THE INSTITUTE OF CHARTERED

ACCOUNTANTS OF NIGERIA

PATHFINDER
NOVEMBER 2024 DIET
SKILLS LEVEL EXAMINATIONS
Question Papers

Suggested Solutions

Marking Guides

and

Examiners‟ Reports

163
 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

Page
FOREWARD 1

TABLE OF CONTENT 3

FINANCIAL REPORTING 4 - 41

AUDIT AND ASSURANCE 42 - 63

PERFORMANCE MANAGEMENT 64 - 91

PUBLIC SECTOR ACCOUNTING & FINANCE 92 – 122

CORPORATE STRATEGIC MANAGEMENT & ETHICS 123 - 147

TAXATION 148 – 172

2
ICAN/242/Q/B1 Examination No.....................

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

SKILLS LEVEL EXAMINATION – NOVEMBER 2024

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 any other COLOUR OF INK will not be marked.
8. You are required to attempt Question ONE (Compulsory), TWO Questions in
Section B and TWO Questions in Section C.
9. Check that you have collected the correct question paper for the examination you
are writing.
TUESDAY, NOVEMBER 19, 2024

DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO

3
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION – NOVEMBER 2024

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
The following is the trial balance of Konko-Below Plc for the year ended March 31,
2023.
Dr. Cr.
N’m N’m
Land and building 1,350
Plant and machinery 780
Investment properties:
Valuation at April 1, 2022 450
Purchases 391
Operating expenses 78
Loan interest paid 10
Rental of leased plant 110
Dividend paid 75
Inventories at April 1, 2022 189
Trade receivables 266
Revenue 1,392
Income from investment property 23
Ordinary shares at N1 each (fully paid) 750
Retained earnings at April 1, 2022 598
8% loan notes 250
Accm. depreciation at April 1, 2022:
- Buildings 300
- Plant 130
Trade payables 167
Deferred tax 62
Bank overdraft _____ 27
3,699 3,699

4
Additional Information:
(i) The land and buildings were purchased 15 years before the beginning of the
period. The cost of the land was N350million. No land and buildings have been
purchased by Konko-Below Plc since that date. On April 1, 2022 Konko-Below
PLC had its land and building professionally valued at N400million and
N875million respectively. The directors wish to incorporate these values into the
financial statements. The estimated life of the buildings was originally 50 years
and the remaining life has not changed as a result of the valuation.

- Later, the estate valuer Messers Ajasoco and company informed Konko-
Below PLC that investment properties of the type owned by Konko-Below Plc
had increased in value by 7% in the year ended March 31, 2023.
- Plant and machinery, other than the leased plant stated in (ii) below is
depreciated at 15% per annum using reducing balance method.
Depreciation of building, plant and machinery is charged to cost of sales.

(ii) On April 1, 2022 Konko-Below Plc entered into a lease for an item of plant
which had an estimated life of five (5) years. The lease period is also five (5)
years with annual rental of N110 million payable in advance from April 1, 2022.
The plant is expected to have a nil residual value at the end of its life. If
purchased the plant would have a cost of N460million and be depreciated on a
straight-line basis.

The interest rate implicit in the lease is 10%.

(iii) The loan notes was issued on July 1, 2022 with interest payable six monthly in
arrears.

(iv) The provision for income tax for the year to March 31, 2023 has been estimated
at N141.5million. The deferred tax provision at March 31, 2023 is to be
adjusted to a credit balance of N70.5million.

(v) The inventories at March 31, 2023 were valued at N216million.

You are required to prepare:

a. Statement of profit or loss and other comprehensive income for the year ended
March 31, 2023. (10 Marks)
b. Statement of changes in equity for the year ended March 31, 2023. (6 Marks)
c. Statement of financial position as at that date. (14 Marks)
(Total 30 Marks)

5
SECTION B: YOU ARE REQUIRED TO ATTEMPT TWO OUT OF THREE
QUESTIONS IN THIS SECTION (40 MARKS)

QUESTION 2

Orak Nigeria Limited is a specialist computer component manufacturer. The company

presently has a staff strength of 54 employees and it has two main customers located
in the Southwestern part of the country.

However, the relative success of Orak Nigeria Limited over the last few years has
attracted interest from a number of potential buyers that want to acquire the
company. One of Orak Nig. Limited‟s main customers, Datamatic Plc, is now
considering making a bid for the entire share capital of Orak Nig. Limited thereby
effectively bringing Orak‟s services in-house. Datamatic Plc is of the opinion that the
specialist products that Orak Nig. Limited supplies it will now be under their
company‟s control.

The financial adviser to Datamatic Plc has obtained the following information relating
to Orak Nig. Limited.
Extract from financial statements of Orak Nig. Limited for the year ended Sept. 30,
2023
N’000
Revenue 220,950
Cost of sales 125,820
Other costs 78,030
Profit before tax 17,100
Profit for the year 11,970
Dividend paid 5,850
Non-current assets 80,460
Inventories 20,880
Receivables 13,140
Cash and cash equivalents 2,880
Payables 21,960
Ordinary share capital 9,000
Retained earnings 86,400

6
Information obtained from computer component manufacturers association (Industry
data)
Ratios
Average P/E ratio (for quoted companies) 9.0
Average annual growth in reported post-tax profit (2022 to 2023) 3.0%
Average pre-tax profit margin 5.1%
Average pre-tax ROCE 13%
Average receivables collection days 78
Average payables payment days 34
Average revenue per employee N2,313,000

The finance director of Datamatics Plc has provided the following summary of
Datamatics Plc recent performance as at September 30:

2023 2022 2021 2020

N’000 N’000 N’000 N’000
Revenue 881,250 834,000 754,500 757,500
Pre-tax profit 66,000 107,250 116,250 150,750
Dividend paid 6,000 37,500 37,500 37,500

Required:
a. Compute the following ratios for Orak Nig. Limited

i. Gross profit to capital employed

ii. Pre-tax profit to capital employed
iii. Gross profit margin
iv. Net profit margin
v. Non-current asset turnover
vi. Receivables collection period (days)
vii. Payables payment period (days)
viii. Inventories turnover (days)
ix. Revenue per employee (N)
x. Dividend cover
xi. Current ratio
xii. Quick ratio (12 Marks)

b. Analyse the financial position and performance of Orak Nigeria Limited for the
year ended Sept. 30, 2023 and determine if Datamatics Plc‟s investment in Orak
Nig. Limited will be worthwhile. (8 Marks)
(Total 20 Marks)

7
QUESTION 3

On October, 1 2022 Papaya Plc acquired 90% interest in Bafana Ltd by issuing
1,000,000 ordinary shares at an agreed value of N2 per share, paying N1,000,000 in
cash.

At that time the net assets of Bafana Ltd were as follows:

N’000
Property, plant and equipment 1,900
Inventories 700
Trade receivables 300
Cash and cash equivalents 100
Trade payables (400)
2,600

The consolidated statement of financial position of Papaya Group Plc as at December

31, were as follows:
2022 2021
Non-current assets: N’000 N’000
Property plant and equipment 25,000 23,000
Goodwill 660 --
25,660 23,000
Current assets:
Inventories 14,500 12,000
Trade receivables 13,700 11,000
Cash and cash equivalents 760 500
28,960 23,500
Total assets 54,620 46,500
Equity attributable to owners of parent
Ordinary share capital (N1 each) 11,500 10,000
Share premium account 6,500 5,000
Retained earnings 17,910 15,300
35,910 30,300
Non-controlling interests 310 --
Total equity 36,220 30,300
Current liabilities:
Trade payables 16,900 15,200
Income tax 1,500 1,000
18,400 16,200
Total equity and liabilities 54,620 46,500

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The consolidated statement of profit or loss for the year ended December 31 2022

N’000
Revenue 100,000
Cost of sales (75,000)
Gross profit 25,000
Administrative expenses (20,800)
Profit before taxation 4,200
Income tax expense (1,500)
Profit for the year 2,700
Profit attributable to owners of Papaya PLC 2,610
Non-controlling interests 90
2,700

The statement of changes in equity for year ended December 31, 2022 (Extract) was as
follows:-
Retained
earnings
N’000
Balance as at December 31, 2021 15,300
Total profit for the year 2,610
Balance at December 31, 2022 17,910

Additional information:
(i) All other subsidiaries are wholly owned.
(ii) Depreciation charged to the consolidated statement of profit or loss amounted
to N2,100,000.
(iii) There were no disposals of property, plant and equipment during the year.
(iv) Goodwill is not impaired.
(v) Non-controlling interests is valued on the proportionate basis.

Required:
Prepare consolidated statement of cash flows for Papaya Plc for the year ended
December 31, 2022, using indirect method in accordance with IAS 7 – Statement of
cash flows.
(Total 20 Marks)

9
QUESTION 4
Ogbagi Plc
Statement of profit or loss and other comprehensive income for the year ended
December 31, 2022
N’000 N’000
Revenue: 3,200,000
Interest income 20,000
Gain on sale of plant 16,000
3,236,000
Expenses:
Cost of sales 1,920,000
Staff remunerations 480,000
Depreciation on plant and equipment 100,000
Interest expense 16,000
Other expenses 304,000
(2,820,000)
Profit before tax 416,000
Income tax expense (120,000)
Profit for the year 296,000
Other comprehensive income
Gain on sale of investment 8,000
Attributable tax (2,400)
5,600
Total comprehensive income for the year 301,600

Ogbagi Plc
Comparative statements of financial position as at December 31
2022 2021 Increase/(decrease)
N’000 N’000 N’000
Cash at bank 226,200 240,000 (13,800)
Account receivables 316,000 280,000 36,000
Inventories 280,000 260,000 20,000
Prepayments 38,000 32,000 6,000
Interest receivable 400 600 (200)
Plant and equipment 660,000 600,000 60,000
Investment 56,000 48,000 8,000
Intangible assets 60,000 - 60,000
1,636,600 1,460,600 176,000
Accounts payables 180,000 168,000 12,000
Staff remuneration payable 20,000 16,000 4,000
Accrued interests 800 - 800
Other expenses payable 7,200 12,000 (4,800)
Current tax payable 64,000 56,000 8,000

10
 Deferred tax liability 34,400 20,000 14,400
Long-term borrowings 280,000 240,000 40,000
Share capital 800,000 800,000 -
Retained earnings 244,600 148,600 96,000
Fair value reserve 5,600 - 5,600
1,636,600 1,460,600 176,000

Additional information:
(i) Plants which had a carrying amount of N40million was sold for N56million cash
and new equipment was purchased for N200million.
(ii) Intangibles valued at N60million were acquired for cash.
(iii) Borrowings of N40millon were made during the year and received in cash.
(iv) Dividends paid in cash amounted to N200million.

Required:
Prepare statement of cash flows for Ogbagi Plc for the year ended December 31, 2022
in accordance with IAS 7 using direct method.
(Total 20 Marks)

SECTION C: YOU ARE REQUIRED TO ATTEMPT TWO OUT OF THREE

QUESTIONS IN THIS SECTION (30 MARKS)

QUESTION 5

a. The IASB Framework states that several measurement bases are used for the
elements in financial statements

Explain the following bases of measurement:

i. Historical cost
ii. Current cost or current value
iii. Realisable value (or settlement value)
iv. Present valu (4 Marks)
b. The following information was extracted from the statement of financial
position of Wadai Plc, a company newly quoted on the Nigeria Exchange limited
(NGX)
₦’000
Total non-current assets (as at December 31, 2022) 50,000
Closing inventories (as at December 31, 2022) 5,000

11
 A financial analyst interested in investing in the company computed the
following ratios, in respect of the company, for the year ended December 31,
2022:

Gross profit margin 25%

Net profit/margin 20%
Inventory turnover ratio 10 times
Net profit/Equity 20%
Equity to current liabilities 50%
Non-current assets/Equity 5:4
Non-current assets/Total current assets 5:7

You are required to prepare:

i. The statement of financial position as at December 31, 2022. (7 Marks)
ii. The statement of profit or loss for the year ended December 31, 2022.
(4 Marks)
(Total 15 Marks)

QUESTION 6

a. Ajorosun Investment Limited has 12 million ordinary shares in issue and ₦4

million of 5% convertible bonds. As at December 31, 2021, there had been no
new issues of shares or bonds for several years. The bonds are convertible into
ordinary shares in the year 2022 or year 2023 at the following rates:

 At December 31, 2022: 30 shares for every ₦100 of bonds

 At December 31, 2023: 25 shares for every N100 of bonds

Total earnings for the year to December 31, 2021 were ₦3,600,000. Total
earning for the previous year 2020 were ₦3,300,000. Tax is payable at a rate of
30% on profits.

Required:
Calculate the basic Earnings Per Share (EPS) and diluted EPS for the year 2021,
and the comparative figures for the year 2020 for inclusion in the year 2021
financial statements. (8 Marks)

b. As the Finance manager, write a short memo to the board of directors of

Ajorosun Ltd, explaining FOUR advantages and THREE limitations of Earnings
Per Share (EPS) as a performance indicator to users of financial statements.
(7 Marks)
(Total 15 Marks)

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QUESTION 7
a. The preparation of financial statements requires a great deal of professional
judgment, honesty and integrity. Therefore, Chartered Accountants should
employ a degree of healthy skepticism when reviewing financial statements and
any analysis provided by the company‟s management.

Required:
i. Identify and explain THREE major inappropriate practices that can be discovered
whilst reviewing your client‟s financial statements and accompanying analysis.
(4½ Marks)
ii. Identify and explain THREE fundamental ethical considerations that
professional accountants should always consider. (4½ Marks)
b. Despite the largely global adoption of IFRS, users of financial statements still
experience problems when comparing financial statements of similar companies.

Required:
Discuss THREE reasons why the comparison of primary financial statements is problematic for
users. (6 Marks)
(Total 15 Marks)

13
SECTION A

SOLUTION 1

Konko-Below Plc
a) Statement of profit or loss and other comprehensive income for the year
ended March 31, 2023
Note N'm
Revenue 1,392.0
Cost of sales 1 (578.5)
Gross profit 813.5
Operating expenses (78.0)
Income from investment property 23.0
Fair value gain on Investment properties (7% × N450) 31.5
Operating profit 790.0
Finance cost 2 (50.0)
Profit before taxation 740.0
Income tax expenses 3 (150.0)
Profit for the year 590.0
Other comprehensive income:
Gain on revaluation of land & building 4 225.0
Total comprehensive income 815.0

Konko-Below Plc
b) Statement of changes in equity for the year ended march 31, 2023
Ordinary Revaluation Retained Total
share surplus earnings
N‟m N‟m N‟m N‟m
Balance b/f (April 1, 2022) 750 - 598 1,348
Profit for the year - - 590 590
Gain on revaluation - 225 - 225
Dividend paid - - (75) (75)
Balance to SOFP (March 31, 2022) 750 225 1,113 2,088

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 Konko-Below Plc
c) Statement of financial position as at March 31, 2023
Note N‟m
Non-current asset:
Property, plant and equipment 5 2,170.5
Investment properties (at fair value) 6 481.5
Total non-current assets 2,652.0
Current assets:
Inventory 216.0
Trade receivables 266.0
Total current assets 482.0
Total assets 3,134.0
Equity and liabilities:
Equity:
Ordinary shares of N1 each 750.0
Revaluation reserves on land and building 225.0
Retained earnings 1,113.0
Total equity 2,088.0
Non-current liabilities:
Deferred tax 3 b) 70.5
8% loan notes 250.0
Lease liabilities 7 275.0
Total non-current liabilities 595.5
Current liabilities:
Trade payables 167.0
Accrued interest expenses 8 5.0
Lease liabilities 7 110.0
Current tax payables 141.5
Bank overdraft 27.0
Total current liabilities 450.5
Total liabilities 1,046.0
Total equity and liabilities 3,134.0

Working notes
Wk 1: Cost of Sales N‟m
Opening inventories 189.0
Purchases 31.5
Closing inventories (216.0)
Depreciation (Wk 1) 214.5
SOPL 578.5
Wk 2: Lease rentals N‟m
Outstanding lease obligation 385

15
Net obligation at inception (N460 110) (350)
Lease obligation accrued interest 35
Finance cost on loan interest (8% x N250m x 9/12) 15
50
Wk 3a: Income tax expenses N‟m
Current year charges 141.5
Increase in deferred tax (Wk 3b) 8.5
Accrued to SOPL 150.0
Wk 3b: Deferred tax N‟m
Opening balance 62.0
Closing balance 70.5
Increase in deferred tax (Wk 3a) 8.5
Land Building
Wk 4: Gain on revaluation of land and building:
N‟m N‟m
Cost of land and building 31/3/2023 350 700
At valuation 31/3/2023 400 875
Gain on revaluation 50 175

Total gain on revaluation (50 + 175) = N225

Wk 5: Schedule of movement in PPE for the year ended March 31, 2023
Land Building P/Equip ROU Total
Cost/valuation: N‟m N‟m N‟m N‟m N‟m
Balance b/f 350.0 1,000.0 780.0 - 2,130.0
Additions - - - 460.0 460.0
Revaluation 50.0 175.0 - - 225.0
Balance c/f 400.0 1,175.0 780.0 460.0 2,815.0
Acc. depreciation:
Balance b/f - 300.0 130.0 - 430.0
Current year charges - 25.0 97.5 92.0 214.5
Balance c/f - 325.0 227.5 92.0 644.5
Carrying amount:
Balance c/f 400.0 850.0 552.5 368.0 2,170.5
Balance b/f 350.0 700.0 650.0 - 1700.0
Wk 6: Investment properties N‟m
Valuation at April 1, 2022 450.0
Fair value gain (7% x N450m) 31.5
Balance to SOFP 481.5
Wk 7: Lease liabilities N‟m
Fair value of Right of Use (ROU) 460.0
Payment made during the year (wk 9) (110)
Lease Interest 35
Balance to SOFP 385
16
Classified into:
Non-current 275
Current 110
385
Wk 8: 8% Loan Interest N‟m
SOPL Current year charges 15.0
Loan interest paid as per TB (10.0)
Accrued to SOFP 5.0

Wk 9: Lease amortisation schedule

Year ended Balance Lease Balance Interest Balance
b/f payment outstanding at 10% c/f
N‟m N‟m N‟m N‟m N‟m
2023 460.0 110.0 350.0 35.0 385.0
2024 385.0 110.0 275.0 27.5 302.5
2025 302.5 110.0 192.5 19.3 211.8
2026 211.8 110.0 101.8 8.3 110.0
2027 110.0 110.0 - - -

Examiner’s report
The question tests the preparation of single entity‟s final accounts, which requires the
presentation of statement of profit or loss and other comprehensive income, statement
of changes in equity and statement of financial position.
Majority of the candidates attempted the question and their performance was average.
The commonest pitfall was the inability of most candidates to apply the provisions of
IFRS 16 – lease, hence they could not properly identify the Right of Use (ROU) of the
leased assets as required under International Financial Reporting Standards. Also,
others could not properly account for deferred tax provisions in accordance with IAS
12- Income tax.
Candidates are advised to pay more attention to the preparation of final accounts of
single entity as this is a regular area of the syllabus that are examined at this level of
the institute‟s examinations.

Marking guide
Marks Marks
a) Preparation of statement of profit or loss and other
comprehensive income:
Title of the statement ¼
Determining the gross profit ¾
Determining the profit before taxation 1½
Income tax expenses ¼

17
 Profit for the year ¼
Stating total comprehensive income ½
Workings for cost of sales 2
Workings for lease rentals 2
Workings for gain on revaluation 1½
Showing other workings for profit or loss items 1 10
b) Preparation of statement of changes in equity:
Title of the statement ½
Opening balance of components of equity 1½
Profit for the year 1
Gain on revaluation 1
Dividend paid 1
Total equity 1 6
c) Preparation of statement of financial position:
The title of the statement ¼
Non-current assets ¾
Current assets 1
Total assets ¼
Components of equity 1
Non-current liabilities 1
Current liabilities 1½
Total equity and liabilities ¼
Workings for movement in PPE 5¼
Workings for lease amortisation schedule 1
Workings for investment properties ¾
Workings for lease liabilities 1 14
Total 30

18
SECTION B

SOLUTION 2

(a) Computation of ratios of Orak Nigeria Limited for the year ended Sept. 30, 2023
S/N Ratios Orak Nig. Limited
= 95,130 x 100
Gross profit x 100 95,400
i) Gross profit to capital employed =
Capital employed = 99.72%

ii) Pre-tax profit to capital employed = Profit before Tax x 100 = 17,100 x 100
Capital employed 95,400
= 17.92%

Gross profit x 100 = 95,130 x 100

iii) Gross profit margin =
Revenue 220,950
==marginOCE = = 43.05%

Net profit margin = Profit for the year x 100 = 17,100 x 100
iv)
Revenue 220,950
= 7.74%

Revenue 220,950
v) Non-current asset turnover = =
Non-current asset 80,460
= 2.75 times

vi) Receivables collection period = Trade rec. x 365 days = 13,140 x 365 days
Revenue 220,950
= 22 days

Trade Payable x 365 days 21,960 x 365 days

vii) Payables payment period = =
Purchases 125,820
= 64 days

viii) Inventories x 365 days 20,880 x 365 days

Inventory turnover = =
Cost of Sales 125,820
= 61 days

Revenue 220,950,000
ix) Revenue per employee (N) = =
Number of employees 54 staff
= N4,091,667

x) Dividend cover = Profit for the year = 11,970

Dividend 5,850
= 2.05 times

19
 xii) Current ratio = Current assets = 36,900
Current liabilities 21,960
= 1.68:1

xiii) Quick ratio = Current assets – inventory = 36,900 – 20,880

Current liabilities 21,960
= 0.73:1

(b) Analysis of financial position and performance of Orak Nig. Ltd for the year 2023
Based on the ratios calculated and the data provided in the financial statements,
here is an analysis of Orak Nigeria Ltd's financial performance and position.
Profitability
(i) Gross profit margin (43.1%)
Orak Nig. Ltd maintains a strong gross profit margin, indicating good
control over cost of sales relative to revenue. This level of profitability
suggests that the company effectively manages its production and
operational costs.

(ii) Net profit margin (7.7%)

While the net profit margin is significantly lower than the gross profit
margin, it reflects moderate profitability after accounting for all other costs.
This suggests a room for improvement, especially in controlling overhead or
financing costs.
(iii) Return on capital employed (ROCE)
 Gross profit to capital employed (65.1%)
 Pre-tax profit to capital employed (13.8%)
These figures suggest that Orak Nig. Ltd generates relatively strong returns
on its capital employed, especially when analysing profit before tax.
Datamatics Plc can expect reasonable returns on their investment based on
this performance.
(iv) Revenue per employee is 168% higher than the industry average, which is a
reflection of the profitability and revenue generation of Orak Nig. Ltd. This
is an evidence that the company is able to charge high prices and also put
in place cost control measures.
(v) However, we do not have detailed information about the salaries and wages
of the employees of Orak Nig. Ltd. If the salaries of the employees of Orak
are higher than that of Datamatic Plc, this may lead to demand for higher
salaries among the workforce of Datamatics Plc.
(vi) With the acquisition of Orak Nig. Ltd. by Datamatics Plc, which is a larger
company, this could further lead to economic of scale and even cheaper
supplies.

20
(vii) As Orak Ltd is currently paying high dividend, this will be good news for
shareholders of Datamatics Plc.
(viii) Also pre-tax ROCE and pre-tax profit margin 38% and 5% respectively are
higher than industry average which support the view that Orak Nig. Ltd. is
able to charge high prices. This would appear to be as a result of
specialisation of the service of Orak Nig. Ltd.
(ix) Should Orak Ltd acquire Datamatics Plc, Orak Limited will benefit from price
premium thereby generating better profitability for Datamatics Plc.

Liquidity
(i) Current ratio (1.68)
A current ratio above 1 shows that Orak Nig. Ltd has sufficient short-term
assets to cover its short term liabilities. This is a good liquidity position,
reducing the risk of cash flow problems.
(ii) Quick ratio (0.73)
The quick ratio indicates weaker liquidity after inventories are excluded,
suggesting some reliance on inventory turnover to meet liabilities.
Datamatics Plc should consider whether this reliance aligns with their risk
appetite.

Efficiency
(i) Receivables collection period (22 days)
Orak Nig. Ltd collects receivables efficiently within 22 days on average,
which is a positive indicator of cash flow management.
(ii) Payables payment period (64 days)
The company takes about 64 days to pay suppliers, which may suggest they
are effective in managing cash flow. However, this could strain supplier
relationships if extended further.

(iii) Inventory turnover period (61 days)

Inventory turnover is satisfactory, indicating that Orak is not overstocked
and it can efficiently convert inventory into sales.

Investment efficiency
(i) Non-current asset turnover (2.75)
Orak Nig. Ltd current assets turnover is 2.75. However, the industrial
average is not provided for comparison.
(ii) Revenue per employee (₦2.313 million)
This is a good productivity ratio, when compared with the industrial
average.

21
Dividend sustainability
 Dividend Cover (2.05)
The net profit at Orak Nig Ltd covers it dividend more than twice, indicating
the sustainability of the company. This is a positive indicator for Datamatics,
as it shows the company‟s ability to distribute profits without jeopardising
reinvestment opportunities.

Industry analysis when compared to the computer component manufacturing

industry:
(i) Orak Nig. Ltd‟s profitability is above average in gross profit but slightly
below average in net profit.
(ii) Liquidity metrics such as the current ratio are strong, but the quick ratio
and reliance on inventory pose potential risks.
(iii) Operational efficiency in receivables collection is better than industrial average,
though payables and inventory turnover needs improvement.
(iv) Productivity metrics suggest that the company is slightly behind in revenue
per employee but is comparable with industry benchmarks.

Limitations and risks

(i) Net profit margin: The net profit margin is relatively low, indicating that
overhead costs and other expenses could be reducing profitability.
(ii) Reliance on inventory: The quick ratio suggests that Orak Nig. Ltd relies on
inventory for short term liquidity, posing a potential risk if inventory
turnover reduces overtime.
(iii) Customer dependence: Orak Nig. Ltd has only two main customers. A loss of
either could severely impact revenue and profitability.
(iv) Receivable collection period of 22 days is exceptionally low when compared
with industry average. This is probably due to the fact that Orak Nig. Ltd
has only has two main customers making it possible to form close working
relationship. Given the specialisation that Orak Nig. Ltd provides, it is
likelythat its customers do not want to spoil their relationship by delaying
payments. There is no reason to believe that this will change if Datamatics
acquires the company.
(v) Payable payment period of 64 days is almost twice the industry average
and reflect either a strict cash management policy within Orak Nig. Ltd or a
potentially cash flow problem. However, given the high profitability within
Orak Nig. Ltd, and its healthy statement of financial position items it would
appear that Orak Nig. Ltd has squeezed its suppliers quite hard. If Orak

22
 Nig. Ltd. is acquired by Datamatics Plc, there may be need to change this
policy.
(vi) Inventory turnover of 61 days indicates that the production process within
Orak Nig. Ltd. is about two months and may be a reflection of the
complexity of the manufacturing process that it undertakes. This may
largely be as a result of safety checks, which are key features of supply of
specialised computer components and the time taken may contribute to the
61-day figure.

Recommendation
Datamatics Plc‟s investment in Orak Nigeria Limited appears to be worthwhile,
based on the following:
(i) Orak Nig. Ltd is generating strong gross profit margins and acceptable
ROCE, making it a profitable company.
(ii) Liquidity and operational efficiency ratios are within acceptable ranges.
(iii) Integration of Orak Nig. Ltd‟s services into Datamatics PLC could reduce
costs and increase operational synergies.

However, Datamatics Plc should consider:

(i) Reducing Orak Nig. Ltd‟s reliance on a few key customers.
(ii) Exploring opportunities to improve net profit margins through better cost
management.
(iii) Engaging in proactive management to mitigate risks and maximise returns.

Examiner’s report
The question tests the computation and analyses of financial ratios for investment
decisions.
Majority of the candidate attempted the question and their performance was above
average.
The candidates performed very well in the computation of the required ratios, but
most could not give proper interpretation to the computed ratios.
Candidates are advised to pay more attention to the interpretation of financial
statements at this level of the institute‟s examination rather than focusing on
computation of relevant financial ratios.

23
Marking guide
Marks Marks
a) Computation of relevant ratios:
Calculation of:
Gross profit to ROCE 1
Pre-tax to ROCE 1
Gross profit margin 1
Net profit margin 1
Non-current asset turnover 1
Receivables collection period 1
Payables payment period 1
Inventory turnover 1
Revenue per employee 1
Dividend cover 1
Calculation of current ratio 1
Quick ratio 1 12
b) Analysis of financial position and performance
Analysis of financial performance:
Any 6 correct points at ¼ mark each 3
Analysis of financial position:
Any 8 correct points at ½ mark each 4
Stating recommendation ½
Stating reservation ½ 8
Total 20

24
SOLUTION 3

Papaya Plc
Consolidated statement of cash flows for the year ended December 31, 2022

Operating activities: N'000 N'000

Profit before tax 4,200
Add/less: Adjustment:
Depreciation 2,100
Cashflow from operation before working capital 6,300
Working capital changes:
Increase in inventories (Wk 1) (1,800)
Increase in trade receivables (Wk 1) (2,400)
Increase in trade payables and accruals (Wk 1) 1,300 (2,900)
Cash flows from operation 3,400
Taxation paid (Wk 2) (1,000)
Net cash flows from operating activities 2,400
Investing activities:
Purchase of subsidiary (Wk 4) (900)
Purchase of property, plant and equipment (Wk 3) (2,200)
Net cash flows from investing activities (3,100)
Financing activities:
Proceeds from issue of shares (Wk 6) 1,000
Dividend paid to NCI by cash (Wk 5) (40)
Net cash flows from financing activities 960
Net Increase in cash and cash equivalents for the year 260
Cash and cash equivalent at the beginning 500
Cash and cash equivalent at the end 760

Working notes
Wk 1: Increase/decrease in working capital
Inventory Trade rec. Trade pay.
N‟000 N‟000 N‟000
Opening balance 12,000 11,000 15,200
Acquisition of subsidiary 700 300 400
Expected closing balance 12,700 11,300 15,600
Actual closing balance 14,500 13,700 16,900
Increase/decrease (1,800) (2,400) (1,300)

Wk 2: Taxation paid N‟000

Opening balance 1,000
Current year charge 1,500
Expected closing balance 2,500

25
Actual closing balance 1,500
Cash paid 1,000

Wk 3: Purchase of PPE by cash N‟000

Opening balance 23,000
Acquisition of subsidiary 1,900
Depreciation charge for the year (2,100)
Expected closing balance 22,800
Actual closing balance 25,000
Additional purchase by cash (2,200)

Wk 4: Purchase of subsidiary N‟000

Acquisition cost in cash 1,000
Cash portion of net asset acquired (100)
Cash paid 900

Wk 5: Dividend paid to NCI N‟000

NCI at acquisition (10% x 2,600) 260
Share of post-acquisition profit 90
Expected closing balance 350
Actual closing balance 310
Cash dividend paid 40

Wk 6: Proceeds from issue of shares Share Share Total

capital premium
N‟000 N‟000 N‟000
Opening balance 10,000 5,000 15,000
Shares issue towards the acquisition of subs. 1,000 1,000 2,000
Expected closing balance 11,000 6,000 17,000
Actual closing balance 11,500 6,500 18,000
Shares issued for cash 500 500 1,000

Examiner’s report
The question examines the candidates‟ ability to prepare consolidated statement of
cash flows of a simple group, using the indirect method.
Most of the candidates attempted the question and their performance was below
average.
Those candidates that attempted the question approached it as if they were preparing
statement of cash flows for a single entity hence most of them did not make necessary
adjustments to reflect the effect of the subsidiary on the cash flow of the group and
this led to loss of valuable marks.
Candidates are advised to cover all sections of the syllabus, on group accounts and
other related topics for better performance in future examinations.

26
Marking guide
Marks
a) Preparation of consolidated statement of cash
flows
Title of the statement ½
Determination of cash flows from operating
activities 2¾
Determination of cash flows from investing
activities 1
Determination of cash flows from financing
activities 1
Stating cash and cash equivalents ¾
Determination of movement in working capital 4
Workings notes for taxation paid 1½
Stating working notes for cash purchase of PPE 1¾
Working notes for purchase of subsidiary 1
Calculation of dividend paid to NCI 1¾
Calculation of proceed on issue of shares 4
Total 20

SOLUTION 4
Ogbagi Plc
Statement of cash flows for the year ended December 31, 2022
Operating activities: N'000 N'000
Cash received from customers (Wk 2) 3,164,000
Cash paid to suppliers (Wk 3) (1,928,000)
Cash paid to employees (Wk 5) (476,000)
Cash paid for other operating expenses (Wk 4) (314,800)
Cash flow from operation 445,200
Interest Received (Wk 7) 20,200
Interest paid (Wk 6) (15,200)
Taxation paid (Wk 1) (100,000)
Net cash flows from operating activities 350,200
Investing activities:
Purchase of plant and equipment by cash (Wk 8) (200,000)
Purchase of intangible by cash (60,000)
Proceeds from disposal of plant (Wk 9) 56,000
Net cash flows from investing activities (204,000)
Financing activities:
Proceeds from issue of long-term borrowings 40,000
Dividend paid by cash (200,000)
Net cash flows from financing activities (160,000)
Net increase in cash and cash equivalents for the (13,800)
27
year
Cash and cash equivalents at the beginning 240,000
Cash and cash equivalents at the end 226,200

Working notes
Wk 1: Taxation paid N'000
Opening balance (56,000 + 20,000) 76,000
Income tax expense (120,000 + 2,400) 122,400
Expected closing balance 198,400
Actual closing balance (64,000 + 34,400) 98,400
Taxation paid 100,000
Wk 2: Cash received from customers N'000
Opening balance 280,000
Revenue for the year 3,200,000
Expected closing balance 3,480,000
Actual closing balance 316,000
Cash received from customers 3,164,000

Wk 3: Cash paid to suppliers N'000

Cost of sales 1,920,000
Closing inventories 280,000
Opening inventories (260,000)
Purchases for the year 1,940,000
Opening balance of account payables 168,000
Expected closing balance 2,108,000
Actual closing balance of account payables 180,000
Cash paid to suppliers 1,928,000
Wk 4: Cash paid for other operating expenses N'000
Accrued other expenses b/f 12,000
Prepayment b/f (32,000)
Other expenses charge to SOPL 304,000
Accrued other expenses c/f (7,200)
Prepayment c/f 38,000
Cash paid 314,800
Wk 5: Cash paid to employees N'000
Opening balance 16,000
Staff remunerations for the year 480,000
Expected closing balance 496,000
Actual closing balance 20,000
Cash paid 476,000

28
Wk 6: Interest paid N'000
Opening balance –
Interest expense charged to SOPL 16,000
Expected closing balance 16,000
Actual closing balance 800
Interest paid 15,200

Wk 7: Interest received N'000

Opening balance 600
Interest income for the year 20,000
Expected closing balance 20,600
Actual closing balance (400)
Interest received 20,200

Wk 8: Plant and machinery N'000

Opening balance 600,000
Disposal (40,000)
Depreciation (100,000)
Expected closing balance 460,000
Actual closing balance (660,000)
Addition by cash (200,000)
Wk 9: Disposal of plant N'000
Carrying amount 40,000
Proceeds from disposal 56,000
Profit on disposal of plant (16,000)
Wk 10: Investment N'000
Opening balance 48,000
Gain on fair value of investment 8,000
Expected and actual closing balance 56,000
Wk 11: Retained earnings N'000
Opening balance 148,600
Profit for the year 296,000
Expected closing balance 444,600
Actual closing balance (244,600)
Dividend declared and paid 200,000

29
Examiner’s report
The question tests candidates‟ knowledge of preparation of statement of cash flows of
a single entity in accordance with provisions of IFRS 7, using direct method.
Many candidates attempted the question and performance was average.
The commonest pitfall of the candidates was their inability to correctly determine the
cashflows from operating activities, using the direct method. Some of the candidates
could not determine the cash received from customers, cash paid to suppliers as well
cash paid for other operating expenses.
Other candidates also used the indirect method despite the fact that the question
specifically requests for the use of direct method and this led to loss of valuable marks.
Candidates are advised to pay special attention to this area of the syllabus and other
relevant sections for better performance in future examinations of the institute.

Marking guide
Marks
a) Preparation of statement of cash flows
Title of the statement ¼
Determining cash received from customers 1¾
Determining cash paid to suppliers 2½
Determining cash paid to employees 1¾
Determining cash paid for other operating
expenses 2
Determining net cash flows from operating
activities 1¼
Determining cash flows from investing activities 1¼
Determining cash flows from financing activities 1
Stating cash and cash equivalents ¾
Workings notes for taxation paid 2¾
Workings notes for interest paid 1¼
Workings notes for cash purchase of plant and
machinery 1½
Determining profit on disposal of plant 1
Determining gain on fair value of investment 1
Total 20

30
SECTION C

SOLUTION 5

a) Bases of measurement:
i. Historical cost: Assets are measured at the amount of cash paid, or at the
fair value of the consideration given to acquire them. Liabilities are
measured at:
 the amount of proceeds received in exchange for the obligation (for
example, bank loan or a bank overdraft), or
 the amount of cash that will be paid to satisfy the liability.

ii. Current cost or current value is the basis used in current value
accounting/current cost accounting. Assets are measured at the amount that
would be paid to purchase the same or a similar asset currently. Liabilities
are measured at the amount that would be required to settle the obligation
currently.
iii. Realisable value (or settlement value): This method of measurement is
relevant when an entity is not a going concern and is faced with liquidation
(and a forced sale of its assets). Assets are measured at the amount that
could be obtained by selling them. Liabilities are measured at the amount
that would be required to settle them currently.
iv. Present value. Assets might be measured at the value of the future net cash
inflows that the item is expected to generate, discounted to a present value.
Similarly, a liability might be measured at the discounted present value of
the expected cash outflows that will be made to settle the liability.

b) Wadai Plc
i) Statement of profit or loss for the year ended December 31, 2022
Notes N'000 N'000
Revenue 4 40,000
Cost of sales:
Opening inventory 7 1,000
Purchases 34,000
35,000
Closing inventory 6 (5,000) (30,000)
Gross profit 5 10,000
Operating expenses (2,000)
Net profit for the year 3 8,000

31
 Wadai Plc
ii) Statement of financial position as at December 31, 2022
Note N'000
Total non-current assets 50,000
Current assets:
Inventory 5,000
Other current assets 65,000
Total current assets 2 70,000
Total assets 120,000

Equity and liabilities:

Equity 1 40,000
Current liabilities 8 80,000
Total equity and liabilities 120,000

Working notes
Wk 1: Determination of equity
Non-current assets = 5 = 50,000
Equity 4 Equity
Equity = 50,000 x 4 = N40,000
5

Wk 2: Determination of total current assets

Non-current assets = 5 = 50,000
Total current assets 7 Total current assets
Total current assets = 50,000 x 7 = N70,000
5

Wk 3: Determination of net profit

Net profit = 20%
Equity
Net profit = 20% x Equity = 40,000 x 20% = N8,000

Wk 4: Determination of revenue
Net profit
= 20%
Revenue
Revenue = Net profit/20% = 8,000/0.20 = N40,000

Wk 5: Determination of gross profit

Gross profit
= 25%
Revenue
Gross profit = 25% x Revenue = 40,000 x 25% = N10,000

Wk 6: Determination of cost of sales

Revenue – gross profit = cost of sales
32
 N(40,000 – 10,000) = N30,000

Wk 7: Determination of opening inventory

Cost of sales = 10 times
Av. inventory
Average inventory = 30,000/10times = N3,000
But average inventory = ½(opening inventory + closing inventory)
3,000 = ½(opening inventory + 5,000)
3,000 x 2 = opening inventory + 5,000
6,000 – 5,000 = opening inventory opening inventory = N1,000

Wk 8: Determination of current liabilities

Equity
= 50%
Current liability
Current liability = 40,000/0.5 = N80,000

Examiner’s report
The question tests candidates‟ knowledge of the bases of measurement in accordance
with IASB Framework in part a, while part b requires candidates to prepare
summarised statement of profit or loss and statement of financial position from
various financial ratios by generating relevant figures for the financial statements
from the interrelated financial ratios.
Most of the candidates did not attempt this question and the few that attempted
performed poorly.
The main pitfall of the candidates was their inability to identify how these financial
ratios are related and hence they could not use them to generate relevant figures for
the purpose of preparing the summarised financial statements.
Candidates should note that they are expected to be able apply accounting principles
and theories at the skills level of the institute examination hence they are advised to
emphasise the applications of the various accounting principles and theories in
various sections of the syllabus.

33
Marking guide
Marks Marks
a) Explanation of four bases of measurement at 1
mark each 4
b)i Statement of financial position:
Determining total current assets 1½
Determining equity 1½
Calculation of current liabilities 1½
Determining non-current assets 1
Derivation of closing inventory 1
Determining total assets and total liabilities ½ 7
b)ii Statement of profit or loss:
Determination of revenue ½
Estimation of opening inventory 1½
Determination of cost of sales ½
Determination of gross profit 1
Determination of net profit ½ 4
Total 15

SOLUTION 6

a) Ajorosun Investment Limited

Computation of basic EPS and diluted EPS for the year 2021 and 2020
2021 2020

N3,600,000 N3,300,000
Basic EPS = Earnings attributable to ordinary shareholders
Weighted average number of ordinary shares 12,000,000 12,000,000
= N0.30 per share = N0.28 per share

Earnings for Basic EPS + X__ N(3,600,000 + 140,000) N(3,300,000 + 140,000)

Diluted EPS = (12,000,000+1,200,000) (12,000,000+1,200,000)
No. of shares for Basic EPS + Y
N70,000 N3,740,000 N3,440,000
13,200,000 shares 13,200,000 shares
= N0.28 per share = N0.26 per share

Where:
X = Interest savings (net of tax) on convertible
bond that qualifies for dilution
Y = No. of ordinary shares that would be
exchanged for the convertible bond.

34
Working notes

Test of dilution

Incremental EPS = Interest savings (net of tax) on convertible stock

No. of ordinary shares that would be exchanged for the convertible
bond

(a) Interest savings (net of tax)

Total interest = 5% x N4,000,000 = N200,000
Interest saving (net of tax) = N200,000 (1 – 0.3) = N200,000 (0.7) = N140,000

(b) No. of ordinary shares in exchange

Conversion ratio: N100 bond = 30 shares
N4m bond = N4,000,000/N100 x 30 shares = 1,200,000
shares

Incremental EPS = N140,000 = N0.12 per share.

1,200,000
N70,000
Potential shares:
The number of potential shares is calculated using the conversion rate of 30 shares for
every ₦100 of bonds. This is because this conversion rate produces more new shares
than the other conversion rate of 25 shares for every ₦100 of bonds.

b) INTERNAL MEMO

To: Board of Directors, Ajorosun Ltd

From: Finance Manager
Subject: Advantages and limitations of earnings Per Share (EPS)
Date: 19 November, 2024

This memo aims to provide an overview of the advantages and limitations of Earnings
Per Share (EPS) as a performance indicator for users of financial statements.

Advantages of EPS
(i) Simplicity and comparability: EPS provides a straightforward measure of
profitability on a per-share basis, allowing investors to easily compare the
earnings performance of different companies within the same industry.
(ii) Decision-making tool for investors: Investors often use EPS as a key metric to
evaluate potential returns, aiding in decision-making about buying, holding, or
selling shares.

35
(iii) Market sentiment indicator: A rising EPS trend indicates strong company
performance, often leading to increased investor confidence and positive market
sentiment.
(iv) Basis for valuation metrics: EPS is a core input in widely used valuation ratios
like the Price-Earnings (P/E) ratio, helping investors assess the relative value of a
company's stock.
(v) Trend analysis: It can be used to evaluate and compare the EPS of the same
entity in different years. Thus, it is useful in trend analysis of an entity‟s EPS.
(vi) Performance measurement: It measures performance from the perspectives of
investors and potential investors
(vii) Earning distribution: It points out earnings distributable to the entity‟s
shareholders

Limitations of EPS
(i) Ignores capital structure: EPS does not account for differences in capital
structure, such as debt levels. Two companies with similar EPS but different risk
profiles (e.g., high vs. low debt) may not be equally attractive.
(ii) Subject to accounting manipulation and window dressing: EPS can be
manipulated through accounting practices, such as share buybacks or changes in
depreciation methods, which may not reflect genuine operational improvements.
(iii) Fails to consider cash flows: EPS focuses solely on accounting profits,
disregarding cash flows. This limits its usefulness for evaluating a company's
ability to meet financial obligations or invest in growth.

(iv) Inflation: Inflation is not considered.

(v) Historical cost information: Historical information from the financial statement is
used, hence it does not take cognizance of time value of money.
(vi) Differential in accounting policies: The choice of accounting policies affects EPS
of an entity.
While EPS is a widely recognised performance indicator, it should be used
alongside other financial metrics to gain a more comprehensive understanding of
a company‟s financial health and prospects.

Best regards,
Finance Manager

36
Examiner’s report
The question examines candidates‟ knowledge of computation of basic and diluted
earnings per share (EPS) and the advantages and limitations of the EPS as
performance indicators to users of financial statements.
Few candidates attempted the question and performance was below average.
Most candidates could not correctly calculate the basic and diluted earnings per share
(EPS). However, they were able to explain the advantages and limitations of the EPS
as a performance indicator to users of financial statements.
Candidates are advised to pay more attention to all areas of the syllabus most
especially the relevant international accounting standards at this level of the institute
examination.

Marking guide
Marks Marks
a) Calculation of basic and diluted earnings per
share with comparative figures:
Calculation of basic EPS and comparative 4
figures
Calculation of diluted EPS and its comparative
figures 4 8
b)ii Memo addressed to board of directors
explaining advantages and limitations of EPS:
Presentation of report in memo format 2
Explaining four (4) advantages at ½ mark each 2
Explaining three (3) limitations at 1 mark each 3 7
Total 15

SOLUTION 7

a) Major inappropriate practices that can be discovered whilst reviewing your

client's financial statements and accompanying analysis:
(i) Revenue recognition manipulation: This occurs when a company inflates its
revenue by recognising sales that have not yet occurred or by recognising
revenue prematurely. For instance, recording revenue from contracts that
are not yet fulfilled violates the principle of revenue recognition. This
misleads stakeholders about the company's financial performance and
inflates profitability.
(ii) Understatement of liabilities or expenses: Companies may deliberately omit
or understate liabilities (e.g., contingent liabilities) or fail to record
expenses to enhance reported profitability or maintain compliance with

37
 debt covenants. This distorts the financial position and may lead to
inaccurate assessments of the company‟s solvency.
(iii) Overstatement of asset values: Inflating the value of assets such as
inventory, accounts receivable, or intangible assets, such as goodwill, can
artificially improve a company's statement of financial position. This often
involves using unrealistic assumptions or failing to account for
impairments. Overstated assets mislead stakeholders about the true net
worth and financial stability of the company.
(iv) Misclassification of expenses: Companies may intentionally misclassify
operating expenses as capital expenditures to improve reported
profitability. This inflates current period profits while understating actual
costs. A company classifies routine repair and maintenance costs as
improvements to non-current assets, which should be expensed in the
income statement rather than capitalised on the statement of financial
position. This misclassification distorts both the income statement and the
statement of financial position misleading stakeholders about the
company's operational efficiency and financial position.
(v) Window dressing of the year-end financial position
Examples may include:
 Agreeing with customers that receivables are paid on shorter term
around year end, so that trade receivables collection period is reduced
and operating cash flows are enhanced.
 Modifying the supplier payment cycle by delaying payment normally
made in the last month of the current year until first month of the
following year. This will improve the cash position.

(vi) Exercise of judgement in applying accounting standards

 Reducing the percentage of outstanding receivables for which full
provision is made.
 Extending useful life of property, plant and equipment to reduce depreciation
charge hence inflating profit.
 Reducing the obsolence provision in respect of slow-moving inventories.

(vii) In-appropriate transactions recording

Intentionally failing to correct a number of accounting errors

aii) Identification and explanation of THREE fundamental ethical considerations that

professional accountants should always consider.
 Integrity: Accountants must be honest and straightforward in all
professional and business relationships. They should avoid falsifying
records or participating in fraudulent reporting. This builds trust and
ensures that financial reports are reliable for decision making.
38
  Objectivity: Accountants must not allow bias, conflicts of interest, or undue
influence from others to override their professional judgment. For example,
pressure from management should not compromise their assessments.
Objectivity ensures fair and unbiased representation of financial data.
 Professional competence and due care: Accountants must maintain their
knowledge and skills to provide competent services, ensuring they apply
relevant laws, regulations and standards. This upholds the quality of
financial reporting and aligns with stakeholders' expectations.
 Confidentiality: Professional accountants must respect the confidentiality of
information obtained during their work. This means they should not disclose
such information to third parties without proper authority or unless there is
a legal or professional obligation to do so.
Protecting sensitive client or company information builds trust between the
accountant and stakeholders while ensuring compliance with legal and
professional standards. An accountant working on an acquisition should not
disclose financial details to external parties before the information is
publicly announced.
 Professional behaviour: Accountants must comply with relevant laws and
regulations and avoid actions that discredit the profession. This includes
behaving ethically, maintaining transparency, and promoting public
confidence in the profession.
Upholding professional behaviour safeguards the reputation of the
accounting profession and ensures high standards of practice. Avoiding
involvement in tax evasion schemes or fraudulent activities even when
pressured by management or clients.

b) Reasons why the comparison of primary financial statements is problematic for

users despite the global adoption of IFRS
(i) Differences in application of IFRS: While IFRS provides a global framework,
companies in different jurisdictions may interpret or apply the standards
differently due to variations in regulatory guidance or enforcement
mechanisms. This creates inconsistencies in financial reporting, making
comparisons less reliable.
(ii) Impact of judgment and estimates: IFRS requires the use of professional
judgment in areas like asset valuation, impairment and revenue
recognition. Subjective estimates can differ significantly between
companies. Users may find it challenging to identify whether differences are
due to operational realities or varying interpretations of IFRS.

39
(iii) Local laws and cultural influences: Despite IFRS adoption, local laws, tax
systems, and cultural practices may influence how companies prepare and
disclose financial statements. For example, taxation rules can affect
reported profits differently across regions. This can reduce comparability
even when companies report under the same IFRS standards.
(iv) Impact of different economic environments: Companies operating in diverse
countries face varying economic environments, such as inflation rates,
exchange rates and interest rates. These differences can significantly
influence financial results and ratios, making direct comparisons between
companies challenging.
A company operating in a high-inflation economy may show distorted asset
values or costs compared to a company in a low-inflation economy, despite
similar operational performance.
(v) Use of management estimates and judgments: Financial statements often
rely on management's estimates and judgments, such as in valuing
inventory, calculating depreciation, or assessing impairment. These
subjective decisions can vary widely between companies, even within the
same industry, affecting comparability.
One company may use aggressive assumptions for revenue recognition,
while another applies conservative assumptions, leading to different
reported earnings despite similar underlying operations.
(vi) Different accounting policies: There is still flexibility allowed in the choice of
accounting policies adopted by companies. One important choice involves
the option to revalue PPE. This will have an impact on assets and equity
values in the financial statements (statement of financial position) and also
the amount of depreciation in the statement of profit or loss.
(vii) Different format of financial statements: A characteristic of IFRS is that it is
flexible in terms of how statements are presented. All statements required
minimum disclosures but do not specify precise formats. Furthermore the
statement of profit or loss can be presented in different formats (by function
or by nature) making comparison particularly difficult.
(viii) Different year-ends: Company may prepare their financial statements at any
month end of their choice. Some companies involved in seasonal trading
may chose a year end that presents a more favourable impression of their
financial position than is typical for the year, others may not.
These factors highlight the inherent challenges in achieving full
comparability of financial statements, even under global accounting
standards like IFRS.

40
Examiner’s report
The question tests candidates‟ knowledge of possible inappropriate practices that
could exist in financial statements when carrying out its review. The question also
requires candidates to identify and explain fundamental ethical considerations which
professional accountants should always consider as well as to state the reasons why
comparison of primary financial statements is problematic to users despite the global
adoption of IFRS.
Most candidates attempted the question and performance was average.
Majority of the candidates were able to identify and explain major inappropriate
practices when reviewing financial statements. They could also clearly state the
fundamental ethical considerations that professional accountants should always
consider. However, only few of them could state the reasons why comparison of
primary financial statements is problematic to users.
Candidates are advised to ensure to cover all sections of the syllabus for better
performance in future examinations of the institute.

Marking guide
Marks Marks
a)i Identification and explanation of three (3) major
inappropriate practices at 1½ mark each 4½
ii Identification and explanation of three (3) fundamental
ethical considerations that professional accountants should
always consider at 1½ marks each 4½ 9
b) Stating three (3) reasons why comparison of primary
financial statement is problematic for users at 2 marks each 6
Total 15

41
ICAN/242/Q/B2 Examination No...........................
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

SKILLS LEVEL EXAMINATION – NOVEMBER 2024

AUDIT AND ASSURANCE
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 any other COLOUR OF INK will not be marked.
8. You are required to attempt Question ONE (Compulsory), TWO Questions in
Section B and TWO Questions in Section C.
9. Check that you have collected the correct question paper for the examination you
are writing.
WEDNESDAY, NOVEMBER 20, 2024

DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO

42
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION – NOVEMBER 2024

AUDIT AND ASSURANCE

Time Allowed: 31/4 hours (including 15 minutes reading time)

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

QUESTIONS IN THIS PAPER

SECTION A: COMPULSORY QUESTION (30 MARKS)

QUESTION 1
Hellen Ayee, a Ph.D Accounting degree holder, recently joined a renowned firm of
chartered accountants as a new audit staff. She was excited at the insights she gained
upon completion of the firm‟s mandatory orientation period for new hires. During her
first assignment at the audit of a medium sized manufacturing entity, she overheard
the supervisor and other more experienced members of the audit team discussing a
N500 million difference between the actual revenue figure as per trial balance and the
revenue of N75 billion obtained by an audit-intern staff. As the brainstorming session
continued, Hellen understood that N500 million is material to the financial statements
of the manufacturing entity. She also gathered that the audit team had, as part of the
approved work programme, tested controls and noted no exceptions. However, the
difficulty started when the difference of N500 million was recorded. Rightly, Hellen
joined the discussion and together with the audit team, they read and understood the
substantive work areas of the work programme.

The supervisor, being satisfied with Hellen‟s contribution, reassigned the audit of
revenue to Hellen with the following instructions:

(i) Familiarise yourself with all the work done to date on revenue;
(ii) Perform the substantive analytical procedures on revenue as well as complete
other remaining substantive procedures; and
(iii) Document your conclusions.

The supervisor, recognising that the engagement is for the statutory audit of the
financial statements of the manufacturing entity meant for filing in Nigeria, and
having noted that you are writing the Skills level of the ICAN Examinations and
therefore, have sufficient knowledge and relevant experience to review Hellen‟s work,
assigned the responsibility to you.

43
Required:
a. During the review of Hellen‟s work, you noted the necessity to explain the
objectives and the need for audit and assurance to her.
Required:
i. Explain the objectives of an external audit and differentiate an audit from
an assurance engagement. (3 Marks)
ii. Identify the parties to an audit engagement and highlight the key
differences between the responsibilities of the directors of the
manufacturing entity and the audit firm. (3 Marks)
b. During your review of Hellen‟s work, she wondered about the rights and duties
of the external auditor. S. 404 of the Companies and Allied Matters Act 2020 (as
amended), requires the auditor to form an opinion on matters stated in
schedule 5 to CAMA.
Required:
Explain to Hellen the matters in schedule 5 to CAMA. (6 Marks)
c. As you were about to complete your review of Helen‟s work, the audit-intern
staff joined and you needed to provide some coaching.

Required:
i. Explain the FOUR guidelines used by auditors to determine the reliability
of audit evidence (8 Marks)
ii. Define “Analytical procedures” in accordance with ISA 520 (2 Marks)
iii. Explain FOUR issues ISA 520 requires the auditor to consider when using
analytical procedures in substantive testing (8 Marks)
(Total 30 Marks)
SECTION B: YOU ARE REQUIRED TO ATTEMPT TWO OUT OF THREE QUESTIONS
IN THIS SECTION (40 MARKS)

QUESTION 2
The Committee of Sponsoring Organisations of the Treadway Commission (COSO)
describes internal control as a process, effected by an entity‟s board of directors,
management, and other personnel, designed to provide reasonable assurance
regarding the achievement of objectives in the following categories: effectiveness and
efficiency of operations; in the reliability of reporting; and in compliance with
applicable laws and regulations.
Required:
a. Describe an internal control system. (2 Marks)
b. Explain the different types of internal controls. (6 Marks)
c. Explain FOUR components of internal controls. (8 Marks)
d. State the FOUR limitations of internal controls. (4 Marks)
(Total 20 Marks)
44
QUESTION 3

The following is an extract from a publication in a financial newspaper:

“Materiality, a fundamental concept in auditing, is the lens through which the
independent auditor examines financial statements to ascertain whether they contain
material errors or misstatements and whether the audited financial statements present
a true and fair view of the company's financial affairs in accordance with the
international standards on auditing. To play this fiduciary role effectively, the auditors
must be independent of the shareholders and the management team of the entity”;
and

During the recently concluded Annual General Meeting (AGM) of New-Level Insurance
Plc, the statutory auditors, Messrs Aliyu & Ayodele (Chartered Accountants) informed
the shareholders that they are independent of New-Level Insurance Plc, and that they
conducted their audit in sufficient detail to identify material errors or misstatement in
the financial statements, if any existed. In turn, the shareholders, knowing that the
financial statements were audited to levels of materiality, sought to understand from
the auditors the areas for improvement noted for management action during the audit.
A fellow ICAN student shared the excerpt with you as part of your discussions.
Required:
a. Explain “Audit” and “Assurance”. (3 Marks)
b. Explain the concept of “True and Fair View”. (4 Marks)
c. Discuss the importance of the materiality concept to an external auditor.
(4 Marks)
d. State TWO reasons to justify the requirement for an auditor to be independent
of the audit client. (4 Marks)
e. In terms of ISA 320, explain when the statutory auditor is required to apply the
concept of materiality. (5 Marks)
(Total 20 Marks)

QUESTION 4
The IFAC Code provides additional guidance for all professional accountants on how to
respond to Non-Compliance with Laws and Regulations (NOCLAR).
Required:
a. State FIVE examples of NOCLAR. (5 Marks)
b. Explain NOCLAR framework as it relates to the professional accountant.
(5 Marks)
c. Explain FIVE steps the professional accountant will take when he becomes
aware of NOCLAR. (10 Mark)
(Total 20 Marks)

45
SECTION C: YOU ARE REQUIRED TO ATTEMPT TWO OUT OF THREE QUESTIONS IN
THIS SECTION (30 MARKS)

QUESTION 5
Qual-Bank Limited, a leading bank in Nigeria, has recently recognised the significance
of staying abreast of developments in the digital space and has accordingly deployed
a state-of-the-art online enterprise system for all its banking operations. The
shareholders, being technologically savvy, are concerned that the statutory auditors
may not have the skill and experience to audit a bank such as theirs. They understand
that such technological advancement in the bank certainly calls for the deployment of
digitally supported audit techniques, if they are to have any confidence in the audit
report.

The Institute of Chartered Accountants of Nigeria (ICAN) had since, through so many
fora, including mandatory training and conferences, equipped members of the
Institute to not only adapt to technological changes in their clients‟ environment but
indeed to be ahead of the curve. It is, therefore, to be expected that Tomiwa, the Lead
Partner in Tomiwa Chuks & Co, with a wealth of experience in auditing financial
institutions, is also well-versed in the application of digital techniques in the provision
of audit services.

Together with his teammates, Tomiwa led effort towards updating the team‟s risk
assessment, planning, execution and reporting phases of the audit of Qual-Bank to
reflect the significant changes at the bank and to the admiration of management,
directors and shareholders. Specifically, Tomiwa implemented integrated real-time
audit software into the audit process to:

(i) Support efforts in ascertaining the accuracy and reliability of financial

statements; and
(ii) Assess the online transactions and complex financial data generated by the
bank's digital system.

You have also deepened your understanding of digital/IT audit techniques and as part
of the Qual-Bank audit team, you are required to:

a. Explain THREE likely challenges Tomiwa Chuks & Co would face in its just
implemented advanced audit software. (9 Marks)

b. Explain SIX methods of obtaining audit evidence for substantive testing.

(6 Marks)
(Total 15 Marks)

46
QUESTION 6
High-Flier Nigeria Limited was incorporated in 2003. This visionary company became
known as a symbol of innovation and a commitment to excellence. With the passage of
time, the company's success stood firmly on the core principles of transparency,
accountability, and the presentation of fair financial statements.
At the heart of High-Flier Nigeria Limited's corporate ethos, is the profound
understanding of the principal-agent theory - a concept of paramount significance in
the realm of corporate governance. This theory emphasises the need for directors to
meticulously render accounts of their stewardship to the shareholders.

This accountability is not a mere formality but the very essence of their corporate
narrative.
Required:
a. Explain the Principal-agent relationship. (2 Marks)
b. In the context of the above scenario,
i. Who is the principal?
ii. Who is the agent? (2 Marks)
c. Explain the concept of stewardship. (2 Marks)
d. Explain TWO reasons for which stewardship account is rendered. (4 Marks)
e. Explain the concept of accountability. (2 Marks)
f. Describe “financial statements”. (3 Marks)
(Total 15 Marks)

QUESTION 7
Trade and other receivables often form a substantial part of current assets, and the
amounts could be significant to the financial statements of an entity. If not well
managed, recovery could be expensive and in some instances some balances may be
lost.
You are the staff responsible for the audit of trade and other receivables during the
year-end statutory audit of Nano-Manufacturing Limited, a company based in Port
Harcourt, Nigeria, with approximately 65% of sales on credit.
Required:
a. Describe TWO principal risks of misstatement of the balances of trade
receivables balances. (2 Marks)
b. Explain FOUR purposes of a direct confirmation of receivables. (6 Marks)
c. Explain the FOUR requirements of ISA 505 as they relate to the auditor
maintaining control over external confirmation requests. (4 Marks)
d. Enumerate THREE steps you would take if the client‟s management refuses to
allow you to send a confirmation request. (3 Marks)
(Total 15 Marks)

47
SOLUTION 1

a. i. Objectives of an external audit

The main objective of an external audit is to enable an auditor to express
an opinion as to whether the financial statements of an entity are
prepared according to the applicable accounting standards and in
compliance with the relevant laws and regulations.

The secondary objectives are to prevent and detect errors and frauds,
and to give recommendations for improvements in the internal control
system to management or those charged with governance.

Distinctions between an audit and an assurance engagement

Audit Assurance engagement

 This is a review of all aspects of This is a review into an aspect

the financial statements. of the financial statements.
 It is a reasonable form of It is a limited form of assurance
assurance with high level, but where the practitioner‟s
not absolute. Conclusion is opinion is expressed in a
usually expressed in a positive negative form, for example,
form, for example, “in our “nothing has come to our
opinion, the financial attention to suggest that
statements are true and fair”. information is misstated”.
 An audit takes more time and is An assurance engagement
more costly. takes less time and is less
costly.
 The auditor is not limited in The practitioner is limited to a
his/her review of the entire segment of the entity for
entity. example, a review of a cash
flow forecast.

ii. Parties to an audit engagement include:

 The management or those charged with governance of the entity;
 The external auditor; and
 Third parties.

48
 Differences in responsibilities of directors and audit firm
The directors are responsible for:
 The preparation of the financial statements in line with the relevant
standards and extant laws and regulations;
 Giving the auditors access to their premises and locations;
 Giving explanations to all the auditors‟ queries; and
 Providing all records and information required by the auditors.

The audit firm is responsible for the:

 Review and audit of the financial statements of the entity; and
 Expression of opinion on the financial statements of the entity.

b. Section 407 of CAMA 2020 requires the auditor to form an opinion on

matters stated in schedule 5 of CAMA 2020, as provided below:

 Whether the auditors have obtained all information and explanations

which to the best of their knowledge and belief were necessary for the
purpose of their audit;
 Whether in the auditor‟s opinion, proper books of accounts have been
kept by the company, so far as it appears from their examination of those
books, and proper returns adequate for the purpose of audit have been
received from branches not visited by them;
 Whether the company‟s statement of financial position and (unless it is
framed as a consolidated profit or loss account) profit or loss account
dealt with by the report agree with the books of accounts and returns;
 Whether in the auditor‟s opinion and to the best of their information
and according to the explanations given them, the said statements give
the information required by the Act in the manner so required and give a
true and fair view in the case of:
 The statement of financial position, of the state of the company‟s
affairs as at the end of it‟s year; and
 The profit or loss account, of the profit or loss for its year; or as
the case may be, give a true and fair view thereof subject to the
non-disclosure of any matters (to be indicated in the report)
which, by the virtue of Part 1 of the second schedule of the Act,
are not required to be disclosed; and
 In the case of holding company submitting group financial statements
whether, in their opinion, the group financial statements have been
properly prepared in accordance with the provisions of this Act so as to
give a true and fair view of the state of affairs and profit or loss of the
company and its subsidiaries and associates.

49
c. Coaching aspect to the audit intern staff

i. Reliability: This relates to the integrity and credibility of the evidence. The
following factors assist in assessing the reliability of an audit evidence:
 Documentary evidence is more reliable than oral evidence;
 Original documents are more reliable than photocopies;
 Evidence obtained from outsider source is more reliable than one from
insider source;
 Evidence from satisfactory internal control is more reliable than the one
obtained from poor internal control; and
 Evidence generated by auditor himself is more reliable than evidence
from client or internal source.

ii. The standard (ISA 520) defines „Analytical procedures‟ as “evaluations of

financial information through analysis of plausible relationships among both
financial and non-financial data”. Analytical procedures also encompass
investigation of identified fluctuations or relationships that are inconsistent
with other relevant information or that differ from expected values by a
significant amount.

iii. Analytical procedures in substantive testing

When using analytical procedures in substantive testing, ISA 520 requires the
auditor to:
 Determine the suitability of particular substantive analytical procedures for
given assertions – that is, how effective they will be in detecting a
particular type of material misstatement;
 Develop an expectation of recorded amounts or ratios and evaluate
whether that expectation is sufficiently precise to identify a misstatement;
 Evaluate the reliability of the data from which the expectation has been
developed; and
 Determine what level of difference from expected amounts is acceptable
without further investigation.
Examiner’s report
The question tests candidates‟ knowledge of audit engagements, matters stated in
schedule 5 of CAMA 2020 on audit opinion, and substantive testing principles.

Being compulsory, virtually all the candidates attempted the question, but
performance was below average.

The common pitfalls were the misrepresentation of the objectives of an external audit
and assurance engagements, and specific functions of the external auditors as they
relate to Schedule 5 to Companies and Allied Matters Act 2020 (CAMA).
Candidates are advised to read widely making use of the Institute‟s Pathfinders and
Study Text to prepare for future examinations.
50
Marking guide
Marks Marks
(a) i. Objectives of external audit
Primary objective ½
Secondary objective ½
Differences between audit and assurance engagements
Any 2 correct points @ 1 each 2 3

ii. Parties to an audit engagement

Any 2 points @ ½ mark each 1
Responsibilities of the directors and audit firm
2 correct points for directors @ ½ mark each 1
2 correct points for audit firm @ ½ mark each 1 3

(b) Matters in schedule 5 of CAMA 2020

2 marks each for any 3 correct points 6

(c) i. Guidelines to determine reliability of audit evidence

Any 4 correct points @ 2 marks each 8
ii. Defining analytical procedures 2
iii. Four requirements of ISA 520 to the auditor as regards
analytical procedures at 2 marks each 8 18
Total 30

SOLUTION 2

a) An internal control system

„An internal control system encompasses the policies, processes, tasks,
behaviours, and other aspects of a company taken together to:

i. Facilitate its effective and efficient operation by enabling it to respond

appropriately to significant business, operational, financial, compliance
and other risks to achieving the company‟s objectives;
ii. Help to ensure the quality of internal and external reporting;
iii. Help to ensure compliance with applicable laws and regulations; and
with internal policies with respect to the conduct of business.

51
b) Types of Internal control

ISA 315 categorises internal controls into the following types:

i. Performance reviews - These include reviews and analyses of actual

performance against budgets, forecasts and prior period performance.
Most of these control activities will be performed by management and
are often referred to as management controls. They include supervision
by management of the work of subordinates, management review of
performance and control reporting (including management accounting
techniques such as variance analysis).
ii. Information processing - A variety of controls are used to check the
accuracy, completeness and authorisation of transactions. These controls
are split into two broad groupings:
 Application controls (controls over master files and standing data
and controls over inputs, processing and outputs); and
 General IT controls.

iii. Physical controls - These include controls over the physical security of
assets and records to prevent unauthorised use, theft or damage.
Examples include limiting access to inventory areas to a restricted
number of authorised personnel, and requiring authorisation for access
to computer programs and data files.

iv. Segregation of duties - This control involves assigning different people

the responsibilities of authorising and recording transactions and
maintaining the custody of assets. This reduces the likelihood of an
employee being able to carry out and conceal errors or fraud.

c) ISA 315 identifies five components which together make up the internal
control system:
i. The control environment
The „control environment‟ is often referred to as the general
„attitude‟ to internal control of management and employees in the
organisation.

The control environment includes the views, awareness, and

actions of management regarding an entity‟s internal control. It
also includes the governance and functions of management and
asserts the premise of an organisation. It is the basis for good
internal control, providing guidance and structure.

52
 ii. The entity’s risk assessment process
Within a strong system of internal control, management should
identify, assess and manage business risks, on a continual basis.
Significant business risks are any events or omissions that may
prevent the entity from achieving its objectives.

Identifying risks means recognising the existence of risks or

potential risks. Assessing the risks means deciding whether the
risks are significant, and possibly ranking risks in order of
significance. Managing risks means developing and implementing
controls and other measures to deal with those risks.

ISA 315 requires the auditor to gain an understanding of these risk

assessment processes used by the client company‟s management,
to the extent that those risk assessment processes may affect the
financial reporting process.

iii. The information system

An information system consists of the infrastructure (physical and
hardware components), the software, the people, the procedures,
and the data within the entity.

ISA 315 requires the auditor to gain an understanding of the business

information systems (including the accounting systems) used by
management to the extent that they may affect the financial reporting
process.
iv. Control activities (internal controls)
Control activities are the policies and procedures, other than the control
environment, used to ensure that the entity‟s objectives are achieved.
They are the application of internal controls. Control activities are the
specific procedures designed to prevent errors that may arise in
processing information, or to detect and correct errors that may arise in
processing information.

v. Monitoring of controls
It is important within an internal control system that management
should review and monitor the operation of the controls, on a systematic
basis, to satisfy themselves that the controls remain adequate and that
they are being applied properly. ISA 315 requires the auditor to obtain
an understanding of this monitoring process.

53
d) Limitations of internal controls

Internal control systems are never fool proof. All systems, no matter how
effective they may appear to be, have several limitations. These include:
i. Human error may result in incomplete or inaccurate processing which
may not be detected by control systems;
ii. Certain types of controls may not be cost-effective to be established in an
organisation;
iii. Controls may be in place, but they may be ignored or overridden by
employees or management; and
iv. Collusion may render segregation of duties to be ineffective. Collusion
means that two or more people work together to avoid a control, possibly
for the purpose of committing fraud.

Examiner’s report
The question tests candidates‟ knowledge of internal control system and internal
controls.

About 90% of the candidates attempted the question, but the performance was fair.
The common pitfall of the candidates was mix-up of meanings of types and
components of internal control.

Candidates ate enjoined to be meticulous in their studies. This would ensure proper
assimilation of professional knowledge and scholarship.

Marking guide
Marks
(a) Description of internal control 2
(b) Types of internal control
3 correct points @ 2marks each 6
(c) Components of internal control
4 correct points @ 2 marks each 8
(d) Limitations of Internal control
4 correct points @ 1 mark each 4
Total 20

54
SOLUTION 3

a. An audit is an official examination of the financial statements of an entity by the

auditor. The objective of an audit is to enable the auditor form an opinion as to
whether the financial statements of the entity give a true and fair view and are
prepared according to applicable financial framework.

An assurance engagement is where a firm is engaged by one party to give an

opinion on a piece of information that has been prepared by another party. The
opinion is an expression of assurance about the information that has been
reviewed. It gives assurance to the party that hired the assurance firm that the
information can be relied on.

b. The auditor reports on whether the financial statements give a true and fair view,
or present fairly, the position of the entity as at the end of the financial period
and of the performance of the entity during the period. The auditor does not
certify or guarantee that the financial statements are correct.

Although the phrase „true and fair view‟ has no legal definition, the term „true‟
implies free from error, and „fair‟ implies that there is no undue bias in the
financial statements or the way in which they have been presented. In preparing
the financial statements, a large amount of judgement is though exercised by the
directors.

Similarly, judgement is exercised by the auditor in reaching his opinion. The

phrases „true and fair view‟ and „present fairly‟ indicate that a judgement is being
given that the financial statements can be relied upon and have been properly
prepared in accordance with an appropriate financial reporting framework.

c. The materiality concept

The auditor reports in accordance with the concept of materiality. He gives an
opinion on whether the financial statements present fairly in all material respects
the financial position and performance of the entity. Information is material if, on
the basis of the financial statements, it could influence the economic decisions of
users should it be omitted or misstated.

Applying the concept of materiality means that the auditor will not aim to
examine every number in the financial statements. He will concentrate his efforts
on the more significant items in the financial statements, either because of their
value, or because there is a greater risk that they could be omitted or stated
incorrectly.
55
d. Reasons to justify the requirements for an auditor to be independent of
the audit client include:
i. To avoid undue influence from management of the entity;
ii. To ensure that the auditor complies with all relevant laws and financial
reporting requirements; and
iii. To ensure that the auditor does not have any financial or other vested
interest in the client‟s organisation.

e. ISA 320: Materiality in planning and performing an audit requires the

auditor to apply the concept of materiality:
i. When planning and performing the audit;
ii. When evaluating the effect of misstatements on the financial statements
and therefore on his audit opinion; and
iii. When assessing the aggregate of all material aspects of the audit at the
reporting stage.

Examiner’s report
The question tests the candidates‟ knowledge of audit and assurance, and
independence of the auditor on materiality concept.

About 80% of the candidates attempted the question, but performance was just fair.
The common pitfall was the candidates‟ inability to explain the fundamental audit
issues.
Candidates are advised to study very well for the next examination and make use of
the Institute‟s Study Text and other relevant publications.

Marking guide
Marks
(a) Explanation of audit and assurance 3
(b) Explanation of true and fair View 4
(c) Explanation of importance of materiality 4
(d) Justification of auditors independence
(2 marks any two) 4
(e) Concept of materiality
Any 2 correct points @ 2 ½ marks 5
Total 20

56
SOLUTION 4

a) Examples of Non-Compliance with Laws and Regulation (NOCLAR)

include:
i. Fraud, corruption, and bribery;
ii. Money laundering, terrorist financing and proceeds of crime;
iii. Securities markets and trading;
iv. Banking and other financial products and services;
v. Data protection;
vi. Tax and pension liabilities and payments;
vii. Environmental protection;
viii. Public health and safety, and
ix. Non compliance with government financial regulations.

b) Implications of the NOCLAR Framework

Under the framework, auditors cannot simply resign from an engagement
because of identified or suspected NOCLAR without the matter being
appropriately addressed.

The NOCLAR framework explains:

i. The process to be followed when a professional accountant encounters a
suspected fraud or illegal act (i.e., NOCLAR); and
ii. The circumstances in which a professional accountant would override the
fundamental principle of confidentiality and disclose the matter to an
appropriate authority (also known as whistle-blowing).

c) Where a professional accountant becomes aware of a matter relating to

NOCLAR, he must:
i. Obtain an understanding of the matter;
ii. Advise management to rectify, remediate, or mitigate the consequences
of non-compliance;
iii. Deter the commission of the non-compliance where it has not yet
occurred;
iv. Advise management to disclose the matter to an appropriate authority;
and
v. Advise management to determine whether further action is needed by
considering the appropriateness of management‟s response.

57
Examiner’s report
The question tests candidates‟ knowledge of Non-Compliance with Laws and
Regulations (NOCLAR).

About 10% of the candidates attempted the question, and performance was fair.
The pitfall of the candidates was lack of proper coverage of the subject syllabus,
especially the current issues in auditing.

Candidates are advised to be up-to-date in their studies, incorporating new and

contemporary issues and developments. Additionally, they should always make use of
the Institute‟s Study Text and Pathfinder.

Marking guide
Marks
(a) Examples of NOCLAR
1 mark each for 5 correct points 5

(b) Implications of NOCLAR

2½ marks each subject to a maximum of 2 points 5

(c) Steps to take when aware of NOCLAR

2 marks each subject to a maximum of 5 correct points 10
Total 20

SOLUTION 5

a) Likely Challenges with using advanced audit software

Advanced audit software may need to be written so that it is compatible with
the client entity‟s IT system, and can therefore face challenges in its use,
particularly in the following circumstances:
i. When it is being used for the first time for a client, so that the audit
firm has high set-up costs;
ii. The client entity changes its accounting system, so that new the audit
software would need to be modified substantially;
iii. There may be problems with producing a suitable audit software where
the client has an old purpose-written IT accounting system for which
there is incomplete system documentation; and
iv. When using copies of client‟s files, the auditor should insist on observing
the copying of the files to make sure that they are correct and genuine.

58
b) Methods of obtaining audit evidence for substantive testing include:
i. Inspection - Obtaining evidence about an item by sighting it. For
example, an auditor can obtain evidence about the existence of tangible
non-current assets by going to look at them or to confirm existence
physically;
ii. Observation -The auditor can obtain evidence by watching a procedure
and seeing how it is carried out, for instance, physical inventory count
process;

iii. Inquiry - Evidence can be obtained by asking questions. For example,

evidence about the existence of trade receivables can be obtained by
asking customers on the list of trade receivables to confirm that they do
owe the amount of money that the client company asserts;

iv. Confirmation - This is a specific type of inquiry where the auditor

seeks confirmation from a party outside the entity, for example, from a
bank or a customer;
v. Re-calculation - The auditor checks the arithmetical accuracy of
documents or records, for example, payroll recomputation;
vi. Reperformance - The auditor independently re-performs, or carries out
procedures or controls originally performed by the client; and.
vii. Analytical procedures - These are ratios and comparative analyses
computed by the auditor to reveal relationships between actual,
expected, and periodic financial and non-financial information.

Examiner’s report
The question tests candidates‟ knowledge of challenges in the implementation of
advanced audit software in the audit process and audit evidence.

About 80% of the candidates attempted the question, but performance was only fair.
The common pitfall of the candidates was their inability to explain computer audit
software and associated issues and challenges.

Candidates are advised to be adequately equipped with modern audit techniques and
issues.

59
Marking guide
Marks
(a) Likely challenges Tomiwa Chuks & Co. would face for
implementation of advanced audit software
3 marks each subject to maximum of 3 points 9
(b) Methods of obtaining audit evidence for substantive testing
1 mark each for any correct 6 points 6
Total 15

SOLUTION 6

a) The relationship between the shareholders of a company and the board of

directors is an application of the general legal principle of agency. The concept
of agency applies whenever one person or group of individuals acts as an agent
on behalf of someone or group (the principal). The agent has a legal duty to act
in the best interests of the principal, and should be accountable to the principal
for everything that he does as agent.
b) i. The principal is the shareholders.
ii, The agent is the directors.

c) Stewardship
The directors play a stewardship role in the affairs of the company. They look
after the assets of the company and manage them on behalf of the
shareholders. In small companies, the shareholders may be the same people as
the directors. However, in most large companies, the two groups are different.

d) Why stewardship accounts should be rendered

i. The directors are usually different and distinct from the owners - the
shareholders.
ii. To present a record of the financial affairs to the owners at the end of a
period.
e) Accountability
As agents for the shareholders, the board of directors should be accountable to
the shareholders. For the directors to show their accountability to the
shareholders, it is a general principle of company law that the directors are
required to prepare annual financial statements, which are presented to the
shareholders for their approval.

60
f) Financial Statements
The financial statements refer to the compendium comprising:
i. Statement of financial position;
ii. Statement of profit or loss and other comprehensive income;
iii. Statement of changes in equity;
iv. Statement of cashflows; and
v. Statement of value-added.

Examiner’s report
The question tests the candidates‟ knowledge of the Principal - Agent relationship,
stewardship and accountability as they relate to audit and financial statements.

About 75% of the candidates attempted the question and the performance was fair.
The common pitfall of the candidates was their inability to relate their solutions on
Principal and Agent, Stewardship and Accountability to the scenario as required by
the question.

Candidates are expected to relate their theoretical knowledge to the practical and
relevant requirements of the question.

Marking guide

Marks Marks
(a) Explanation of Principal-agent relationship 2
(b) i. Definition of principal 1
ii. Definition of an Agent 1 2
(c) Explanation of concept of stewardship 2
(d) Reasons for stewardship
Any two correct reasons at 2 marks each 4
(e) Explanation of concept of accountability 2
(f) Description of financial statements
Stating three correct components 3
Total 15

61
SOLUTION 7

a) The principal risks of misstatement of the trade receivables balances are

due to:

i. Receivables being irrecoverable (the valuation assertion);

ii. Receivables being contested by customers (the existence rights and
obligations assertions); and
iii. Cut-off between goods outwards and receivables recording being
incorrect (the cut-off assertion – an income statement assertion that has a
knock-on effect to the audit of trade receivables).

b) A direct confirmation of receivables is intended to check the following

assertions:
i. Existence assertion - That the receivables do in fact exist, and there is
no over statement of receivables in the financial statements;

ii. Rights and obligations assertion - That the client entity has the legal
right to the amounts receivable;

iii. Valuation assertion - That the receivables are stated at their

appropriate amounts; and

iv. Cut-off assertion - That transactions have been recorded in the correct
accounting period.

c) The requirements of ISA 505 that the auditor should maintain control
over external confirmation requests include:
i. Deciding on the information to be confirmed or requested;
ii. Selecting the “confirming party” (for example, the financial
director/controller at the entity contacted);
iii. Designing the confirmation requests (including an instruction for
responses to be sent directly to the auditor); and
iv. Sending the requests himself.

d) If management refuse to allow the auditor to send a confirmation

request, the auditor should:
i. Enquire into and validate the reasons for such refusal;
ii. Consider the implications of the refusal on risk assessment and other
audit procedures;
iii. Perform alternative audit procedures; and
iv. Communicate with those charged with governance.

62
Examiner’s report
The question tests the candidates‟ knowledge of substantive procedures as they relate
to receivables and ISA 505 - External confirmations.

About 80% of the candidates attempted the question, and performance was fair.

The common pitfall of the candidates was their inability to explain the requirements of
ISA 505.

Candidates are advised to read widely, especially taking note of relevant International
Standards on Auditing (ISAs) in their studies.

Marking guide
Marks
(a) Principal risks of misstatement of trade receivable
1 mark each for any 2 points 2
(b) Purposes of direct confirmation of receivables
1½ mark each for any correct 4 points 6
(c) Requirements of ISA 505 on auditor‟s control over
external confirmation request
1 mark each for any 4 points 4
(d) Steps to take on client‟s management refusal to allow
confirmation request
1 mark each for any 3 points 3
Total 15

63
ICAN/242/Q/B4 Examination No....................

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

SKILLS LEVEL EXAMINATION – NOVEMBER 2024

PERFORMANCE MANAGEMENT
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 any other COLOUR OF INK will not be marked.
8. A formula sheet and discount tables are provided with this examination paper.
9. You are required to attempt Question ONE (compulsory), any TWO Questions in
Section B and any Two questions in Section C.
10. Check that you have collected the correct question paper for the examination you
are writing.

WEDNESDAY, NOVEMBER 20, 2024

DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO

64
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

SKILLS LEVEL EXAMINATION – NOVEMBER 2024

PERFORMANCE MANAGEMENT

Time Allowed: 31/4 hours (including 15 minutes reading time)

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

QUESTIONS IN THIS PAPER

SECTION A: COMPULSORY QUESTION (30 MARKS)

QUESTION 1

Kayode Limited (KL) manufactures and sells a product (XW) which is widely used in
the construction industry. Although XW (and competitors‟ products) have sold well for
many years, KL believes that products of this type are now reaching the end of their
life cycles because of concerns about their long term environmental impact. KL has
adopted a strategy which is designed to achieve profitability for XW in what the
company believes will be for the short remaining product‟s lifespan as indicated
below:

The only variable cost of manufacturing XW is raw materials. The following table
shows the standard variable cost of manufacturing 95 kilograms of XW:

Kilograms Purchase Price Total cost

Raw material A 50 kg ₦160 per kg. 50 × ₦160 = ₦8,000
Raw material B 30 kg ₦180 per kg. 30 × ₦180 = ₦5,400
Raw material C 20 kg ₦280 per kg. 20 × ₦280 = ₦5,600
Total raw material input 100 kg ₦19,000
Less: Normal loss 5 kg
Normal output 95 kg

Last month, KL produced 19,000 kilograms of XW and sold these for ₦368 per kilogram
(₦18 per kilogram higher than the budgeted selling price). The actual sales quantity
represented a 30% market share and was 5% less than the budgeted sales quantity.
When KL was preparing its budget, the budget committee assumed that the company
would have a 25% market share.
The actual costs of the raw materials purchased and used last month were as follows:
Raw material A 9,800 kg @ ₦165 per kg = ₦1,617,000
Raw material B 6,800 kg @ ₦175 per kg = ₦1,190,000
Raw material C 4,400 kg @ ₦295 per kg = ₦1,298,000
Total cost ₦4,105,000

65
Required:
a. Determine KL‟s budgeted and actual contribution for XW for last month. Then,
carry out a variance analysis to reconcile the budgeted and actual contribution in
as much detail as possible from the information provided. (22 Marks)

b. Critically evaluate the success of the strategy adopted by KL in relation to XW.

Justify your answer, having regard to the particular phase of the product‟s
lifecycle (as identified in the question) and making use of the information
available from your answer to part (a) above. (8 Marks)
(Total 30 Marks)

SECTION B: YOU ARE REQUIRED TO ATTEMPT TWO OUT OF THE THREE

QUESTIONS IN THIS SECTION (40 MARKS)

QUESTION 2
Okekedem Nigeria Limited is considering the use of Activity-Based Costing (ABC)
approach in its overhead recovery. The company manufactures 2 products known as
Alpham and Betam.

Details of production for the two products are given below:

Alpham Betam
Annual production in units 120,000 120,000
Direct labour time per unit in hours 20 25
Number of special parts per unit 10 40
Number of set ups per batch 10 30
Number of sales invoices issued per year 500 2,400
Number of separate materials issued per batch 10 10
Batch size units 10,000 50

The analysis of the overhead costs provided the following information:

S/N Overhead cost analysis Amount (N) Cost driver
1 Set up costs 2,928,000 Number of set ups
2 Special part handling costs 2,400,000 Number of special parts
3 Customer invoicing costs 1,160,000 Number of invoices
4 Material handling cost 2,520,000 Numbers of batches
5 Other overheads 4,320,000 Labour hours

Required:
a. i. Use the traditional approach to determine the direct labour hourly rate for the
company. (1 Mark)
ii. Use the direct labour hour rate to compute the overhead rate attributable to a
unit of Alpham and Betam products. (2 Marks)
66
b. i. Determine the cost driver rate using the ABC approach (9 Marks)
ii. Compute the overhead rate per unit of each products using the ABC
approach. (3 Marks)

c. If the unit material and labour costs for the products are as shown below,
determine their unit selling prices where the company adheres to a policy of 20%
profit margin using the two overhead absorption methods.

Material cost Labour

Alpham N400 N100
Betam N500 N125 (5 Marks)
(Total 20 Marks)

QUESTION 3
Agege and Sons Bakery Limited uses absorption costing technique in its
accounting system. The company produces and sells three bakery products, namely
Four Corner Loaf (F), Round Corner Loaf (R) and Executive Loaf (E) which are
substitutes for each other. The following standard selling prices and cost data relate to
these three products:

Product Selling Price Direct Direct labour Variable

materials Per unit expenses
Per unit
Per unit (N) Per unit
F 200.00 25kg at N3/kg 1.2 hrs at N10/hr 1.2hrs at N5/hr
R 250.00 30kg at N3/kg 1.5hrs at N10/hr 1.5hrs at N5/ hr
E 300.00 38kg at N3/kg 1.8hrs at N10/hr 1.8hrs at N5/hr

Annual budgeted fixed production overhead was N4,320,000. The company policy is
that overhead will be absorbed on a machine hour basis. The standard machine hour
for each product and the monthly budgeted level of production and sales for each
product are as follows:

Product F R E
Standard machine hour per unit 0.3 hr 0.6 hr 0. 8 hr
Monthly budgeted production and sales (units) 10,000 13,000 9,000

Actual volumes and selling prices for the three products in a particular month
are as follows:
Product F R E
Actual selling price per unit (N) 220 260 320
Actual production and sales (unit) 9,500 13,500 8,500

67
You are required to:
a. Calculate the following variances for the particular month:
i. Sales price variance (2 Marks)
ii. Sales volume variance (2 Marks)
iii. Sales mix variance; and (3 Marks)
iv. Sales quantity variance. (3 Marks)
b. Determine the monthly budgeted profit for the company. (6 Marks)
c. Discuss the significance of sales mix variances in a variance accounting system.
(4 Marks)
(Total 20 Marks)
QUESTION 4
Paint Masters Limited is a fast growing paint manufacturing company established six
years ago. The company sells its products directly to retailers, wholesalers and also
accepts special orders directly from customers.

On May 1, 2021 a special order for a gallery painting was received from the Arts
Gallery, a non-profit making government department. The work, if the order is
accepted, would be carried out in addition to the normal work of the company. As a
result of existing commitments, some weekend and overtime working would be
required to complete the painting of the gallery.

A part-time accounting trainee has produced the following cost estimates based on the
resources required for the contract:

N
Direct materials - Paint Deluxe (book value) 50,000
- Paint Unique (purchase price) 40,000
Direct labour - Skilled 300 hours @ N150.00 45,000
- Unskilled 150 hours @ N100.00 15,000
Variable overhead 350 hours @ N110.00 38,500
Painting equipment depreciation 300 hours @ N200.00 60,000
Fixed production costs 250 hours @ N150.00 37,500
Estimating Department costs 2,500
Public Relation (PR) costs 10,000
298,500

The management of Paint Masters Limited is of the view that securing this contract
will lead to considerable publicity for the company and is geared to presenting a
competitive tender to win the order.

68
The following notes are relevant to the cost estimate above:
(a) Material Paint Deluxe to be used is currently in stock at a value of N50,000. It is
of an unusual colour which has not been used for some time. The replacement
price of the paint is N90,000, while the scrap value of the one in stock is
N30,000. The project manager does not foresee any alternative use for the paint
if it is not used for the gallery painting.
(b) Paint Unique required for the contract is not held in stock. It would have to be
bought in bulk at a cost of N80,000. 70% of the paint purchased would be used
for the contract and no other use is foreseen for the remaining portion of the
purchase.
(c) Skilled direct labour is in short supply and to accommodate the gallery painting
contract, 50% of the time required would be worked at weekends for which a
premium of 30% above the normal hourly rate is paid. The normal hourly rate is
N150.00 per hour.
(d) Unskilled labour is presently under-utilised, at present 300 hours per week are
recorded as idle time. If the painting work is carried out at a weekend, 30
unskilled hours would have to occur at this time, but the employees concerned
would be given two hours‟ time off (for which they would be paid) in lieu of
each hour worked.
(e) Variable overhead represents the cost of operating the gallery painting contract.
(f) When not being used by the company, the painting equipment is rented out to
outside clients for N5,000.00 per hour. This earns a contribution of N4,000.00.
There is unlimited demand for this facility.
(g) Fixed production costs would be incurred irrespective of the gallery contract.
(h) The cost of the estimating department represents time spent in discussions with
the Arts Gallery Committee for the painting contract.
(i) The Public Relation costs relate to miscellaneous expenses allowable for the
contract.

Required:
a. Prepare a revised cost estimate using relevant cost approach, showing clearly,
the minimum price that the company should accept for the contract. Give
reasons for each resource valuation in your cost estimate. (15 Marks)

b. Identify FOUR non-monetary factors that should be taken into consideration

before accepting the Art Gallery Contract. (5 Marks)
(Total 20 Marks)

69
SECTION C: YOU ARE REQUIRED TO ATTEMPT TWO OUT OF THE THREE
QUESTIONS IN THIS SECTION (30 MARKS)

QUESTION 5
The most recent published results for Tinko Plc. (TP) are shown below:
Published
(Nm)
Profit before tax for year ending 31 December 13.6
Summary of consolidated statement of financial position at 31 December:
Non-current assets 35.9
Current assets 137.2
Less: Current liabilities (95.7)
Net current assets 41.5
Total assets less current liabilities 77.4
Borrowings (15.0)
Deferred tax provisions (7.6)
Net assets 54.8
Capital and reserves 54.8

An analyst working for a stockbroker has taken these published results, made the
adjustments shown below, and has reported his conclusion that „the management of
TP is destroying value‟.

Analyst‟s adjustments to profit before tax:

(Nm)
Profit before tax 13.6
Adjustments
Add: Interest paid (net) 1.6
Research and development (R & D) 2.1
Advertising 2.3
Amortisation of goodwill 1.3
Less: Taxation paid (4.8)
Adjusted profit 16.1

70
Analyst‟s adjustments to summary of consolidated statement of financial position at 31
December
(Nm)
Capital and reserves 54.8
Adjustments
Add: Borrowings 15.0
Deferred tax provisions 7.6
R&D 17.4 Last 7 year‟s expenditure
Advertising 10.5 Last 7 year‟s expenditure
Goodwill 40.7 Written off against reserves on acquisitions in
previous years
Adjusted capital employed 146.0
Required return 17.5 12% cost of capital
Adjusted profit 16.1
Value destroyed 1.4
The Chairman of TP has obtained a copy of the analyst‟s report.
Required:
a. As the finance controller of TP, explain the principles of the approach taken by the
analyst. (5 Marks)
b. Comment on the treatment of the specific adjustments to R&D, Advertising,
Interest and Borrowings and Goodwill. (10 Marks)
(Total 15 Marks)

QUESION 6
Oforogere Nigeria Limited is a company located in Onitsha which manufactures motor
cycles. The company has two divisions: The engine division and the assembly division.

The engine division manufactures and sells a standard engine as used by the Motor
cycle. The engine division supplies the manufactured engines to both the assembly
division and external customers. The following information is available for the period
in respect of the engine division:

Capacity in Units 100

Selling price to external customer in the intermediate market N60,000
Variable cost per unit N32,000
Fixed cost per unit based on capacity N18,000

The Assembly division of the company can use the engine in the manufacture of motor
cycle. The Assembly division currently purchases 10 motor cycle engines at a cost of
N58,000 per engine.

71
Required:
a. i. If the engine division is selling all that it can manufacture to outside
customers in the intermediate market and N6,000 variable costs per engine
can be avoided on transfers within the company, due to reduced selling costs,
what is the acceptable range, if any, for the transfer price between the two
divisions? (2 Marks)
ii. If the engine division has ample idle capacity to handle all assembly divisions
needs, what is the acceptable range , if any , for the transfer prices between
the two divisions? (3 Marks)
iii. If the engine division is selling all that it can produce to outside customers in
the intermediate market, what is the acceptable range, if any, for the transfer
price between the two divisions? (4 Marks)

b. Explain the concept of environmental management accounting and state the

reasons why companies need to report their environmental activities in Nigeria.
(6 Marks)
(Total 15 Marks)

QUESTION 7
PT manufactures and sells a number of products. All of its products have a life cycle of
six months or less. PT uses a four stage life cycle model (introduction; Growth;
Maturity; and Decline) and measures the profits from its products at each stage of
their life cycle.
PT has recently developed an innovative product. Since the product is unique, it was
decided that it would be launched with a market skimming pricing policy. However,
PT expects that other companies will try to enter the market very soon.
This product is generating significant unit profits during the introduction stage of its
life cycle. However there are concerns that the unit profits will reduce during the other
stages of the product‟s life cycle.
Required:
Explain the likely changes that will occur in the unit selling prices and in the unit
production costs, compared to the proceeding stage for each of the following:
i. Growth (9 Marks)
ii. Maturity stages of the new products‟ life cycle (6 Marks)
(Total 15 Marks)

72
 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

73
 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 = 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

74
75
SECTION A

SOLUTION 1
a) Kayode Limited
Budgeted contribution last month
Budgeted Selling price/kg = ₦368 - ₦18 = ₦350
Budgeted VC/kg = ₦19,000/95kg = ₦200
Budgeted contribution/kg ₦150
Budgeted sales quantity = 19,000kg/0.95* = 20,000kg
Total budgeted contribution = 20,000 kg × ₦150 = ₦3,000,000
(* Actual sales were 95% of budget)

Actual contribution last month

₦000
Actual sales = 19,000 kg × ₦368 = 6,992
Total variable cost = 4,105
Actual contribution 2,887

Materials Price Variance (MPV)

Std price Actual Price Actual Qty Variance (₦000)
A ₦160 ₦165 9,800 49 (A)
B ₦180 ₦175 6,800 34 (F)
C ₦280 ₦295 4,400 66 (A)
Total MPV 81 (A)

Material Mix Variance (MMV)

Actual Qty in Actual Qty in Std Price/Kg Variance
Std Mix (5:3:2) actual mix ₦
(a) (b) (c) (a-b) × (c)
Kg Kg ₦ ₦000
A 10,500 9,800 160 112 (F)
B 6,300 6,800 180 90 (A)
C 4,200 4,400 280 56 (A)
Total 21,000 21,000 34 (A)

Material Yield Variance (MYV)

Std material cost per kg of output = ₦19,000/95 kg = ₦200
Actual Yield = 19,000kg of output
Std Yield = 21,000 kg × 95/100 = 19,950kg of output
MYV = (Actual Yield – Std Yield) × Std RM Cost/kg of output
= (19,000 – 19,950) × ₦200 = ₦190,000 (A)
76
OR: Alternative Calculation of MYV
Standard quantity in standard mix:
A19,000 × 50/95 = 10,000 kg
B19,000 × 30/95 = 6,000 kg
C 19,000 × 20/95 = 4,000 kg
20,000 kg

Std Q Ty Actual Qty Std Price Yield Variance

In Std mix in Std mix per kg
(a) (b) (c) (d) = (a-b) × (c)
Kg Kg ₦ ₦190,000 (A)
A 10,000 10,500 160 80 (A)
B 6,000 6,300 180 54 (A)
C 4,000 4,200 280 56 (A)
Total 20,000 21,000 190 (A)

Sales Price Variance (SPV)

Actual Price – Budgeted Price x Actual Qty = (₦368 – 350)(19,000) = ₦342,000 (F)

Market Size Variance (MZV)

Budgeted Actual Budgeted Budgeted

MZV = market × industry sales − industry sales × contribution
share % in units in units per unit

 19,000 20,000 
 (25%)   X (₦150) = 625,000 (A)
 30% 25% 

Market Share Variance (MSV)

Actual 𝐴𝑐𝑡𝑢𝑎𝑙 𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 Budgeted

MSV = Industry sales × 𝑚𝑎𝑟𝑘𝑒𝑡 − 𝑚𝑎𝑟𝑘𝑒𝑡 × contribution
in units 𝑠ℎ𝑎𝑟𝑒 % 𝑠ℎ𝑎𝑟𝑒% per unit
In units
19,000
  (30%  25%) X ₦150 = 475,000 (F)
30%

77
 Reconciliation of contribution
₦‟000 ₦‟000
Budgeted Contribution 3,000
Material Price Variance 81(A)
Material Mix Variance 34(A)
Material Yield Variance 190(A)
Material Usage Variance 224 (A)
Sales Price Variance 342 (F)
Market Size Variance 625 (A)
Market Share Variance 475 (F)
Sales Volume Variance 150 (A)
Actual Contribution 2,887

b) The strategy seems to have centred around trying to achieve an increased share
of a declining market. The evidence for this is that market share increased
significantly (from budgeted 25% to actual 30%). This helped somewhat to offset
the fact that the total market shrank very significantly in by 20.83% (from 80,000
units budgeted to 63,333 units actual).

How was this achieved? It seems likely that the quality of the product was
deliberately improved. All of the variances in relation to raw materials are
unfavourable. KL may have purchased more expensive versions of the raw
materials (MPV ₦81,000 (A)), combined them in ways which made use of the
more expensive types B and C (MMV ₦34,000 (A)), and been more stringent in the
removal of wastage in production (MYV ₦190,000 (A)).

Was this financially successful? In short, yes. The combined cost of the 3 raw
materials referred to above is ₦305,000. But the benefits (in terms of an
increased market share and a higher selling price) were ₦342,000 (F) +
₦475,000 (F) = ₦817,000 (F).

So it could be said that there was a net gain from the strategy of (₦817,000 –
₦305,000 = ₦512,000).

Why then was the actual total contribution for the month below budget? Only
because of the market size variance (₦625,000 (A)) which was uncontrollable by
the company. If the company had not adopted the strategy that it did, then the
decrease in contribution experienced would have been far worse than it actually
was.

78
Examiner’s report
This is a compulsory question that tests candidates‟ knowledge of how to handle
advanced variance analysis and reconciliation of budgeted contribution with actual
contribution. The question also tests with the analysis of Product life cycle as it relates
to variance accounting.
Being a compulsory question, it was attempted by most candidates. The candidates
recorded average performance.
The pitfall is that most candidates failed to compute material mix and material yield
variances. Candidates are encouraged to study the Institute‟s Study Text when
preparing for future examination.

Marking guide
Marks Marks Marks
1a. Budgeted Contribution
Actual Contribution
Reconciliation of Budgeted and Actual
Contribution 22
b. Evaluation of the Product life cycle in variance
analysis. 8 30

SECTION B

SOLUTION 2

a.i. Labour hourly rate = N13,328,000

5,400,000
= N2.468 per labour hour

a.ii Overhead attributable to each of the Product

AlphamBetam
Blanket rate N2.468 N2.468
Labour Hours 20 25
Overhead cost per unit N49.36 N61.70

79
b.i. Computation of cost driver absorption rate
S/n Activity Cost Cost Total Cost driver
Allocated (N) Driver Activity(N) rate (N)
1. Set up cost 2,928,000 No. of set up 72,120 40.599
2. Special handling 2,400,000 No. of special 6,000,000 0.40
cost parts
3. Customer 1,160,000 No. of invoices 2900 400
invoicing costs
4. Material handling 2,520,000 No. of batches 2412 1044.77
cost
5. Other overheads 4,300,000 Labour hours 5,400,000 0.80
6. 13,328,000

Computation of total activity

Product No. of setup No of spare No. of No. of Labour hours
parts invoice Batches
Alpham 120 1,200,000 500 12 2,400,000
Betam 72000 4,800,000 2400 2400 3,000,000
Total 72120 6,000,000 2900 2412 5,400,000

b.ii. Determination of total and unit overhead allocation to the Product:

S/n Particulars Alpham Betam
N N
1. Set up cost
120 x N40.599 4,872.00
7200 x N40.599 2,923,128.00
2. Special Part handling costs:
1,200,000 x N0.40 480,000.00
4,800,000 x N0.40 1,920,000.00
.

3. Customer invoicing costs:

500 x N400 200,000.00
2400 x N400 960,000.00
4. Material handling costs:
12 x N1044.77 12,537.00
2400 x N1044.77 2,507,463.00
5. Other overhead:
2,400,000 x N0.80 1,920,000.00
3,000,000 x N0.80 2,400,000.00
Total Overhead 2,617,409.00 10,710,591.00
Units Produced 120,000.00 120,000.00
80
 Unit overhead cost 21.81 89.255.00

c. Selling Price for each Product using Traditional Method

Cost Particulars Alpham(N) Betam(N)
Material cost 400.00 500.00
Labour cost 100.00 125.00
Overhead cost 49.36 61.70
Total costs 549.36 686.70
Profit 137.34 171.68
Selling Prices 686.70 858.38
d. Selling Prices for each product using ABC Method

Cost Particulars Alpham(N) Betam (N)

Material cost 400.00 500.00
Labour cost 100.00 125.00
Overhead cost 21.81 89.26
Total costs 521.81 714.26
Profit 130.45 178.57
Selling Prices 652.26 892.83

Examiner’s report
This question tests candidates understanding of using ABC approach for overhead
estimation. The candidates recorded an average performance.
The pitfall noticed was the candidates‟ failure to determine the cost driver rate of the
activities.
Candidates are advised to study the Institute‟s Study Text when preparing for future
examination.

Marking guide
Marks Marks Marks
2a.i. Direct Labour hourly rate 1
ii. Unit overhead rate 2 3
bi. Cost driver rate 9
ii. Unit overhead rate using ABC approach 3 12
c. Computation of unit selling price 5 20

81
SOLUTION 3

a. Calculate the Sales Price, Sales volume Profit, Sales mix profit and Sales quantity
profit variances
(i) Sales price variance = AS - SS = AQS (ASP - SSP)
For F = (220 - 200 ) 9,500 = N190,000 (F)
For R = (260 - 250 ) 13,500 = N135,000 (F)
For E = (320 - 300) 8,500 = N170,000 (F)
Total sales price variance = N495,000 (F)
(ii) Sales volume variance:
= (AQS in Standard Proportion - BQ) SSP
F = (9,843.75 - 10,000) 200 = 31,250A
R = (12,796.875 – 13,000) 250 = N50,781.25 (A)
E = (8,859.375 - 9,000) 300 = N42,187.50 (A)
Total N124,218.75 (A)

(iii) Sales mix variance:

= (AQS - AQS in Standard Proportion) SSP
Product Standard Proportion Actual Quantity Sales in Std Proportion
F 10,000 = 0.3125 9,843.750
R 13,000 = 0.40625 12,796.875
E 9,000 = 0.28125 8,859.375
Total 32,000 31,500.000

F = (9,500 - 9,843.75) 200 = N68,750 (A)

R = (13,500 - 12,796.875) 250 = N175,781.25 (F)
E = (8,500 - 8,859.375) 300 = N107,812.50 (A)
Product Sales mix variance Sales volume variance Sales Quantity
variance
F 68,750.00 (A) 31,250.00 (A) 100,000.00 (A)
R 175,781.25 (F) 50,781.25 (A) 125,000.00 (F)
E 107,812.50 (A) 42,187.50 (A) 150,000.00 (A)
Total 781.25 (A) 124,218.75 (A) 125,000.00 (A)

Standard Profit per unit

Product F R E
Direct Material 75 90 114
Direct labour 12 15 18
Variable overhead 6 7.50 9.0
Total variable cost 93 112.5 141
Fixed cost 6 12 16
Profit 101 125.5 143
Standard selling price 200 250 300

82
b. Monthly Budgeted Profit
Budgeted Sales
N
F= 10,000 x 200 = 2,000,000
R= 13,000 x 250 = 3,250,000
E= 9,000 x 300 = 2,700,000
7,950,000
Budgeted/Standard Costs
Variable Material Unit Cost Volt Total variable cost
Cost Labour N
F 75 12 6= 93 x 10,000 = 930,000
R 90 15 7.5 = 112.5 x 13,000 = 1,462,500
E 114 18 9= 141 x 9,000 = 1,269,200 3,661,500
4,288,500
Fixed Cost (4320000/12) 360,000
Budgeted Profit 3,928,500

c. Significance of Sales Mix Variance

The sales mix is a calculation of the mix or proportion of each product or services
sold in relation to the total sales volume and profitability. Sales mix variance is
significant because:

(i) It affects profitability;

(ii) It can be used in performance evaluation; and
(iii) It is used for decision-making.

Examiner’s report
The question tests candidates‟ understanding of advanced variance analysis - Sales
Price variance, Sales mix variances, Sales volume variances and sales quantity prices.
It also tests candidates‟ ability to determine budgeted contribution as well as the
explanation of the implication of sales mix in variance accounting.
The attempt on this question by candidates was very moderate. The candidates
recorded average performance.
The Pitfalls noticed were: The candidates‟ inability to compute the standard mix
/proportions on actual sales; and Deduction of annual fixed overhead when what was
required is monthly fixed overhead.
Candidates are advised to use the Institute‟s Study Text intensively when preparing for
future examination.

83
Marking guide
Marks Marks Marks
3a.i. Sales price variance 2
ii. Sales volume variance 2
iii. Sales mix variance 3
iv. Sales quantity variance 3 10
b. Determination of monthly budgeted profit 6
c. Significance of sales mix variances in variance 4 20

SOLUTION 4

Suggested Solutions on Relevant Costing principles:

(a) Revised Cost Estimate

N
Direct material Deluxe 30,000
Unique 80,000
Skilled 51,750
Direct labour Unskilled -

Variable o/h 38,500

Printing press 300,000
Fixed production costs -
Estimating costs -
Public relation cost 10,000
510,250

Reasons for Resource valuation

1 Direct material – duluxe
Current stock value of N50,000 is irrelevant as it is a sunk cost. As there is
no other use for this material replacement is irrelevant. The scrap value of
N30,000 is an opportunity cost and relevant.

2 Direct material – unique

As paint unique is not in stock the purchase price is relevant. The entire
N80,000 is chargeable though only 70% of the material will be used, as
there is no foreseeable use of the remainder.

3 Direct labour – skilled

As this is in short supply all labour costs are relevant.
150 hours @ N150 per hour = N22,500
150 hours @ N195 per hour = N29,250
N51,750

84
 4 Direct labour - unskilled
The weekend work results in 75 hours‟ time off in lieu, this with the 120
(150 – 30) other hours worked totals 125 hours which is less than the 300
hours of idle time which are already being paid for, thus there is no
incremental cost.
5. Variable overhead
This is a future cost which will be incurred if the work is undertaken and
therefore is relevant.
6. Painting Equipment
The depreciation is a sunk cost and should be ignored. However, the use of
the painting machine has an opportunity cost. If this work is undertaken,
the machine is not available for hire. The opportunity cost is the
contribution which would be earned from hiring:
(300 hours x N1,000) = N300,000

7. Fixed production cost: As these costs are unaffected by the decision, they
should be ignored.

8. Estimating Department cost – these costs are past and sunk

9. Public Relation costs – relevant

(b) Other non-monetary factors that should be taken into consideration are:
 Is there sufficient capacity to undertake the project?
 Is the customer credit worthy?
 Has the company the necessary skills and quality to execute the contract?
 Is the contract likely to lead to future contracts?
 Is these other lucrative contract for the company in future?
 Will project publicity translate to positive contribution to the company?
 Does the company have required expertise?

Examiner’s report
This is a popular question which tests computation of revised cost estimate using
relevant costing approach. The attempt by candidates was more than average.
Performance on this questing remains average.
The pitfall noticed was the inability of candidates to decipher relevant cost items that
should be computed and added to the cost estimate.
Candidates are advised to study the Institute‟s Study Text when preparing for future
examination.

85
Marking guide
Marks Marks Marks
4 a. Preparation of revised cost estimate 15
b. Identify 4 non-monetary factors in accepting
the Art Gallery contract 5 20

SOLUTION 5

(a) The analyst has adopted the principles of economic value added (EVA). EVA is an
estimate of a firm‟s economic profit, or the value created in excess of the required
return of the company. The idea is that value is created when the return on the
firm‟s economic capital employed exceeds the cost of that capital. This amount
can be determined by making adjustments to GAAP accounting as presented by
the analyst. Adjustments are made to the reported financial accounting profit
and also to the statement of financial position, as follows:
i) Some of the revenue expenditure, such as research and development and
advertising, provide future benefits over several years but financial
accounting requirements often require such expenditure to be written off in
the year in which they are incurred. This understates the value added
during a particular period;
ii) The profits computed to meet financial accounting requirements do not take
into account the cost of equity finance provided by the shareholders. The
only cost of capital that is taken into account is interest on borrowed funds
(i.e. the cost of debt finance). Profits should reflect the cost of both debt and
equity finance; and
iii) A better measure of the managers‟ ability to create value is to adjust the
traditional financial statements for those expenses that are likely to provide
benefits in future periods. The economic value added measure attempts to
meet this requirement.

(b) The following comments relate to the treatment of specific adjustments:

Research and development
The expenditure of ₦2.1 million is added back because it represents an
investment that will yield future benefits. Therefore, it should be capitalised and
allocated to the future periods based on the benefits received in the particular
period. The expenditure of ₦17.4 million is added back based on the assumption
that the company is continuing to benefit from such expenditures that have
previously been written off as depreciation based on the value that has been
eroded during the period.

86
 Advertising
Advertising expenditure adds value by supporting future sales arising from
increasing customer awareness and brand loyalty. Based on the same
justification as research and development expenditure, advertising should be
capitalised for the EVA calculation and added back to profits. The ₦10.5m added
back in the statement of financial position reflects the costs incurred in building
up future income. Some of this cost should be depreciated based on the value of
future benefits eroded during the period.

Interest and borrowings

The aim is to ascertain whether value is being added for the shareholders in the
sense of whether the funds invested in the business generate a return in excess of
the opportunity cost of capital. To do this, a profit figure is calculated that
initially does not include any charges for the cost of capital. Interest on
borrowings is therefore added back to avoid the situation where the cost of
capital on debt finance is included in the traditional profit calculation whereas
the cost of equity capital is not. To ascertain the total source of funds invested in
the business borrowings are added back to the capital base in the balance sheet.
The required return (i.e. the opportunity cost of capital) of ₦17.5m on the
resulting capital base is calculated and compared with the adjusted profit of
₦16.1m generated from the funds. This comparison captures the cost of both debt
and equity and indicates that value added is a negative figure.

Goodwill
Goodwill refers to price paid for the business in excess of the current cost of net
assets. Goodwill payments should therefore add value to the company. Hence the
amount written off is added back to profits since it represents part of the
intangible assets value of the business. The cumulative write off of ₦40.7m is
added back in order to provide a more realistic value of the capital base from
which a return should be generated. This is because it represents an element of
the value of the business. The value of goodwill should be regularly reviewed
and the amount eroded written off against profits.

Examiner’s report
The question tests candidates‟ understanding of economic value added (EVA)
principle.
The question was averagely attempted by candidates as it was not a popular question.
The candidates recorded low performance.
The pitfall noticed was candidates‟ lack of understanding of the principles of EVA
approach to performance measurement.
Candidates are advised to study the Institute‟s Study Text when preparing for future
examination.

87
Marking guide
Marks Marks Marks
5 a. Explanation of the Economic value Added
principle (EVA) 5
b. Comment on the treatment of specific
adjustments like R&D, Advertising, Interest,
Borrowings and Goodwill 10 15

SOLUTION 6
a.i. The lowest acceptable price from selling Division, The transfer price will be
Transfer price = Variable cost -Avoidable costs +selling Price Less Variable costs

Transfer Price = N32,000 - N6000 + N60,000 - N32,000 = N54,000

The Transfer Price range is N54,000 and N58,000

ii. Since the Engine division has idle capacity, it does not have to give up any
capacity to external customer.
Thus from the view point of the selling Division (Engine Division)
The transfer price = Variable cost Plus unit contribution on lost sales.
Transfer Price = N32,000 + (N58,000 - N58,000/ 10) = N32,000 - 0 =
N32,000.

Since the Assembly division is unwilling to pay more than N58,000 that is, the
price it is currently paying the outside supplier for the engines, thus the transfer
price it is willing to pay as a buying division will be within range.
Hence the transfer price is N32,000 and N58,000.

iii. The engine division sells all it can produce in the market, it can give some of the
engines to assembly division to enable it do its own business. Thus the engines
division has opportunity costs for loss of sales or transfers to Assembly Divisions
therefore the transfer price.

Transfer Price = Variable costs + Loss contribution

= N32,000 + (N60,000 - N32,000) = N32,000 + N28,000 =
N60,000.

Since the Assembly division can purchase from outside supplier at N58,000, it
will be not advantageous for the buying divisions, to buy from Engine
Divisions at N60,000 per unit.

88
b. Meaning of Environmental management Accounting and reasons why it is
reported upon:

Environmental management accounting (EMA) is the generation and analysis of

both financial and non financial information in order to support internal
environmental management processes. United nations divisions for sustainable
development (UNDSD) defined environmental management accounting as the
identification, collections, analysis, and use of two types of information (Physical
and monetary information) for internal decision making.

Reasons to report environmental activities are:

 It attracts incentive like tax reduction and subsidies;
 It will lead to avoidance of penalties/fines by Federal Environmental
Protection Agency (FEPA);
 It can promote research and development that can reduce environmental
costs;
 Good EMA report can attract investors especially if the report shows the
environment is investor friendly;
 It can promote accurate costing and pricing of products; and
 It can lead to the development of environment management system.

Examiner’s report
This question tests candidates‟ knowledge of transfer pricing approach in Performance
Management.
Many candidates attempted the question but failed to understand the requirements of
the question. Therefore, the candidates recorded average performance.
The major pitfall noticed was the inability of candidates to understand the mechanism
for computing transfer prices under the following situations: Where the manufacturing
company can sell all that it manufactured to outside customers; Transfer at a lower
variable cost to a division within the company where there are ample idle capacity;
and where it can sell all it can produce to outside customers.
Candidates are advised to pay special attention to the requirements of questions
before answering them. They should also use the Institute‟s Study Text when preparing
for future examination.

89
Marking guide
Marks Marks Marks
6a.i. Transfer Price when selling division can sell all
product to external buyer and can transfer to
internal users at a reduced variable cost. 2
ii. Transfer Price where there is idle capacity. 3
iii. Transfer price where the selling division can sell
all to outside customers. 4 9
b. Explanation of environmental management
accounting and reason for the importance of the
report on environmental activities. 6 15

SOLUTION 7
(i) Growth Stage
Compared to the introduction stage likely changes are as follows:

Unit selling prices

These are likely to be reducing for a number of reasons:
 The product will become less unique as competitors use reverse engineering
to introduce their versions of the product;
 PT may wish to discourage competitors from entering the market by
lowering the price and hereby lowering the unit profitability; and
 The price needs to be lowered so that the product becomes attractive to
customers in different market segments thus increasing demand to achieve
growth in sales volume.

Unit production costs

These are likely to reduce for a number of reasons:

 Direct materials are being bought in larger quantities and therefore PT may
be able to negotiate better prices from its suppliers thus causing unit
material costs to reduce;
 Direct labour costs may be reducing if the product is labour intensive due to
the effects of the learning and experience curves; and
 Fixed production costs are being shared by a greater number of units.

90
(ii) Maturity Stage
Compared to the growth stage the likely changes are as follows:

Unit selling prices

These are unlikely to be reducing any longer as the product has become
established in the market place. This is a time for consolidation and while there
may be occasional offers to tempt customers to buy the product the selling price
is likely to be fairly constant during this period.

Unit production cost

Direct material costs are likely to be fairly constant in this stage. They may even
increase as the quantities required diminish compared to those required in the
growth stage, with the consequential loss of negotiating power.

Direct labour costs are unlikely to be reducing any longer as the effect of the
learning and experience curves has ended. Indeed the workers may have started
working on the next product so that their attention towards this product has
diminished with the result that direct labour costs may increase.

Overhead costs are likely to be similar to those of the end of the growth stage as
optimum batch sizes have been established and are more likely to be used in this
maturity stage of the product life cycle where demand is more easily predicted.

Examiner’s report
The question tests candidates‟ understanding of likely changes that will occur in unit
selling price and unit cost of production in product life cycle situation especially
during growth and maturity stages.
Many candidates attempted the question, but performance was poor.
The pitfalls noticed were: Candidates‟ failure to read the questions to decipher the
requirements; and Candidates‟ failure to limit their discussion to the growth and
maturity stages made them miss the points.
Candidates are advised to pay special attention to the requirements of questions
before attempting them. They should also use the Institute‟s Study Text when
preparing for future examination.

Marking guide
Marks Marks Marks
7.i. Explain the changes in unit selling prices and
unit production costs on growth stage of a
product life cycle. 9
ii. Explain the changes in unit selling prices and
unit production costs on maturity stage of a
product life cycle. 6 15

91
ICAN/242/Q/B5 Examination No....................
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

SKILLS LEVEL EXAMINATION – NOVEMBER 2024

PUBLIC SECTOR ACCOUNTING & FINANCE

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 any other COLOUR OF INK will not be marked.

8. You are required to attempt Question ONE (Compulsory), TWO Questions in Section
B and TWO Questions in Section C.

9. Check that you have collected the correct question paper for the examination you are
writing.

THURSDAY, NOVEMBER 21, 2024

DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO

92
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION – NOVEMBER 2024
PUBLIC SECTOR ACCOUNTING & FINANCE
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
a. Following the directive of the Minister of Health to the Medical Research Council
(MRC) to relocate its storage facility to the Federal Capital Territory, the Director
signed an agreement with Kaftan Nigeria Limited to lease its medical cooling
system for a 6-year term beginning from January 1, 2020 at the rate of
N4.85million per annum payable at the end of each year. The terms of the
agreement showed that the medical cooling system has an estimated economic
life of 6 years and the facility would have no scrap value by the end of year 4.
The following additional information was made available by the director of
accounts:

 The lessor entity sets the annual rental to ensure a rate of return on its
investment at 12%.
 The fair value of the medical cooling system is N22million.
 It is the practice of the entity to use straight line depreciation for assets of
similar type.
 The medical cooling system reverts to the lessor and there is no option of
renewal.

Required:
i. Prepare the journal entries in the books of the lessor and the lessee at the
inception of the lease. (5 Marks)
ii. Justify the choice of the lease based on IPSAS-13-Leases. (2 Marks)

b. i. Identify the features of non-investment properties in accordance with

IPSAS 16 - Investment Properties. (5 Marks)
ii. The accountant of Afonja State Development Property Corporation has
provided the following information on some properties acquired and
managed by the corporation:
 At the Central Business District, a land was acquired in 2020 at the
cost of N30 million to construct a plaza for rent over its useful life
span of 25 years. The cost of construction was put at N0.96billion as
at the end of the year 2020. Though the plaza would have a residual
93
 value of N15million, the fair value of the property at the end of the
10th year was put at N1.05billion. It is the policy of the entity to
depreciate its investment properties using the straight-line method.

 At the Kulende Estate, a building was acquired in 2020 at the cost

of N410,000,000 while additional N98,050,000 was spent to carry
out major renovation on the building, which is to be held for capital
appreciation.

 At the Tanke area of the town, two different 3-storey buildings

which were to be held for capital appreciation were acquired in
2020 at the cost of N15,000,000 and renovated at additional cost of
N8million. The buildings were swapped with a bungalow close to
the GRA at a cost of N25million, which would be held for capital
appreciation.

Required:
Prepare the journal entries in the books of the corporation in accordance with
IPSAS 16 - Investment Properties. (4½ Marks)

c. The Bursar of a state-owned university has provided the following information

on the University‟s property, plant and equipment:

i. During the year ended December 31, 2020, office equipment worth
N72,050,000 was acquired from Woodmate Nigeria Limited and the
company charged additional N823,680 to cover the installation cost. An
agreement was reached to pay 75% of the cost of the equipment during
the year while the balance was paid later in January 2021.

ii. In order to commence the award of B.Sc. degree programme in forensic

accounting at the 2021/2022 academic session, the State Government
through the Commissioner for Education transferred the ownership of a
PPE of a defunct Technical College (including buildings and other
infrastructures) to the department. The fair value of the PPE taken over
was estimated at N413,000,000 while the carrying amount in the books
of the State Government was N582,000,000.

iii. During the year, a forensic laboratory worth N1.3billion was donated by
a recognised professional accounting body to the University as part of
their support towards the commencement of the degree programme.
The intervention was to assist in securing a full accreditation from the
Nigeria Universities Commission.

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 iv. During the year ended December 31, 2020, the storage section of the
chemistry laboratory owned by the university was gutted by fire. Though
the carrying amount of the building as at the date of the fire incidence
was put at N423,050,000, the fair value of the building after the fire
incidence was estimated by a valuer to be N218,600,000.

v. On January 1, 2020, the University acquired two (2) blocks of lecture

theatres for the faculty of engineering at a cost of N0.75billion each. The
policy of the university is to depreciate its lecture buildings on straight-
line method over 50 years. By the end of the 12th year, a valuer put the
fair value of the two buildings at N1.25billion.

vi. On January 1, 2020, three (3) project vehicles were acquired for
monitoring the Students‟ Industrial Work Experience Scheme (SIWES)
programme at N8,250,000 each. The estimated useful life and the
residual value at year 4 for each vehicle is N0.7million. The university
decided to dispose the vehicles for N6million at the end of the second
year. The accounting policy of the university is to depreciate PPE on
straight-line basis.

Required:
Journalise the above entries in the books of the State University in
accordance with IPSAS 17 - Property, Plant and Equipment. (8½ Marks)

d. Enumerate measures by which asset impairment can be determined in

accordance with IPSAS 21 - Impairment of Non-Cash Generating Units.
(5 Marks)
(Total 30 Marks)

SECTION B: YOU ARE REQUIRED TO ATTEMPT TWO OUT OF THE THREE

QUESTIONS IN THIS SECTION (40 MARKS)

QUESTION 2
a. Identify the responsibilities of a Micro Pension Contributor who seeks to operate
a Retirement Savings Account (RSA). (5 Marks)

b. Enumerate FOUR criteria for eligibility for participation in a Micro Pension Plan
and identify FOUR documents necessary during registration for a Micro Pension
Plan. (4 Marks)

c. Highlight SIX provisions of the Pensions Reform Act 2014 (as amended) on the
administration of contingent withdrawal in a Micro Pension Plan. (6 Marks)

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d. Explain the conditions to be met for an individual to convert from Micro Pension
Plan to a mandatory contribution plan. (5 Marks)
(Total 20 Marks)
QUESTION 3
Pension Reform Act 2014 (as amended) established uniform set of rules, regulations
and standards for the administration of pension scheme in Nigeria.

You are required to:

a. Explain SIX processes of remitting contributions into Retirement Savings
Account by contributors as stated in the Act. (6 Marks)

b. Highlight the categories of persons exempted from the Contributory Pension

Scheme (CPS) as contained in the PRA (2014) (as amended). (8 Marks)

c. Explain SIX procedures for payment of retirement benefits to holders of

Retirement Savings Accounts (RSA) as provided by the Act. (6 Marks)
(Total 20 Marks)

QUESTION 4
a. Enumerate FIVE benefits of each of the following components of the Treasury
Single Account (TSA)
E-payment (5 Marks)
E-collection (5 Marks)

b. Explain THREE conditions that need to be met for supplementary funds to be

approved. (6 Marks)

c. As an accountant in the Treasury Control Unit of the Office of the Accountant-

General of the Federation (OAGF) who has been sent out to conduct an
examination of payment vouchers in the central pay office, create a checklist of
major concerns. (4 Marks)
(Total 20 Marks)

SECTION C: YOU ARE REQUIRED TO ATTEMPT TWO OUT OF THE THREE

QUESTIONS IN THIS SECTION (30 MARKS)
QUESTION 5

Public debt and taxation are the methods used by governments to finance the
economic activities of the country. It has also been argued in some quarters that tax
financing is preferable to debt financing.

96
Required:
a. Explain the concept of public debt, “distinguishing between bilateral and
multilateral debts”. State ONE example each. (6 Marks)
b. Explain TWO conditions under which debt finance would be preferable
(3 Marks)
c. Identify and explain FOUR reasons to justify the need for public debts
(6 Marks)
(Total 15 Marks)

QUESTION 6
The government, as an instrument of social controls, wholly or partly owns public
enterprises.

Required:
Discuss FIVE factors to justify the need for public enterprises.
(Total 15 Marks)

QUESTION 7

a. Explain the measures open to a Federal Government in intervening in the

activities of an economy. (5 Marks)

b. Enumerate the steps that the Federal Government or its agencies must take
before seeking the approval of the National Assembly on their request for
external borrowing. (4 Marks)

c. Identify the requirements for raising funds from the domestic capital market by
State Government. (6 Marks)
(Total 15 Marks)

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SECTION A

SOLUTION 1
a.
i Medical Research Council (MRC)
Journal entries
Recognising the lease at inception
S/N Details Dr Cr Narration
Lessee: ₦ ₦
i. Lease PPE (Generator) 19,938,350 To recognise lease
Provision for interest 9,161,650 assets and associated
Lease liability 29,100,000 liability

ii. Lease liability 4,850,000 Recognition of first

Bank 4,850,000 instalment paid at the
end of year 2020

iii. Interest expense 1,526,941.67 Interest due in year

Provision for interest 1,526,941.67 one

iv. Depreciation charges 3,323,058.33 To recognise

Accumulated depreciation 3,323,058.33 depreciation charges
charges for year 2020

Lessor
i. Account receivable 19,938,350 To recognise asset
Lease asset (Generator) 19,938,350 leased to the lessee
at inception

ii. Bank 4,850,000 To recognise equal

Account receivable 3,323,058.33 instalment received in
Interest earned 1,526,941.67 year 2020

ii This is a clear case of finance lease because of the following:

 The lease terms equal the useful economic life of the equipment;
 The present value of the minimum lease payment (₦19,938,350)
exceeds 90% of the fair value of the asset which is ₦22,000,000
 The present value of annuity of 12% = 4.111 x N4.85m = N19,938,350

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bi. Non-investment properties
 Property held for sale in the ordinary courses of operations or in
the process of construction or development for such sale.
 Property being constructed or developed on behalf of third parties
e.g., where a service department of a ministry enters into
construction contracts with entities external to its government.
 Owner-occupied property including property held for future use as
owner-occupied property held for future development as
subsequent use as owner-occupied property. Property occupied by
employees such as housing for military or police personnel.
 Property that is being constructed or developed for future use as
investment property. Until construction or development is
complete, at which time the property become investment property;
such property does not meet investment property status.
 Property held to provide a social service and which also generates
cash flows; and
 Property held for strategic purpose, which could be accounted for
in accordance with IPSAS 17 (Property, Plant and Equipment).

ii. Afonja State Development Property Corporation

Journal entries
Plaza at Central Business District
Details Dr Cr Narration
N’000 N’000
Investment property 990,000 To recognise the investment
Bank 990,000 property in the books

Accumulated depreciation 378,000 To close the investment pr

Revaluation account 612,000 property account
Investment property 990,000

Investment property 1,050,000 To reinstate the new value of

Revaluation account 612,000 the investment property
Revaluation surplus 438,000

Building at Kulende Estate

Details Dr Cr Narration
N’000 N’000
Investment property 508,050 To recognise the investment
Bank 508,050 property in the books

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 Swapping of 2-storey building
Details Dr Cr Narration
N’000 N’000
Investment property 23,000 To recognise the investment
Bank 23,000 property in the books

Swapped investment property

New investment property 25,000 To recognise gain on the
Existing investment property 23,000 swapping of investment
Gain on exchange 2,000 property

b. Journal entries for state-owned university

S/N Details Dr Cr Narration
N’000 N’000
i. PPE- (Office 72,873.68 The cost of assets is made up of
equipment) the purchase cost plus all
Bank 54,655.26 attributable cost.
Accounts payable 18,218.42

Accounts Payable 18,218.42 On payment of outstanding

Bank 18,218.42 debt

ii. PPE 413,000 This is treated as part of take-

Take over grant 413,000 off grant

Impairment charges 169,000 Impairment on carrying

PPE 169,000 amount of PPE taken over

iii. PPE – Forensic 1,300,000 Donation received during the

laboratory year
Aid and grant received 1,300,000

iv. Impairment charges 204,450 Being difference between the

Accum. Impairment 204,450 carrying amount and the fair
value of the building

100
v. PPE 1,500,000 Acquisition of PPE
Bank 1,500,000

Revaluation account 1,140,000 To close the account of the

Accum. Depreciation 360,000 carrying amount as well as
Building 1,500,000 the corresponding
accumulated depreciation

Building 110,000 To reinstate the current value

Revaluation surplus 110,000 of the PPE

vi. PPE 24,750

Bank 24,750 Purchase of PPE

PPE disposal account 24,750 To close the account of the

Motor vehicle Account 24,750 motor vehicle

Accum. depreciation 11,325 To close accumulated

PPE disposal account 11,325 depreciation account

Bank 6,000 To recognise proceeds from the

Loss on disposal 7,425 sale of the motor vehicle
PPE disposal account 13,425

c. The measures used in identifying impairment of non-cash generating units

include:
i. External sources of information
 Cessation, or near cessation, of the demand or need for the services
provided by the asset;
 Significant long-term changes with an adverse on the entity have
been taken place during the period or will take place in the near
future, in the technological, legal or government policy environment
in which the entity operates.
ii. Internal sources of information
 Evidence is available of physical damage of an asset;
 Significant long-term changes with an adverse on the entity have
taken place during the period or are expected to take place in near
future, in the extent to which, or manner in which, an asset is used or
expected to be used. These changes include the asset becoming idle,
plans to discontinue or restructure the operation to which an asset
belongs, or plans to dispose of an asset before the previously
expected date;
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  A decision to halt the construction of an asset before it is completed or
in a usable condition; and
 Evidence is available from internal reporting that indicates that the
service performance of an asset is, or will be, significantly worse than
expected.

Examiner’s report
The question is in four parts. Part (a) of the question tests candidates‟ knowledge on
the preparation of journal entries in the book of the lessor and lessee at the inception
of the lease in accordance to IPSAS 13 - Leases. Part (b) requires the candidates to
identify the features of non-investment properties and prepare journal entries in
accordance to IPSAS 16 -Investment Properties. Part (c) requires the candidates to
prepare journal entries on some transactions as related to property, plants and
equipment in accordance to IPSAS 17 - Property, Plants and Equipment, while part (d)
requires to enumerate measures by which asset impairment can be determined in
accordance with IPSAS 21 - Impairment of Non - Cash Generating Units.
All the candidates attempted the question and their performance was below average

The common pitfalls were the inability of the candidates to understand the provisions
of IPSAS 13 - Leases; IPSAS 16 - Investment Properties; IPSAS 17 - Property, Plants and
Equipment; and IPSAS 21 - Impairment of Non - Cash Generating Units.

Candidates are advised to have adequate knowledge of the relevant provisions of the
syllabus and to make use of the Institute‟s Pathfinder and the Study Text for better
performance in the Institute‟s future examinations.

Marking guide
Marks Marks
ai. Journal entries
Correct journal entries - Lessee 3¼
Correct journal entries – Lessor 1¾
ii. Type of lease and justification
Type of lease at 1 mark 1
Any two (2) justifications at ½ mark each 1 7

b.i. Description of non-investment properties

Any five (5) descriptions at 1 mark each 5

ii. Journal entries

Correct journal entries for Plaza 2
Correct journal for building at Kulende ½
Correct journal entries for swapping of investment properties 2 4½

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 c. Journal entries for state-owned university
Correct journal entries 8½

d. Sources of information for impairment

Any five sources at 1 mark each 5
Total 30

SECTION B

SOLUTION 2

a. The responsibilities of Micro Pension Contributor shall include:

i. Opening of a Retirement Savings Account (RSA) with any Pension Fund

Administrator (PFA) of choice;
iii. Making contributions into RSA in accordance with the relevant guidelines;
iv. Requesting for RSA statement from PFA;
v. Updating RSA information on request;
vi. Appointing a next of kin;
vii. Choosing the platform for making contributions;
viii. Deciding to make contingent withdrawals;
ix. Choosing the mode of accessing pension (programmed withdrawal or
annuity) from micro pension plan; and
x. Demanding for adequate customer service as provided in the consumer
protection framework issued by the Commission.
b. The following persons not below 18 years of age with source of income shall
be eligible for participation in micro pension plan under Section 2(3) of the
Pension Reform Act 2014:

i. Criterial for eligibility for participating in micro pension plan

 Self-employed persons that belong to a trade, profession,
cooperative or business association;
 Self-employed persons with a business registration as a company,
partnership or enterprise.
 Employees operating in the informal sector who work with or
without formal written employment contract.
 Other self-employed individuals.
 Micro Pension Contributors shall be resident in Nigeria.

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 ii. The following documents shall be provided at the point of
registration:
 Evidence of membership of a registered association, union or
cooperative society
 Certificate of business registration
 Certificate of incorporation
 Letter of employment
 Bank Verification Number (BVN)
 Other documentation as may be specified by the PFA

iii. Provisions of Pension Reform Act (PRA) 2014 on contingent withdrawal

 The micro pension contributor shall be eligible to access the portion
of his/her contribution available for withdrawal 3 months after
making the initial contribution.
 Subsequently, the micro pension contributor can only make
withdrawals once in a week from the balance of the contingent
portion of the RSA.
 The micro pension contributor may withdraw the total balance of the
contingent portion of RSA including all accrued investment income
thereto.
 The micro pension contributor may choose to convert the contingent
portion of the contributions to the retirement benefits portion at the
end of every year.
 The time frame for processing and payment of contingent
withdrawals shall not exceed two working days.
 Payment shall be made only to the Micro Pension Contributor‟s
designated bank account.
 The PFA shall approve and pay all requests for contingent
withdrawals.
 The PFA shall notify the Commission of all payments made monthly.
 Contingent withdrawals shall be subject to applicable tax laws in
accordance with the provisions of Section 10(4) of the PRA 2014.
 At retirement, the Micro Pension Contributor has the option of
transferring part or all of his outstanding balance on the contingent
portion to his retirement benefits portion.

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 iv. Conversion from micro pension plan to mandatory contribution
plan
 The micro pension contributor shall be eligible to participate under
Section 2(1) of the Pension Reform Act, 2014 where the secures
employment in the formal sector with an organisation that has three
(3) or more employees.
 The micro pension contributor shall formally request for conversion,
attaching all necessary documents specified in the guidelines for the
registration of contributors/members issued by the commission.
 The micro pension contributor shall retain the existing RSA.
 Micro pension contributor may withdraw the total balance of the
contingent portion of the RSA prior to conversion.
 Where the micro pension contributor chooses not to withdraw the
contingent portion, the balance of the contingent portion shall be
merged with the retirement benefits portion of the RSA prior to
conversion.
 At conversion, the PFA shall move the micro pension contributor‟s
RSA balance to the appropriate fund under the multi-fund structure.
 Where an eligible contributor fails or refuses to request for
conversion to the mandatory contribution after one (1) month of
receiving remittance from the new employer, the PFA shall
automatically change the status of the contributor upon receiving
the second remittance.
 The PFA shall notify the employer of the status of the RSA of the
contributor.
 The PFA shall forward monthly returns on conversion to the
Commission.

Examiner’s report
The question is in four parts. Part (a) of the question requires the candidates to explain
the responsibilities of a micro pension contributor, while part (b) requires the
candidates to enumerate criterial for eligibility to participate and document necessary
requirements and registration for micro pension plan. Also, part (c) of the question
requires the candidates to highlight the provisions of Pension Reform Act 2014 (as
amended) on the administration of contingent withdrawals in a micro pension plan
and part (d) requires the candidates to explain the conditions to be met for an
individual to convert from micro pension plan to a mandatory contribution plan.

105
Few candidates attempted the question and their performance was below average.

The commonest pitfall was the inability of the candidates to properly identify and
explain the provisions of Pension Reform Act 2014 (as amended) as it affects micro
pension plan.

Candidates are advised to make use of ICAN Pathfinders and the Study Text for better
performance in the Institute‟s future examinations.

Marking guide
Marks Marks
a Responsibilities of a micro pension contributor
Identification of any five responsibilities 5

b. i Eligibility criteria for micro pension plan

Any four eligibility criteria at ½ mark each 2
ii Documentation for micro pension plan
Any four documents at ½ mark each 2 4

c. Provisions of PRA on contingent withdrawal

Any six provisions 6

d. Conditions for conversion from micro pension plan to a mandatory

contribution plan
Explanation of any five conditions 5
Total 20

SOLUTION 3
a. Processes of remitting contributions into Retirement Savings Account by
contributors as in the PRA (2014):
i. Every employee to whom this Act applies shall maintain an account, (in
this Act referred to as “Retirement Savings Account”) in his name with
any Pension Fund Administrator of his choice.
ii. The employee shall notify his employer of the Pension Fund
Administrator chosen and the identity of the retirement savings account
opened under (i) above.
iii. The employer shall:
 Deduct at source the monthly contribution of the employee; and
 Not later than 7 working days from the day the employee is paid
his salary, remit an amount comprising the employee‟s
contribution under paragraph of this subsection and the

106
 employer‟s contribution to the Pension Fund Custodian specified
by the Pension Fund Administrator of the employee.
iv. Upon receipt of the contributions remitted under (iii) above, the Pension
Fund Custodian shall notify the Pension Fund Administrator who shall
cause to be credited the retirement savings account of the employee for
whom the employer had made the payment;
v. Where an employee fails to open such Retirement Savings Account within
a period of six months after assumption of duty, his employer shall,
subject to guidelines issued by the Commission, request a Pension Fund
Administrator to open a nominal retirement savings account for such
employee for the remittance of his pension contributions;
vi. An employer who fails to deduct or remit the contributions within the
time stipulated in (iii) above shall, in addition to making the remittance
already due, be liable to a penalty to be stipulated by the Commission;
vii. The penalty referred to in (vi) above shall not be less than 2 percent of
the total contribution that remains unpaid for each month or part of each
month the default continues and the amount of the penalty shall be
recoverable as a debt owed to the employee‟s retirement savings
account, as the case may be;
viii. An employee shall not have access to his retirement savings account or
have any dealing with the Pension Fund Custodian with respect to the
retirement savings account except through the Pension Fund
Administrator; and
ix. The Commission shall determine the cost of recovery of un-remitted
contributions and the sources to defray the cost, which may include the
amount recovered as penalty pursuant to (vi) above.

b. Categories of persons exempted from the Contributory Pension Scheme (CPS) as

contained in the PRA 2014:
i. The categories of persons mentioned in Section 291 of the Constitution of
the Federal Republic of Nigeria 1999 (as amended) including the
members of Armed Forces, the Intelligence and Secret Services of the
Federation;
ii. An employee who is entitled to retirement benefits under any pension
scheme existing before the 25th day of June 2004 and has 3 or less years
to retire (i.e. fully funded pension scheme);
iii. Any person who falls within the provisions of (i) and (ii) above shall
continue to derive retirement benefit under such existing pension scheme
as provided for in the Second Schedule to this Act; and

107
 iv. Where an officer exempted under (ii) above dies in service or in the
course of duty, the Federal Government Pension Transitional
Arrangements Directorate (PTAD) and the Federal Capital Territory
Pension Transitional Arrangements Directorate shall cause to be paid, en-
bloc to his next- of- kin or designated survivors, a gratuity and pension to
which the officer would have been entitled at the date of his death
calculated on the basis of applicable computations under the existing
Pay-As-You-Go Pension scheme of the public service of the Federation
and Federal Capital Territory.

c. Procedures for payment of retirement benefits to holders of Retirement

Savings Accounts (RSA) as provided by the Act:
i. A holder of retirement savings account shall upon retirement or attaining
the age of 50 years, whichever is later, utilise the balance standing to the
credit of his retirement savings account for the following benefits:
 Programmed monthly or quarterly withdrawals calculated on the
basis of an expected life span;
 Withdrawal of a lump sum from the total amount credited to his
retirement savings account provided that the amount left after the
lump sum withdrawal shall be sufficient to procure a programmed
fund withdrawals or annuity for life in accordance with extant
guidelines issued by the Commission, from time to time;
 Annuity for life purchased from a life insurance company licensed
by the National Insurance Commission with monthly or quarterly
payments;
 Professors covered by the Universities (Miscellaneous Provisions
(Amendment) Act, 2012 shall be according to the University Act; or
 Other categories of employees entitled, by virtue of their terms
and conditions of employment, to retire with full retirement
benefits shall still apply.

ii. Where an employee retires before the age of 50 years, the employee may
request for withdrawal of lump sum of money of not more than 25% per
cent of the amount standing to the credit of the retirement savings
account, provided that such withdrawals shall only be made after six
months of such retirement and the retired employee does not secure
another employment.

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 iii. Where an employee has accessed the amount standing in his retirement
savings account pursuant to (ii) above, such employee shall subsequently
access the balance in the retirement savings account in accordance with
(i) above.

iv. If an officer retires and is less than 50 years, on the advice of suitably
qualified physician or properly constituted medical board, certifying that
the employee is no longer mentally and physically capable of carrying
out the function of his office, the officer may withdraw;

v. The medical board or suitably qualified physician, at the request of the

employee, be made once in every two years to review the fitness of the
employee and where the medical board certifies that he is now mentally
and physically capable of carrying out the functions of his office, he may
re-enter the scheme upon securing another employment.

vi. Any employee who disengages or is disengaged from employment before

the age of 50 years and is unable to secure another employment within
four months of such disengagement may make withdrawal from his
retirement savings account in accordance with the provisions of section
7(2) and (3) of the PRA (2014).

vii. If the officer is retired due to total or permanent disability either of mind
or body, may withdraw retirement savings account.

viii. Where the employee retires before the age of 50 years in accordance with
the terms and conditions of employment, the officer shall be entitled to
make withdrawals

Examiner’s report
The question is in three parts and it relates to the provisions of Pension Reform Act,
2014 (as amended). Part (a) of the question requires candidates to explain processes
of remitting contributions into Retirement Savings Account (RSA). Part (b) of the
question requires the candidates to highlight the categories of persons exempted from
the Contributory Pension Scheme (CPS), while part (c) requires candidates to explain
the procedures for payment of retirement benefits to holders of Retirement Savings
Account (RSA).

Majority of the candidates attempted the question and their performance was average.

The commonest pitfall was the inability of the candidates to properly identify and
explain the provisions of Pension Reform Act 2014 (as amended).

109
Candidates are advised to read widely and ensure they have adequate knowledge of the
relevant sections of the syllabus. They should also make use of Pathfinders and the
Study Text of the Institute and other relevant learning materials on this aspect of the
syllabus for better performance in future examinations.

Marking guide
Marks
a Processes of remitting contributions into Retirement Savings Account by
contributors
Explanation of any six processes of remitting contributions 6

b. Categories of persons exempted from the CPS as contained in the PRA

2014:
Any four categories of persons exempted at 2 marks each 8

c. Procedures for payment of retirement benefits to holders of Retirement

Savings Accounts
Explanation of any six procedures 6
Total 20

SOLUTION 4
a. Benefits of e-payments and e-collection
e-Payment e-Collection
i. Provides complete and timely i. It controls and monitors receipts and
information on government cash payments of FGN funds;
resources; ii. It prevents and detects potential and
ii. Improve operational control on actual fraud;
budget execution; iii. Its improves planning through MTEF;
iii. Enables efficient cash iv. Avoids double payments and likely
management; build- up of payment arrears;
iv. Reduces bank fees and transaction v. Creates an accurate cash flow
costs; statements that help government to
v. Facilitates efficient payment obtain an appropriate line of credit;
mechanisms; vi. Implements cash collection
vi. Improves bank reconciliation and acceleration techniques;
quality of fiscal data; vii. Integrates policy priorities into annual
vii. Improves liquidity of government; budgets and thereby ensures that
viii. Allows issuance of warrants and available resources are channelled to
AIEs based on cash plan; priority sectors;

110
 ix. No more commercial bank accounts viii. Minimises deficits and borrowings
maintain by MDAs; within limits set by government; and
x. Brings about drastic fall on the ix. Improves transparency and
ways and means (overdraft) accountability of all FGN receipts.
requirement from CBN; and
xi. Supports government budget
execution.

b. Conditions for approving supplementary funds

The conditions under which such requests may be granted are as follows:
i. Public interest
The supplementary request must manifestly be in the public interest. This
must genuinely be at addressing issues, which have generated interest or
debate nationally. For example, the need to fund vaccination in a
pandemic situation, which was not earlier, envisaged.
ii. Urgency
The need is so urgent that the additional provisions request cannot be
deferred till the following year when it will be incorporated in the new
estimates. For example, a war situation.
iii. Unforeseen circumstances
The need could not be foreseen when the current estimates were being
approved.
iv. Virement impracticable
The money required cannot be sourced through virement

c. Examination of payment vouchers

The checklist shall include:
i. Are all paid vouchers and supporting documents stamped “PAID” and also
stamped “CHEQUE SIGNED” to differentiate them from new vouchers?
ii. Are cheque numbers entered on paid vouchers?
iii. Are payment vouchers received in the Central Pay Office (CPO) through
schedules controlled serially or through voucher movement register?
iv. Are the payment vouchers properly checked?
v. Is there adequate safeguard to ensure that payments are made only to the
right people and for good consideration?

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Examiner’s report
The question is in three parts. Part (a) of the question requires candidates to
enumerate the benefits of e-payment and e-collection of the components of Treasury
Single Account (TSA). Part (b) of the question requires the candidates to explain the
conditions that need to be met for supplementary funds to be approved and part (c) of
the question requires the candidates to create a checklist on how to examine payment
vouchers.

Majority of the candidates attempted the question and performance was below
average.

The common pitfalls were the inability of the candidates to explain the conditions that
need to be met for supplementary funds to be approved, while in part (c), the
candidates were unable to create a checklist on how to examine payment vouchers.
Candidates are advised to read widely and ensure they have adequate knowledge of
relevant regulations relating to public sector accounting for better performance in the
Institute‟s future examinations.

Marking guide
Marks Marks
a Benefits of TSA components
Any five benefits of e-payment 5
Any five benefits of e-collection 5 10

b. Conditions for supplementary fund approval

Identification of any three conditions 3
Explanation of conditions identified 3 6

c. Examination of payment voucher

Stating any four checklists 4
Total 20

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SECTION C

SOLUTION 5

a. Definition of public debt

The total amount of loan raised by government directly or through any of the
authorised agencies is known as public debt. The loan could be raised within
the domestic economy, in which case the creditors are mostly citizens or from
outside the economy, in which the creditors are foreigners. The former is
commonly known as domestic or internal debt, while the latter is known as
external or foreign debt.
In other words, public debt can be defined as total outstanding financial
obligations of a government during a given period. It is an important source of
capital formation, most especially in developing economies like Nigeria where
the low level of income is insufficient for consumption and hence does not
permit sustainable savings.

Public debt may be bilateral or multilateral. It is bilateral where the creditors

are governments of a given country. For example:

i As at March 2024, Nigeria owed China $5.05 billion;

ii France $652 million; and
iii Germany $125.62 million in bilateral debts.

It is multilateral when multilateral institutions are the creditors for

example:
i World Bank;
ii International Monetary Fund (IMF);
iii Islamic Development Bank (IsDB);
iv European Development Bank;
v International Fund for Agricultural Development;
vi International Development Association (IDA); and
vii The African Development Bank (AfDB).

b. Under certain circumstances, debt financing becomes either necessary or

preferable.
i During war and other emergencies, when there is need for large pool of
funds and additional tax revenue cannot be raised, debt financing
becomes inevitable.
ii Where actual tax receipts are falling much below the anticipated volume,
while expenditure is not showing a corresponding reduction.
iii Debt financing can be tied to a project where such projects are expected
to benefit certain areas or certain sections of the people who can be
expected to bear the cost of the project out of the benefit they would
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 receive. For instance, a particular irrigation project might benefit the
farmers of a particular area. In this case, the cost of the project can be
met through borrowing and then recovered from the beneficiaries
through a levy or some other means.
iv Governments can use debt financing in situations of economic depression
to help the country.
v Government can avoid negative effect of taxes on incentives through
borrowing especially when tax burden is significantly high.

c. Reasons advanced to justify the need for public debts

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 stretched 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 Rapid population growth: 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 requires 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 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 borrowings may be used to stimulate economic activities
during economic depression.
vi Natural disasters: Government has the responsibility to provide relief to
victims of natural disasters, such as earthquakes, floods and fire
disasters, famines, sectarian violence and other natural calamities.
Government borrowing may be justified because such occurrences are
never expected nor budgeted for.
vii Fluctuations in government revenue: Most countries operate mono
cultural economies depending on only one (or very few) export product

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 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
herself 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 government. Hence, the need to borrow
arises to avoid devastating consequences of defeat.
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.

Examiner’s report
The question is in three parts. Part (a) of the question requires the candidates to
explain the concept of public debt “distinguishing between bilateral and multilateral
debt”. Part (b) of the question require the candidates to explain the conditions under
which debt finance would be preferable, while part (c) requires the candidates to
identify and explain reasons to justify the need for public debts.
Majority of the candidates attempted the question and their performance was very
good.
The common pitfalls were the inability of the candidates to distinguish between
bilateral and multilateral debt, while in parts (b) and (c) few of the candidates could
not satisfactorily explain the conditions under which debt finance would be preferable
and explain reasons to justify the need for public debts respectively.
Candidates are advised to make use of Pathfinders and the Study Text of the Institute for
better performance in the Institute‟s future examinations.

Marking guide
Marks Marks
a. Concept of public debt
Explanation of the concept of public debts 2
Distinguishing between bilateral and unilateral debts 2
One example each. 2 6

b. Conditions under which debt finance would be preferable

Explanation of two conditions at 1½ marks each 3

c. Reasons advanced to justify the need for public debts

Identification of any four reasons at ½ mark each 2
Explanation of any four reasons identify at 1 mark each 4 6
Total 15

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SOLUTION 6

Factors to justify the need for public enterprises:

i Market failure: The operation of market mechanism presupposes that the

economic activities are guided by rational expectation, that is, profitability.
However, there are differences in endowment which in most cases determines
productivity and returns. Therefore, public undertakings are required in areas
of the economy which the government deems necessary or very crucial, but
which investors may not be willing to touch because of the huge capital and
risks involved in such ventures. Furthermore, investment in such areas of the
economy may take a longer time to materialise. It is for these reasons that
public enterprises are established to operate in such essential industries of the
economy
.

ii Merit goods: The goods or services considered to be of utmost necessity such as

education, health care services, water supply and the likes cannot be left in the
hands of private investors. They would be under-supplied because consumers
would not be able to pay the market prices of these goods. Generally, the supply
of such services should be adequate and should be available at low or near zero
prices in order to encourage more consumption or participation. In the case of
education, for example, the government may insist that every child up to a
certain age must benefit from free education. In some cases, free medical
services are provided for certain categories of people such as pregnant women
as well as people over 75 years. But when private investors dominate the
provision and supply, the prices may be beyond the reach of the people. For
example, private tertiary institutions in Nigeria embark on aggressive
advertisement for students, whereas, public tertiary institutions are burdened
with over-population. Hence, the need for these services to be provided by
government through the establishment of public enterprises thereby making
prices become bearable for the populace.

iii Strategic or security consideration: Sometimes, governments set up public

enterprises because of the very nature of the projects. Currency and mint, for
example cannot be expected to be left in the hands of private investors.
Similarly, some defence industries, certain research and development
organisations would be better handled by public enterprises.

iv Promote growth of the economy: Usually, the objective or goal of the

government is that the country should grow and develop at an optimum rate.
This happens if the various components of the country have steady access to
116
 capital stock which may not be readily available through market mechanism.
Therefore, public undertakings directly add to the capital assets of the economy
in the form of roads, bridges, factories and the likes. Without public
undertakings, certain areas of the country‟s economy may be starved of the
capital they require to function even though such areas of the economy are very
important. Hence, another reason why public enterprises are established is to
inject capital into areas of the economy which ordinarily private investors may
shy away from. The establishment of an Agriculture Development Bank, Bank of
Industry are examples to ensure that capital is provided for investors in those
sectors that lack funding.

v Monopoly: Another reason for the establishment of public undertakings is

where the effective control of the economy is sought to be in the hands of the
state rather than individuals. This is the argument of not permitting the
emergence of monopoly in the hands of private investors. The authorities might
plan to have a strategic control over the workings of the whole economy
through controlling of key sectors. This is generally referred to as controlling the
commanding heights of the economy from which, indirectly, the movement of
the economy can be guided.

vi Natural resources: One of the potent reasons for public undertakings is the
case of some natural resources like forests, mines, and so on. The commercial
interest of private investors may be in conflict with those of the state. A private
investor, for example, authorised to mine a particular resource may likely want
to make more money by extracting more than expected. This may result in a
large scale and quick denuding of the land thereby causing soil erosion and
upsetting the ecological balance. A public enterprise or undertaking given the
same task would operate based on a defined systematic policy of extraction
thereby avoiding damage to the soil structure and environment.

Examiner’s report
The question requires candidates to discuss factors to justify the need for public
enterprises.
Majority of the candidates attempted the question and their performance was above
average.
The common pitfalls were the inability of few candidates to identify and explain
factors to justify the need for public enterprises.
Candidates are advised to make use of Pathfinders and the Study Text of the Institute
for better performance in the future examinations.

117
Marking guide
Marks Marks
Factors to justify the need for public enterprises:
Identification of any five factors 5
Explanation of the five factors identified at 2 marks each 10 15
Total 15

SOLUTION 7

a. The following are the measures open to a Federal Government in intervening in

the activities of an economy:
i. Fiscal policy
It relates to government expenditure and tax measures aimed at
controlling aggregate demand and hence the economy. It may be
expansionary or contractionary depending on the objective(s) being
pursued. Its components include taxation, expenditure, national budget,
borrowing or public debt and subsidies
ii. Monetary policy
This refers to the conscious and deliberate action on the part of the
monetary authorities to control money supply, the general credit
availability, the direction and cost of credit within the economy. It is
aimed at influencing intermediate variables for the purpose of
manipulating target variables. It comprises the use of measures such as
open market operations, cash reserve ratio, liquidity ratio, bank rate or
discount rate, credit ceiling, sectoral allocation, moral suasion and
mandatory deposit.
iii. Commercial policy
It relates to a set of rules and regulations that influence the country‟s
imports and exports. It consists of tariffs, quotas and other form of trade
restrictions design to promote exports, generate income and employment
and restrict imports in order to reduce commercial deficits.
b. The following steps are required to be taken by the Federal Government or its
agencies before seeking the approval of the National Assembly on their request
for external borrowing:

i. The FG must seek approval of the annual borrowing programme;

ii. Approval of the terms and conditions of external loans as contained in

the annual borrowing programme must be sought by the FG;

iii. The FG must seek approval of overall limits, for the amounts of
consolidated debt of the federal, state and local governments, to be set

118
 by the President on the advice of the Honourable Minister of Finance
(HMF); and

iv. There must be prior authorisation in the Appropriation or other Act or

Law for the purpose for which the borrowing is to be utilised.

c. Requirements for raising fund from the domestic market by state

governments.
In order to raise fund from the domestic capital market, a state government
must conform to the requirements of the Investment and Security Act, 2007 as
stated below:
i. Compliance with constitutional provisions:
In accordance with Section 120 of the 1999 Constitution (as amended),
state governments must ensure any borrowing is approved by the State
House of Assembly. Borrowing must align with the legal framework
governing public finance and borrowing in Nigeria.

ii. Approval from the Federal Government:

As per the Debt Management Office (DMO) Act, 2003, state governments
must obtain approval from the Federal Ministry of Finance through the
Debt Management Office (DMO) before accessing the domestic capital
market.

iii. Adherence to the Fiscal Responsibility Act (FRA) 2007:

The FRA imposes specific requirements on borrowing by state
governments:
 Borrowing must be strictly for capital expenditure or human
development projects.
 The loan must demonstrate clear economic benefits.
 The state must show a viable repayment plan, ensuring debt
sustainability.

iv. Debt Sustainability Analysis (DSA):

The DMO conducts a debt sustainability analysis to assess whether the
state‟s existing debt profile and proposed borrowing are sustainable.

v. The consent of the Federal Ministry of Finance to state‟s request to

borrow from the capital market

vi. Credit worthiness and credit rating:

States are typically required to obtain a credit rating from a recognised
agency to demonstrate their financial capacity and repayment ability. A

119
 profile of the assets and liabilities of the state in the last five years in
addition to a 5- year projection
vii. Preparation of an offer document (Prospectus): A profile of the state
showing its population, major industries, their locations and other major
projects embarked upon. The information has to be submitted with an
application to the Securities and Exchange Commission (SEC) as well as
the Nigerian Exchange Limited (NGX)

viii. Registration with the Securities and Exchange Commission (SEC)

The borrowing programme must be registered with the Securities and
Exchange Commission (SEC), which is responsible for regulating the
Nigerian capital market.

ix. Applications to Securities and Exchange Commission (SEC):

The application shall, amongst other documents, be accompanied by an
original copy of an irrevocable letter of authority giving the Accountant
General of the Federation the authority to deduct at source from the
statutory allocation due to the body, in the event of default by the body
in meeting its payment obligations under the terms of the loan and the
relevant trust deed.

x. Legislative approval
The borrowing must be approved by the state‟s legislature, ensuring that
it aligns with the state's budgetary and developmental priorities.
Legislative approval provides legal backing for the issuance of bonds or
other securities.

xi. Open and transparent bidding process

States may be required to conduct an open and transparent bidding
process for the selection of financial advisors, underwriters and other
intermediaries in the borrowing process.

xii. Collateral or revenue backing

The state may need to provide guarantees, such as internally generated
revenue (IGR) or statutory allocations from the federation account, as
security for the borrowing.

xiii. Adherence to capital market rules

The borrowing must comply with capital market rules, including listing
requirements for bonds on the Nigerian Exchange (NGX) or Financial
Market Dealers Quotation (FMDQ) Exchange.

120
 xiv. Engagement with professional advisors
States must engage professionals such as financial advisors, issuing
houses and legal counsel to structure and manage the borrowing process
effectively. These professionals ensure compliance with legal, financial
and market standards.

xv. Independent revenue verification

States must demonstrate adequate revenue-generation capacity to repay
the debt. Verification by independent auditors may be required to
confirm revenue streams.

xvi. Alignment with development goals

Borrowing plans must be tied to specific developmental projects,
ensuring alignment with the state's medium to long-term goals.

Examiner’s report
The question is in three parts. Part (a) of the question requires candidates to explain
the measures open to Federal Government in intervening in the activities of an
economy. Part (b) of the question requires the candidates to enumerate the steps that
the Federal Government or its agencies must take before seeking the approval of the
National Assembly on their request for external borrowing, while part (c) of the
question asks the candidates to identify the requirements for raising funds from the
domestic capital market by state governments.

Few of the candidates attempted the question and their performance was poor.

The commonest pitfall was the inability of few candidates to enumerate the steps that
the Federal Government or its agencies must take before seeking the approval of the
National Assembly on their request for external borrowing. Also, few candidates were
unable to identify the requirements for raising funds from the domestic capital market
by State Government.

Candidates are advised to make use of Pathfinders and the Study Text of the Institute for
better performance in the Institute‟s future examination.

121
Marking guide
Marks Marks
a. Measure used for intervening in the economy by FG
Identification of any two measures 1
Explanation of any of the two measures identified at 1½ marks 3
each
Any example of each of the two measures at ½ mark each 1 5

b. Measures to be taken before seeking approval of NASS for external

borrowing
Identification and explanation of any four measures 4

c. Requirements for raising funds from domestic market by state

government
Any four requirements identified at 1½ marks each 6
Total 15

122
ICAN/242/Q/B6 Examination No.........................

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

SKILLS LEVEL EXAMINATION – NOVEMBER 2024

CORPORATE STRATEGIC MANAGEMENT & ETHICS

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 any other COLOUR OF INK will not be marked.
8. You are required to attempt Question ONE (compulsory), any TWO Questions in
Section B and any Two questions in Section C.
9. Check that you have collected the correct question paper for the examination you are
writing.

THURSDAY, NOVEMBER 21, 2024

DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO

123
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION – NOVEMBER 2024
CORPORATE STRATEGIC MANAGEMENT & ETHICS
Time Allowed: 31/4 hours (including 15 minutes reading time)
INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT FIVE OUT OF THE SEVEN
QUESTIONS IN THIS PAPER

SECTION A: COMPULSORY QUESTION (30 MARKS)

QUESTION 1
Gold Bank Plc is a leading commercial bank in Nigeria. Since inception in 2005, it has
been at the forefront of the development, deployment and marketing of diverse
internet driven banking products. These services complement traditional banking
products, which Gold Bank Plc offers to its over ten million customers across Nigeria,
with branches in Africa, Europe, and North America.

However, the last couple of years have been particularly challenging for Gold Bank
Plc. Net profit grew at an average of 15% between 2010 and 2017, but declined to 5%
between 2017 and 2021. Banking surveillance report revealed that this decline is
attributable to increased customer preference for Financial Technology (FinTech)
services which are not part of Gold Bank Plc‟s portfolio of banking products. FinTech
is a group of emerging Information Technology (IT) and internet-driven financial
services. Such services include digital wallets, digital lending, digital payments,
blockchain, and digital wealth management. Consequently, the Board of Directors of
Gold bank Plc decided that a key component of the bank growth strategy in the
coming years is to diversify into the Fintech market.

Since its inception in 2005, Gold Bank Plc has been developing its internal capacity to
innovate and deploy IT driven financial services. This has given the organisation a
reputation as one of the most innovative institutions in Nigeria‟s banking industry.
This reputation was achieved through consistent investment in IT infrastructure,
attraction, development and deployment of highly qualified IT professionals. The bank
is also known for its robust management support system, which is evidenced by the
creation of a separate, but highly organised department saddled with the
responsibility of developing, deploying, maintaining and overseeing the bank‟s IT and
cybersecurity infrastructure. However, diversification into Fintech requires additional
resources, such as bigger internet bandwidths, specialised computer hardware and
software, and human resources with skills and experience in Fintech. Unfortunately,
Gold Bank plc does not currently possess these.

124
Nigeria‟s Fintech market is currently made up of tech start-ups, most of which are
currently small in terms of size, number of employees, but big in terms of asset value
and volume of transactions processed annually. As a bourgeoning market, it is
estimated that Nigeria‟s Fintech industry will double in market size and value in the
next two years. Thus making it one of the fastest growing sectors in Nigeria. This is
partly because more traditional banking customers are switching to Fintech services.

Currently, the biggest Fintech company in Nigeria is Oceanwave Limited with a current
market value estimated to be in excess of N5 billion. Entry into the industry is highly
regulated with several legal requirements. One of these is high paid-up capital
requirement. Also, the resources and IT infrastructure requirements for setting up a
Fintech company pose a strong barrier for new entrants into the industry.
Consequently, there are only five Fintech companies that are registered to do business
in Nigeria.

The Board of Directors of Gold Bank Plc is to decide between two options as entry
strategy into Nigeria‟s Fintech space: organic growth or acquisition strategies. To this
end, the bank is already in acquisition talks with Barterwave, the third largest Fintech
company in Nigeria.

Required:
You have been engaged as a consultant to provide advice to Gold Bank Plc on its
strategic initiatives.
a. Advise the Board of Directors of Gold Bank Plc on the potential benefits and
drawbacks of pursuing organic growth. (10 Marks)
b. From the scenario above, use the Johnson and Scholes framework to advice on
how Gold Bank Plc can use Critical Success Factors (CSF) to achieve competitive
advantage through diversification into the Fintech market. (7 Marks)
c.

d. Using SWOT analysis, advise on the chances of success of Gold Bank Plc with the
proposed organic growth strategy of diversification into the Fintech market.
(10 Marks)
e. Advise the management of Gold Bank Plc on the likely drawbacks of pursuing
acquisition as a growth strategy as the company is considering acquiring
Barterwave Limited. (3 Marks)
(Total 30 Marks)

125
SECTION B: YOU ARE REQUIRED TO ATTEMPT TWO OUT OF THE THREE
QUESTIONS IN THIS SECTION (40 MARKS)

QUESTION 2
Every business venture involves risk. Often the higher the risks, the higher the
expected return. However, it is important that owners of businesses have clear
understanding of the types and dynamics of risks involved in business engagements.
As an expert in business risk management, you are expected to explain the following
to a set of young entrepreneurs who are just starting their businesses:
a. Measuring risks (3 Marks)
b. Prioritising risks (3 Marks)
c. Related and Correlated risk factors (3 Marks)
d. Objective and subjective risk perception, using an appropriate illustrative table
(7 Marks)
e. Role of the risk manager (4 Marks)
(Total 20 Marks)

QUESTION 3
Gafar is uneducated and has worked as a messenger for most of his adult life. He
recently won N500 million in a raffle draw. He has procured 50 hectares of land at
Alabata village where he hopes to establish a large poultry farm in the sum of about
N250 million. He has been advised to reach out to stakeholders in the poultry industry
in the region to ensure their optimal cooperation towards the successful and highly
profitable running of the farm. However, Gafar is not clear about who the stakeholders
are and he consequently approaches you as an expert in Corporate Governance for
some assistance.
You are required to clarify the following in ways that Gafar will fully understand them:
a. What are the general responsibilities of an organisation towards its
stakeholders, and what is the important objective of corporate governance with
respect to stakeholders? (5 Marks)
b. State ONE example and ONE problem of indirect claim. (5 Marks)
c. Explain FIVE categories of stakeholders. (10 Marks)
(Total 20 Marks)

126
QUESTION 4
Professional accountants are expected to be ethical in decision making. Adeolu works
in an audit firm whose services have been enlisted to audit the accounts of a large
manufacturing company in Nigeria. Adeolu was sent as the head of the team to the
company.
During the audit process, a lot of financial infractions that resulted in material
misstatements in the financial statements were discovered.
When it was clear to the company‟s management that these misstatements have been
discovered, Adeolu, on the instruction of the Managing Director was invited to the
office of the Financial Controller (FC), who is also a professional accountant, and was
offered 50 million naira to ignore the impact of the misstatements in issuing the audit
report. The FC was pressurised by the MD that he should convince Adeolu whom he
knows was his classmate in the university to accept the N50 million and issue an
unqualified audit report. He also threatened that failure to do this might cost him his
job. Interestingly, the MD is an uncle of the FC‟s wife. He got the job by virtue of this
relationship.
Adeolu‟s mother needs an urgent surgery which is to cost the sum of 18 million naira.
His wife also will soon put to bed, and he has no idea how to raise the money required
to prepare for the arrival of the baby. No doubt the offer of N50 million is very
tempting, but Adeolu remembers what he has learnt about the critical steps to be
taken in arriving at ethical decisions.

You are required to:

a. Explain the critical steps to be taken in arriving at an ethical decision and relate
these to the scenario above. (8 Marks)
b. Identify the ethical threats an accountant in business might be exposed to, their
classifications and relate these to the situation of the FC of the company in
question. (10 Marks)
c. State how a person will take moral decisions, if the person is moral in
accordance with the four-step model of moral behaviour and the scenario
documented in this question. (2 Marks)
(Total 20 Marks)

127
SECTION C: YOU ARE REQUIRED TO ATTEMPT TWO OUT OF THE
THREE QUESTIONS IN THIS SECTION (30 MARKS)

QUESTION 5
After a long economic recession, Nkechi and Saburi have come together to establish a
plastic company and the board of directors have drawn the corporate code of ethics for
the company.
a. Explain the concept of corporate code of ethics. (2 Marks)
b. Discuss THREE basic reasons for developing a company‟s code of ethics.
(6 Marks)
c. Highlight SIX general statements that a corporate code of ethics specify.
(3 Marks)
d. Highlight FOUR statements of corporate code of ethics in respect of the
company‟s employees and FOUR in respect of the customers. (4 Marks)
(Total 15 Marks)

QUESTION 6
The ethics of an organisation is shaped by its corporate culture.
a. Using the Johnson and Scholes cultural web, describe the contents of corporate
culture. (12 Marks)
b. Use the Edgar Schein model to describe the level of corporate culture in an
organisation. (3 Marks)
(Total 15 Marks)

QUESTION 7
You are being interviewed for a job as a risk manager and you are required to:
a. Specify the role of a risk manager. (3 Marks)
b. Discuss the TARA framework for risk management. (4 Marks)
c. Explain the roles of management and board in risk management.
(8 Marks)
(Total 15 Marks)

128
SECTION A

SOLUTION 1

a. Internal development strategy is pursued when an organisation develops and

deploys its internal competencies and capabilities to achieve organisational
growth.
Potential benefits of growth through internal development are as follows:
Firstly, it will provide more latitude for management to control Gold Bank Plc‟s
growth, thus ensuring that progress is achieved within the means of the entity.
Adopting this strategy ensures that adequate resources are available for the
success of the growth initiative.
Secondly, it will provide opportunity for Gold Bank Plc to identify, develop and
deploy its core competencies for successful growth and improved competitive
advantage. These core competencies include a robust management support
system and the possession of needed resources, which has made Gold Bank the
most innovative bank in the industry
Thirdly, Gold bank Plc can fill identified resource gaps by acquiring such from the
market. For example, a shortfall in skills needed for diversification into the
Fintech market can be met through recruitment of needed human resources from
the labour market.
Drawbacks of pursuing internal development strategy are as follows:
First, the growth that Gold Bank Plc can achieve will be limited to its internal
capabilities. In pursuing this strategy, the bank may deny itself access to
competencies and capabilities which can be provided by other firms through
mergers and acquisition.
Second, the time lag between when internal capabilities are deployed and when
Gold Bank plc commences the rollout of Fintech services may be significant. The
development and rollout process may also be very costly. It will also take some
time to build the bank‟s reputation as a Fintech service provider. All these gaps
and costs are eliminated with mergers and acquisitions.
Third, internal development would require adaptation/modification of available
resources for them to be usable for the Fintech business including
reskilling/upskilling of existing staff. This poses some risks as the quality of
Fintech services provided by the bank may not offer competitive advantage to the
entity.
Fourth, Diversification into the Fintech business may require a significant change
in the management structure of the entity. This feat could be difficult to achieve.

129
b. Critical Success Factors (CSF) are components of an organisations strategy that
can offer competitive advantage.
Johnson and Scholes proposed a six-step approach to using CSF to gain
competitive advantage:
Step 1: Identify the CSF that significantly determine the profitability of the
business. In doing this, it is useful for the firm to consider the 4Ps of marketing:
Price, Product, Place and Promotion. From the given scenario, Gold Bank Plc can
improve on the quality and type of products currently on offer in the Fintech
market and improve same; while charging lower rates than the competitors.
Step 2: Identify the critical competencies that will deliver high profit and
competitive advantage. It means identifying which competencies that the firm
should build to achieve business success. For example, the firm may need to
deploy resources to strengthen the quality of its product. There is no critical
competency mentioned in the scenario. However, Gold Bank Plc can deploy
resources that will either ensure high quality Fintech services or achieving low-
cost operations.
Step 3: Develop critical competencies (identified in step 2) that will deliver
profitability and competitive advantage. Requisite inputs that will deliver
competitive advantage in the FinTech market should be developed and deployed
by Gold Bank Plc.
Step 4: Identify Key Performance Indicators (KPIs) for each critical competency
identified in step 2.
Step 5: Emphasise the development of critical competencies of each aspect of the
firm‟s performance in such a manner that it will be difficult to replicate or be
matched by competitors.
Step 6: Monitor the achievement of the firm‟s KPI to ensure that set targets are
met and competitive advantage is achieved

c. SWOT ANALYSIS
Strength: The resources and competencies that an entity possesses.
From the given scenario, these include, experience spanning over a decade in the
financial services sector, strong IT infrastructure, highly skilled and qualified IT
personnel, strong innovation capabilities, strong management support system,
organisational structure that supports rendering of IT driven financial services,
and large customer base.
Weaknesses: Resources and competencies that the organisation currently lack,
but are critical to the success of its strategies and achievement of its goals.
From the given scenario, these include: inadequate internet bandwidth,
inadequate computer hardware and software, lack of adequate skilled manpower
in Fintech.

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 Opportunities: Factors in the external environment that can be exploited to
deliver competitive advantage and realisation of corporate goals.
From the given scenario, these include: a rapidly growing Fintech market
increasing number of customers are switching to Fintech services.
Threats: Factors in the external environment that may hamper the success of the
entity‟s strategies and hinder the achievement of corporate goals.
From the given scenario, these are: size and activities of Oceanwave Limited and
other competitors. These sum up to make the FinTech market highly competitive.
Also, there are strong entry barriers into the Fintech business such as high capital
base, IT infrastructure, and regulatory requirements.
Conclusion:
The success of Gold Bank Plc in the Fintech business depends on if its strengths
and opportunities are stronger than weaknesses and threats. When strengths and
opportunities are stronger, then it is very likely that Gold Bank Plc will succeed in
the proposed Fintech business. However, if weaknesses and threats are stronger,
then the chances of failure of Gold Bank Plc in the Fintech business is higher.

d. Drawbacks of acquisition as a growth strategy:

Cost of acquiring Barterwave Limited may be high enough to encourage many of
its current shareholders to sell off their shares, thus lowering the return on
investment of the buyer (Gold Bank Plc). Also, adopting acquisition as a growth
strategy may lead to a loss of proportional ownership of the entity as acquisition
may lead to a change in ownership structure. Furthermore, the integration of
both Barterwave and Gold Bank into a single entity could be challenging given
the fact that both firms have different management structures, corporate cultures
and compensation management systems. It may also lead to the acquisition of
liabilities, which Barterwave may be carrying as may be shown in its financial
position statement.

Examiner’s report
This scenario based compulsory Strategic Management question tests the following
aspects of growth strategy:
a. Benefits and drawbacks of organic growth;
b. Johnson and Scholes framework to use Critical Success Factor (CSF) for
competitive advantage;
c. SWOT Analysis of organic growth strategy; and
d. Drawbacks of acquisition as a growth strategy.
Virtually all the candidates attempted this question.
Performance was below average, as less than 40 percent of the candidates scored up
to 50 percent of the marks allocated to this question.
Many candidates did not demonstrate adequate knowledge of Johnson and Scholes
framework for use of Critical Success Factor (CSF) for competitive advantage.
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Candidates are advised to pay serious attention to the use of Critical Success Factor for
competitive advantage.

Marking guide
Number of Marks per Total
points point
a) Definition of internal
development strategy 1 2 2
Potential benefits 6 11/4 5
Drawbacks 8 11/4 5
10
b) Definition of CSF 1 1 1
Steps 6 1 6
7
c) Strengths:
Definition 1 ½ ½
Bullet points 5 ½ 2½
Weaknesses 1 ½ ½
Definition
Bullet Points 3 ½ 1½
Opportunities 1 ½ ½
Definition
Bullet Points 1 1 1
Threats 1 ½ ½
Definition
Bullet Points 1 1 1
Conclusion 2 1 2
10
d) Drawbacks of 3 1 3
acquisition as a
growth strategy
3
Total 30

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SECTION B

SOLUTION 2

a. Measuring risks: Measuring risk means assigning quantitative values to risk. Risk
measurements can be financial measurements (for example, a measurement of
the expected loss) or non-financial (for example, a measurement of expected
injuries to employees at work). However, not all risks can be measured.
Where risks are assessed in qualitative terms, risk management decisions become
a matter of management judgement. When risks are quantified, the risk can be
managed through setting targets for maximum risk tolerance and measuring
actual performance against the target.
b. Prioritising risks: Risk prioritisation is the process of ranking risks based on their
likelihood of occurrence and the potential impact they may have on the
organisation, project, and activity. Within a system of risk management,
companies need to establish a process for deciding which risks are tolerable,
which are not and which might need more control measures to reduce the risk.
(Sometimes, it might be decided that control measures are excessive, and that
money can be saved by reducing the controls, without increasing risk above
acceptable levels).
Deciding on priorities for risk management might be a matter of management
judgement. Some companies and non-business entities use formal techniques to
help them with the prioritisation of risk. One of such techniques is risk
dashboard.

c. Related and correlated risk factors: Related risk factors are risks that are
interconnected, and therefore may influence one another. These connections can
arise because they share common causes, affects similar stakeholders, or trigger
secondary risk. Understanding and managing related risks is crucial in
preventing cascading failures and ensure a comprehensive risk management
strategy. Examples may include economic recessions which may lead to reduced
consumer spending (marketing risk) which may lead to a reduced consumer
spending (operational risk).

d. Correlated risk factors: Correlated risks are underlying variables or conditions

that simultaneously influence multiple risks, creating a relationship between
them. Examples of correlated risks may include inflation, which can drive up
costs (operational risks) and reduce purchasing power (market risk). Risks might
be positively correlated (both go up or down together) or negatively correlated
(one falls as the other increases). Correlation might be due to the risks having a
common cause or because one type of risk might give rise to the other.

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 Objective and subjective risk perception
Objective risk perception
Risk is objectively perceived/ assessed when all variables (likelihood and impact)
can be measured accurately (where hard information is available). Assessment of
a risk based on objective measurement of likelihood and impact is usually more
robust than if based on subjective judgement. This will affect the risk
management strategy. In many cases, it is difficult to assign a value to likelihood
or impact with any degree of accuracy. In such cases, risks are subjectively
perceived/ assessed. Assessment of a risk based on objective measurement of
likelihood or impact is usually more robust than if based on subjective judgment.

Subjective risk perception

Subjective risk perception refers to the personal and individual judgment about
the likelihood and severity of a risk. Subjective risks are based on psychological,
social, cultural, and emotional factors.
The following table contains illustrations of risks where impact and likelihood
might be objective or subjective:

Objective likelihood measurement Subjective likelihood measurement

Quality failure in a batch of An oil well disaster occurring this
components (based on previous year in Siberia.
manufacturing experience).

Objective impact measurement Subjective impact measurement

The change in interest payments as a Change in revenue due to change in
result of a 1% increase in interest rates. consumer taste.

e. Role of the risk manager

The role of a risk manager includes:
i. Helping with the identification of risks;
ii. Establishing „tools‟ to help with the identification of risks;
iii. Establishing modelling methods for the assessment and measurement of
risks;
iv. Collecting risk incident reports (for example, health and safety incident
reports);
v. Assisting heads of departments and other line managers in the review of
reports by the internal auditors;
vi. Preparing regular risk management reports for senior managers or risk
committees; and
vii. Monitoring „best practice‟ in risk management and encouraging the adoption
of best practice within the entity.

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Examiner’s report
This Risk Management question tests the following:
a. Measuring risks;
b. Priotising risks;
c. Related and correlated risk factors;
d. Objective and subjective risk perception; and
e. Role of Risk Manager.
More than 80% of the candidates attempted this question.
Performance was average as about half the number of candidates who attempted this
question scored more than 50 percent of the marks allotted to it.
The candidates who performed poorly could not effectively distinguish between
related and correlated risk factors, and objective and subjective risk perception.
Candidates at this level of the examination must be able to demonstrate knowledge of
basic concepts such as these.

Marking guide
Description Number of points Marks per point Total
a) Measuring risks 3 1 3
b) Prioritising risks 3 1 3
c) Related risk factors 3 ½ 1½
Correlated risk factors 3 ½ 1½
d) Objective risk perception 2 1 2
Subjective risk perception 1 1 1
Diagram 4 segments 1 per segment 4
e) Role of the risk manager 4 1 4
Total 20

SOLUTION 3

a. A stakeholder is any group or individual who has a stake or interest, or some

expectation from an organisation and can affect or be affected by the
achievement of the entity‟s objectives. An organisation has a responsibility to
meet at least some of the expectations of its stakeholders. If a company fails to
meet any of the expectations of its stakeholders, they might lose interest in the
entity. If a company wishes to remain associated with its stakeholders, it must do
something to satisfy these expectations. The expectations of different groups of
stakeholders are not the same, and they are often inconsistent with each other.
The objectives of corporate governance should be to provide enough satisfaction
for each stakeholder group.
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b. Indirect stakeholder claims are claims that are not made directly by a
stakeholder or stakeholder group but are made indirectly on their behalf by
someone else. For example:
 A small customer of a very large company is too powerless to make claims
in his own name;
 Future generations have a claim on what a company does today, for
example if the company‟s operations can preserve or destroying the
environment, future generations will be affected. They are not yet alive and
able to express their claims directly, and someone else must think about
their interests for them; and
 Terrorist groups may claim to represent the interests of people in their
region or country.

The problem with indirect stakeholder claims is that it is not always possible to
be sure that the stakeholders are being properly represented and their claims
correctly expressed.

Categories of stakeholders
i. Narrow and wide stakeholders
Narrow stakeholders are those that are the most affected by the actions and
decisions of the organisation. Narrow stakeholder groups for a company
usually include shareholders, directors, other management, employees,
suppliers, and those customers who depend on the goods produced by the
company. Wide stakeholders are those groups that are less dependent on the
organisation. Wide stakeholders for a company may include customers who
are not particularly dependent on the company‟s goods or services, the
government, and the wider community (as distinct from local communities in
which the company operates, which may be narrow stakeholders). Companies
have more responsibility and accountability to narrow stakeholders than to
wide stakeholders.

ii. Primary and secondary stakeholders

A primary stakeholder group for a company is a group that is essential for the
continuation of the company as a going concern. Customers, suppliers, and
employees may be primary stakeholders. Secondary stakeholders are those
that the organisation does not directly rely on for its continued survival, at
least in the short term. Primary stakeholders have strong influence over a
company‟s decisions and actions.
iii. Active and passive stakeholders
Active stakeholders are those that seek involvement in the company‟s
activities and decisions. These stakeholders may be a part of the company‟s
normal decision-making and operating processes, such as management and
employees. Other active stakeholders who are external to the company may
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 include, for example government regulators or environmental pressure
groups. Passive stakeholders are those stakeholders who do not usually try to
get involved with a company‟s policy making. They may have a strong
interest in what the company does, but they do not want to get actively
involved in the decision-making. The government and local communities may
be examples of passive stakeholders.
iv. Voluntary and involuntary stakeholders
A voluntary stakeholder is someone who becomes a stakeholder voluntarily.
They include employees (who could move to a job with a different employer),
customers (who could buy goods from another company) and shareholders
(who could sell their shares). Involuntary stakeholders are those who do not
choose to be stakeholders but have no choice. These include local
communities, stakeholders who suffer from the effect of the company‟s
operations on the environment, and future generations. Most competitors are
also involuntary stakeholders.
v. Legitimate and illegitimate stakeholders
Legitimate stakeholders are those with a „right‟ to make a claim on the
company (a „legitimate‟ claim). Illegitimate stakeholders are those that do
not have such a „right‟. Deciding whether stakeholders have legitimate or
illegitimate claims on a company may depend on a person‟s viewpoint and
the distinction is therefore to some extent a matter of judgement. Examples of
illegitimate stakeholders may be certain lobby groups or pressure groups (for
example, animal rights activists) or charity organisations. In some countries,
rebel groups or terrorists may be illegitimate stakeholders with considerable
influence over a company‟s activities.
vi. Known and unknown stakeholders
Known stakeholders are those that the company knows about. Unknown
stakeholders are those whose existence the company is not aware of. This
distinction may be relevant when a company has operations that affect the
environment or is planning new activities that will have an environmental
impact. The company will not necessarily be aware of all the stakeholders
that will be affected by its activities – for example animals, insects, and sea
creatures. It may be argued that before implementing any new business
strategy a company should carry out a thorough investigation to identify
unknown stakeholders and consider the impact of its strategy on them.
vii. Internal and external stakeholders
Internal stakeholders of a company are inside the company and a part of it.
Two insider stakeholder groups in a company are the equity shareholders
and the directors. External stakeholders are outside the company and are not
a part of it. These include government agencies and the wider community.

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Examiner’s report
This is a Governance question covering the following areas:
a. General responsibilities of an organisation to its stakeholders and objectives of
corporate governance to stakeholders;
b. Problems of indirect claim; and
c. Categories of stakeholder.
Less than 60 percent of the candidates attempted this question.
Performance was poor, as less than 40 percent of the candidates who attempted this
question, scored up to 50 percent of the marks allocated to the question.
Many candidates did not understand the categories of stakeholder, as they mistook
them for stakeholder groups.
Candidates are admonished to master these concepts as they are important in
governance.

Marking guide
Number of Marks per
Description points point Total
a) Responsibilities of organisations
to stakeholders 5 1 5
b) Example and problem of indirect
claim 2 2½ 5
c) Categories of stakeholders 5 2 10
Total 20

SOLUTION 4

a) The critical steps to arrive at an ethical decision in business include:

Step 1: Identification of the Moral Issue
The individual must be able to recognise the relevant moral issue or moral
dilemma whenever there is an ethical aspect to a situation. He or she must be
able to recognise that a moral decision has to be taken.
Scenario
The moral dilemma in this case is whether or not to window dress the audit
report to cover the financial infractions in the company.

Step 2: Recognition/selection of the course of action.

The decision-maker must be able to recognise and select the course of action that
is morally correct.

138
 Scenario
Adeolu must be able to recognise that the professional and morally correct action
is to reject the offer of N50 million and present an accurate and objective audit
report.

Step 3: Accessing the significance of the threats

The decision maker must identify the significance of the threats to compliance
with the fundamental principles of integrity and objectivity.
Scenario
One of the threats is very significant because much money is involved (N50
million) and Adeolu is a close associate to the FC. This may impair objectivity and
integrity.

Step 4: Prioritisation/ preference for right line of action

The decision- maker must give priority to the right line of action above all other
considerations (for example, self-interest).
Scenario
Adeolu must not prioritise the needs of his mother and wife over what is ethical
from the professional point of view.

Step 5: Demonstration of moral strength

The decision-maker must have enough moral strength to implement the decision
that he selects in Steps 2 and 3.
Scenario
Adeolu must act accordingly.

Step 6: Introducing safeguards.

Safeguards can be introduced to reduce the threat to compliance with integrity
and objectivity.
Scenario
One of the safeguards that can be introduced is for Adeolu to request for
replacement in the engagement team

4b. Identification of unethical actions/ethical threats

The unethical actions/ethical threats that an accountant could be exposed to
include:
i. Breaking a law or regulation: Illegal activity is always unethical;
ii. ignoring technical standards, such as financial reporting standards or
auditing standards;
iii. Lying to the external auditors or regulators; and
iv. Issuing a report that is misleading and misrepresents the facts.

139
 Classification of ethical threats

i. Self-interest threats: By doing what the senior management expects, the

accountant might expect to benefit from personal rewards, such as a bonus,
a higher salary or promotion;
ii. Intimidation threats: There might also be a threat from senior management
that the accountant might not receive a bonus or might be expected to
resign unless he agrees to do what senior management ask;
iii. Familiarity threats: In some cases, an accountant might be expected to
agree to what senior management ask because he has known them for a
long time and should be expected to trust them to do „what is right‟ for the
company;
iv. Advocacy threats: This might occur when group of individuals within an
organisation advocate for a particular position or interest that may
compromise objectivity; and
v. Self -review threats: There might be a threat from the management of the
company by attempting to audit their own company account by dictating
what to be done by independent team of auditors.

Relating the threats to the situation of the FC:

There is the intimidation threat as the MD had threatened the FC with the
possibility of losing his job.
There is also the familiarity threat as the FC is related to the MD by marriage and
also a classmate of Adeolu.

4c. How a moral or ethical person would take moral decisions given the four-step
model of moral behaviour.

Step 1: Identify the ethical issue

Scenario: Adeolu should identify all the ethical issues involved in the auditing of
the account. His appointment to lead the team of auditors to do the job is based
on his knowledge and experience. Adeolu is faced with the dilemma of accepting
N50 million gift in order to accept or reject the provision of unqualified audit
report.

Step 2: Consideration of the threats that compliance with the fundamental ethical
principles could create
Scenario: In this case, there are threats to the principles of integrity, objectivity,
professional behaviour, professional competence and due care.

Step 3: Consideration of the significance of the threats to the compliance with the
fundamental principles

140
 Scenario: The significance of the threat will depend on how committed Adeolu is
to the ethics of his profession as an auditor and, the extent in which the threats
could compromised objectivity.

Step 4: Consider safeguarding the ethical threats and find solution.

The step to take so as to ensure moral decisions is for Adeolu and his auditing
team to adhere to the right course of action that is morally correct.

Examiner’s report
This is a scenario-based Ethics question on ethical threats and safeguards.
More than 80 percent of candidates who attempted this question, however,
performance was below average as not more than 30 percent of the candidates who
attempted it scored 50 percent of the marks allotted.
The common pitfall was candidates‟ inability to relate their responses to the scenario
provided. This is a major distinction between Foundation and Skills levels of the
examination. Candidates must master this skill as they will require it at higher levels
of the examination.

Marking guide

Description No of points Marks per point Total

a) Identification of steps 4 ½ 2
Explanation of steps 4 ½ 2
Application to the scenario 4 1 4
b) Identification of unethical
actions/ethical threats 2 1 2
Classification of ethical
threats 5 1 5
Relation to the given
scenario 2 1½ 3
c) Points mentioned 4 ¼ 1
Scenario explained 4 ¼ 1
Total 20

141
SECTION C

SOLUTION 5
a. A corporate code of ethics is a written set of guidelines that outlines the
principles, values, and behaviour expected of employees within an organisation.
It serves as a moral compass, guiding decision-making and actions to ensure that
the organisation operates with integrity, accountability, and transparency.
A corporate code of ethics is a code of ethical behaviour, issued by the board of
directors of a company. It is a formal written statement, and should be
distributed or easily available to all employees. The decisions and actions of all
employees in the company must be guided by the code.

b. Reason 1: Managing for compliance - The company wants to ensure that all its
employees comply with relevant laws and regulations, and conduct themselves in
a way that the public expects. For example, companies providing a service to the
general public need to ensure that their employees are polite and well-behaved
in their dealings with customers.

Reason 2: Managing stakeholder relations - A code of ethics can help to improve

and develop the relations between the company and its stakeholders, by
improving the trust that stakeholders have in the company. The code might
therefore include the ethical stance of the company on disclosing information to
stakeholders and the investing public (openness and transparency) and on
respecting the rights of stakeholders.

Reason 3: Creating a value-based organisation - A company might recognise the

long-term benefits of creating an ethical culture, and encouraging employees to
act and think in a way that is consistent with the values in its code of ethics. (It
could be argued that an ethical company, like a well-governed company, is more
likely to be successful in business in the long term. However, there is no firm
evidence to prove this point, and it is therefore a matter of opinion.

c. Six general statements that a Corporate Code of Ethics specify;

i. A code of conduct should specify that compliance with local laws is essential.
In addition, employees should comply with the policies and procedures of the
company. There might be a statement that any employee who fails to comply
with the company‟s code of conduct will face disciplinary action.
ii. The code might also include an overview of business conduct, and the need
to protect the company‟s reputation and „good name‟.

iii. It might also contain statements about the values of the company, such as:
 Acting at all times with integrity;
 Protecting the environment;
 The „pursuit of excellence‟; and
 Respect for the individual.
142
d. A code of ethics in respect of employees might include statements about:
i. Human rights, including the right of all employees to join legally authorised
organisations such as a trade union or political party;
ii. Equal opportunities for all employees, regardless of gender, race, ethnic
origin, religion, age, disability or sexual orientation;
iii. Refusal to tolerate harassment of employees by colleagues or managers;
iv. Concern for the health and safety of employees
v. Respect for the privacy of confidential information about each employee; and
vi. Company policy on giving or receiving entertainment or bribes.

A code of ethics in respect of customer‟s might include statements about:

i. Fair dealing with customers;
ii. Product safety and/or product quality;
iii. The truthfulness of advertisements; and
iv. Respect for the privacy of confidential information about each customer.

Examiner’s report
This Corporate Governance question tests candidates‟ knowledge of corporate code of
ethics.
This question was attempted by more than 80 percent of the candidates, with average
performance, as about 50 percent of the candidates who attempted it scored 50
percent of the marks allotted.
Those candidates who performed poorly were unable to discuss the basic reasons for
developing a company‟s code of ethics.
Candidates are advised to develop a full understanding of these concepts.

Marking guide
Description No of points Marks per Total
point
a) Definition of corporate code of ethics 1 2 2

b) Basic reasons for developing company‟s

code of ethics: Identification 3 1 3
Explanation 3 1 3
c) Statements that corporate codes of ethics
specify 6 ½ 3
d) Statements of corporate codes of ethics in
respect of employees 4 ½ 2
Statements of corporate codes of ethics in
respect of customers 4 ½ 2
Total 15

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SOLUTION 6

a. According to Johnson and Scholes, the cultural web consists of six inter-related
elements within an organisation:
Routines and rituals: These are „the ways things are done around here‟.
Individuals get used to established ways of doing things. For example, a team
meeting held first thing on Monday mornings.
Stories and myths: These describe the history of an organisation, and to suggest
the importance of certain individuals or events. History is passed by word of
mouth. Stories and myths help to create an impression of how the organisation
got to where it is, and it can be difficult to challenge established myths and
consider a need for a change of direction in the future. For example, a past
achievement.
Symbols: These are representations of the nature of the organisation. Examples of
symbols might be a company official vehicles, an office or building, a logo or a
style of language.
Power structure: Organisations are influenced by the individuals who are in
position of power. In many business organisations, power is obtained from
management position. However, power can also come from personal influence or
experience and expertise.
Organisation 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.
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.

b. According to Schein, there are three levels of culture that members of an

organisation acquire.
The outer skin: At one level, the culture of a company is evident in what an
observer can see by visiting the company, and in the values that it states. The
facilities and surroundings in which employees work help to create culture. So
too does the way that employees dress. Culture is also seen in the way that
employees talk to each other and interact with each other. A company might
have a formal code of ethical behaviour, which is intended to shape the attitudes
of all its members. However, stated values and mission statements are often
expressed in general terms, such as „providing a service to the community‟ and
„providing the best quality of service to customers‟.
144
 An inner layer: At this second level, the employees in a company share common
views on specific issues. This layer of culture can be seen in the ethical stance
that the company takes. Inner layer is expressed in relation to specific issues,
such as: Should we trade with companies or governments in politically repressive
countries? Should we buy goods from suppliers who use slave labour or child
labour?
The heart: The third level of culture is the company‟s paradigm. This is a term for
the shared assumptions and attitudes about what really matters, that are taken
for granted and rarely discussed. These affect the way that the organisation sees
itself and the environment in which it operates, and is the real „core‟ culture of
the organisation. A paradigm is not written down, and it is difficult to identify or
explain. The „paradigm‟ has also been described as the reason why the
organisation exists.

Examiner’s report
This Ethics question tests corporate culture with respect to Johnson and Scholes
cultural web and Edgar Schein‟s model on level of corporate culture.
About 70% of the candidates attempted this question.
Performance was average, as about half of these candidates scored not less than 50%
of the marks allotted.
Those candidates who performed poorly mixed up the two models tested in this
question.
Candidates are enjoined to take due care in handling questions.

Marking guide

Description No. of points Marks per point Total

a) Elements of cultural web: 6 ½ 3
Identification
Explanation 6 1½ 9
b) Levels of culture: Identification 3 ½ 1½
Explanation 3 ½ 1½
Total 15

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SOLUTION 7

a. Role of Risk Manager:

i. Helping with the identification of risks;
ii. Establishing „tools‟ to help with the identification of risks;
iii. Establishing modelling methods for the assessment and measurement of
risks;
iv. Collecting risk incident reports (for example, health and safety incident
reports);
v. Assisting heads of departments and other line managers in the review of
reports by the internal auditors;
vi. Preparing regular risk management reports for senior managers or risk
committees; and
vii. Monitoring „best practice‟ in risk management and encouraging the
adoption of best practice within the entity.

b. The TARA framework for risk management

The TARA framework for risk management stands for:
i. Risk transfer has been described: A common method of risk transfer is to buy
insurance, and transfer risk to the insurance company.
ii. Risk avoidance usually means „not doing‟ something or withdrawing from an
activity that creates risk. It could make sense to avoid risk if the risk is too
high for the expected returns. In order to make entrepreneurial profits
however, some business risks have to be taken.
iii. Risks can be reduced by various measures. In particular, risks of errors and
fraud can be reduced by means of a sound system of internal control.
iv. Accepting Risk:
 If the risk is not too great, and the cost of reducing; and
 Transferring the risk would not be worthwhile, exposure to a risk may be
acceptable.

c. Role of the management and board in risk management

i. Identification of key risks (although the board of directors might take on the
responsibility, with advice from management and auditors);
ii. Assessment of risks and for designing and implementing risk controls;
iii. Monitoring the effectiveness of risk controls, and keeping risks under review;
iv. Regularly report risks and risk management to the board of directors.
v. Drafting of company‟s policy on risk and providing guidance on the
company‟s risk appetite.

146
Examiner’s report
This Risk Management question tests candidates‟ knowledge of:
a. Role of a risk manager;
b. TARA framework for risk management; and
c. Roles of management and board in risk management.
About 80 percent of the candidates attempted this question, and performance was
good as more than 60% of the candidates scored more than 50 percent of the marks
allotted.
Candidates who performed poorly could not distinguish between the roles of
management and board in risk management.
Candidates are advised to note the distinction between the roles of management and
board.

Marking guide
Description No. of Marks per Total
points point
a) Role of risk manager 3 1 3
b) TARA: Identification 4 ½ 2
Explanation 4 ½ 2
c) Role of management and
board in risk management 4 2 8
Total 15

147
ICAN/242/Q/B3 Examination No....................
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

SKILLS LEVEL EXAMINATION – NOVEMBER 2024

TAXATION
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 any other COLOUR OF INK will not be marked.
8. You are required to attempt Question ONE (compulsory), any TWO Questions in
Section B and any TWO questions in Section C.
9. Tax and Capital Allowances rates are provided with this examination paper.
10.

10. Check that you have collected the correct question paper for the examination you
are writing.

TUESDAY, NOVEMBER 19, 2024

DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO

148
 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION – NOVEMBER 2024

TAXATION
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

ABC Limited was incorporated on December 7, 2019, with an authorised share capital
of N2,500,000. It is engaged in general merchandising.

It commenced business on July 1, 2020. The accounting year-end is November 30,

each year. The statement of profit or loss of the company has revealed the following:

Year ended Period ended

November 30, 2021 November 30, 2020
N N N N
Gross turnover 125,600,000 87,200,000
Cost of sales (92,944,000) (65,400,000)
Gross profit 32,656,000 21,800,000
Dividend received (gross) 432,100 432,100
Rent received 660,000 600,000
33,748,100 22,832,100
Expenses:
Salaries and wages 3,890,000 3,625,000
Rent and rates 1,200,000 1,200,000
Transport and travelling 421,300 300,500
Repairs and maintenance 86,000 380,000
Donations and subscriptions 570,000 400,000
Utilities – electricity, gas,
water, etc 201,360 195,200
Allowance for doubtful debts 320,000 210,000
Bad debts 92,000 85,000
Income tax provision 425,000 387,000
Printing, photocopying and
stationery 187,100 124,600
General expenses 89,000 82,000

Legal and other professional

149
charges 370,000 419,000
Audit fees 600,000 500,000
Bank charges and
commission 628,000 436,000
Depreciation 903,500 (9,983,260) 423,500 (8,767,800)
Net profit 23,764,840 14,064,300

Additional information provided:

2021 2020
N N
(i) Repairs and maintenance comprise:
Cost of new plant not captured in property, plant
and equipment (PPE) 0 125,000
Cost of furniture excluded in PPE 0 182,000
Repairs of motor vehicles and other equipment 86,000 73,000
86,000 380,000
(ii) Donations and subscriptions are composed of:
Donations to the MD‟s church 400,000 250,000
Donations to XYZ Club 120,000 100,000
Subscriptions for relevant journals 50,000 50,000
570,000 400,000
(iii) Legal and other professional charges comprise:
Retainership fees 250,000 250,000
Legal cost of acquiring a new lease 0 85,000
Legal cost of defending a tax appeal 120,000 0
Legal cost of renewing a long lease 0 36,000
Legal cost of defending traffic offence 0 48,000
370,000 419,000

(iv) The company acquired the following qualifying capital expenditure:

Asset Date of purchase Cost N

Plant July 1, 2020 2,480,000
Furniture July 1, 2020 520,000
Fixtures and fittings July 7, 2020 650,000
Motor vehicle December 2, 2020 2,400,000

Required:
Compute the company‟s income tax liabilities for the relevant assessment years.
(30 Marks)

150
SECTION B: YOU ARE REQUIRED TO ATTEMPT TWO OUT OF THE THREE QUESTIONS
IN THIS SECTION (40 MARKS)

QUESTION 2

Mr. Apa Eniapampa was appointed the General Manager, Finance of Apaapa-eni
Nigeria Limited in Sambisa, Lagos State, on April 1, 2020 on a basic salary of N50
million annually. His contract of employment entitles him to professional allowance,
furnished accommodation, car, payment of utility bills and annual bonus.

During the year 2021, his employers made available to him total cash emoluments of
N80,350,000, including bonus of N12 million. He contributed 5% of his salary to the
social security scheme.

He also contributed 5% of his basic salary to the employer for the accommodation and
furnishing provided.

He earned the following other incomes during the year:

a. Trading income of N5,200,000. No capital allowance is claimable.
b. A dividend of N500,000 from his membership of an approved unit trust
scheme.
c. Interest of N2,000,000 from National Rural Bank.

He had two dependent children both of whom were pursuing degree courses. One was
at the university in the country while the other was at the University of Hull in the
United Kingdom. He financed a life assurance policy with the following details:
Yearly premium - N10 million
Sum assured - N120 million

Required:
Compute the chargeable income of Mr. Apa Eniapampa for the relevant year of
assessment. (Total 20 Marks)

QUESTION 3

Opion Nigeria Limited has been in business for so many years. The company is
engaged in the sale of plastics.

The company filed its tax returns up to December 31, 2020, on due dates. Due to harsh
economic environment and change in management, it experienced a downward trend
in its gross turnover, effective January 1, 2021. Based on the foregoing, it could not
file its monthly Value Added Tax (VAT) returns as and when due.

151
 You were appointed as the tax consultant in February 2022. The financial records of
the company for the year ended December 31, 2021, revealed the following:
Jan Feb Mar April May June July Aug Sept Oct Nov Dec Total
N‟000 N‟000 N‟000 N‟000 N‟000 N‟000 N‟000 N‟000 N‟000 N‟000 N‟000 N‟000 N‟000
Gross
turnover 2,500 2,250 2,100 2,000 1,850 1,720 1,600 1,500 1,480 1,450 1,510 1,485 21,445
Opening
inventory (180) (200) (190) (175) (162) (159) (148) (136) (135) (130) (128) (125) (1,868)

Purchases (1,900) (1,640) (1,505) (1417) (1,297) (1,179) (1,060) (984) (975) (978) (1,062) (1,061) (15,058)
420 410 405 408 391 382 392 380 370 342 320 299 4,519
Closing
inventory 200 190 175 162 159 148 136 135 130 128 125 121 1,809
Gross
620 600 580 570 550 530 528 515 500 470 445 420 6,328
profit

Additional information provided:

(i) The monthly VAT returns relating to 2021 financial year were filed in January
2022.
(ii) For the following months, sales returns were yet to be adjusted in the gross
turnover:
N‟000
January 2021 200
February 2021 150
March 2021 100
Required:
Compute the:
a. Monthly VAT payable (13 Marks)
b. Penalties payable by the company for failing to file monthly VAT returns
as and when due on transactions for the year ended December 31, 2021
(7 Marks)
(Total 20 Marks)
QUESTION 4

The Federal and State governments have primary responsibilities for tax matters
including initiating proposals for amendments to tax laws. There are, however, other
stakeholders which the government must collaborate with to ensure the success of the
National tax policy (NTP), 2017.

Required:
Explain the responsibilities of the following stakeholders according to the NTP:
a. The government including revenue agencies (5 Marks)
b. The taxpayer (5 Marks)
c. Professional bodies, tax practitioners, consultants and agents. (5 Marks)
d. Media and advocacy groups (5 Marks)
(Total 20 Marks)

152
SECTION C: YOU ARE REQUIRED TO ATTEMPT TWO OUT OF THE THREE
QUESTIONS IN THIS SECTION (30 MARKS)

QUESTION 5

Section 105 of CITA, having been amended by the Finance Act 2019 states that,
“regulated securities lending transaction” means any securities lending transaction
conducted in accordance with rules made by Securities and Exchange Commission
(SEC).

The provisions of the Investment and Securities Act, Securities and Exchange Rules
2013 (as amended) and other extant laws and regulations control the operations of
SEC lending in the Nigerian Capital Market.

The taxation of SEC lending transactions is influenced by the Companies Income Tax
Act Cap. C21 LFN 2004 (CITA) (as amended) and other relevant tax laws.

A would-be investor approached you for your advice on the tax implications of the
operation of the regulated securities lending transactions („Sec Lending‟) in Nigeria.

Required:
Discuss the following in respect of „SEC Lending‟ in Nigeria:
a. Taxation of dividend and interest received, fees and other benefits, taking into
consideration the relevant provisions of CITA (as amended) (7 Marks)
b. Tax treatment of dividend and interest received by an individual (2 Marks)
c. Documents and transactions that are tax- exempt from stamp duties (6 Marks)
(Total 15 Marks)

QUESTION 6

The basis of assessment used by the relevant tax authority for the determination of
personal income tax liability of an individual shall be on actual year basis. It is,
however, pertinent to note that in determining the gross income of an individual,
income from employment is based on actual year basis, while unearned incomes are
based on the preceding year basis.

The Sixth Schedule of the Personal Income Tax (Amendment) Act, 2011 (as amended)
states the deductions that are tax exempt and relief allowance claimable in the
computation of chargeable income of an individual.

Required:
Discuss the following, taking into consideration the provisions of Personal Income Tax
(Amendment) Act, 2011:

a. FOUR tax exempt deductions (12 Marks)

b. Computations of consolidated relief allowance (CRA) (3 Marks)
(Total 15 Marks)
153
 QUESTION 7

Withholding tax is a tax deducted from payments made to a taxable person for
the supply of goods and services.

It is not another form of tax but simply an advance payment of tax. In certain
cases, the withholding tax deducted at source is the final tax in the hands of the
recipients.

Since the introduction of the withholding tax scheme, there have been
challenges affecting the scheme.

Required:
a. Explain the term „Contract of supplies‟. (5 Marks)
b. Explain FIVE challenges bedeviling the withholding tax scheme in Nigeria.
(5 Marks)
c. The Tax Appeal Tribunal, in one of its judgements, exempted contracts,
which are outright sales and purchases of goods and property in the
ordinary courses of business.

Required:
Explain the criteria laid out in the judgement for the ascertainment of what
constitutes „sales in the ordinary course of business‟. (5 Marks)
(Total 15 Marks)

154
 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 Up to August 31, 2023 (10%); and Finance Act 2023 (NIL)
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 Income (N) Rate of Tax (%)
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: Finance Act 2019 specifies:
30% (Large Company)
20% (Medium-Sized Company)
0% (Small Company)
5. TERTIARY EDUCATION TAX: 2% of assessable profit (up to December 31, 2021)
2.5% of assessable profit (with effect from January 1,
2022) and 3% of assessable profit, with effect from
September 1, 2023 (Finance Act 2023)
6. CAPITAL GAINS TAX 10%
7. VALUE ADDED TAX 7.5%
8. HYDROCARBON TAX 15% (Petroleum prospecting
Licence and Marginal Fields Companies)
30% (Petroleum Mining Lease Companies)

155
SOLUTION 1

ABC Limited
Computation of income tax liabilities
For assessment years 2021 and 2022

a) Assessment year (A.Y) Basis period

2021 1/7/2020 – 30/11/2020
2022 1/12/2020 – 30/11/2021

b) Computation of adjusted profit Year ended Period ended

November 30, 2021 November 30, 2020
(A.Y 2022) (A.Y 2021)
N N N N
Net profit per accounts 23,764,840 14,064,300
Add: disallowable expenses
Cost of new plant not captured in
property, plant and equipment (PPE)
0 125,000
Cost of furniture excluded in PPE 0 182,000
Donations - M.D‟s church 400,000 250,000
- XYZ Club 120,000 100,000
Allowance for doubtful debts 320,000 210,000
Income tax provision 425,000 387,000
Legal and other professional charges:
Cost of new lease
0 85,000
Cost of defending a tax appeal 120,000 0
Cost of renewing long lease 0 36,000
Cost of defending traffic offence 0 48,000
Depreciation 903,500 2,288,500 423,500 1,846,500
26,053,340 15,910,800
Dividend received (gross) (432,100) (432,100)
Adjusted profit 25,621,240 15,478,700

c) Computation of income tax liabilities N

Assessment year 2021
Adjusted profit 15,478,700
Capital allowances (2,121,177)
Total profit 13,357,523

Companies income tax payable (20% of total profit) N2,671,504.60

Tertiary education tax payable (2% of assessable profit) N309,574.00

156
 Assessment year 2022 N
Adjusted profit 25,621,240
Capital allowances (2,028,425)
Total profit 23,592,815

Companies income tax payable (30% of total profit) N7,077,844.50

Tertiary education tax payable (2.5% of assessable profit) N 640,531.00

NOTE

Minimum tax computation is not applicable because the company is not up to 48

calendar months in business.

Computation of capital allowances

Plant Furnitur Fixtures Motor Total
e and vehicles
Fittings
Initial allowance (%) 50 25 25 50
Annual allowance (%) 25 20 20 25
Investment allowance (%) 10 0 0 0
N N N N N
Assessment year 2021
Cost 2,480,000 520,000 650,000 3,650,000
Cost- Assets excluded in PPE 125,000 0 307,000
182,000
2,605,000 702,000 650,000 3,957,000

Initial allowance (1,302,500) (175,500) (162,500) 1,640,500

Annual allowance (135,677) (43,875) (40,625) 220,177
Investment allowance 260,500
__________ ________ ________ 2,121,177
W.D.V. c/f to A.Y 2022 1,166,823 482,625 446,875

Assessment year 2022

Addition – cost 0 0 0 2,400,000 2,400,000
1,166,823 482,625 446,875 2,400,000
Initial allowance 0 0 0 (1,200,000) 1,200,000
Annual allowance (325,625) (105,300) (97,500) (300,000) 828,425
2,028,425
W.D.V. c/f to A.Y. 2023 841,198 377,325 349,375 900,000

157
Examiner’s report
The question tests the candidates‟ knowledge of the computation of taxes payable by a
company.

This being a compulsory question, about 100% of the candidates attempted the
question and their performance was above average.

The common pitfalls of the candidates were their inability to:

i) Capture the costs of plant and furniture omitted in PPE as disallowable expenses;
ii) Reflect these costs as additions to the relevant assets in the computation of
capital allowances for assessment year (A.Y.) 2021; and
iii) Prorate the annual allowance in A.Y. 2021.

Candidates are advised to read widely and be conversant with the provisions of the
Companies Income Tax Act Cap. C 21 LFN 2004 (as amended) before sitting for the
subsequent examination to enhance better performance.

Marking guide
Marks
Heading - Name of company ¼
- Computation of income tax liabilities ¼
- Assessment years ¼
Basis period (½ mark for each of the 2 correct basis periods) 1
Computation of adjusted profit
Net profit accounts (½ mark for each of the 2 points) 1
Disallowable expenses (1 mark for each of the 16 points) 16
Dividend received (gross) (1 mark for each of the 2 points) 2
Assessment year 2021
Adjusted profit ½
Capital allowances ½
Total profit ½
Companies income tax payable ¼
Tertiary education tax payable ¼

Assessment year 2022

Adjusted profit ½
Capital allowances ½
Total profit ½
Companies income tax payable ½
Tertiary education tax payable ½

158
Computation of capital allowances
Heading 1
/4
Assessment year 2021
Cost (1/4 mark each for any correct cost) 3
/4
Assets disallowed (capital in nature) /4
2

Initial allowance ( ¼ mark each for any correct allowance) ¾

Annual allowance (¼ mark each for any correct allowance) ¾
Investment allowance ¼
Assessment year 2022
Cost – Addition ¼
Initial allowance ¼
Annual allowance (¼ mark each for any correct allowance) 1
Total 30

SOLUTION 2

Mr. Apa Eniapampa

Computation of chargeable income
For 2021 assessment year
Earned income: N N
Income from employment:
Basic salary 68,350,000
Bonus 12,000,000 80,350,000
Income from trade 5,200,000
85,550,000
Add: Unearned income
Interest received from National Rural Bank 2,000,000
87,550,000
Less: Tax exempt item:
Life assurance premium 10,000,000
Gross income 77,550,000

Less: Consolidated relief allowance

(1% of N77,550,000 or N200,000, whichever is higher,
+20% of N77,550,000) 16,285,500
Chargeable income 61,264,500

NOTE
The dividend received from an approved unit trust scheme is tax exempt, hence the
exclusion in the computation.

159
Examiner’s report
The question tests the candidates‟ knowledge of the computation of personal income
tax (PIT) of an employee.

About 80% of the candidates attempted the question but the performance was fair.
The commonest pitfall of the candidates was their inability to compute the correct
consolidated relief allowance (CRA).

Candidates are advised to read relevant texts on taxation, ICAN Pathfinders and Study
Text.

Marking guide
Marks
Heading - Name of company 1
- Computation of income tax liabilities 1
- Assessment year 1
Basic salary 2½
Bonus 2½
Income from trade 2½
Interest 2½
Life assurance premium 2½
Computation of consolidated relief allowance:
- 1% of N77,550,000 1
- N200,000 1
- whichever is higher ½
- 20% of N77,550,000 2
Total 20

160
SOLUTION 3
a) Opion Nigeria Limited
Computation of monthly VAT payable

(A) (B) (C) (D) (E) (F) (D) – (F)

Month of Gross Sales Gross Output Cost Input Monthly
transaction turnover returns turnover VAT of VAT VAT
(Net) (07.5%) sales (07.5%) remittable
N‟000 N‟000 N‟000 N‟000 N‟000 N‟000 N‟000
Jan. 2021 2,500 200 2,300 172.50 1,880 141.00 31.50
Feb. 2021 2,250 150 2,100 157.50 1,650 123.75 33.75
March 2021 2,100 100 2,000 150.00 1,520 114.00 36.00
April 2021 2,000 2,000 150.00 1,430 107.25 42.75
May 2021 1,850 1,850 138.75 1,300 97.50 41.25
June 2021 1,720 1,720 129.00 1,190 89.25 39.75
July 2021 1,600 1,600 120.00 1,072 80.40 39.60
Aug. 2021 1,500 1,500 112.50 985 73.88 38.62
Sept. 2021 1,480 1,480 111.00 980 73.50 37.50
Oct. 2021 1,450 1,450 108.75 980 73.50 35.25
Nov. 2021 1,510 1,510 113.25 1,065 79.88 33.37
Dec. 2021 1,485 ____ 1,485 111.38 1,065 79.88 31.50
Total 21,445 450 20,995 1,574.63 15,117 1,133.79 440.84
Note:
Cost of sales = Opening inventory + purchases – closing inventory

161
b) Opion Nigeria Limited
Computation of monthly VAT penalties

Month Jan Feb March April May June July Aug Sept Oct Nov Dec Monthly
total
N N N N N N N N N N N N N
Jan. 2021 - - - - - - - - - - - - -
Feb. 2021 50,000 - - - - - - - - - - - 50,000
March 2021 25,000 50,000 - - - - - - - - - 75,000
April 2021 25,000 25,000 50,000 - - - - - - - - 100,000
May 2021 25,000 25,000 25,000 50,000 - - - - - - - - 125,000
June 2021 25,000 25,000 25,000 25,000 50,000 - - - - - - - 150,000
July 2021 25,000 25,000 25,000 25,000 25,000 50,000 - - - - - - 175,000
Aug. 2021 25,000 25,000 25,000 25,000 25,000 25,000 50,000 - - - - - 200,000
Sept. 2021 25,000 25,000 25,000 25,000 25,000 25,000 25,000 50,000 - - - - 225,000
Oct. 2021 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 50,000 - - - 250,000
Nov. 2021 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 50,000 - - 275,000
Dec. 2021 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 50,000 - 300,000
Total 300,000 275,000 250,000 225,000 200,000 175,000 150,000 125,000 100,000 75,000 50,000 - 1,925,000

162
Examiner’s report
The question tests candidates‟ knowledge of filing of monthly value added tax (VAT)
returns and the penalties payable for non-filing of same.

About 50% of the candidates attempted the question but the performance was poor.
Most of the candidates did not adjust for sales returns in the ascertainment of net
gross turnover for the months of January to March 2021 before computing the output
VAT. Additionally, they found it difficult to ascertain the penalties payable for late
filing of monthly VAT returns.

Candidates are advised to make use of the Institute‟s Pathfinders and Study Text in
their preparations for subsequent examination.

Marking guide
Marks Marks
a) Computation of monthly VAT payable
Heading - Name of company ½
- Computation of monthly VAT payable ½

Computation of monthly VAT:

Input VAT (½ mark each for any correct answer) 6
Output VAT (½ mark each for any correct answer) 6 13

b) Computation of monthly VAT penalties

Heading - Name of company ½
- Computation of monthly VAT penalties ½

Computation of monthly VAT penalties:

(½ mark each for any correct amount) 6 7
Total 20

163
SOLUTION 4
Stakeholders and their responsibilities as per the National tax policy (NTP),
2017
(a) The government
All levels and arms of government, ministries, extra-ministerial departments
and agencies where applicable shall:
(i) Implement and regularly review tax policies and laws;
(ii) Provide information on all revenue collected on a quarterly basis;
(iii) Ensure adequate funding, administrative and operational autonomy of
tax authorities; and
(iv) Ensure a reasonable transition period of between three and six
months before implementation of a new tax.

(b) The taxpayer

A taxpayer is a person, group of persons or an entity that pays or is liable
to tax. The taxpayer is the most critical stakeholder and primary focus of
the tax system. The taxpayer shall consider tax responsibilities as a civic
obligation and constant duty that must be discharged as and when due.
The taxpayer shall be entitled to:
(i) Relevant information for the discharge of tax obligations;
(ii) Receive prompt, courteous and professional assistance in dealing with
tax authorities;
(iii) Raise objections to decisions and assessments and receive response
within a reasonable time;
(iv) A fair and impartial appeal; and
(v) Self-representation or by any agent of choice, provided an agent acting
for financial reward shall be an accredited tax practitioner.

(c) Professional bodies, tax practitioners, consultants and agents

They shall:
(i) Act in accordance with professional code of conduct and ethics;
(ii) Not aid and abet tax evasion and corrupt practices; and
(iii) Actively promote effective tax compliance.

(d) Media and advocacy groups

They shall:
(i) Promote tax education and awareness;
(ii) Articulate, protect and advance tax payers right;
(iii) Advance accountability and transparency in the utilisation of tax
revenue;
(iv) Ensure accurate, objective and balanced reporting in accordance with

164
 their professional code of conduct and ethics; and
(v) Ensure that aspiring political office holders clearly understand the tax
policy and the Nigeria tax system and are able to articulate their plans
for the tax system to which they will be held accountable.

Examiner’s report
The question tests the candidates‟ knowledge of the other stakeholders the
government must collaborate with and their responsibilities to ensure the success of
the National tax policy (NTP).
About 80% of the candidates attempted the question but performance was fair.
Many of the candidates displayed poor knowledge of National tax policy (NTP), 2017,
as they could not explain the responsibilities of the various stakeholders.
Candidates should be conversant with the provisions of the relevant tax laws and
circulars.

Marking guide
Marks Marks
a) The government
1¼ marks each for any correct answer 5

b) The taxpayer
1¼ marks each for any correct answer subject to a
maximum of 4 points 5

c) Professional bodies tax practitioners consultants

and agents
- Acting in accordance with professional code of
conduct and ethics 2
- Not aiding and abetting tax evasion and corrupt
Practices 2
- Actively promoting effect tax compliance 1 5

d) Media and advocacy groups

1¼ marks for any correct answer subject to a
maximum of 4 points 5
Total 20

SOLUTION 5

Taxation of a SEC lending based on the provisions of CITA (as amended)

(a) Dividend and interest received
The relevant provisions of the Act as they apply to dividend and interest
received are as follows:

165
 i) Section 9 of CITA (as amended)
Under section 9(1) (c) of the Act, gross dividend and interest received
by a lender and borrower, being income, are taxable.
ii) Section 23 of CITA (as amended)
Despite the provision of section 9 (1) (c) of CITA which regards gross
dividend and interest received by a lender and borrower as taxable,
section 23(1)(t) and (u) of the Act, provides that dividend received by a
lender from a borrower or by an agent from a borrower under SEC
Lending is a franked investment income, hence it is not subject to
further tax in the hand of the lender.
Given the provisions of section 23(1) of the Act, interest received by an
agent from a lender under SEC lending is tax exempt in the hand of the
agent.
iii) Section 24 of CITA (as amended)
Interest paid by a lender to an agent or a borrower under a SEC Lending
is an allowable deduction under section 24(1)(l) of the Act.

iv) Section 27 of CITA (as amended)

Dividend generated by a borrower, and paid to an agent or lender
under SEC Lending will not be an allowable deduction to the borrower
in accordance with section 27(1) (l) of the Act.

v) Section 78 of CITA (as amended)

The interest received by a borrower from a lender is liable to
withholding tax deduction as provided under section 78 of the Act.
Where the borrower receives beneficial interest from the lender through
the agent, the responsibility to deduct withholding tax rests with the
agent.
Where the agent remits interest to the borrower, the agent is to deduct
withholding tax.

vi) Section 80 of CITA (as amended)

Under this section of the Act, payment of a dividend from a borrower to
an agent shall not be subject to deduction of withholding tax.

vii) Fees, rights, bonuses and other benefits

Under section 9(1)(h) of CITA, rights, bonuses, profits, fees and other
benefits received by a borrower or lender under a SEC Lending are
taxable income.

166
 (b) Dividend and interest received by an individual under a SEC Lending
Given the fact that the above stated exemptions and concessions provided in
CITA relate to persons taxable under CITA, dividend and interest received
under SEC Lending by individuals are not tax exempt.

(c) Documents and transactions that are exempt from stamp duties are:
(i) All documents issued by the Securities and Exchange Commission (SEC) in
relation to a SEC Lending;
(ii) Shares, stocks or securities returned to a lender or its recognised agent by
a borrower in accordance with the rules of Securities and Exchange
Commission (SEC) Lending;
(iii) Receipts given by any person under a Securities and Exchange
Commission (SEC) Lending; and
(iv) Shares, stocks or securities transferred by a lender to its agent or
borrower in furtherance of a Securities and Exchange Commission (SEC)
Lending.

Examiner’s report
The question tests the candidates‟ knowledge of taxation of regulated securities
lending transactions in respect of dividend and interest received, fees, and other
benefits for individuals and companies.
About 35% of the candidates attempted the question and performance was poor.
The commonest pitfall of the candidates was their inability to explain the taxation of
dividend, interest received, and other fees in respect of regulated securities lending
transactions.

Candidates are advised to cover the syllabus adequately before sitting for ICAN
examination.

Marking guide
Marks
a) Taxation of dividend and interest received - CITA
(1 mark for any correct point) 7
b) Tax treatment of dividend and interest received by an individual- PITA
(2 marks for correct discussion of tax/statement of dividend and interest
received by an individual)
2
c) Documents and transactions exempt from stamp duties
(1½ marks for any correct point) 6
Total 15

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SOLUTION 6

(a) Tax-exempt deductions based on Personal Income Tax (Amendment) Act,

2011
The following deductions are tax exempt:

(i) National housing fund contribution

The National Housing Fund Act Cap LFN 2004, provides that a Nigerian
earning an income of ₦3,000 and above per month in either the public
or private sector of the economy shall contribute 2.5 per cent of his
basic monthly salary to the Fund. Employers who fail to deduct or remit
are liable to pay a penalty of ₦50,000 whilst self-employed persons are
to pay ₦5,000 or one year imprisonment on conviction or both. The
employer is to deduct the contribution from the employee‟s monthly
salary and remit to the Federal Mortgage Bank of Nigeria within one
month of making the deduction. The Act mandates the Federal
Mortgage Bank of Nigeria to collect, manage and administer the fund.
Contributions made to the fund are tax deductible.
(ii) National health insurance scheme
The National Health Insurance Scheme (NHIS) was set up by The
National Health Insurance Act, Cap N42 LFN 2004, for the purpose of
providing health insurance which shall entitle persons insured under
the scheme and their dependants the benefits of prescribed good
quality and cost effective health services as set out in the Act.
The Act provides that an employer who has a minimum of ten
employees may, together with every person in his employment, pay
contribution under the scheme, at such rate and in such manner as may
be determined, from time to time, by the Governing Council for the
Scheme.

In the public sector (Federal), the employer is expected to pay 3.25%,

while the employee pays 1.75% which translate to 5% of the employee‟s
consolidated salary. In the case of the private sector and other tiers of
government, the employer is expected to pay 10% while the employee
pays 5% representing 15% of the employee‟s basic salary. The employer
may decide to pay the entire contribution. Sometimes, the employer
may also undertake extra contributions for additional cover to the
benefit package.

An employer under the scheme shall cause to be deducted from an

employee‟s wages the negotiated amount of any contributions payable
by the employee.
The employer‟s contributions and the contributions in respect of its
employees are to be paid into the account of a designated health
maintenance organisation. Contributions to the scheme are tax
deductible.

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 (iii) Life assurance premium
A deduction of the annual amount of any premium paid by the individual
during the year preceding the year of assessment to an insurance
company in respect of insurance on his life or the life of his spouse.
(iv) National pension scheme
The Pension Reform Act 2014 (PRA), established a uniform contributory
pension scheme for payment of retirement benefits of employees. The
scheme applies to all employees in both the public and private sectors
who are in employment in an organisation in which there are 15 or more
employees.
The rate of contribution to the scheme shall be a minimum of 8% of
employee‟s monthly emolument (i.e. basic salary, housing allowance
and transport allowance) as contribution for employees in the public
and private sectors and 10% of the monthly emoluments as employer‟s
contribution.
However, contributions made by an employee to the scheme shall be
tax deductible.
Notwithstanding the foregoing mode of contribution to the scheme, an
employer may agree or elect to bear the full burden of the scheme,
provided that in such a case, the employer‟s contribution shall not be
less than 20% of the monthly emoluments of the employee.
It is pertinent to state that the tax relief is only limited to pension
contributions to schemes, provident or retirement benefits fund that
are recognised under the Pension Reform Act, 2014.

(v) Gratuities
Gratuity is money paid to an employee who is retiring or leaving his
employer after several years of service. Gratuity is tax deductible.

(b) Computation of consolidated relief allowance

“Gross emolument” means wages, salaries, allowances (including benefits-
in-kind), gratuities, superannuation and any other income derived solely by
reason of employment.

“Gross income” means income from all sources less non-taxable income,
income on which no further tax is payable, tax-exempt items listed in
paragraph (2) of the sixth schedule, all allowable business expenses and
capital allowance – section 33 (2) and (3) of PITA 2004 (as amended).

Consolidated relief allowance (CRA) is granted at the higher of ₦200,000 or

1% of gross income plus 20% of gross income.

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Examiner’s report
The question tests the candidates‟ knowledge of four tax exempt deductions and
computations of consolidated relief allowance (CRA), taking into consideration the
provisions of Personal Income Tax ( Amendment) Act, 2011(as amended).

About 85% of the candidates attempted the question but performance was poor.
The commonest pitfall was the candidates‟ inability to explain the tax exempt
deductions in the computation of personal income tax.

Candidates are advised to read ICAN Study Texts and Pathfinders.

Marking guide
Marks Marks
a) Tax-exempt deductions
(3 marks for any correct answer subject to a maximum of 4
points) 12
b) Computation of consolidated relief allowance:
Definition of gross emolument ½
Definition of gross income ½
N200,000 ½
1% of gross income ½
20% of gross income 1 3
Total 15

SOLUTION 7

a. The term “Contract of Supplies” covers all forms of supplies, deliveries, or the
like through competitive bidding tenders, LPOs or other arrangements,
whether oral or written. The term does not cover the across counter cash sales
or supplies in the ordinary course of sales.
Contract, which is outright sale and purchase of goods and property in the
ordinary course of business are exempted from withholding tax.
Section 73 of CITN and Section 81 of PITA empowered the Finance Minister to
add to the above list from time to time through official gazette.

b. Challenges bedeviling the withholding tax scheme in Nigeria

Since the introduction of withholding tax into the Nigerian tax system, the
scheme has been bedeviled by so many challenges. Some of the challenges
affecting the withholding tax scheme include:

(i) It could discourage hard work by Revenue Officers as it is self-

accounting in nature;

(ii) Bureaucracy in the process of claiming withholding tax credit;

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 (iii) Penalty for failure to deduct - Taxpayers who are essentially obliged
under the income tax law to register for income tax, does so as an
unpaid agent of the relevant tax authority. Therefore, penalising the
tax agent for failure to deduct withholding tax may be considered as
counter-productive considering that the tax agent is not paid for
assisting the relevant tax authority in this regard;

(iv) Appropriate WHT rate to apply to transactions - In some cases, tax

agents are in dilemma as to determine and apply WHT rate correctly on
different transactions; and

(v) Bureaucracy in the process of withholding tax refund - Taxpayers are

subjected to rigorous audit process before refunds are made to them.

c. On November 30, 2020, the Tax Appeal Tribunal (TAT), Lagos Zone, in the case
of Tetra Pak West Africa Limited Vs Federal Inland Revenue Service, ruled that
sales in the ordinary course of business shall not be liable to withholding tax
(WHT).

The TAT laid the following criteria in ascertaining what constitutes “sales in
the ordinary course of business”:
(i) The inclusion of the transaction/activity in the objects of the
memorandum of association;
(ii) The nature and practice of the taxpayer‟s business and industry;
(iii) The history of the taxpayer in relation to the activity; and
(iv) The frequency of the type of transaction.

Examiner’s report
The question tests the candidates‟ knowledge of “contract of supplies”, challenges
bedeviling withholding tax scheme, and criteria laid out in the Tax Appeal Tribunal
judgement for the ascertainment of what constitutes „sales in the ordinary course of
business”.

About 65% of the candidates attempted the question but the performance was
average.
Many of the candidates could not explain the criteria laid out in the judgement of the
Tax Appeal Tribunal for the ascertainment of what constitutes sales in the ordinary
course of business.
Candidates are advised to adequately cover the syllabus and read the Institute‟s
Pathfinders and Study Text when preparing for future examination.

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Marking guide
Marks Marks
a) Explanation of the term “Contract of suppliers”
- Definition 2
- Stating tax exemption of sale and purchase of goods
in the ordinary course of business 2
- Stating that the Finance Minister has the
prerogative 1 5
to elongate the list
b) Challenges bedeviling the withholding tax system
(1 mark each for any correct solution) 5

c) Criteria in the ascertainment of what constitutes

“sales in the ordinary course of business”
- Inclusion of the transaction in memorandum of
Association 2
- Nature and practice of the taxpayer‟s business and
Industry 1
- History of the taxpayer‟s in relation to the activity 1
- Frequency of the type of transaction 1 5
Total 15

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