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.

Page 1 of 9
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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

Blackberry

Ltd

Ltd

Rs 000

Rs 000

245,000

95,000

(140,000)

(52,000)

Gross Profit

105,000

43,000

Distribution Costs

(12,000)

(10,000)

Administrative Expenses

(55,000)

(13,000)

Profit from operations

38,000

20,000

Dividend income from Blackberry

7,000

Profit before tax

45,000

20,000

(13,250)

(5,000)

31,750

15,000

Sales Revenue
Cost of Sales

Income tax Expense

Profit for the Year

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Statement of Financial Position as at 31st October 2010

Blackson Ltd
Rs 000

Rs 000

Blackberry Ltd
Rs 000

Rs 000

ASSETS
Non-current Assets
Property, Plant & Equipment

110,000

40,000

24,000

Investments:
21,000,000 Rs1
Ordinary Shares in Blackberry
Ltd at cost

134,000

40,000

Current Assets
Inventory, at cost

13,360

3,890

14,640

6,280

Trade receivables and

dividend receivable
Bank

3,500

Total Assets

31,500

2,570

12,740

165,500

52,740

100,000

30,000

9,200

1,000

27,300

9,280

136,500

40,280

EQUITY AND LIABILITIES

Capital and Reserves
Rs 1 Ordinary Shares
General reserve
Accumulated profits

Current Liabilities
Payables
Tax

9,000
20,000

Total Equity and Liabilities

2,460
29,000
165,500

10,000

12,460
52,740

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.

v.

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.

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.

(ii)

(4 marks)

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

1,500

1 August 2010

2,400

1 December 2010

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

Interest for the year

Rs 000

Rs 000

Loan A

10,000

1,150

Loan B

8,000

720

Loan C

5,000

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

Buildings

Machinery

(Rs)

(Rs)

(Rs)

Cost

1,000,000

5,000,000

2,000,000

Fair value at 31/12/2009

1,200,000

4,500,000

2,100,000

Fair value at 31/12/2010

1,500,000

4,600,000

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:

a.

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.

b.

(6 marks)

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.

(ii)

(3 marks)

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)

***END OF QUESTION PAPER***

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