 95 Nil
Plant Expenditure (excluding Furniture & Fittings) 50 25
Manufacturing Industrial Plant Expenditure 50 25
Construction Plant expenditure (excluding Furniture
and Fittings) 50 Nil
Public Transportation Motor Vehicle 95 Nil
Ranching and Plantation Expenditure 30 50
Plantation Equipment Expenditure 95 Nil
Research and Development Expenditure 95 Nil
Housing Estate Expenditure 50 25
Motor Vehicle Expenditure 50 25
Agricultural Plant Expenditure 95 Nil
Furniture and Fittings Expenditure 25 20
2. INVESTMENT ALLOWANCE 10%
3. RATES OF PERSONAL INCOME TAX
Graduated tax rates and consolidated relief allowance of N200,000 or 1% of
Gross Income, whichever is higher + 20% of Gross Income.
Taxable Rate of Tax
Income (N) (%)
First 300,000 7
Next 300,000 11
Next 500,000 15
Next 500,000 19
Next 1,600,000 21
Over 3,200,000 24
After the relief allowance and exemption had been granted, the balance of
income shall be taxed as specified in the tax table above.
4. COMPANIES INCOME TAX RATE 30%; 2% or 0%
5. TERTIARY EDUCATION TAX (2.5% of Assessable Profit)
6. CAPITAL GAINS TAX 10%
7. VALUE ADDED TAX 7.5%
8. HYDROCARBON TAX 15% (Petroleum prospecting
License and Marginal Fields
Companies)
30% (Petroleum Mining Lease
Companies)
149
SOLUTION 1 BASED ON OCTOBER 31, YEAR END
(a) AbdulRaman Limited
Computation of capital allowances
Motor Office Ranching and Plantation Building Total

vehicle furniture plantation equipment
expenditure
Initial allowance 50 25 30 95 15
Annual allowance 25 20 50 - 10
N N N N N N
Assessment year 2021
(9 months)
Cost 2,040,500 355,000 447,600 - 2,843,100
Initial allowance (1,020,250) (88,750) (134,280) - 1,243,280
Annual allowance (191,297) (39,938) (117,495) - 348,730
1,592,010
W.D.V. c/f to A.Y 2022 828,953 226,312 195,825 - -

Cost - - - 70,000 2,081,000 2,151,000
Initial allowance - - - - (66,500) (312,150) 378,650
Annual allowance
- Old asset (255,063) (53,250) (156,660) - - 464,973
- New asset - - - - (176,885) 176,885
- 1,020,508
W.D.V. c/f to A.Y 2023 573,890 173,062 39,165 3,500 1,591,965
Cost - - - 1,037,000 - 1,037,000
Initial allowance - - - (985,150) - 985,150

Annual allowance
- Old asset (255,063) (53,250) - - (176,885) 485,198
- New asset - - - - - -
1,470,348
________ ________ _______ ______ __________
W.D.V c/f to AY 2024 318,827 119,812 39,165 55.350 1,415,080
150
Notes:
i. Based on the provisions of Finance Act, 2019, there would not be any gap or
overlapping period anymore, except for transitional purposes only.
ii. Certain expenses included in preliminary expenses have been capitalised as
qualifying capital expenditure (plantation) in accordance with the provisions of para
(1) of Schedule 2 of CITA (as amended).
The capitalised costs consist:
N
- Cost of initial clearing and cultivation 70,000
- Cost of labour and technical expertise on the first planting 56,060
- Cost of nursery plant from Federal Ministry of Agriculture 191,540
- Cost of nursery plant from IART 130,000
447,600
iii. Stamp duties and registration expenses have been disallowed as they are incurred in
bringing the company into existence and not for the purpose of producing the profits
assessable to tax.
iv. Gratification to local chiefs and heads of families have been disallowed because the
expenditure was not incurred wholly and exclusively for the purpose of providing the
company‟s profit or loss.
v. There would be no restriction in capital allowances to be claimed in any period because
companies in agricultural production are exempted from such restriction.
(b) Computation of adjusted profits

For 2021 and 2022 assessment years
2021 2022
N N
Net profit for accounts 32,654,000 92,013,000
Add: Disallowable expenses:
- Preliminary expenses 132,000 132,000
- Depreciation 492,000 900,000
Adjusted profit 33,278,000 93,045,000
151
(c) Computation of income tax liabilities
For 2021 and 2022 assessment years
Assessment year 2021 (1/2/2020 – 30/10/2020)

N
Adjusted profit 33,278.000
Capital allowances (1,592,010)
Total profit 31,685,990
Companies income tax (20% of total profit) 6,337,198
Tertiary education tax (2% of assessable profit) 665,560
Assessment year 2022 (1/11/2020 – 31/10/2021)

Adjusted profit 93,045,000
Capital allowances (1,020,508)
Companies income tax (30% of total profit) = 27,607,347.60
Tertiary education tax (2% of assessable profit) 1,860,900
Workings
(i) Determination of basis period (BP) based on Finance Act, 2019
YOA B.P for assessments B.P for capital allowances
2021 1/2/2020 – 31/10/2020 1/2/2020 – 31/10/2020
2022 1/11/2020 – 31/10/2021 1/11/2020 – 31/10/2021
2023 1/11/2021 – 31/10/2022 1/11/2021 – 31/10/2022
Examiner’s report
The question tests candidates‟ knowledge of the taxation of agricultural companies,
taking into consideration the relevant provisions of Finance Acts 2019, 2020 and
2021.
This being a compulsory question, about 100% of the candidates attempted the
question. The performance of the candidates was poor.
The commonest pitfalls of the candidates were their inability to capitalise some of
the preoperational expenses in line with the provisions paragraph 1 of Schedule 2
of CITA (as amended). Additionally, some them could not prorate the initial
allowance and were unable to identify the relevant basis periods.
152
Candidates are advised to read widely and be conversant with the provisions of the
Finance Acts and other relevant tax laws before sitting for subsequent examinations
to enhance better performance.
Making guide
QUESTION 1 BASED ON OCTOBER 31 YEAR END Marks Marks

a. Computation of capital allowance
Heading ½
Cost (3 ticks @ ½ mark each) 1½
Initial allowance (3 ticks @ ½ mark each) 1½
Annual allowance (3 ticks @ ½ mark each) 1½
Total capital allowance (1 tick) ¼

Cost (2 ticks @ ¼ mark each) ½
Initial allowance (2 ticks @ ¼ mark each) ½
Annual allowance:
- Old asset (3 ticks @ ¼ mark each) ¾
- New asset (1 tick @ ½ mark each) ½
Total capital allowance (1 tick) ¼

Cost (1 tick) ½
Initial allowance (1 tick) ½
Annual allowance:
- Old asset (3 ticks @ ¼ mark each) ¾
- New asset (1 tick) ¼
Total capital allowance ¼ 10
b. Computation of adjusted profits for relevant assessment years

Heading 1
Net profit per accounts 1
- Preliminary expenses 1
- Depreciation 1
Adjusted profit 1½

Net profit per accounts 1
- Preliminary expenses 1
- Depreciation 1
- Adjusted profit 1½ 10
153
c. Computation of income tax liabilities for relevant assessment
Years
Heading 1
Assessment year 2021 1
Adjusted profit 1
Capital allowances 1
Total profit ½
Companies income tax (20% of total profit) ½
Tertiary education tax (2% of assessable profit) ½
Assessment year 2022 1

Adjusted profit 1
Capital allowances 1
Total profit ½
Companies income tax (30% of total profit) ½
Tertiary education tax (2% of assessable profit) ½ 10
Total 30
SOLUTION 2
a. Zaki Limited
(i) Computation of basis periods
Year Basis period
2019 1/3/2017 - 28/2/2018
2020 1/3/2018 - 28/2/2019
2021 1/3/2019 - 28/2/2020
2021(Cessation) 1/3/2020 - 30/4/2020
(ii) Computation of assessable profits

Year Basis period Assessable Profit
N
2020 1/5/2018 – 28/02/2019 20,000,000
2021 1/3/2019 – 28/02/2020 5,000,000
2021 1/3/2020 – 30/4/2020 100,000
Note: If the company had ceased business on any date from July 1, 2020 to
December 31, 2020, the year of cessation would have been 2022
assessment year.
b. (i) The two forms of stamp duties are:

 Ad-valorem
These are duties that vary with the amount of consideration and are in
accordance with a scale prescribed by the Act. The Commissioner of
Stamp Duties or adjudicator will need to know the amount involved in
154
the transaction. This will enable him determine the appropriate duty
to be paid.
Examples of instruments that are assessed based on ad-valorem basis

are:
 Deed of assignment;
 Sales agreement;
 Tenancy or lease agreement;
 Insurance policies;
 Contract agreements;
 Vending agreement;
 Charter-party;
 Contract notes;
 Legal mortgage and debenture loans;
 Share capital of companies; and
 Promissory notes.
 Fixed duties
These are duties that do not vary with the consideration for the
document being stamped.
Examples of instruments assessed by fixed duties are:

 Power of Attorney (POA);
 Certificate of occupancy (C of O);
 Appointment of receiver;
 Memorandum of understanding (MOU);
 Joint venture agreements (JVA);
 Ordinary agreements and receipts;
 Guarantor forms; and
 Proxy form.
(ii) Instruments exempted
Instruments that are specifically exempted are as follows:
 Those relating to agreements between the Federal Government and
other foreign governments;
 Instruments relating to reconstruction and amalgamation; subject to
specified condition under section 104(1) of the Act;
 Transactions and sales of properties of a company under liquidation
arising from a compulsory winding up by a court or creditors‟
voluntary winding up;
 Based on Central Bank circular number CBN/GEN/DMB/02/006 dated
January 15, 2016, titled “Currency and Remittance of Statutory
Charges or Receipts to Nigerian Postal Service under the Stamp Duties
Act”, the following transactions are exempted from stamp duties:
Transactions relating to savings accounts holders, salary
accounts or students savings accounts;
155
Payments and deposits for self to self-transactions whether
inter or intra-bank; and
Payments for goods supplied or services rendered if the
amount is under N1,000, payment of salaries or wages,
pensions, gratuities, etc;
 Section 56 of the Finance Act, 2019, exempts the following “exempt

receipts” and “general exemptions” from stamp duties;
Exempt receipts
 Receipts given by any person in a regulated securities
lending transaction carried out under regulations issued
by the Securities and Exchange Commission
General exemptions which include the following:

 Shares, stocks or securities transferred by a lender to its
approved agent or a borrower in furtherance of a
regulated securities lending transactions;
 Shares stocks or securities returned to a lender or its
Approved agent by a borrower in pursuant to a
regulated securities lending transaction; and
 All document relating to a regulating transactions
carried Out under regulations issued by the Securities
and Exchange Commission; and
 Share transfer based on FIRS information circular on
“clarifications on the provisions of the Stamp Duties Act”
No: 2020/05 dated April 29, 2020.
Examiner’s report
The question tests candidates‟ knowledge of computations of assessable
profits of a company in cessation, chargeable transactions subject to ad-
valorem and fixed duties, and instruments exempted from stamp duties.
About 50% of the candidates attempted the question and the performance
was poor.
The commonest pitfalls of the candidates were their inability to ascertain the
relevant basis periods for a company in cessation and were also unable to
state the instruments that are exempted from stamp duties.
Candidates are advised to pay attention to the amendments to tax laws and
effects on tax computations in their preparations for future examinations.
156
Marking guide
a (i) Computation of basis periods for the relevant years of Marks Marks
Assessment
Heading (2 ticks @1/2 mark each) 1
Year 1
Basis period 1
Year 1
Basis period 1

Year 1
Basis period 1
Assessment year 2021 (ceasation)

Year 1
Basis period 1 9
(ii) Computation of assessable profits for the relevant years of

Assessment
Basis period ½
Assessable profit ½

Basis period ½
Assessable profit ½
Assessment year 2021 (ceasation)

Basis period ½
Assessable profit ½ 3
b i. Ad-valorem instruments
(½ mark for any correct transaction subject to a maximum of 5
points) 2½
Fixed duty instruments
(½ mark for any correct transaction subject to a maximum of 5
points) 2½ 5
ii. Instruments exempted from stamp duties

(1 mark for each correct instrument subject to a maximum of 3
points) 3
Total 20
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SOLUTION 3
a. Objectives of the NTP

The National tax policy provides the fundamental guidelines for the
orderly development of the Nigerian tax system. The policy is expected to
achieve the following specific objectives, among others:
(i) Guide the operation and review of the tax system;
(ii) Provide the basis for future tax legislations and administration;
(iii) Serve as a point of reference for all stakeholders on taxation;
(iv) Provide benchmark on which stakeholders shall be held accountable;

and
(v) Provide clarity on the roles and responsibilities of stakeholders in the
tax system.
b. The tax system usually involves a tripartite aspect, namely the tax policy, tax
laws, and tax administration.
i. Tax policy
The tax policies are general statements of intention, which guide
the thinking and the action of all concerned towards the
realisation of the set goals. They usually include:
 Movement of emphasis from income tax to consumption tax that
is less prone to tax evasion;
 Pursuance of a tax law regime with the aim of reducing Individual
tax burden, widening the tax net and encouraging savings and
investments; and
 Introduction of the self-assessment scheme to encourage
taxpayer participation in the tax assessment process, which is
considered to be realistic in approach. The policy can also include
movement from coercive method of taxation to voluntary
compliance as in the case of Nigeria in recent time.
ii. Tax laws

The tax laws include the following notable tax legislations in Nigeria:
 Personal Income Tax Act Cap. P8 LFN 2004;
 Companies Income Tax Act Cap. C21 LFN 2004 (as amended);
 Petroleum Industry Act 2021;
 Capital Gains Tax Act Cap. C1 LFN 2004 (as amended);
 Value Added Tax Act Cap. V1 LFN 2004 (as amended);
 Education Tax Act Cap. E4 LFN 2004(as amended);and
 Stamp Duties Act Cap. S8 LFN 2004.
158
In Nigeria, the Constitution vests the legislation of income tax,
whether personal or corporate on the Federal Government in order
to promote uniformity. However, the three tiers of government
share the administration of the various taxes. Tax laws are
reviewed periodically in line with the changes in social, political
and economic conditions of the country.
The power to impose tax in Nigeria is within the exclusive
legislative authority of the Federal Government. There are
various machineries set up by the government to ensure strict
compliance of these laws; non-compliance attracts penalties and
fines.
iii. Tax administration

This involves practical interpretation and application of the tax
laws. The bodies charged with the administration of tax in Nigeria
are the Federal, State and Local governments. The tax authorities
of these tiers of government derive their formation from the
relevant laws which include:
 The Federal Inland Revenue Service (FIRS), sections 1, 2,

and 3 of the Federal Inland Revenue Establishment Act
(FIRSEA) 2007;
 The State Internal Revenue Service (SIRS), sections 87 of
Personal Income Tax Act Cap P8 LFN 2004 (as amended); and
 The Local Government Revenue Committee, section 90 of
Personal Income Tax Act Cap P8 LFN 2004 (as amended).
Examiner’s report
The question tests candidates‟ knowledge of the specific objectives of the National
tax policy (NTP) 2017, and the tripartite structure of the Nigerian tax system.
About 90% of the candidates attempted the question but the performance was
average.
The commonest pitfall of the candidates was their inability to explain the specific
objectives of the National tax policy (NTP) 2017.
Candidates are advised to familiarise themselves with the provisions of the National
tax policy (NTP) 2017 and also read ICAN Pathfinders and Study Text in their
preparations for subsequent examinations.
159
Marking guide
a. Specific objectives the National tax policy is designed to achieve Marks Marks
(1 mark for each objective subject to a maximum of 5 points) 5
bi. Explanation of tax policy

General statements of intention 1
Guide towards realisation of set goals 1
Any 3 examples 3 5
ii. Explanation of tax laws

(1 mark for each tax law mentioned subject to a maximum of
5points) 5
iii. Explanation of tax administration:

Involves practical interpretation and application of the tax laws 2
3 bodies charged with the administration 3 5
Total 20
SOLUTION 4
a. Types of capital allowances are:

(i) Initial allowance (IA)
This is a relief that is granted to a business that has incurred a
qualifying capital expenditure in the basis period of the year or in the
year the qualifying expenditure was incurred. Initial allowance is
granted to give an immediate relief from the huge expenditure
incurred by the business. Initial allowance has the following
attributes:
 It is claimable only once throughout the useful life of the asset;
 It is determined by applying initial allowance rate on asset‟s
cost; and
 Initial allowance is never prorated on account of the basis

period being less than twelve months. However, if the relevant
tax authority establishes that the asset has been put to private
use, the amount of initial allowance that will be allowed as a
deduction from profit shall be restricted to the proportion
attributable to the business use of the assets.
(ii) Annual allowance (AA)

This relief is granted annually on the residue of qualifying capital
expenditure incurred on the qualifying capital expenditure after
deducting initial allowance. Annual allowance has the following
attributes:
160
 It is granted annually over the useful life of the asset;
 It is determined by dividing the cost of the assets less initial
allowance over the assets useful life, taking into consideration the
specified rates;
 Annual allowance shall be prorated where the basis period of a
year of assessment is less than twelve months;
 Annual allowance is calculated on straight line basis; and
 A book value of N10 shall be deducted from annual allowance
claimable in the last year of the assets life and retained until the
asset is disposed off.
(iii) Investment allowance

This is an incentive granted to a business that incurred qualifying
capital expenditure on plant and machinery. Investment
allowance has the following features:
 It is granted only once in the life of the asset;

 It is granted only on plant and machinery; and
 It is granted at the rate of 10%;
 Initial allowance is never prorated on account of the basis period
being less than twelve months. However, if the relevant tax
authority establishes that the asset has been put to private use,
the amount of initial allowance that will be allowed as a
deduction from profit shall be restricted to the proportion
attributable to the business use of the assets; and
 It is never used in determining the tax written down value of the
asset. In other words, investment allowance does not impact the
tax written down value of the asset. However, it should be added
to other capital allowances i.e. IA and AA, and deducted from
assessable profit.
(iv) Balancing adjustments

These shall arise upon the disposal of a qualifying capital expenditure
in a year of assessment. The disposal may result in either:
 Balancing allowance
This is arrived at when the tax written down value of the
qualifying capital expenditure is greater than the sale proceeds
at the time of disposal. Balancing allowance shall be added to
other capital allowances that is IA and AA and deducted from
assessable profit; or
 Balancing charge
This is arrived at when the tax written down value of a
qualifying capital expenditure is less than the sale proceeds at
the time of disposal. Balancing charge being a gain shall be
161
added to assessable profit. However, since balancing charge is
a claw back of capital allowances previously enjoyed on the
disposal asset, the amount to be added back to profit shall not
exceed the relief previously enjoyed. Consequently, the excess
of balancing charge being capital gains shall be assessed
under the Capital Gains Tax Act.
(b) i. Big City Enterprises Limited

Determination of basis periods for assessment and capital allowances
Assessment Basis period Assessable Capital
Years profit allowances
N N
2021 1/1/2020 – 30/6/2020 8,500,000 Motor vehicle and
office equipment
2022 1/7/2020 – 30/6/2021 22,400,000 Furniture and
fittings
ii. Computation of income tax payable

Assessment year 2021 N N
Adjustment profit 8,500,000
Capital allowances (see workings) 6,018,750
But limited to 66 /3 of adjusted profit (5,666,667) (5,666,667)
2
Unutilised capital allowances c/f 352,083 _______

Companies income tax payable (20% of total profit) =
N566,666.60
Tertiary education tax payable (2% of assessable profit ) N 170,000.00
Adjusted profit 22,400,000
Capital allowances - b/f 352,083
- For the year 1,817,500 (2,169,583)
(See workings)
Companies income tax payable (30% of total profit) N 6,069,125.10
Tertiary education tax payable (2% of assessable profit) N448,000,00
162
Workings
Computation of capital allowances
Motor Office Furniture Total
vehicle equipment and fitting
Initial allowance (%) 50 50 25
Annual allowance (%) 25 25 20
N N N N
Cost 8,400,000 2,300,000 10,700,000
Initial allowance (4,200,000) (1,150,000) 5,350,000
Annual allowance (525,000) (143,750) 668,750
_________ 6,018,750
W.D.V c/f to A.Y. 2022 3,675,000 1,006,250

Cost 1,200,000
Initial allowance (300,000) 300,000
Annual allowance (1,050,000) (287,500) (180,000) 1,517,500
__________ ________ ________ 1,817,500
W.D.V c/f to A.Y. 2023 2,625,000 718,750 720,000
b. iii. An initial or an annual allowance in respect of qualifying expenditure

incurred in respect of any asset shall only be made to a company for
a year of assessment if at the end of its basis period for that year, it
was the owner of that asset and that asset was in use for the
purposes of a trade or businesses carried on by that company.
Examiner’s report
The question tests candidates‟ knowledge of commencement principles,
computation of capital allowances and explanation of “in use” in relation to capital
allowances, and computation of companies income tax payable.
About 75% of the candidates attempted the question but performance was fair.
The commonest pitfall of the candidates was their inability to identify the basis
periods for assessments and capital allowances. Also, they could not explain the
meaning of “in use” in relation to capital allowances.
Candidates are advised to read ICAN Study Text and Pathfinders when preparing
for subsequent examinations to ensure better performance in future.
163
Marking guide
a. Types of capital allowances Marks Marks
(1 mark for any correct capital allowance subject to a maximum
of 3 points) 3
(1 mark for explanation of a correct capital allowance subject to a
maximum of 3 points)
3 6
b i. Basis periods for assessment and capital allowances
Year 1
Basis period 1
Year 1
Basis period 1 4
ii. Computation of income tax payable
Year ¼
Adjusted profit ¼
Capital allowances ¼
Limited to 662/3 of adjusted profit ¼
Unutilised capital allowances c/f ¼
Total profit ½
Companies income tax payable (20% of total profit ½
Tertiary education tax payable (2% of assessable profit) ¼

Year ¼
Adjusted profit ¼
capital allowances - b/f ¼
- For the year ¼
Total profit ¼
Companies income tax payable (30% of total profit) ¼
Tertiary education tax payable (2% of assessable profit) ¼
164
Workings:
Year ¼
Cost (2 ticks @ ¼ each) ½
Initial allowance (2 ticks @ ¼ each) ½
Annual allowance (2 ticks @ ¼ each) ½
Capital allowance ¼
Assessment 2022
Year ¼
Cost ¼
Initial allowance ¼
Annual allowance(3 ticks @ ¼ each) ¾
Total allowance ¼ 8
iii. Meaning of “in use”

The asset was in use at the end of the basis period for that year 1
The asset was in use for the purposes of trade or business carried out
by the company 1 2
Total 20
SOLUTION 5
(a) Most often, the terms “e-business” and “e-commerce” are used
interchangeably; however, they are not synonymous. E-commerce refers to
buying and selling online, while e-business encompasses all business
conducted online. Therefore, e-commerce can be viewed as a subset of e-
business.
Below are the differences between e-commerce and e-business:

S/N E-commerce E- business
i. E-commerce involves commercial E- business is the conduct of business
transactions done over the process on the internet.
internet.
ii. E-commerce is use of electronic In addition, „e-business‟ also includes
transmission medium that caters the exchange of information directly
for buying and selling of related to buying and selling of
products and services. products.
iii. Activities that essentially involve This includes activities like
monetary transaction are termed procurement of raw materials or
“e-commerce”. goods, customer education, looking
for suppliers, etc.
iv. E-commerce usually requires the E-business involves the use of CRM‟s,
use of just a website. ERP‟s that connect different business
processes.
165
v. E-commerce involves the E-business could involve the use of
mandatory use of the internet. internet, intranet, or extranet.
vi. E-commerce is narrower concept E-business is a broader concept that
and restricted to buying and involves market surveying, supply
selling. chain and logistics management, and
using data mining.
(b) i. Objectives of tax identification number (TIN)
Tax identification number (TIN) is a unique nine-digit number allocated

to taxpayers with a view to identifying an individual, business or any
other entity in tax returns and other documents filed with the tax
authorities.
The major objectives of introducing TIN, as specified in Joint Tax Board

Bulletin 2011 include:
 Creating closer linkage between tax authorities in Nigeria;

 Aiding cooperation and information sharing amongst the tax
authorities; and
 Increasing revenue generation accruing to all tiers of the
government.
ii. Items to be contained in returns to be filed by companies to FIRS

Section 55 of the CITA, Cap C21, LFN 2004 (as amended) provides that
all companies (including businesses granted exemption from
incorporation) to at least once a year without notice or demand from
the Federal Inland Revenue Service (FIRS), file a return with the FIRS
in a prescribed form and containing prescribed information together
with the following documents:
 Audited financial statements;

 Income tax and capital allowance computation schedules;
 Completed copy of Companies Income Tax (Form IR3C-4Coy);
 Completed copy of Tertiary education tax (Form 4D EDT);
 Evidence of payment of companies income tax liability; and
 Evidence of payment of Tertiary education tax liability.
166
Examiner’s report
The question tests candidates‟ understanding of the taxation of “e-commerce” and
“e-business”.
About 55% of the candidates attempted the question but performance was poor.
The commonest pitfalls of the candidates were their inability to state the
differences between “e-commerce” and “e-business”. In addition to the foregoing,
some candidates could not state the objectives of taxpayers identification number
(TIN).
Candidates are advised to read widely before sitting for the Institute‟s
examinations.
Marking guide
Marks Marks
a. Differences between “e-commerce” and “e-business”
(1 mark for each explanation subject to a maximum of 10 points) 5
i. Objectives of tax identification number (TIN)

(1½ marks for each of the three major objectives stated) 4½
Identification of an individual taxpayer ½ 5
ii. Items required to be contained in returns filed by companies

with FIRS
(1 mark for each content subject to a maximum of 5 points) 5
Total 15
167
SOLUTION 6
(a) Employment
Employment is an agreement between an employer and an employee that
the employee will provide certain services on the job and in the employer‟s
designated workplace to facilitate the accomplishment of the employer
organisation‟s goals and mission, in return for compensation. The agreement
can be verbal, implied or an official employment contract.
In employment, the employer determines where, when, how, why and what
of the work that is performed by the employee. The degree of input,
autonomy and self-directedness that an employee experiences on a job is a
by-product of an employer‟s philosophy of management and employment.
Employment ends at the prerogative of the employer or the employee.
Vocation
A vocation is a specified business, occupation, profession, or trade to which a
person is specially drawn or for which he or she is suited, trained or
qualified. Vocation can either be an activity that serves as an individual‟s
regular source of livelihood or as an activity engaged in especially as a
means of passing time.
Profession
A profession refers to an occupation that requires specialized education,
knowledge, training and ethics. Although professionals make their living in
what they do, this paid work is often more than just a job or occupation
alone. Whether the occupation is law, medicine, plumbing, writing, interior
design or accounting, those who are in it are expected to meet and maintain
common standards.
Professions are, ideally, made up of people who should have high ethical
standards, special knowledge and skills. The responsibility of people in
certain occupations to the public is an important distinction from those who
may participate in the fields on an amateur or non-professional basis. For
example, if a home owner hires a non-licensed plumber to save money, he or
she wouldn‟t be able to hold this person to the same standards as a licensed
professional in the same industry.
168
(b) Cash emoluments
Cash emoluments are the remuneration that an employee receives from the
employer in cash.
Cash emoluments include salary, wages, fee, allowance or other gain or
profit from employment, including compensations, bonuses, premiums,
benefits, and share of profits received by an employee.
Benefits–in–kind (BIK)
Benefits-in-kind mean those expenses incurred by an employer in the
provision of benefits to the employee.
Such benefits often include: furnished living accommodation;

gardener/stewards (domestic servants), use of official car for private purposes
by employees; installation of air conditioners or generator in an employee‟s
residence, etc.
These benefits are regarded as part of the employee‟s taxable income if

these relate to services rendered by the employee.
Benefits-in-kind will also include such benefits which are usually provided to
the spouse, family, servant, dependent or guest of the employee.
(c) The following are the general rules for quantifying benefits-in-kind on
the use of assets, etc:
i. Use of assets owned acquired by the employer
The employee is deemed to have derived income equal to 5% of the

cost of assets if known or 5% of the market value at the date of
acquisition and where the cost is not known, to be determined by the
tax authorities.
Assets rented or hired by the employer
The employee is deemed to have derived an income equal to the

annual amount of the rent or hire expended by the employer on the
asset.
Where an employee has made any refund in respect of the asset

rented or hired by the employer for the employee‟s benefit, the
employee shall be deemed to have derived income equal to the
difference between the amount incurred by the employer and any
amount refunded by the employee.
169
ii. Provision of residential accommodation by the employer
If an employer provides residential accommodation for the benefit of

an employee anywhere in Nigeria and the employee pays no rent for
the premises, or pays a rent which is less than the annual value of the
premises, the employee is deemed to have derived income each year
equal to the annual rateable value of the premises less any rent paid
by the employee.
The annual rateable value of any premises is that value as determined

by the relevant tax authority for purposes of local rate.
iii. Provision of domestic staff by the employer
Where an employer engages the service of domestic staff (such as

driver, steward, washman, housemaid, gardener, etc.) for the
exclusive benefit of an employee, the cost incurred in form of salary
by the employer for the use of the domestic staff by the employee
shall be deemed as income in the hands of the employee and taxed
accordingly.
The income of a domestic staff shall only be deemed as income in the

hands of the employee only where the domestic staff is not a
permanent employee of the employer, that is, a contract staff.
Examiner’s report
The question tests the candidates‟ knowledge of the taxation of individuals with
emphases on explanations of “employment”, “vocation”, “profession”, “cash
emoluments”, and benefits-in- kind.
Over 80% of the candidates attempted the question but performance was average.
The commonest pitfall was the candidates‟ inability to explain the general rules for
quantifying “benefits-in-kind”.
Candidates are advised to read relevant study materials in order to perform well in
future examinations.
170
171
Marking guide
Marks Marks
a. Explanation of “employment”, “vocation” and “profession”
Employment
Employment is an agreement between an employer and an employee.
Agreement can be verbal, implied or an official employment contract.
The employer dictates the terms.
Employment ends at the prerogative of the employer or the employee
(1 mark for any correct point subject to a maximum of 2 points) 2
Vocation
Definition 1
Nature of vocation 1
Profession
Definition 1
Explanation 1 6
b. Explanation of “cash emoluments” and “benefits-in-kind”

Cash emoluments
Definition/explanation ½
Examples ½
Benefits-in-kind
Definition ½
Examples ½ 2
c. Rules for qualifying “benefits-in-kind”

i. Use of asset owned or acquired, by the employer
Employee‟s deemed derived income is equal to 5% of the cost of 1
asset or
5% if the market value at the date of requisition 1
Assets rented or hired by the employer

Employee‟s deemed derived income is equal to the amount of the
rent or hire expended by the employer, ½
Where the employee‟s makes a refund, the employee‟s deemed

derived income is equal to the difference between the amount
incurred by the employer and any amount refunded by the
employee. ½ 3
ii. Provision of residual accommodation by the employer

Employee‟s deemed derived income is equal to the annual
rateable value of the property less any rent paid by the employee. 2
iii. Provision of domestic staff by the employer

Employee‟s deemed income shall be the cost incurred in form of
salary by the employer for the use of the domestic staff. 1
The income of the domestic staff shall only be deemed as income

in the hands of the employee only where the domestic staff is not a
permanent employee of the employer, that is, a contract staff. 1 2
Total 15
172
SOLUTION 7
(a) Ultimate beneficiaries of withholding tax

The Companies Income Tax Act and Personal Income Tax Act clearly specify
the ultimate government beneficiary of withholding taxes. These are the
state governments through the agency of the State Internal Revenue Service
(SIRS) and the Federal government through the Federal Inland Revenue
Service (FIRS).
Therefore, the administration of withholding tax is within the purview of

both the FIRS and the SIRS.
(b) Contents of WHT returns/payment schedule

Each withholding tax cheque, being paid to the Revenue must be
accompanied with a payment schedule, which is a list of those who suffered
the deductions that make up the cheque. The payment schedule must
contain the following particulars:
i. Name of the taxpayers who suffered the deductions;

ii. Their addresses;
iii. The nature of their activities/services and period covered;
iv. Their tax file numbers (now Tax Identification Number (TIN);
v. The total amount payable;
vi. The rate of tax applied;
vii. The amount of tax withheld;
viii. The balance paid to the taxpayer;
ix. The tax contract for which returns were being made;
x. The date of payment; and
xi. The cheque number and date.
(c) Penalty for late remittance and non-deduction of withholding tax

from payments
Section 82 of CITA 2004 (as amended) specifies that where any person who
being obliged to deduct any tax under section 78 (deduction of tax from
interest, etc), 79 (deduction of tax on rent), 80 (deduction of tax from
dividend) or 81 (deduction of tax at source) of this Act fails to deduct or
having deducted fails to pay to the FIRS within 21 days from the date the
amount was deducted or the time the duty to deduct arose, shall be guilty of
an offence and shall be liable to a penalty of 10% per annum of the tax
withheld or not remitted, as the case may be.
Similarly, failure to deduct or having deducted, fails to remit to the SIRS

within 30 days, withholding tax withheld from payments due to individuals,
shall be guilty of an offence punishable on conviction and shall be liable to a
fine of N5,000, in addition to the tax deductible or deducted, but not
remitted, plus interest at the prevailing commercial rate.
173
(d) Currency of deduction
The currency in which tax is to be deducted and paid over to the relevant tax
authorities is the currency of transaction. Where the transaction is in foreign
currency, the tax is to be withheld in the foreign currency and paid to the
relevant tax authority, through the Central Bank of Nigeria (CBN). The CBN
would then effect the necessary conversion, using the ruling rate of
exchange and then credit the appropriate government account with the sum.
Examiner’s report
The question tests the candidates‟ knowledge of ultimate beneficiaries of
withholding tax, filing of returns/payment schedule, penalties, and currency of
payment for withholding tax.
About 80% of the candidates attempted the question and the performance was
good.
The commonest pitfall was candidates‟ lack of knowledge of the penalties payable
for non deduction and late remittance of withholding tax to the appropriate tax
authorities.
Candidates are advised to pay attention to this particular aspect of the syllabus.
Marking guide
Marks Marks
a. Ultimate beneficiaries of withholding tax
State Internal Revenue Service 1½
Federal Income Revenue Service 1½ 3
b. Withholding tax returns/payment schedule

(1 mark for any correct item subject to a maximum of 5 points) 5
c. Penalties for the late remittance and non deduction of

withholding tax
Companies
Penalty of 10% per annum of the tax withheld or not remitted
Individuals 1½
Penalty/fine of N5,000 plus interest at the prevailing commercial rate 1½ 3
d. Currency of deduction/remittance
Currency of transaction 4
Total 15
174

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THE INSTITUTE OF CHARTERED

This issue of the PATHFINDER is published principally, in response to a growing

(i) Candidates preparing to write future examinations of the Institute of

(ii) Unsuccessful candidates in the identification of those areas in which they

(iii) Lecturers and students interested in acquisition of knowledge in the

(iv) The professional; in improving pre-examinations and screening processes,

It is hoped that the suggested answers will prove to be of tremendous assistance

AUDIT AND ASSURANCE 33 – 54

PUBLIC SECTOR ACCOUNTING & FINANCE 91 – 120

CORPORATE STRATEGIC MANAGEMENT & ETHICS 121 - 140

TAXATION 141 – 173

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

SKILLS LEVEL EXAMINATION – NOVEMBER 2022

PLEASE READ THESE INSTRUCTIONS BEFORE THE COMMENCEMENT OF THE PAPER

2. Write your EXAMINATION NUMBER in the space provided above.

3. Do NOT write anything on your question paper EXCEPT your

4. Do NOT write anything on your docket.

5. Read all instructions in each section of the question paper carefully

6. Do NOT answer more than the number of questions required in each

7. All solutions should be written in BLUE or BLACK INK. Any solution

TUESDAY, NOVEMBER 15, 2022

DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO

SKILLS LEVEL EXAMINATION – NOVEMBER 2022

INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT FIVE OUT OF SEVEN

SECTION A: COMPULSORY QUESTION (30 MARKS)

There has been agitation to stop importation of containers from China, to

Favour Plc Grace Ltd Blessing Ltd

Favour Plc Grace Ltd Blessing Ltd

SECTION B: OPEN-ENDED QUESTIONS (40 MARKS)

INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF THREE

Obudu Nigeria Limited

Obudu Nigeria Limited

Opening balance b/f 5,500 1,588

SECTION C: OPEN-ENDED QUESTIONS (30 MARKS)

INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF THREE

The Institute of Chartered Accountants of Nigeria (ICAN) prescribes ethical

You are required to:

c. EPS is probably the single most important indicator of an entity‟s

a. Briefly explain SIX purposes of Conceptual Framework of the International

FROM: Trainee Accountant TO: Managing Partner

November 15, 2021

SUBJECT: Analysis of financial performance scorecard of Blessing Limited

Liquidity position of the two companies

Gearing and solvency position of the two companies

(c) Types of records that are maintained in block chain

Benefits of making use of blockchain technology

The following are the benefits of blockchain technology:

i. It will benefit businesses by reducing costs, increasing traceability and

Marking Guide Marks Marks

c) Types of Records and Benefit of Block chain

(a) Obudu Nigeria Limited

(c) Benefits of statement of cash flows information to users of financial

Marking guide Marks Marks

- Determination of cash flows from investing activities 1¼

b) Reconciliation of operating profit to cash flow from operations

c) Six benefits of Statement of Cash flows information: 6

(a) Food Plc

Wk 3: Determination of goodwill on acquisition

Wk 4: Unrealised profit N'000