BSc (Hons) Banking and International Finance Cohort: BBIF/09/FT Examinations for 2011 2012 Semester I / 2011 Semester II

MODULE: ACCOUNTING AND AUDITING PRACTICE MODULE CODE: ACCF3121 Duration: 2 Hours 30 minutes

Instructions to Candidates:
1. This paper consists of Sections A and B. 2. Section A is compulsory. 3. Answer any two questions from Section B. 4. Always start a new question on a fresh page. 5. Calculators may be used, but all relevant working must be shown clearly. 5. Total marks: 100. This question Paper contains 4 Questions and 9 pages.

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SECTION A: COMPULSORY QUESTION 1: (40 MARKS)

Part A (10 marks)

Discuss the limitations of published accounts.

(10 marks)

Part B (30 marks)

You are presented with the following information for Blackson Ltd, a limited liability company, and its subsidiary Blackberry Ltd:

Statement of Comprehensive Income for the year ended 31 October 2010 Blackson Ltd Rs 000 Sales Revenue Cost of Sales Gross Profit Distribution Costs Administrative Expenses Profit from operations Dividend income from Blackberry Profit before tax Income tax Expense Profit for the Year 245,000 (140,000) 105,000 (12,000) (55,000) 38,000 7,000 45,000 (13,250) 31,750 Blackberry Ltd Rs 000 95,000 (52,000) 43,000 (10,000) (13,000) 20,000 20,000 (5,000) 15,000

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Statement of Financial Position as at 31st October 2010 Blackson Ltd Rs 000 ASSETS Non-current Assets Property, Plant & Equipment Investments: 21,000,000 Rs1 Ordinary Shares in Blackberry Ltd at cost Current Assets Inventory, at cost Trade receivables and dividend receivable Bank Total Assets 14,640 3,500 31,500 165,500 6,280 2,570 12,740 52,740 13,360 3,890 110,000 40,000 Rs 000 Blackberry Ltd Rs 000 Rs 000

24,000 134,000

40,000

EQUITY AND LIABILITIES Capital and Reserves Rs 1 Ordinary Shares General reserve Accumulated profits 100,000 9,200 27,300 136,500 Current Liabilities Payables Tax Total Equity and Liabilities 9,000 20,000 29,000 165,500 2,460 10,000 12,460 52,740 30,000 1,000 9,280 40,280

The following information is also available: i. Blackson Ltd purchased its Rs 1 ordinary shares in Blackberry Ltd on 1st November 2005. At that date, the balance on Blackberry Ltd general reserve was Rs 0.5 million and the balance of accumulated profits was Rs 1.5 million.

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ii.

At 1 November 2009, the goodwill arising from the acquisition of Blackberry Ltd was valued at Rs 1,460,000. Blacksons Ltd impairment review of this goodwill at 31 October 2010 valued it at Rs 1,300,000.

iii.

During the year ended 31 October 2010, Blackson Ltd sold goods which originally cost Rs 12 million to Blackberry. Blackson Ltd invoiced Blackberry Ltd at cost plus 40%. Blackberry Ltd still has 30% of these goods in inventory at 31 October 2010.

iv.

Blackberry Ltd owed Blackson Ltd Rs 1.5 million at 31 October 2010 for some of the goods Blackson Ltd supplied during the year. It is groups policy to value the non-controlling interest at fair value. For this purpose, the fair value of the goodwill attributable to the non-controlling interest (NCI) of Blackberry Ltd is Rs 500,000.

v.

Required: a. Calculate the goodwill arising on the acquisition of Blackberry Ltd. (3 marks) b. Prepare the following financial statements for Blackson Ltd:(i) The Consolidated Income Statement for the year ended 31st October 2010. (10 marks) (ii)The Consolidated Statement of Financial Position as at 31st October 2010. (Disclosure notes are not required.) (17 marks)

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SECTION B: ANSWER ANY TWO QUESTIONS QUESTION 2: (30 MARKS)

Part A (10 marks)

(i)

Define the term borrowing costs and explain the accounting treatment of such costs which is required by International Accounting standard IAS23.
(4 marks)

(ii)

During the year to 31 December 2010, a company started work on the construction of a manufacturing plant and incurred expenditure as follows: Rs 000 1 April 2010 1 August 2010 1 December 2010 1,500 2,400 1,800

All payments were made out of general borrowings. Construction work was still underway at 31 December 2010. The company had the following general borrowings outstanding throughout the year 2009:

Amount of loan Rs 000 Loan A Loan B Loan C 10,000 8,000 5,000

Interest for the year Rs 000 1,150 720 430

Required:

Calculate the amount of borrowing costs that should be capitalized in relation to the construction of the manufacturing plant during the year.
(6 marks)

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Part B (10 marks) Assume that Kiely company Ltd has elected to measure Property Plant and Equipment (PPE) at revalued amounts. Costs and fair values for Kiely companys three classes of PPE at 31 December 2009 and 2010 are as follows:

Land (Rs) Cost Fair value at 31/12/2009 Fair value at 31/12/2010 1,000,000 1,200,000 1,500,000

Buildings (Rs) 5,000,000 4,500,000 4,600,000

Machinery (Rs) 2,000,000 2,100,000 1,850,000

Required: Prepare suitable journal entries as at December 2009 and 2010 to adjust the carrying amount of the three classes of PPE to fair value. (10 marks)

Part C (10 marks) (i) Define the term investment property and explain the two models permitted by international standard IAS40 for the measurement of investment property after its initial recognition. (5 marks)

(ii) How do these two models differ from the two models permitted by IAS16 in relation to the measurement of property, plant and equipment? (5 marks)

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QUESTION 3: (30 MARKS)

Part A (15 marks)

The following are five situations, each containing two means of accumulating evidence: Confirmed receivables with consumers versus confirming accounts receivable with business organization. Examine duplicates sales invoices when several competent people are checking each others work versus examining documents prepared by a competent person on a one-person staff. Discuss the likelihood and amount of loss in a law suit against the client with clients in-house legal counsel versus discussion with the auditing firms owned counsel. Confirm the oil and gas reserves with a geologist specializing in oil and gas versus confirming a bank balance. Physically count the clients inventory held by an independent party versus confirming the count with an independent party.

Required:

a. Identify five factors that determine the reliability of evidence.

(5 marks)

b. For each of the five situations listed above, state whether the first or second type of evidence is more reliable. (5 marks)

c. For each situation, state which factors affected the reliability of the evidence. (5 marks)

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Part B (15 marks)

(i) Explain what is meant by a non-current asset held for sale and how it is measured. (5 marks)

(ii) On 1st October 2010, a company which prepares financial statements to 31st December classifies a non-current asset as held for sale. The assets carrying amount on that date is Rs 5,000,000 and its fair value less costs to sell is Rs 5,500,000. The asset was sold in June 2011 for Rs 5,300,000.

Required: Calculate any impairment losses or gains that should be recognized if the assets fair value less costs to sell at 31st December 2010 was : (i) Rs 5,250,000 (ii) Rs 4,900,000. (6 marks)

a.

b.

In each case, calculate also the gain or loss that should be recognized on the disposal of the asset. (4 marks)

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QUESTION 4: (30 MARKS)

Part A (15 marks) (i) Define the audit risk model and briefly explain each term in the model Also, describe which two factors of the model when combined reflect the risk of material misstatement. (6 marks)

(ii) What is meant by planned detection risk? What is the effect of the amount of evidence the auditor must accumulate when planned detection risk is increased from medium to high? (3 marks)

(iii) Define what is meant by inherent risk. Identify four factors that make for high inherent risk in auditing. (6 marks)

Part B (15 marks) (i) Define the meaning of the term materiality as it is used in accounting and auditing. (3 marks)

(ii)

Distinguish between the terms tolerable misstatement and preliminary judgement about materiality. How are they related to each other? (5 marks)

(iii) Delta Investments provides a group of mutual funds for investors. The elements of its financial statements are: a. Net profit = Rs 40 million b. Total assets = Rs 4.3 billion c. Total revenue = Rs 900 million During the course of the audit, Deltas audit firm detected two misstatements that aggregated to an overstatement of net profit of Rs 5.75 million.

Required:

Determine planning materiality and evaluate the audit findings.

(7 marks)

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