May 2023 Pathfinder - Skills Level

THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF NIGERIA
PATHFINDER
MAY 2023 DIET
SKILLS LEVEL EXAMINATIONS
Question Papers
Suggested Solutions
Marking Guides
and
Examiners‟ Reports
FOREWARD
This issue of the PATHFINDER is published principally, in response to a growing

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

Accountants of Nigeria (ICAN);
(ii) Unsuccessful candidates in the identification of those areas in which they lost
marks and need to improve their knowledge and presentation;
(iii) Lecturers and students interested in acquisition of knowledge in the relevant

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

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

students and those who assist them in their preparations for the Institute‟s
Examinations.
NOTES
Although these suggested solutions have been published under the
Institute‟s name, they do not represent the views of the Council of the
Institute. The suggested solutions are entirely the responsibility of their
authors and the Institute will not enter into any correspondence on them.
1
TABLE OF CONTENTS
FOREWARD PAGE
FINANCIAL REPORTING 3 - 36
AUDIT AND ASSURANCE 37 - 61
PERFORMANCE MANAGEMENT 62 - 93
94 – 123
PUBLIC SECTOR ACCOUNTING & FINANCE
CORPORATE STRATEGIC MANAGEMENT & ETHICS 124 - 149
TAXATION 150 – 176
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ICAN/231/Q/B1 Examination No.....................
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION – MAY 2023
FINANCIAL REPORTING
EXAMINATION INSTRUCTIONS
PLEASE READ THESE INSTRUCTIONS BEFORE THE COMMENCEMENT OF THE PAPER
1. Check your pockets, purse, mathematical set, etc. to ensure that you do not
have prohibited items such as telephone handset, electronic storage device,
programmable devices, wristwatches or any form of written material on you
in the examination hall. You will be stopped from continuing with the
examination and liable to further disciplinary actions including cancellation
of examination result if caught.
2. Write your EXAMINATION NUMBER in the space provided above.
3. Do NOT write anything on your question paper EXCEPT your
examination number.
4. Do NOT write anything on your docket.
5. Read all instructions in each section of the question paper carefully before
answering the questions.
6. Do NOT answer more than the number of questions required in each section,
otherwise, you will be penalised.
7. All solutions should be written in BLUE or BLACK INK. Any solution written
in PENCIL or RED INK will not be marked.
TUESDAY, MAY 16, 2023
DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO
3
FINANCIAL REPORTING
Time Allowed: 31/4 hours (including 15 minutes reading time)
INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT FIVE OUT OF SEVEN

QUESTIONS IN THIS PAPER
SECTION A: COMPULSORY QUESTION (30 MARKS)
QUESTION 1
a. The following trial balance was extracted from the books of Adama Plc as at
June 30, 2022:
N‟000 N‟000
Freehold land and building at valuation 1/7/21 1,065,600
Office equipment 865,800
Delivery van 301,400
Accumulated depreciation at 1/7/21:
Delivery van 120,560
Ordinary share capital of 50k each fully paid 790,000
Bank balances 142,310 49,950
Investment income 65,246
Financial assets 244,200
Dividend paid 119,880
Cost of sales 995,003
Distribution costs 161,128
Gain on translation of foreign operations 47,108
Trade receivables/payables 579,065 353,846
Revenue 2,142,819
Intangibles 50,600
Administrative expenses 173,727
Interest on loan notes 14,763
General reserve 109,809
Deferred tax at 1/7/21 100,078
Inventories at 30/06/2022 622,812
Retained earnings 231,572
3% redeemable loan notes 843,000
Revaluation reserve-freehold land and buildings 80,500
Share premium 142,000
Suspense account _________ 60,000
5,336,288 5,336,288
4
Additional information:
(i) The value of the freehold land and buildings includes a land element of
N266,800,000 and the estimated remaining life of the buildings at July
1, 2021 was 25 years. Depreciation on buildings is charged 65% to cost
of sales and 35% to administrative expenses.
(ii) The revenue includes N69,250,000 for an item of office equipment

disposed on November 30, 2021. The equipment had a carrying value of
N46,060,000 at the date of sale. The equipment cost N75,000,000 when
it was acquired three years ago.
(iii) Included in the cost of sales is N82,600,000 incurred in the manufacture
of a new office equipment which was put to use by Adama PLC on
February 1, 2022.
(iv) All office equipment is depreciated at 15% per annum using reducing
balance method and charged to cost of sales while depreciation of all
motor vehicles is at 20% per annum on straight line basis and charged
to distribution costs. Depreciation is to be charged in full in the year of
acquisition and no charge in the year of disposal.
(v) Following the conclusion of a winding-up proceedings on one of Adama
PLC‟s customer, it was resolved to write-off the sum of N26,450,000 due
from the customer and to make allowance for doubtful receivables of
2½% on the continuing trade receivables.
(vi) The financial assets are equity instruments held at fair value through
profit or loss and have suffered impairment loss of N12,700,000 at the
year end.
(vii) The 3% redeemable loan notes was issued on October 1, 2021 under
terms that provided for a large premium on redemption in 2025. These
terms were interpreted by the finance director to mean that the loan
notes have effective interest rate of 6½% per annum.
(viii) The income tax expense for the year ended June 30, 2022 is estimated
at N143,552,000 while the deferred tax payable for same period
amounted to N12,520,000. There was an over provision of N25,664,000
in respect of income tax for the previous trading year.
(ix) The suspense account balance represents the corresponding credit entry
for shares issued at premium of 15 kobo per share arising on issue of
400,000 ordinary shares made during the year.
(x) The directors recommended a 20 kobo final dividend per ordinary share
for the year and to transfers N38,900,000 to the general reserve.
5
Required:
Prepare for Adama PLC the following financial statements:
i. Statement of profit or loss and other comprehensive income for the year
ended June 30, 2022. (10 Marks)
ii. Statement of changes in equity for the same period (4 Marks)
iii. Statement of financial position as at June 30, 2022 (10 Marks)
b. Some new trainee accountants in your organisation were engaged in a

discussion in which they proclaimed that Earnings Per Share (EPS) and Return
on Capital Employed (ROCE) are the best ratios for analysing financial
performance of any entity. The finance director, who overheard their
discussion have requested you as the Chief Accountant to prepare a brief on
the aforementioned ratios which would be used during the forthcoming in-
house training.
Required:
Prepare a memo to the finance director explaining the ratios and highlighting
the limitations of each of the ratios as a tool for analysing financial
performance. (6 Marks)
(Total 30 Marks)
SECTION B: OPEN-ENDED QUESTIONS (40 MARKS)
INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF THREE

QUESTIONS IN THIS SECTION
QUESTION 2
a. The Conceptual Framework for Financial Reporting sets out the concepts that
underlie the preparation and presentation of financial statements and it also
considers the various users of these financial statements.
Required:
Identify and discuss the information needs of the different users of financial
statements. (10 Marks)
b. Companies and Allied Matters Act (CAMA) 2020 is the primary source of
company law which establishes the requirements for financial reporting by all
companies in Nigeria.
6
Required:
Briefly explain FIVE issues which must be contained in a directors‟ report in
accordance with CAMA 2020. (5 Marks)
c. Babanriga Nigeria Limited acquired a factory machine for N10million on

January 1, 2019. The machine had estimated life and residual value of 10 years
and N2million respectively. It is depreciated on a straight line basis. In lieu of
depreciation, the tax authority allows a tax expense of 40% of the cost of this
type of machine to be claimed against income tax in the year of purchase and
25% per annum of its tax base subsequently on reducing balance basis. The
prevailing company income tax rate is 30%.
Required:
Calculate the deferred tax charge or credit which will be recorded in Babanriga
Nigeria Limited Statements of profit or loss and other comprehensive income for
the year ended December 31, 2021 and the deferred tax balance in the
statement of financial position at that date. (5 Marks)
(Total 20 Marks)
QUESTION 3
Olu Nigeria PLC has a subsidiary, Oba Limited, which it acquired on January 1, 2022.
The financial statements of the companies are detailed below:
Statements of profit or loss for the year ended September 30, 2022
Olu PLC Oba LTD
N‟000 N‟000
Revenue 446,250 233,100
Cost of sales (330,750) (174,600)
Gross profit 115,500 58,500
Other income 40,250 -
Distribution costs (10,250) (11,100)
Administrative expenses (31,650) (14,760)
Finance costs (8,575) (7,200)
Profit before taxation 105,275 25,440
Income tax expense (28,670) (5,790)

Profit for the year 76,605 19,650
Other comprehensive Income:
Gain on revaluation of property 26,600 5,000
Total comprehensive Income 103,205 24,650
7
Statement of financial position as at September 30, 2022
Olu PLC Oba LTD
Non-current assets: N‟000 N‟000
Property, plant and equipment 253,750 82,530
Intangibles 31,420 -
Current assets
Inventories 72,200 30,440
Trade receivables 65,250 25,560
Cash and bank balances 12,550 6,450
435,170 144,980
Equity and liabilities N‟000 N‟000

Ordinary shares of N1 each 100,000 40,000
Retained earnings 235,600 50,550
Non-current liabilities
10% Loan notes 30,000 32,600
Deferred tax 6,400 4,180
Current liabilities
Trade payables 34,500 11,860
Income tax payable 28,670 5,790
435,170 144,980
(i) Olu PLC acquired its 70% interest in Oba Limited through a share exchange of
three shares in Olu PLC for five shares in Oba Limited. At the acquisition date,
the shares of Olu PLC were sold at ₦8.10 each at the Nigerian Exchange (NGX).
The parent company is yet to record this share issue in its books.
(ii) At the acquisition date, the fair value of Oba Limited‟s assets were equal to
their carrying amounts except for an item of plant which had a fair value of
N30,000,000 in excess of its carrying amount. This fair value increase have not
been adjusted for in the books of Oba Limited. The said plant has a remaining
life of five years at acquisition date.
(iii) During the year Oba Limited transferred goods worth N40,000,000 to Olu PLC.
Those goods were invoiced at cost plus 25% and only a quarter of the goods
have been sold by Olu PLC at the year end.
(iv) Included in the other income was N6,550,000 received from Oba Limited as
interest paid on loan granted by Olu Plc. The loan was fully repaid before
September 30, 2022.
(v) An impairment test carried out revealed loss in value of goodwill at the
acquisition date of N28,000,000.
(vi) It is the group‟s policy to value non-controlling interest at their fair value. The
prevailing market price per ordinary share of Oba Limited at January 1, 2022
was N5.05.
8
(vii) The gain on revaluation of property arose from an independent valuation of
the groups property in September 2022.
(viii) The administration expenses of Oba Limited included N10,000,000 paid as
management fees to Olu Plc and the income have been duly accounted for in
the books.
(ix) Except where indicated, income and expenses accrue evenly over the period.
Required:
a. Prepare the consolidated statement of profit or loss and other comprehensive
income for Olu group for the year ended September 30, 2022. (12 Marks)
b. Calculate the goodwill on acquisition and the Non-controlling interest at the
reporting date. (4 Marks)
c. IFRS 10 - Consolidated Financial Statements states that a parent must present
consolidated financial statements in which it consolidates its investments in
subsidiaries.
Required:
State FOUR exceptions to the above pronouncement of IFRS 10. (4 Marks)
(Total 20 Marks)
QUESTION 4
a. Accounting for deferred tax is based on the identification of the temporary
differences.
Required:
Explain the term “Temporary difference” and discuss the TWO different types.
(3 Marks)
b. State and briefly explain FIVE components of tax expense or income.
(5 Marks)
c. Buga Nigeria Limited had an accounting profit before taxation of
N196,800,000 for the year ended September 30, 2022. The following balances
were extracted from the company‟s books as at September 30, 2022.
Non-current assets N‟000 N‟000

Freehold property 236,700
Tax allowed depreciation (22,500) 182,500
Current assets
Trade receivables 174,250
Interest receivable 3,250
Current liabilities
Fine payable 32,500
Interest payable 10,850
9
Other information
(i) Interest income is taxed while interest expense is allowable on a cash
basis. There were no opening balances on interest receivable and interest
payable.
(ii) The trade receivables above is shown net of an allowance for doubtful
balances of N16,750,000. This is the first year that such an allowance has
been recognised. A deduction for debts is only allowed for tax purposes
when the debtors is in the process of winding-up.
(iii) The balances in respect of office equipment are after charging

accounting depreciation of N28,250,000 and tax allowable depreciation
of N22,500,000 respectively.
(iv) The freehold property was purchased on October 1, 2021 for

N263,000,000 and is being depreciated for accounting purposes on a 10%
per annum. Buga Nigeria Limited is in a position to claim N94,600,000 as
accelerated depreciation on cost as taxable expense in this year‟s tax
computation.
Required:
i. Prepare a tax computation and calculate the current tax expense.
(4 Marks)
ii. Calculate the deferred tax liability as at September 30, 2022. (6 Marks)
iii. Show the movement on the deferred tax account for the year ended
September 30, 2022 given that the opening balance was N8,100,000.
(2 Marks)
(Total 20 Marks)
SECTION C: OPEN-ENDED QUESTIONS (30 MARKS)
INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF THREE

QUESTION 5
a. IFRS 9 - Financial Instruments defined a financial instrument as contract that
gives rise to both a financial asset in one entity and a financial liability or
equity instrument in another entity.
Required:
i. Explain the terms “financial asset” and “financial liability”. (3 Marks)
ii. Describe with examples THREE categories of financial assets in
accordance with IFRS 9. (7 Marks)
10
b. Olisa Nigeria PLC issued a stepped bond on January 1, 2018 with an issue
value of N10million. The bond pays a coupon rate of 5% interest for the first
two years and 7% interest for the next two years. The interest on the bond is
paid annually on the anniversary of the bond issue. The bond has an effective
interest rate of 5.94234% and is expected to be redeemed at par after four
years.
Required:
Calculate the amortised cost of the bond at the end of each year over its life.
(5 Marks)
(Total 15 Marks)
QUESTION 6
a. IAS 2 - Inventories sets out the requirements to be followed when accounting
for inventory and specifies two methods of recording inventory so as to allow
the calculation of cost of sales.
Required:
i. Explain the term „Perpetual inventory system” and identify FIVE
possible cause of differences between the balance on the inventory
account and the physical inventory counted. (5 Marks)
ii. State the disclosure requirements for inventory in notes to the financial
statements. (5 Marks)
b. Many accountants believe that Block-Chains Technology will enhance the

recording of financial transactions globally.
Required:
Explain the term “Block-Chain Technology” and state THREE disadvantages of
adopting the technology. (5 Marks)
(Total 15 Marks)
QUESTION 7
a. The Conceptual Framework for Financial Reporting states the qualitative
characteristics of financial information. Identify and explain FIVE qualitative
characteristics of general-purpose financial statements. (10 Marks)
b. IAS 16 prescribes the principles and the valuation methods in recognising

items of property, plant and equipment in financial statements of an entity.
Describe the TWO methods of valuation recognised in IAS 16 on property,

plant and equipment. (5 Marks)
(Total 15 Marks)
11
SECTION A
SOLUTION 1
a. (i)
Adama PLC
Statement of profit or loss and other comprehensive income
for the year ended june 30, 2022
Note N'000
Revenue 1 2,073,569
Cost of sales 2 (1,038,553)
Gross profit 1,035,016
Other income 3 88,436
Administrative expenses 4 (184,910)
Distribution cost 5 (261,673)
Impairment loss on financial assets 6 (12,700)
Operating profit 664,169
Finance cost 7 (41,096)
Profit before taxation 623,072
Income tax expenses 8 (30,330)
Profit for the year 592,742
(ii)
Adama PLC
Statement of Changes in Equity for the year ended June 30, 2022
Ordinary Share General Rev Foreign Retained Total
share premium reserve reserve exchange earnings
reserve
₦'000 ₦'000 ₦'000 ₦'000 ₦'000 ₦'000 ₦'000
Balance
b/f 590,000 142,000 109,809 80,500 47,108 231,572 1,153,881
Profit for
the year - - - - - 592,742 592,742
Issue of
shares 200,000 60,000 - - - - 260,000
Transfer to
Reserve - - 38,900 - - (38,900) -
Dividend
paid - - - - - (119,880) (119,880)
Balance
to SOFP 790,000 202,000 148,709 80,500 47,108 665,534 1,933,851
12
(iii)
Adama PLC
Statement of Financial position as at June 30, 2022
Non-Current Asset: Note N'000
Property, plant & equipment 9 1,751,367
Financial assets 231,500
Intangibles 50,600
Total non-current assets 2,033,467
Current Assets:
Inventory 622,812
Trade receivables 10 538,800
Bank balance 142,310
Total current asset 1,303,922
Total assets 3,337,389
Equity and liabilities:
Equity:
Ordinary shares of ₦0.50 each 790,000
Share premium 202,000
General reserve 148,709
Revaluation reserves on land and buildings 80,500
Foreign exchange reserve 47,108
Retained earnings 665,534
Total equity 1,933,851
Non-current liabilities:
3% Redeemable loan notes 11 869,333
Deferred tax provisions 12 12,520
Total non-currentliabilities 881,853
Current liabilities:
Trade payables 353,846
Bank overdraft 49,950
Current tax payables 117,888
Total current liabilities 521,684
Total liabilities 1,403,537
Total equity and liabilities 3,337,389
13
Wk 1: Revenue ₦'000
Balance b/f 2,142,819
Proceeds on disposal (69,250)
Statement of profit or loss (SOPL) 2,073,569
Wk 2: Cost of sales ₦'000

Balance b/f 995,003
Depreciation on building (65% x (798,800/25yrs) 20,769
Capitalised cost of new office equipment (82,600)
Depreciation on office equipment (Wk 4) 105,381
Balance to SOPL 1,038,553
Wk 3: Other incomes ₦'000

Investment incomes 65,246
Profit on disposal of office equipment ₦69,250 – 46,060) 23,190
Balance to SOPL 88,436
Wk 4: Administrative expenses ₦'000

Balance b/f 173,727
Depreciation on building (35% (798,800/25yrs) 11,183
Workings:
Wk 5: Distribution cost ₦'000

Balance b/f 161,128
Depreciation ondelivery van (Wk 9) 60,280
Irrecoverable debt (Wk 10) 26,450
Allowance for receivables (WK10) 13,815
Wk 6: Financial assets ₦'000

Balance b/f 244,200
Impairment loss on financial assets (SOPL) (12,700)
Balance c/f (SOFP) 231,500
Wk 7: Finance cost ₦'000

Interest on loan notes (W11) 41,096
Wk 8: Income tax expense ₦'000

Current year tax 143,552
Overprovision of previous year tax (25,664)
Balance to SOFP 117,888
14
Decrease in deferred tax provision (100,078 – 12,520) (87,558)
Wk 9: Schedule of mmovement in PPE for the year ended June 20, 2022
Land Building O/equip Del. van Total
Cost/valuation: ₦'000 ₦'000 ₦'000 ₦'000 ₦'000
Balance b/f 266,800 798,800 865,800 301,400 2,232,800
Additions - - 82,600 - 82,600
Disposal (75,000) (75,000)
Balance c/f 266,800 798,800 873,400 301,400 2,240,400
Acc.
depreciation:
Balance b/f - - 199,800 120,560 320,360
Current year - 31,952 105,381 60,280 197,613
charges
Disposal (28,940) (28,940)
Balance c/f - 31,952 276,241 180,840 489,033
Carrying
amount:
Balance c/f 266,800 766,848 597,159 120,560 1,751,367
Balance b/f 266,800 798,800 666,000 180,840 1,912,440
WK 10: Trade receivables N‟000

Balance b/f 579,065
Irrecoverable debt (26,450)
Allowance for receivables (₦579,065 - 26,450 x 2 (13,815)
½ %)
Balance to SOFP 538,800
Wk 11: 3% Redeemable loan notes N‟000

Balance b/f 843,000
Interest on loan notes (14,763)
Effective interest rate (843,000 x 9/12 x 6.5%) 41,096
SOFP 869,333
Wk 12: Deferred tax liabilities N‟000

Closing deferred tax provision 12,520
Opening deferred tax provision (100,078)
Decrease in deferred tax provision (87,558)
Wk 13: Proposed ordinary dividend

The directors recommended a 20 kobo final dividend per
ordinary share for the year.
15
(b) Internal Memo
To: Finance Director
From: Chief Accountant
Subject: Understanding Earnings Per Share (EPS) and Return
On Capital Employed (ROCE)
Date: May 16, 2023
Above subject refers.
Following your request, I have prepared a brief on the financial ratios

Earnings Per Share (EPS) and Return on Capital Employed (ROCE).
Earnings Per Share (EPS):

Earnings are profits available for equity holder. Earnings per share is a
measure of the amount of earnings in a financial period for each equity
share. It is calculated by dividing net earnings(profit) by the number of
ordinary shares outstanding. It is a useful measure for shareholders as it
indicates the profitability available for each share they hold. It is used by
investors as a measure of the performance of companies in which they
invest or wish to invest.
Limitations of EPS:
i. Not all entities use the same accounting policies. It may not always be
possible to make meaningful comparison between EPS of different
companies.
ii. EPS does not take account of inflation, so that, growth in EPS over time
might be misleading.
iii. EPS measures an entity`s profitability, but this is only part of an entity`s
overall performance.
iv. It can be manipulated by changing the number of shares through stock

splits or buybacks.
v. EPS is not useful for companies with no earnings or negative earnings.

vi. Diluted EPS is based on current and not on forecast earnings, therefore
not a reliable predictor of future EPS.
vii. The use of EPS as the main measure of an entity‟s performance
encourages management to make decisions which increase EPS in short
run but damage the entity in the longer-term. That is encourages creative
accounting.
Return on Capital Employed (ROCE):
ROCE is a profitability ratio that measures how effectively a company can
generate profits from its capital employed by comparing net operating profit
to capital employed. It is calculated by dividing earnings before interest and
16
tax (EBIT) by the total capital employed (shareholder's equity + non-current
liabilities).
Limitations of ROCE:
i. ROCE does not take into account the uniqueness of the methodology of
depreciation of assets and the life cycle of the assets,thus, two companies
with similar ROCE may have different risk profiles if one has older assets
compared to the other.
ii. It uses operating profit which can be subject to different accounting
treatments and manipulations.
iii. It does not consider the financing structure of a company. A company
with high debt may show a high ROCE, even though it might be at a
higher risk.
iv. Like all ratios, it needs to be compared to industry average or the
company's past performance for meaningful analysis.
v. Definition of capital employed varies and confusion may arise when the
return on capital is discussed unless terms are rationalised.
vi. The return on capital is a misleading guide to efficiency unless assets are
valued at current prices. Profit is counted in terms of current prices so it
will be misleading if they are compared with capital computed on historic
basis.
While both EPS and ROCE provide important insights into a company's
financial performance, they should not be used in isolation. A
comprehensive financial analysis should use a combination of financial
ratios that considers liquidity, solvency, profitability, and efficiency. I hope
this brief provides a balanced view of these ratios.
Thank you
_______________
Chief Accountant
Examiner‟s report
The question tests candidates‟ knowledge of preparation of final accounts , part
„a „ requires presentation of statement of profit or loss and other comprehensive
income, statement of changes in equity and state and statement of financial
position. Part „ b‟ is on explanation of Return on Capital Employed ( ROCE) and
Earnings Per Share (EPS).
Most candidates attempted the questions and performance was below average.
The common pitfalls were the inability of some candidates to determine the
impairment loss on financial assets and to correctly calculate retained earnings
while others could not prepare the non-current assets schedule. Also some
17
candidates were unable to state limitations of ROCE and EPS as a tool of financial
analysis.
Candidates‟ are advised to pay attention to all areas of the syllabus and make use
of ICAN pathfinder and study text for better performance in future examinations.
Marking guide
Marks Marks
a. i) Preparation of statement of profit or loss and
other comprehensive income
- Title of the financial statement ¼
- Determination of revenue 1
- Determination of cost of sales 1¾
- Determination of gross profit 1½
- Determination of administrative expenses 1½
- Determination of distribution costs 1½
- Stating of profit before taxation ½
- Calculation of income tax expense 1½
- Stating of profit for the year ½ 10
ii) Preparation of statements of changes in equity

- Determination of ordinary share capital ½
- Determination of share premium ½
- Determination of general reserve ½
- Determination of revaluation reserve ½
- Determination of foreign exchange reserve ½
- Determination of retained earnings ¾
- Determination of total equity ½ 4
iii) Preparation of statement of financial position

- Determination of non-current assets 4
- Determination of current assets 2
- Stating of total assets ¼
- Determination of equity 1½
- Determination of non-current liabilities ¾
- Determination of current liabilities 1
- Stating of total equity and liabilities ¼ 10
b) Preparation of internal memo

- Presentation in memo format ½
- Explanation of EPS ½
- Explanation of ROCE ½
- Stating 2 correct limitations of EPS 2
18
- Stating 2 correct limitations of ROCE 2
- Conclusion/Closing ½ 6
Total 30
SOLUTION 2
(a) Users of financial information and their need. Financial statements meet the
common needs of most users as individual primary users have different
information needs. The users include:
i. Shareholders or investors
These are the providers of risk capital. They need information on the entity‟s
financial performance and financial position which help them to assess it's
cash generation abilities and financial stability. They are very concerned
about the risk inherent in and the returns provided by their investments in
the entity;
ii. Government
Governments and their agencies require information in order to regulate the
activities of entities, assess taxation and provide a basis for national
statistics to be used in allocating resources;
iii. Employees
Employees are interested in information that helps them to assess the
ability of their employer to provide remuneration, employment
opportunities, and guaranteed retirement benefits. That is information
about the stability and profitability of their employer and their long-term
employment prospects;
iv. Suppliers
Suppliers and other trade payables are interested in information that
enables them to assess the ability of the entity to make payments when the
obligation becomes due. That is, information that will enable them to decide
whether to sell on credit to the entity;
v. Customers
Customers are interested in information that will confirm the going concern
status of the entity. This is so especially where they rely on the entity for
special products or materials essential to their own existence;
vi. Lenders
Lenders are interested in the information which will help them to determine
whether their loans and interest thereof will be repaid at the repayment
date. That is, information about the short- and long-term liquidity or
solvency of the entity. Potential Lenders also seek such information to
enable them to decide whether to lend or not to the entity;
vii. Public
The general public is invested in information about trends and recent
developments in the entity‟s prosperity and range of its activities so as to
confirm whether the entity will continue to meet its social responsibility to
its immediate community or the general public; and
19
viii. Regulators
Regulators are interested in information that will confirm the entity‟s
compliance with relevant regulations, ilegislation and accounting standards
guiding the entity‟s operation and reporting.
(b) Content of director‟s report – CAMA 2020

Every company must prepare a director‟s report which must contain the
following:
i. A fair view of the development of the business of the company and its
subsidiaries during the year and of their position at the end of it;
ii. The amount (if any) which the directors recommend should be paid as
dividend and the amount (if any) which they propose to transfer to
reserves;
iii. The names of the persons who were directors of the company at any
time during the year;
iv. The financial activities of the company and its subsidiaries in the
course of the year and any significant change in those activities during
the year;
v. Particulars of significant change (if any) in the non-current assets of
the company in the financial year;
vi. The difference between the market value of land and the amount at
which it is recognised in the statement of financial position if in
directors‟ opinion, the difference is of such significance that the
attention of members or loan notes holders;
vii. Details of directors in the company‟s shares and notes holders;
viii. Particulars of any important events affecting the company, which has
occurred since the end of the year;
ix. An indication of likely future developments in the business;
x. An indication of the activities (if any) of the company in the field of
research and development;
xi. Names of distributors of the company‟s product; and
xii. Particulars of donations and gifts made for any purposes.
(c) Babanriga Nigeria Limited

Computation of deferred tax charge/credit for the year ended December 31,
2021
Date Details Carrying Tax Temporary Tax Deferred
amount base difference rate tax
₦'000 ₦'000 ₦'000 % ₦'000
1/1/2019 Cost 10,000 10,000 - 30% -
31/12/2019 Depreciation (800) (4,000) 3,200 30% 960
31/12/2019 Tax base 9,200 6,000 3,200 30% 960
31/12/2020 Depreciation (800) (1,500) 700 30% 210
20
31/12/2020 Tax base 8,400 4,500 3,900 30% 1,170
31/12/2021 Depreciation (800) (1,125) 325 30% 98

31/12/2021 Tax base 7,600 3,375 4,225 30% 1,268
In Summary:
The deferred tax charges to be recognised in the statement of profit or loss and
other comprehensive income will be ₦98,000.
The deferred tax balance to be shown in the statement of financial position will
be ₦1,268,000.
Examiner‟s report
The question tests candidates‟ knowledge of information needs of different users
of financial statements and contents of directors reports in accordance with the
provisions of CAMA 2020 in parts a and b of the question, while part c requires
the computation of deferred tax to be charged to statement of profit or loss and
amount to be disclosed in the statement of financial position.
Most of the candidates attempted the questions and performance was above
average.
Candidates performed well in parts a and b of the question but could not
correctly calculate the deferred tax in the part c and this led to loss of marks.
Deferred tax has been favourite area of the examiners at this level of the institute
examination, hence candidates are advised to pay attention to this area of the
syllabus for better performance in future examinations.
Marking guide
Marks Marks
a) Conceptual Framework
- Identification of five users of financial
statements at ½ marks each 2½
- Explanation of the information needs of the
five users of financial statement at 1 ½
marks each 7½ 10
b) Content of director‟s report-CAMA 2020

- Ten points at 1 mark each 10
Total 20
21
SOLUTION 3
a. Olu Nigeria PLC
Consolidated statement of profit or loss and other comprehensive income for the
year ended September 30, 2022
₦'000
Revenue (446,250 + (233,100 x 9/12) - 40,000) 581,075.00
Cost of sales (330,750 + (174,600 x 9/12) - 40,000 + 6,000 + 4,500) (432,200.00)
Gross profit 148,875.00
Other income (40,250 - 6,550 - 10,000) 23,700.00
Distribution cost (10,250 + 11,100 x 9/12) (18,575.00)
Administrative expenses (31,650 + (14,760 x 9/12) + 28,000 -
10,000) (60,720.00)
Finance cost (8,575 + (7,200 x 9/12) - 6,550) (7,425.00)
Profit before taxation 85,855.00
Income tax expenses (28,670 + 5,790 x 9/12) (33,012.50)
Profit for the year 52,842.50
Other comprehensive income:
Gain on revaluation (26,600 + 5,000) 31,600.00
Total comprehensive income 84,442.50
Profit attributable to:
Owners of parent (bal. figure) 55,006.25
Non-controlling interest (Wk 4) (2,163.75)
84,442.50
Total comprehensive income attributable to:
Owners of parent (Bal. Figure) 85,106.25
Non-Controlling Interest (Wk 4) (663.75)
84,442.50
Working Notes
Wk 1: Group Structure
Olu PLC ------------ 70% --------------- Oba LTD
NCI ------------------- 30%
Wk 2: Unrealised profit
URP = 40,000,000 x 25/125 x 3/4 = N6,000,000
Wk 3: Excess depreciation
30,000,000/5 x 9/12 = N4,500,000
Wk 4: Share of subsidiary's profit ₦'000
For the year (19,650 x 9/12) 14,737.50
Impairment losses (28,000.00)
Management fee 10,000.00
Interest paid 6,550.00
22
Unrealised profit (Wk 2) (6,000.00)
Excess depreciation (4,500.00)
Revised profit for the year (7,212.50)
Other comprehensive income: 5,000.00
Total comprehensive income (2,212.50)
NCI at 30%:
Profit for the year (2,163.75)
Total comprehensive income (663.75)
b i. Computation of goodwill on acquisition ₦'000 ₦'000

Purchase consideration (70% x 40,000 x 3/5 x N8.10) 136,080.00
Fair value of non-controlling interest (30% x 40,000 x N5.05) 60,600.00
Total Purchase consideration 196,680.00
Net Identified asset:
Share capital of subsidiary 40,000.00
Retained earnings at acquisition (50,550 - (19,650 x 9/12) 35,812.50
Fair value adjustment (Plant) 30,000.00
Net asset acquired (105,812.50)
Non-controlling interest (Wk 4) 90,867.50
Less Impairment 28,000
Goodwill 62,867.50
ii.
Computation of non-controlling interest at reporting date ₦'000
Fair value of non-controlling interest (30% x 40,000 x N5.05) 60,600.00
Share of profit/loss (2,163.75)
Share of revaluation surplus (₦5m x 30%) _1,500.00
NCI at reporting date 59,936.25
23
c. Exceptions to the rule of a parent company preparing consolidated
financial statements.
IFRS 10 provides that a parent need not present consolidated financial
statements if (and only if) all the following conditions apply:
i. The parent itself (X) is a wholly owned subsidiary, with its own
parent(Y). Alternatively, the parent (X) is a partially owned subsidiary,
with its own parent (Y), and the other owners of X are prepared to
allow it to avoid preparing consolidated financial statements;
ii. The parent‟s debt or equity instruments are not traded in a public
market;
iii. The parent does not file its financial statements with a securities
commission for the purpose of issuing financial instruments in a public
market; and
iv. The parent‟s own parent, or the ultimate parent company (for
example, the parent of the parent‟s parent), does produce consolidated
financial statements for public use that comply with IFRS.
Examiner‟s report
Parts „a‟ and `b‟ of the question test candidates‟ ability to prepare consolidated
statement of profit or loss and other comprehensive income while that part `c‟ is
on exception rules on why a parent may be excluded from preparing
consolidated financial statement.
Few candidates attempted the questions and performance was below average.
Most candidates could not correctly calculate the goodwill and non -controlling
interest in part `b „ of the question.
Candidates are advised to pay more attention to preparation of group accounts

and relevant IFRS on group accounts for better performance.
Marking guide
a Marks Marks
a) Preparation of consolidated statement of
profit and loss and other comprehensive
income
- Stating title of the consolidated financial
statement ¼
- Determination of consolidated revenue 1
- Determination of consolidated cost of sales 1½
- Stating of consolidated gross profit ¼
- Determination of consolidated distribution ¾
cost
- Determination of consolidated
administrative expenses 1¼
- Determination of consolidated finance 1
costs
24
- Stating the consolidated profit before ¼
taxation
- Determination of consolidated income tax
expenses ¾
- Stating the consolidated profit for the year ¼
- Determination of gains on revaluation ¾
- Stating total comprehensive income ¼
- Determination of profit for the year
attributable to owner‟s of parent ¼
- Determination of profit for the year 1½
attributable to non-controlling interest
- Determination of total comprehensive
income attributable to owner of parent ¼
- Determination of total comprehensive
income attributable to non-controlling
interest 1¾ 12
bi) Calculation of goodwill on acquisition

- Determination of purchase consideration ¾
- Determination of fair value of non-
controlling interest ¾
- Determination of pre-acquisition retained
earnings ½
- Stating fair value adjustment for plant ¼
- Stating subsidiary‟s net asset acquired ¼
- Stating impairment of goodwill ¼
- Stating goodwill on acquisition ¼
ii) Computation of non-controlling Interest
- Stating fair value of non-controlling
interest at acquisition date ¼
- Stating share of post-acquisition profit or ¼
loss
- Stating share of revaluation reserve ¼
- Stating NCI at reporting date ¼ 4
c) - Exception to preparation of consolidated
financial statements by IFRS 10
- Exceptions to preparation of consolidated
financial statement 4
Total 20
25
SOLUTION 4
(a) Temporary differences are differences between the carrying amount of an
asset or liability in the statement of financial position and its tax base
Temporary differences may be either:
i. Taxable temporary differences, which are temporary differences that will
result in taxable amounts in determining taxable profit (tax loss) of
future periods when the carrying amount of the asset or liability is
recovered or settled; or
ii. Deductible temporary differences, which are temporary differences that
will result in amounts that are deductible in determining taxable profit
(tax loss) of future periods when the carrying amount of the asset or
liability is recovered or settled.
(b) The major components of tax expense or income to be disclosed may
include:
i. Current tax expense or income;
ii. Any adjustments recognised in the period for current tax of prior
periods;
iii. The amount of deferred tax expense or income relating to the
origination and reversal of temporary differences;
iv. The amount of deferred tax expense or income relating to changes
in tax rates or the imposition of new taxes;
v. The amount of the benefit from a previously unrecognised tax loss,
tax credit; or temporary difference of a prior period that is used to
reduce deferred tax expense;
vi. Deferred tax expense arising from the write-down, or reversal of a
previous write-down of a deferred tax asset; and
vii. The amount of tax expense or income relating to those changes in
accounting policies and errors that are included in profit or loss in
accordance with IAS 8, because they cannot be accounted for
retrospectively.
26
c. i) Buga Nigeria Limited
Tax computation and current tax expense for the year September 30,
2022
₦'000 ₦'000
Accounting profit before taxation 196,800
Add:
Depreciation on freehold property 26,300
Depreciation of office equipment 28,250
Increase in provision for doubtful debts 16,750
Accrued interest 10,850
Fine payable 32,500 114,650
Less:
Interest income 3,250
Tax allowable depreciation on freehold proper 94,600
Tax allowable depreciation on office equipment 22,500 (120,350)
Taxable Profit
191,100
Tax at 30%
57,330
(ii) Deferred tax liability as at September 30, 2022

Carrying Temporary
Tax base
amount difference
₦'000 ₦'000 ₦'000
Freehold property 236,700 168,400 68,300
Office equipment 205,000 182,500 22,500
Trade receivables 174,250 191,000 (16,750)
Interest receivables 3,250 - 3,250
Fines payable (32,500) (32,500) -
Interest payables (10,850) - (10,850)
66,450
Deferred tax at 30% 19,935
Temporary Deferred tax

difference at 30%
Deferred tax liabilities 94,050 28,215
Deferred tax assets (27,600) (8,280)
Deferred tax 66,450 19,935
27
(iii) Movement on the deferred tax account for the year ended Sept. 30, 2022
₦'000
Deferred tax as at October 1, 2021 8,100
Statement of profit or loss (balancing figure) 11,835
Deferred tax as at September 30, 2022 19,935
Examiner‟s report
The question is on IAS 12 Income Tax with particular emphasis on deferred
taxation computation and disclosure requirements.
Most candidates did not attempt the question and the few that attempted it
performed badly.
This is an indication that most candidates avoid this area of institute‟s syllabus,
hence the poor performance.
Candidates are advised to pay more attention to this area of the syllabus for
better performance in future examinations.
Marking guide
Marks Marks
a. Explanation and types of “temporary
difference”
- Explanation of temporary difference 1
- Discussion of two types of temporary
difference 2 3
b. Stating five components of tax expenses or

income 5
Preparation of tax computation and

c. i) current tax expense
- Stating of accounting profit before tax ½
- Adjustment for depreciation of freehold ½
property
- Adjustment for depreciation of office ½
equipment
- Adjustment for increase in allowance
for doubtful debts ½
- Adjustment for accrued interest ½
- Adjustment for fine payable ½
- Adjustment of interest income ½
- Deduction of tax allowable depreciation
on freehold property ½
28
- Deduction of tax allowable depreciation
on office equipment ½
- Stating of total taxable profit ½
- Calculation of current tax expense ½
- Any 8 items at ½ mark each 4
ii) Calculation deferred tax Liability

- Determination of carrying amounts 1¾
- Determination of tax base 1¼
- Determination of temporary difference 2
- Calculation of deferred tax 1 6
iii) Movement on the deferred tax account

- Title of statement ½
- Stating opening deferred tax balance ½
- Stating deferred tax changed to profit ½
or loss
- Stating closing deferred tax income ½ 2
Total 20
SOLUTION 5
a i) A financial asset is any asset that is:

 Cash;
 an equity instrument of another entity; and
 a contractual right to receive cash or another financial asset from
another entity; or to exchange financial assets or financial liabilities
with another entity.
A financial liability on the other hand is any liability that is a
contractual obligation:
 to deliver cash or another financial asset to another entity.
 to exchange financial assets or financial liabilities with another entity
under conditions that are potentially unfavourable to the entity.
ii) Financial assets must be classified into one of three categories on initial
recognition.
The three categories are:
i) Financial assets at amortised cost

A financial asset is measured at amortised cost if both of the following
conditions are met:
 the asset is held within a business model whose objective is to hold
assets in order to collect contractual cash flows; and
 the contractual terms of the financial assets give rise on specified
dates to cash flows that are solely payments of principal and interest
29
on the principal amount outstanding.
Examples include loans, trade receivables and held-to-maturity
bonds.
ii) Financial assets at fair value through other comprehensive

income FVTOCI)
A financial asset is measured at fair value through OCI if both of the
following conditions are met:
 the asset is held within a business model whose objective is achieved
by both holding and collecting contractual cash flows and selling the
financial assets; and
 the contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and interest
on the principal amount outstanding.
Examples include ordinary share
iii) Financial assets at fair value through profit or loss (FTVPL)

Any financial assets that do not meet the criteria for measurement at
amortised cost or FVTOCI are measured at FVTPL.
An entity may, at initial recognition, irrevocably designate a financial
asset as measured at FVTPL if doing so eliminates or significantly
reduces a measurement or recognition inconsistency.
Examples include derivatives, equity investments unless the entity has

elected to present changes in fair value in other comprehensive income.
Loans and receivables that fail the amortised cost or FVTOCI criteria, or
other securities that are held for trading.
Olisa Nigeria PLC

Computation of amortised cost of the bond at the end of each year
Year Amortised Interest at Cashflows Amortized
ended cost b/f 5.94234% cost c/f
₦ ₦ ₦ ₦
2018 10,000,000 594,234 500,000 10,094,234

2019 10,094,234 599,834 500,000 10,194,068
2020 10,194,068 605,766 700,000 10,099,834
2021 10,099,834 600,166 700,000 10,000,000
30
Examiner‟s report
The question tests candidates‟ knowledge of the provisions of IAS 9 – Financial
Instruments, part` a‟ of the question is on explanation and description of various
categories of financial assets while part ` b‟ is on calculation of amortised cost of
bonds.
Few candidates attempted the question and performance was below average
Some of the candidates were able to explain different categories of financial
assets but majority of them could not calculate armortised cost of bonds.
Candidates are advised to pay attention to both qualitative and quantitative

aspects of financial instruments sections of the syllabus for better performance in
future.
Marking guide
Marks Marks
a i) Explanation of financial asset and financial
liability
- Explanation of financial assets 1½
- Explanation of financial liability 1½ 3
ii) Description and categories of financial assets:

- Stating three categories of financial assets 1½
- Description of financial assets at amortised
cost 1
- Example of financial asset at amortised
cost ½
- Description of financial asset at fairvalue
through other comprehensive income
(FVTOCI) 1
- Example of financial asset at FVTOCI ½
- Description of financial asset at fair value
through profit or loss (FVTPL) 1
- Examples of financial asset at (FVTPL) 1½ 7
b) Calculation of the amortised cost of bond

- Title of calculation ¼ 5
- Determination of amortised cost b/f 1¼
- Determination of yearly interests 1¼
- Determination of cashflows 1
- Determination of amortised cost c/f 1¼
Total 15
31
SOLUTION 6
a.i) Perpetual inventory system

This is a system where inventory records are continuously updated so that
inventory values are always available. A single account is used to record
all inventory movements. The account is used to record purchases in the
period and inventory is brought down on the account at each year-end.
The account is also used to record all issues out of inventory.
All transactions involving the receipt or issue of inventory must be

recorded and at any time, the balance on the inventory account should be
the value of inventory currently held.
The following are the possible cause of differences between the balance on
the inventory account and the physical inventory counted:
 Theft of inventory;
 Damage to inventory with failure to record that damage;
 Mis-posting of inventory receipts or issues (for example posting
component A as component B);
 Failure to record a receipt; and
 Failure to record an issue.
ii) Disclosure requirements for inventory

IAS 2 requires the following disclosures in the notes to the financial
statements:
 The accounting policy adopted for measuring inventories, including the
cost measurement method used;
 The total carrying amount of inventories, is classified appropriately. For
a manufacturer, appropriate classifications will be raw materials, work-
in-progress and finished goods;
 The amount of inventories carried at net realisable value (NRV);
 The amount of inventories written-down value and so recognised as an
expense during the period;
 Details of any circumstances that have led to the write-down of
inventories to NRV;
 The amount of any reversal of any write-down that is recognised as a
reduction in the amount of inventories recognised as expense in the
period; and
 The circumstances or events that led to the reversal of a write-down of
inventories.
d. Block-Chain Technology is one of the new technologies that became

popular globally through the advancements in digital currency
transactions such as Bitcoin. It is used by many businesses to record
their financial and non-financial transactions in an open secured and
decentralised ledger. It also makes the transaction records accessible to
authorised users at any time and at any location.
32
The following are the disadvantages of adopting the block-chains
technology:
 High implementation cost: Blockchain is costlier compared to a
traditional database. Additionally, businesses need proper planning and
execution to integrate blockchain into their process;
 Data modification. Blockchain technology does not allow easy
modification of data once recorded, and it requires rewriting the codes
in all of the blocks, which is time-consuming and expensive. The
downside of this feature is that it is hard to correct a mistake or make
any necessary adjustments;
 Scalability issues: Blockchain networks, especially public ones, often
face problems with scalability. As the number of transactions increases,
the size of the blockchain grows, and more computational power is
required to process new transactions, making the system slower over
time;
 Energy consumption: Blockchain networks, particularly those that use
proof-ofwork consensus mechanisms like Bitcoin, consume large
amounts of energy. This is because the computers or 'nodes' in the
network need to solve complex mathematical problems to add a new
block to the chain, which requires substantial computational power;
 Regulatory and legal challenges: The decentralised nature of blockchain
poses regulatory and legal challenges. It can be difficult to apply
traditional legal frameworks to blockchain transactions, especially when
they cross jurisdictions. Moreover, issues related to privacy and data
protection can emerge, given that information stored on the blockchain
is transparent and immutable;
 Adoption and interoperability: For blockchain to reach its full potential,
widespread adoption is necessary. However, different blockchains are
often not compatible with each other, and existing systems and
infrastructure may need significant changes to accommodate blockchain
technology;
 Potential for misuse: Although blockchain's security features can help
prevent fraud, the technology can also be used for illicit activities. For
example, crypto currencies that uses blockchain technology have been
used for money laundering due to the potential anonymity they can
provide;
 Thorough knowledge or expert: It's challenging to implement and
manage a Blockchain project. To complete the process, the business
must have in-depth expertise. One of the disadvantages of Blockchain is
that it necessitates hiring numerous experts in the sector, which creates
a problem.
 Inefficiency: It is inefficient to have several network users validating the
same operation, since only one will receive the record derived from the
mining process. That is, some blockchains are sometimes inefficient due
to how they operate.
 Unemployment: As blockchain technology is adopted and implemented,
all the intermediation sectors for the validation of payments and process
33
will necessarily be reduced to the point of disappearing and with it the
jobs required for it will disappear, and
 Security: Blockchains are not completely secured.
Examiner‟s report
The question tests candidates„ knowledge of IAS 2 - Inventories and Block -Chain
Technology.
Most of the candidates attempted part `a‟ of the question on Inventory while only
few of them attempted part `b „on Block – Chain Technology. Candidates‟
performance was good in part `a‟ but poor in part `b‟.
Inability of the candidates to pay special attention to information technology part

of the syllabus led to loss of marks.
Candidates are advised to pay more attention to all areas of the syllabus for
better performance in future.
Marking guide
Marks Marks
a) i. Explanation of perpetual inventory system and
cause of difference in balance
- Explanation of perpetual inventory system 2½
- Stating five cause of differences between
balance in inventory account and physical
count 2½ 5
ii. Disclosure requirements for Inventory

- Five correct disclosure of inventory 5
b) Block-Chain Technology
- Explanation of block-chains 2
- Stating three disadvantages of adopting 3 5
block-chain
Total 15
SOLUTION 7
(a) Qualitative characteristics of General-Purpose Financial Statements
are:
i. Relevance Information must be relevant to the decision-making needs of
users. Information is relevant if it can be used for predictive and/or
confirmatory purposes.
• It has predictive value if it helps users to predict what might happen
in the future.
• It has confirmatory value if it helps users to confirm the assessments
and predictions they have made in the past.
34
The relevance of information is affected by its materiality. Information is
material if omitting it or misstating it could reasonably be expected to
influence decisions of the primary users based on financial statements.
• Materiality is an entity-specific aspect of relevance based on the
nature or magnitude (or both) of the items to which the information
relates in the context of an individual entity‟s financial report.
• Therefore, it is not possible for the IASB to specify a uniform
quantitative threshold for materiality or predetermine what could be
material in a particular situation;
ii. Faithful representation Financial reports represent economic phenomena

(economic resources, claims against the reporting entity, and the effects of
transactions and other events and conditions that change those resources
and claims) by depicting them in words and numbers.
To be useful, financial information must not only represent relevant
phenomena, but it must also faithfully represent the phenomena that it
purports to represent. A perfectly faithful representation would have
three characteristics. It would be:
• Complete – the depiction includes all information necessary for a
user to understand the phenomenon being depicted, including all
necessary descriptions and explanations;
• Neutral – the depiction is without bias in the selection or
presentation of financial information; and
• Free from error – where there are no errors or omissions in the
description of the phenomenon, and the process used to produce the
reported information has been selected and applied with no errors in
the process;
iii. Comparability Comparability is the qualitative characteristic that
enables users to identify and understand similarities in, and differences
among, items. Information about a reporting entity is more useful if it
can be compared with similar information about other entities and with
similar information about the same entity for another period or another
date. Consistency is related to comparability but is not the same.
Consistency refers to the use of the same methods for the same items,
either from period to period within a reporting entity or in a single
period across entities. Consistency helps to achieve the goal of
comparability;
iv. Verifiability: This quality helps assure users that information faithfully
represents the economic phenomena it purports to represent.
• Verifiability means that different knowledgeable and independent
observers could reach consensus that a particular depiction is a
faithful representation.
• Quantified information need not be a single point estimate to be
verifiable. A range of possible amounts and the related probabilities
can also be verified;
35
v. Timeliness: This means having information available to decision-makers
in time to be capable of influencing their decisions; and
vi. Understandability Information is made understandable by classifying,

characterising and presenting it in a clear and concise manner. Financial
reports are prepared for users who have a reasonable knowledge of
business and economic activities and who review and analyse the
information diligently.
(b) Models of valuation recognised in IAS 16 – Property, Plant and

Equipment. All items of property, plant and equipment in a class
can be accounted for using one of two models:
i. Cost model - Property, plant and equipment are carried at cost less any
accumulated depreciation and any accumulated impairment losses; and
ii. Revaluation model - Property, plant and equipment are carried at a
revalued amount. This is the fair value at the date of the revaluation
less any subsequent accumulated depreciation and any accumulated
impairment losses.
The same model should be applied to all assets in the same class. For
example, a company‟s policy might be to value all its motor vehicles at
cost but to apply the revaluation model to all its land and buildings.
Examiner‟s report
The question tests candidates‟ knowledge of Conceptual Framework of Financial
Reporting and methods of valuation of property plant and equipment in
accordance with IAS 16.
Most of the candidates attempted the question and performance was good.
Candidates are advised to pay more attention to all relevant International

Financial Reporting Standards (IFRS) at this level of the Institute`s examination
for better performance in future.
Marking guide
Marks Marks
Identification and explanation of qualitative
a) characteristics of general Purpose Financial
Statements
- Stating five qualitative characteristics 2½
- Explanation of the five qualitative characteristics 7½ 10
b) Methods of valuation of PPE

- Stating two methods of valuation 2
- Explanation of the two methods 3 5
Total 15
36
ICAN/231/Q/B2 Examination No...........................

AUDIT AND ASSURANCE
1. Check your pockets, purse, mathematical set, etc. to ensure that you do not have
prohibited items such as telephone handset, electronic storage device,
programmable devices, wristwatches or any form of written material on you in
the examination hall. You will be stopped from continuing with the
examination and liable to further disciplinary actions including cancellation of
examination result if caught.
3. Do NOT write anything on your question paper EXCEPT your

4. examination number.
8. All solutions should be written in BLUE or BLACK INK. Any solution written in
PENCIL or RED INK will not be marked.
WEDNESDAY, MAY 17, 2023
37

AUDIT AND ASSURANCE
INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT FIVE OUT OF THE SEVEN
QUESTION 1
Promise and Treasure are two good childhood friends. After their secondary
education, Promise travelled abroad to further his education. He did his first degree
and second degree over there.
Treasure had his own education in Nigeria, he attended a university in the

Southwest. He came out with a second class lower degree. During his sojourn
abroad, Promise met with some foreigners to join hands together to set up a
company in Nigeria. Promise invited his childhood friend to join them in the
business.
They formed a company called Promise and Treasure Company Nigeria Limited. They
are into importation of steel products, with the intention of setting up a factory to
produce steel products in future.
The first year accounts were made up to December 31, 2020.
Your firm has been appointed as auditors to the company. At the completion of the
audit, you requested for a written representation from the management. This request
was strange to the Managing Director of Promise and Treasure Company Nigeria
Limited, because according to him, they have given your firm all necessary
information and documents needed to carry out the audit.
Required:
a. Explain to the Managing Director the objectives of the auditor in obtaining a

written representation as per ISA 580. (4 Marks)
b. State the steps the auditor should take if a representation by management is
contradicted by other audit evidence. (6 Marks)
c. State THREE matters that are required of management in the letter of
representation in line with ISA 580 which requires the auditor to obtain
specific representation from management. (3 Marks)
d. Highlight SEVEN of the form and contents of a letter of representation.
(14 Marks)
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e. State the steps the auditor should take if management refuses to provide the
requested written representation. (3 Marks)
(Total 30 Marks)
INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF THE THREE
QUESTION 2
Your audit firm was recently appointed as the external auditors of a fast growing
fast-foods outlet, Foods Only Limited. The directors are not clear as to their
responsibilities and the nature of their relationship with the external auditors. The
engagement partner has instructed you to visit the client and explain to the directors
some fundamental aspects of the appointment.
Required:
a. Explain the matters to be stated in an audit report according to Companies
and Allied Matters Act (CAMA) 2020. (5 Marks)
b. State the auditor‟s rights under Companies and Allied Matters Act (CAMA).
(5 Marks)
c. State the duties of external auditors under Companies and Allied Matters Act
(CAMA). (5 Marks)
d. What are the responsibilities of management and those charged with
governance in relation to the accounting function of the company? (5 Marks)
(Total 20 Marks)
QUESTION 3
The following issues emanated from the pre-audit meeting of FIFO Limited:
i. The operating environment has been affected by the COVID-19 pandemic.
Management has tried to react to it by creating a number of policy initiatives
which have been embarked upon to stem the negative impact of the pandemic on
the company. As a direct consequence of the slowdown in business, there was
some contraction in Q2 2020 financial performance which affected the half year
results and led to a revision of the previously approved 2020 budget. The effects
of the pandemic on the economy includes a shrink in Gross Domestic Product,
reduced yields on investment and government securities, growth in foreign
exchange rates and an upward trend in inflation. This has led the company to
make loss in the year.
The significant drop reflects the negative impacts of the disruption caused by
COVID-19 pandemic;
ii. There is the likelihood of increase in account receivable balance due to inability
of customers to make sales and repay balances;
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iii. The company focused on ensuring that there was sufficient liquidity to meet daily
operations;
iv. With the loss position, the engagement team has to look at appropriate
benchmarks for materiality. Profit before tax from continuing operations is often
used for profit-oriented entities. When profit before tax from continuing
operations is volatile, other benchmarks may be more appropriate, such as gross
profit or total revenues;
v. The firm‟s software has formula for calculating materiality, after it has been
based on the selection of an appropriate benchmark, The fundamental
requirement is for the auditor to exercise professional judgement in assessing
materiality;
vi. Members of the engagement team should declare their independence and client‟s
information should be kept confidential;
vii. To meet the agreed timelines, all preliminary engagement activities should be
completed as scheduled and submitted to the Partner for prompt review; and
viii. Preliminary analytical review is a key procedure in helping to assess risk in the
planning of an audit. It helps to identify the existence of unusual transactions or
events and amounts; ratios and trends that might indicate matters that have
audit implications. This may assist the auditor in identifying risks of material
misstatements due to fraud. Hence, it should be handled with care. At the end of
the pre-audit meeting, an Audit Associate has requested for some explanations
from you.
Required:
a. State the preliminary activities to be undertaken before commencement of

the audit. (6 Marks)
b. State the characteristics of confidentiality in auditing. (7 Marks)
c. Explain briefly the purposes of analytical review. (4 Marks)
d. State at what stage of the audit an analytical review should be performed.

(3 Marks)
(Total 20 Marks)
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QUESTION 4
Cringe Professional Services has been auditing Kogberegbe Limited for about 20
years. Being a limited liability company, no regulation imposed restriction on the
tenure of the auditors.
The firm also provides taxation and valuation services for the company. The company
has just adopted International Financial Reporting Standards and has employed the
services of Cringe Professional Services for conversion services from local GAAP. The
firm experienced a high staff turnover in the year and has no choice than to include
the daughter of the Managing Director of the company as part of the engagement
team, although as a support staff.
Management has indicated in confidence that the audit fee for the year will not be
increased, except the firm can guarantee them that no adverse management letter
will be issued and no loss will be made by the company as they are planning to go to
the capital market to raise capital for expansion. With poor management letter and
loss position, they believe that it will be difficult to achieve this.
At the end of the audit exercise, the company made huge profit even with
unfavourable economic climate, thanks to challenges associated with COVID-19.
There was public outcry because it was believed that the financial statements of the
company were misstated and the auditor was accused of negligence. This
necessitated the Financial Reporting Council to conduct an investigation on the
company. It was found that the company restructured its debt portfolio which was
denominated in foreign currency with attendant foreign exchange risks to Naira.
The company restructured a huge intercompany loan to a 7-year principal payment
holiday with principal repayment commencing September 30, 2025.The interest on
the loan for the period was not brought into the books of account.
The company accrued for a NGN70.60m benefit from a transaction in 2019 from
operating fees. This has been treated as income in the financial statements.
There were identified defaults by the company in relation to the payment of interests
and principal on its outstanding loans and borrowings.
There were adverse ratios in the company‟s financial performance ratios in the year
due to interest on borrowings from financial institutions and related parties.
A revisit of the operating performance for the year revealed the following:
 The entity made an operating loss ofN1.22billion;
 It generated negative operating cashflows of N2.15billion;
 There was positive working capital as the current assets exceeded the current
liabilities by N1.2billion in the year; and
 The net assets position of the company was in the negative as the total
liabilities exceeded the total assets by N9.8billion.
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The Financial Reporting Council concluded that there were threats to the auditors‟
independence, hence the professional firm was penalised for that.
A concerned staff of the company asks you of the implications of the issues raised by
the Financial Reporting Council.
You are required to:

a. Identify and explain the threats to independence of the auditor in the above
scenario (7Marks)
b. Discuss circumstances that could give rise to threat to independence
(7 Marks)
c. Suggest appropriate safeguards which could be put in place to
mitigate the identified threats (6 Marks)
(Total 20 Marks)
QUESTION 5
The Association of Builders is conducting a selection process for an external audit
firm. Your firm has been invited to participate by submitting a proposal to render
external audit services.
i. Terms of reference: The terms of reference are intended to provide a scope of

work and deliverables for external audit services for an initial period of three
financial years, covering March 31, 2021 to March 31,2023.Further provision
for an extension of the initial period by two years, will be subject to approval
by the Council of the Association.
ii. Background: The Association of Builders is a statutory body, established in

2014 and registered with the Corporate Affairs Commission. It is committed to
serving and protecting the public and providing guidance to registered
members in the profession.
The objective of the association is to regulate the building profession in the

country in all aspects pertaining to registration, education and training,
professional conduct and ethical behaviour, ensuring continuing professional
development, and fostering compliance with building standards.
iii. Objectives: The objectives of the audit are that the auditors would conduct
the audit assignment as follows:
 The auditors shall express an independent opinion as to whether the
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Financial statements give a true and fair view of the financial position,
financial performance and cash flows of the association in accordance
with the International Financial Reporting Standards (IFRS) and
relevant enabling laws;
 The audit shall be carried out in accordance with the International

Standards on Auditing (ISAs), as issued by the International Federation
of Accountants (IFAC); and
 The auditors in their duties, shall comply with all relevant enabling
laws including the Financial Reporting Council Act.
iv. Scope of work: The appointed service provider will be required to:
 Perform an audit of annual financial statements in accordance with

International Financial Reporting Standards (IFRS) and express an
audit opinion;
 Perform audits in compliance with International Standards on Auditing

(ISAs);
 Work in conjunction with Internal Auditors (where possible) in the

provision of assurance to the Council on the effectiveness of the internal
control systems;
 Communicate audit findings to management and ensure they are fully
aware of the implications to operations of the association;
 Review the financial information in the annual report prior to
publishing; and
 Attend and provide input in the Audit and Risk Committee meetings,
where necessary.
v. Mandatory requirements: The service provider should meet the following

competency requirements:
 The proposed External Auditor must be registered with a recognised
Accounting body and Financial Reporting Council;
 Must have experience and a comprehensive understanding of the
construction industry; and
 The audit firm must have sufficient in-house capacity to perform
external audit for the association.
vi. Contents of the proposal: The proposal must include the following:
 Firm profile and relevant experience;
 Relevant information about the firm to assess her competence;
 Proposed methodology and approach to be used in keeping with the

scope of works;
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 Description of similar work, including fee per project undertaken in the
past 3 years; and
 Curriculum vitae of proposed project team, stating qualification and
experience.
vii. Evaluation process:

Submission after the deadline will attract disqualification.
Your firm has included you as a member of the team to work on the audit
proposal to be submitted soonest.
Required:
Going by the requirements of the Companies and Allied Matters Act and best
practice:
a. Identify and explain briefly the rights of external auditors in relation to
Companies and Allied Matters Act. (5 Marks)
b. State responsibilities of management and those charged with

governance in relation to the financial statements. (6 Marks)
c. Explain what auditors are required to do in relation to International

Standards on Auditing (ISA 200). (4 Marks)
(Total 15 Marks)
QUESTION 6
At one of the seminars you attended on legal and regulatory frameworks of financial
reporting, it was stated that one of the duties of Financial Reporting Council of
Nigeria (FRC) is to provide legal and regulatory frameworks for minimum practice
guideline for auditors in Nigeria. To do this, they (FRC) are supposed to ensure that
all activities of Registered Auditors, other Assurance Providers and Audit Committee
members are regulated, with a view to sustaining best ethical practices capable of
promoting quality audit services.
It is part of the obligations of the Financial Reporting Council of Nigeria to conduct

practice review of registered professionals.
You learnt from the seminar that, for the Financial Reporting Council of Nigeria to do
this effectively, the Audit Regulation requires external auditors to create audit file for
each of the statutory audits carried out and ensure the retention of the working
papers and other materials that support the auditor's conclusions in any audit report
for a minimum period of seven years.
A classmate from the University, who now works in the bank and attended the
seminar with you, has asked for futher explanation on what is meant by „‟working
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paper‟‟ and why it is of great importance that a regulator has to be interested in the
review when there are other important duties to be carried out.
Required:
a. Identify the different types of audit working paper files. (5 Marks)
b. Outline the importance of audit working paper files. (5 Marks)
c. Explain briefly the conditions that determine the size of audit working papers.
(5 Marks)
(Total 15 Marks)
QUESTION 7
Indorise Limited has been in business for about 20 years. The company has
divisional offices in three locations. The accounting records are kept mainly at the
head office, with back up in an adjacent building to the office. The office is not far
from a petrol station.
An unfortunate incident happened in a certain year, the petrol station got burnt and
most offices in the location were engulfed in fire. The company lost most of the
properties in the building, including important accounting records. The company has
to make another arrangement for an office location on another street. Fortunately,
the end of year audit has just been concluded, but most of the accounting records
have not been backed up. The tax office, customers and suppliers are disputing
balances and some are even putting up claim for litigation since they know the
company may not be able to show proof of the balances against them.
A decision was made to approach the external auditors of the company if they can
help to retrieve some accounting records from the schedules and other information
earlier made available to them. The auditors were happy to assist and some of the
problems were resolved.
The Chief Accountant expressed his appreciation to the firm.
You are required:

a. Explain why sufficient and appropriate audit documentation is necessary.
(5 Marks)
b. Explain briefly why you will recommend computer-based audit packages for
documentation. (6 Marks)
c. Identify and explain who has responsibility for the ownership, custody and
confidentiality of working papers. (4 Marks)
(Total 15 Marks)
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SOLUTION 1
a. ISA 580 defines a written representation as a written statement by management

provided to confirm certain matters or to support other audit evidence. ISA 580
requires appropriate written representations from management to be in the
form of a letter of representation, addressed to the auditor. These written
representations may be an important source of audit evidence.
The objectives of the auditor in this area, per ISA 580, are to:
i. Obtain written representations from management that it has fulfilled its
responsibilities in respect of the financial statements and the audit;
ii. Obtain written representations as appropriate to support other audit
evidence; and
iii. Respond appropriately to written representations provided by management,
or if management refuses to provide the written representations requested.
b. If a written representation is contradicted by other audit evidence, the auditor

should:
i. Consider whether his risk assessment of that area is still appropriate;
ii. Consider whether additional audit procedures are needed; and
iii. If he has concerns about the integrity of management, document those
concerns and consider withdrawing from the audit.
c. Matters that are required of management in the letter of representation include:

i. It has fulfilled its responsibility for the preparation and fair presentation of
the financial statements in accordance with the applicable financial
reporting framework;
ii. It has provided the auditor with all relevant information; and
iii. All transactions have been recorded and are reflected in the financial
statements.
d. Form and contents of Management Representation letter

The letter of representation is:
i. Usually drafted by the auditor as he knows the areas on which he requires
written representations;
ii. Addressed to the auditor; and
iii. Dated as near as practicable to, but not after, the date of the audit report.
A written representation letter may include the following statements:

i. There presentation letter relates to the audit of the client company;
ii. The management of the entity has fulfilled its responsibilities for the
preparation of the financial statements, and the financial statements give a
true and fair view and are free from material misstatements;
iii. The assumptions made by management to make accounting estimates and
reach fair values are reasonable – ISA 540;
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iv. Related party relationships and transactions have been disclosed – ISA
550;
v. All events after the reporting period have been either adjusted or
disclosed – ISA 560;
vi. The effect of any uncorrected misstatements (a list of which should be
attached to the letter) is immaterial – ISA 450;
vii. The auditors have been provided with all relevant materials including the
books of accounts and unrestricted access to individuals within the
entity;
viii. All transactions have been recorded and are included in the financial
statements;
ix. Management has disclosed to the auditors all information that is relevant
to fraud or suspected fraud – ISA 240;
x. Management has disclosed all known instances of non-compliance with
laws or regulations that are relevant to the preparation of the financial
statements; and
xi. Representations may also be included that refer to specific assertions in
the financial statements, if the auditors require that such assertions
should be made.
e. Where there are circumstances in which management refuses to provide written

confirmation of representations that the auditors consider necessary, the
auditors should:
i. Discuss the matter with management;
ii. Re-evaluate the integrity of management and reconsider the impact on
other representations and audit evidence;
iii. Take appropriate action, including considering the effect on the audit
report;
iv. Consider the implications of this scope limitation for their report; and
v. Not place reliance on other representations made by management during
the audit.
Examiner‟s report
The question tests candidates‟ knowledge of written representation according to the
requirements of ISA 580.
As a compulsory question, all the candidates attempted the question but their
performance was poor.
The commonest pitfall of the candidates was their inability to explain the
requirements of audit standard ISA 580.
Candidates are advised to study the requirements of the specified ISAs, read relevant
texts and ICAN Pathfinders.
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Marking guide
Marks
a) Explanation of the objectives of the auditor in obtaining a written
representation
2 marks each for any 2 objectives of written representation 4
b) Steps the auditor would take if management representation is

contradicted by other audit evidence
2 marks each for any 3 steps the auditor will take if representation is
contradicted by other audit evidence 6
c) Matters that are required of management in the letter of representation
1 mark each for any 3 matters that are required of management 3
d) Highlighting the form and contents of a letter of representation
2 marks each for a maximum of seven contents of letter of representation 14
e) Steps the auditor should take if management refuses to provide written

representation
1 mark each for any 3 steps the auditor will take for non-provision of
written representation 3
Total 30
SOLUTION 2
a. Matters to be expressly stated in the auditor‟s report according to the Fifth

Schedule – s.404 (2) of CAMA 2020
These matters include:
i. Whether the auditors have obtained all the information and explanations
which, to the best of their knowledge and belief, were necessary for the
purposes of their audit;
ii. Whether, in the auditor‟s opinion, proper books of account have been kept
by the company, so far as appears from their examination of those books,
and proper returns adequate for the purposes of their audit have been
received from branches not visited by them;
iii. Whether the company‟s balance sheet and (unless it is framed as a
consolidated profit and loss account) profit and loss account dealt with by
the report are in agreement with the books of account and returns;
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iv. 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 this Act in the manner so required and give a true
and fair view in the case of the:
 Balance sheet, of the state of the company‟s affairs as at the end of its
year; and
 Profit and loss account, of the profit and 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 virtue of Part I
of the First Schedule of this Act, are not required to be disclosed; and
v. In the case of a holding company submitting group financial statements,
whether, in their opinion, the group financial statements have been
properly prepared in accordance with the provisons 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 dealt with where it, so far as it concerns
members of the company, or the case may show as to give a true and fair
view therof subject to the non-disclosure of any matter to be indicated in
the report which by virtue by part 1 of the First Schedule to this Act, are not
required to be disclosed.
b. Auditor's rights under Companies and Allied Matters Act 2020

External auditors have certain statutory rights, to enable them to perform their
statutory duties. The main statutory rights of the auditor per CAMA 2020
(sections 407 and 410) include the following:
i. The right of access to all accounting books and records at all times;
ii. The right to all information and explanations (from management) necessary
for the proper conduct of the audit;
iii. The right to receive notice of all meetings of the shareholders (such as the
annual general meeting) and to attend those meetings;
iv. The right to be heard at the shareholders' meetings on matters affecting the
audit and auditors; and
v. The auditors have the right to receive copies of all resolutions if the
company uses written resolutions.
c. The primary duty of the external auditors according to section 407 of CAMA is to
investigate and form an opinion regarding the maintenance of proper
accounting records and that the financial statements are in consonance with
those records.
Other duties include, to:
i. Examine the financial statements; and

ii. Issue an auditor‟s report on the financial statements, which is then
presented to the shareholders.
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Sections c407 and 410 CAMA 2020 require the auditor to also form an opinion
on:
i. Whether proper accounting records have been kept by the company and
proper returns adequate for the audit have been received from branches not
visited by the auditors;
ii. Whether the company‟s balance sheet and (if not consolidated) its profit
and loss account are in agreement with the accounting records and returns;
and
iii. Whether the information in the directors‟ report for the year for which the
accounts are prepared is consistent with the financial statements.
d. Responsibility of management and those charged with governance
With respect to the audit and contrary to what members of the public believe, it
is the directors and those charged with governance who are primarily
responsible for:
i. Prevention and detection of fraud;

ii. Preparation of the financial statements; and
iii. Design and implementation of effective internal controls – for example,
authorising payments above a certain amount and monthly bank
reconciliations.
They are also responsible for providing the auditor with:
i. Access to information relevant to the preparation of the financial

statements;
ii. Additional information relevant to the audit;
iii. Unrestricted access to persons whom the auditor needs access to in order to
complete the audit; and
iv. Providing written representations to the auditor at the end of the audit.
Examiner‟s report
This question tests candidates‟ knowledge of the rights and duties of the external
auditors according to the provisions of CAMA 2020 and, the responsibilities of
management and those charged with governance.
About 85% of the candidates attempted this question. The overall performance was
below average.
The candidates‟ pitfall was their inability to refer specifically to the auditor‟s rights
and duties under the CAMA 2020.
Candidates should cover adequately all the sections of the syllabus and make use of
the Institute‟s Study Text.
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Marking guide
Marks
a) Explaining the matters in an audit report according to CAMA
2020
1 mark each for any 5 matters to be stated in an audit report 5
b) Stating auditors‟ rights under CAMA
1 mark each for any 5 rights of the auditor under CAMA 5
c) Stating the duties of external auditors under CAMA
1 mark each for any 5 duties of auditor under CAMA 5
d) Stating the responsibility of management and those charged

with governance
1 mark each for a maximum of 5 responsibilities of management

and those charged with governance 5
Total 20
SOLUTION 3
a. The preliminary activities before commencement of the audit involve the

preparation of an audit strategy memorandum. This is a document setting out
the main points involved in the planning process and the key planning
decisions that have been taken. The memorandum will cover the following
areas:
i. The assignment objectives and reports to be issued;
ii. The audit timetable, to meet the required reporting deadlines for the audit
report;
iii. Changes in the client‟s organisation or business, or external environmental
changes affecting the client‟s business, since the previous audit, as
applicable;
iv. A summary of key financial ratios and other ratios from previous years;
v. Planning decisions for the audit;
vi. The use that will be made of the client‟s staff in the audit (for example,
internal auditors) and the use that will be made of external experts;
vii. Possible problem areas in the audit and the approach to be adopted to
deal with them;
viii. Staffing requirements for the audit, the planned allocation of the work
between members of the audit team, time budgets and records from
previous audits;
ix. Attendance at locations (if the client has more than one location); and
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x. Proposed methods of communication with the client (for example,
meeting/reports);
Other preliminary activities include:
i. Obtaining professional clearance from former auditor, in the case of a new

client; and
ii. Conducting initial opening balance review when a new audit is involved.
b. Characteristics of confidentiality in auditing include:

i. A professional accountant should respect the confidentiality of information
acquired as a result of professional or business relationships;
ii. The normal ethical rule requires that accountants should maintain client
confidentiality, and should not disclose information without the client‟s
consent;
iii. An exception to the rule of confidentiality is that the duty of confidentiality
is overridden by the requirement to provide evidence when requested by a
court of law or by professional right or duty;
iv. Confidential information should not be used for the personal advantage of
the professional accountant or third parties;
v. Legal requirements for disclosure override the rules of client confidentiality.
There may be professional duty or right to disclosure when not prohibited
by law;
vi. The duty of confidentiality continues even after the end of the relationship
between the professional accountant and the client or employer; and
vii. The ICAN‟s Rules of Professional Conduct for Members on confidentiality
gives guidance on how members should handle confidential information.
c. Analytical review procedures consider both comparisons and relationships

between financial information in the draft financial statements with a
benchmark. The procedures include:
i. Ratios, trends, and relationships for the current financial year are compared
with prior periods (historical data);
ii. Ratio, trends and relationships for the current financial year are compared
with budgets and forecasts;
iii. Ratio, trends and relationships for the current financial year are compared
with industry averages (ratios for business entities in the industry);
iv. Reviewing relationship between elements of financial information, such as
gross margins percentages; and
v. Reviewing relationship between financial and non-financial information
like payroll costs to staff nominal roll.
d. Analytical review procedures can be performed at three stages in the audit

process and they are:
i. Performed in planning the nature, timing and extent of other audit
procedures;
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ii. Performed as a substantive procedure when their use is more effective or
efficient than detailed substantive tests of transactions and balances; and
iii. Used at the overall review stage, to allow the auditor to conclude whether
the financial statements as a whole are consistent with his knowledge of the
business or entity.
Examiner‟s report
The question tests candidates‟ understanding of the preliminary activities to be
undertaken before the audit, confidentiality in auditing, and analytical review
procedures.
Only about 25% of this candidates attempted this question notwithstanding that
these are popular areas in auditing. The performance of candidates was generally
poor.
The commonest pitfall was the candidates‟ poor knowledge of confidentiality in

auditing.
Candidates are advised to cover all topics of the syllabus when preparing for future
examinations.
Marking guide
Marks
a) Listing preliminary activities to be undertaken before the
commencement of the audit
1 mark each for any 6 preliminary activities before audit

commencement 6
b) Stating the characteristics of confidentiality in auditing
1 mark each for any 7 characteristics of confidentiality in audit 7
c) Explaining briefly the purpose of analytical review

1 mark each for any 4 purposes of analytical review 4
d) Stating the stage of the audit analytical review is performed
1 mark each for any 3 stages of performing analytical review 3

Total 20
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SOLUTION 4
a. The identified threats to independence of the auditor are:

i. Cringe Professional Services being an auditor of Kogberegbe for about 20
years could lead to familiarity threats. The long term relationship between
the firm and the company might lead to other relationships outside business
relationships;
ii. The provision of taxation and valuation services for the company could
create self review threat, as some of the output from the services could be
input for the audit services;
iii. Including the daughter of the Managing Director of the company as part of
the engagement team will create self-interest, familiarity threats and
intimidation threats; and
iv. The management indication not to increase the audit fees, except the
professional services firm can guarantee no adverse management letter will
be issued and no loss will be made by the company will lead to self-interest
threats and intimidation threats.
b. Circumstances that could lead to threats to independence of the auditor include:

(i) Fees and pricing: When the total fees generated by an assurance firm from
a client represents a large portion of the assurance firm‟s total fees
earnings, this can create self-interest or intimidation threats;
(ii) Financial interests: A financial interest in a client would constitute a self-
interest threat, although the nature of the interest and the degree of
control the accountant has over it will affect the level of the risk;
(iii) Loans and guarantees: A loan from a client which is a bank or similar
institution, made on normal commercial terms would not constitute a
threat to independence. However, loans or guarantees made to or by
assurance clients in other circumstances constitute self-interest threat and
should be avoided;
(iv) Close business relationships: Close business relationships with assurance
clients, such as having a material joint venture, represent a self-interest
threat and possibly an intimidation threat. They should be avoided;
(v) Family and personal relationships: Family and personal relationships
between assurance staff and clients might cause self-interest, familiarity
or intimidation threats. It is impracticable to outline every relationship
that might cause such a risk and each situation should be considered
individually, bearing in mind the role of the assurance staff and the
closeness of the relationship;
(vi) Employment with assurance clients: The assurance team‟s independence
may be threatened if a director or other senior employee of the client has
recently been employed by the assurance firm. There may be self-interest,
familiarity and intimidation threats, particularly if close connections
remain between the individual and the assurance firm;
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(vii) Long association of senior personnel with assurance clients: Using the
same staff on an assurance engagement over a long period of time may
cause a familiarity threat. The firm should consider factors such as the
nature of the person‟s role and the length of time that he has been doing it
when deciding which staff members to be involved in assurance work;
(viii) Provision of other services (non-audit work): The independence of an audit
firm may be threatened when the firm carries out a large amount of non-
audit work like valuation services and taxation services for a company that
is also its audit client which may create self-review threats; and
(ix) Gifts and hospitality: Assurance team members/firms should not accept
goods or hospitality from an assurance client, unless the value of that gift
is clearly insignificant (to all parties).
c. Appropriate safeguards to be put in place for identified threats include:
i. Familiarity threats -Cringe Professional Services being the auditor of

Kogberegbe for about 20 years could lead to familiarity threats. The
safeguard is that Cringe Professional Services as the auditor should be
disengaged or alternatively, there should be a regular rotation of both the
partner and manager in charge of the job to address familiarity threats;
ii. Self-review threats -The provision of taxation and valuation services for the
company could create self-review threat as some of the output from the
services could be input for the audit services. The safeguard is that Cringe
Professional Services as an auditor should be disengaged from providing
other services that could constitute self-review and also ensure that the
income from one client will not constitute undue significance to influence
their objectivity and independence;
iii. Familiarity threats - Including the daughter of the Managing Director of the
company as part of the engagement team will create self-interest,
familiarity threats and intimidation threats. The safeguard is that the
daughter of Managing Director should be excluded from engagement team
to prevent all stated threats;
iv. Intimidation threats - The management indication not to increase the audit
fees, except the professional services firm can give guarantee that no
adverse management letter will be issued and no loss will be made by the
company will lead to self-interest threats and intimidation threats. The
safeguard is that audit fees should be agreed and fixed before the
commencement of the assignment and should never be contingent on
further event that influences auditor‟s independence. Contingent fees are
even not approved in professional accounting practice.
55
Examiner‟s report
The question tests candidates‟ knowledge of threats to the independence of auditors.
About 85% of the candidates attempted the question and performance was above
average.
Candidates‟ commonest pitfall was in part (c) where valuable marks were lost
because of their inability to state the appropriate safeguards to identified threats.
Candidates are advised to apply their skills to identify circumstances that could give
rise to threats to independence of auditors in any given scenario.
Marking guide
Marks Marks
a) Identifying the threats to independence of the auditor in a
given scenaro
1 mark each for any 4 threats to independence of the auditor

identified 4
1 mark each for any 3 threats to independence of the auditor

explained 3 7
b) Discussing circumstances that could give rise to threat to

independence
1 mark each for any 7 characteristics that could give rise to

threat to independence 7
c) Stating appropriate safeguards to mitigate identified threats
2 marks each for any 3 appropriate safeguards to be put in

place 6
Total 20
SOLUTION 5
a. Auditor's rights under Companies and Allied Matters Act 2020:
External auditors have certain statutory rights, to enable them to perform their
statutory duties. The main statutory rights of the auditor per CAMA 2020
(sections 407 and 410) include the right:
i. Of access to all accounting books and records at all times;
ii. To all information and explanations (from management) necessary for the
proper conduct of the audit;
iii. To receive notices of all meetings of the shareholders (such as the annual
general meeting) and to attend those meetings;
56
iv. To be heard at the shareholders' meetings on matters affecting the audit
and the auditor; and
v. To receive a copy of all resolutions, if the company uses written resolutions.
b. Responsibility of management and those charged with governance
With respect to the audit and contrary to what members of the public believe, it
is the directors and those charged with governance who are primarily
responsible for:
i. Prevention and detection of fraud;

ii. Preparation of the financial statements;
iii. Design and implementation of effective internal controls – for example,
authorising payments above a certain amount and monthly bank
reconciliation.
They are also responsible for providing the auditor with:
i. Access to information relevant to the preparation of the financial

statements;
ii. Additional information relevant to the audit;
iii. Unrestricted access to persons whom the auditor needs access to in order to
complete the audit; and
iv. Providing written representations to the auditor at the end of the audit.
c. In relation to International Standards on Auditing (ISA) 200, auditors are

expected to:
i. Obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatements, whether due to fraud or error.
This allows the auditor to give an opinion on whether or not the financial
statements have been prepared in accordance with the applicable financial
reporting framework;
ii. Report on the financial statements, and communicate as required by the
ISAs, in accordance with the auditor‟s findings; and
iii. Disclaim an opinion or resign, where the auditor is unable have reasonable
assurance and a qualified opinion is insufficient.
ISA 200 also requires the auditor to:
i. Comply with all ISAs relevant to the audit;

ii. Comply with relevant ethical requirements;
iii. Plan and perform an audit with professional skepticism;
iv. Exercise professional judgement in planning and performing an audit; and
v. Obtain sufficient and appropriate audit evidence to allow him have
reasonable assurance.
57
Examiner‟s report
The question tests candidates‟ knowledge of the rights of external auditors under the
CAMA, responsibilities of management and those charged with governance in
relation to the financial statements and requirements of ISA 200.
About 85% of the candidates attempted the question and they showed a fair
understanding of the requirements of the question in parts (a) and (b), but poor in
part (c). The general performance was fair.
The commonest pitfall was the inability of the candidates to explain what the
auditors are required to do according to ISA 200.
Candidates are advised to study the ISAs, as they are essential requirements of
auditing papers at relevant levels of the examinations and even the practice of
auditing.
Marking guide
Marks
a) Identifying the rights of external auditors in relation to CAMA
1 mark each for any 5 rights of the auditor under CAMA 5
b) Stating the responsibilities of management and those charged with

governance in relation to financial statements
1 mark for any 6 responsibilities of management and those charged

with governance 6
c) Explaining what the audition should do in relation to ISA 200
1 mark each for any 4 actions the auditor can take in relation to IAS 4
200
Total 15
SOLUTION 6
a. Types of audit working paper files
All audit works must be properly documented and held in an audit file. It has
been a normal practice to maintain two types of audit files; a permanent file
and a current file.
Permanent audit file records information that is likely to be of significance to

every annual audit of that client and of continuing significance to more than
the current audit.
58
Examples of such information might include:
i. The legal constitution of the company or entity;
ii. A summary of history, development and ownership of the business or
entity;
iii. A record of the accounting systems and procedures used by the client;
iv. Other important legal documents and agreements; and
v. Copies of previous years‟ financial statements.
Current audit file contains information relevant to the current year's audit.
Examples include:
i. Final financial statements and audit report;

ii. Audit planning material which includes audit plan, materiality threshold
calculations and risk assessments;
iii. Audit letters;
iv. Audit programme; and
v. Audit control materials like time budgets and review points.
b. Importance of audit working papers files include:

i. Enhancing the quality of the audit;
ii. Facilitating the effective review and evaluation of the audit evidence
obtained and conclusions reached, before the audit report is finalised;
iii. Assisting the audit team to plan and perform an audit;
iv. Assisting supervisors in directing and supervising audit work; and
v. Keeping a record of matters of continuing significance to future audits.
c. Conditions that determine the size of the audit working papers include:
i. The nature, timing and extent of the audit procedures performed;
ii. The results of the audit procedures and the audit evidence obtained;
iii. Significant matters arising during the audit and the conclusions reached
thereon;
iv. The nature of the financial statements and reports; and
v. Method of audit documentation whether paper, electronic or other media.
Examiner‟s report
The question tests candidates‟ knowledge of audit working papers.
About 50% of the candidates attempted the question but the performance was just
average.
The commonest pitfall was the candidates‟ poor knowledge of audit working papers.
Candidates are advised to read relevant texts and ICAN Pathfinders when preparing
for future examinations.
59
Marking guide
Marks Marks
a) Identifying the different types of working paper files
1 mark each for the 2 types of working paper files identified 2
½ mark each for any 3 examples of content of each working

paper files stated 3 5
b) Outlining the importance of audit working paper file
1 mark each for any 5 points of importance stated 5
c) Explaining conditions that determine the size of working

paper file
1 mark each for any 5 points on conditions that determine

size of audit documentation working papers 5
Total 15
SOLUTION 7
a. Reasons for preparing sufficient and appropriate audit documentation include:

i. Enhancing the quality of the audit;
ii. Facilitating the effective review and evaluation of the audit evidence
obtained and conclusions reached, before the audit report is finalised;
iii. Enabling an experienced auditor, with no previous connection with that
audit, to conduct quality control reviews or other inspections, that is, by
understanding the work that has been performed and the conclusions that
have been reached;
iv. Ensuring members of the audit team are accountable for their work; and
v. Keeping a record of matters of continuing significance to future audits.
b. The advantages of the computer software packages for auditors are as follows:
i. The working papers are neat, easy to read and in standard formats;
ii. There is a lower risk of error by the auditor in processing adjustments;
iii. The audit review process by senior managers or the audit partner can be
carried out remotely, without the necessity for the manager or partner to
visit the client‟s premises to carry out thereview;
iv. Auditors often use computer software (with laptop computers) to improve
the efficiency of preparing audit working papers;
v. Automatic processing of adjustments saves significant time and therefore
saves costs; and
vi. It is easy to store and retrieve relevant information.
60
c. Ownership, custody and confidentiality of audit working papers
The audit firm has ownership of the audit working papers. The working papers
are not a part of the client‟s accounting records and do not belong to the client.
The auditor needs to decide how long to keep the audit files.
ISQC1 requires a minimum period of five years from the date of the audit report,
or group audit report, if later (and relevant).Auditing standards require the
auditor to ensure that working papers are kept safe and that their contents are
kept confidential. Confidential information should only be made available to
third parties in accordance with ethical guidelines and legal requirements.
Examiner‟s report
This question tests candidates‟ knowledge of audit documentation.
About 70% of the candidates attempted the question and their performance was fair.
The commonest pitfall was in part (b) where the candidates did not show the
expected knowledge of computer-based audit packages.
Candidates should familiarise themselves with computer-based audit procedures,

because of their relevance in modern-day auditing. They should also make good use
of the Institute‟s Study Text and Pathfinders.
Marking guide
Marks Marks
a) Explaining why sufficient and appropriate audit
documentation is necessary
1 mark each for 5 reasons why sufficient and appropriate
audit documentation is necessary 5
b) Explaining why computer-based audit packages would be

recommended for documentation
2 marks each for any 3 recommendations of a computer-based

audit packages 6
c) Explaining the responsibility for the ownership custody and

confidentiality of working papers
2 marks for identification of responsibilities for ownership,

custody and confidentiality of working papers 2
2 marks each for explanation of responsibility for ownership,

custody and confidentiality of working papers 2 4
Total 15
61
ICAN/231/Q/B4 Examination No....................
PERFORMANCE MANAGEMENT
the examination hall. You will be stopped from continuing with the examination
and liable to further disciplinary actions including cancellation of examination
result if caught.
3. Do NOT write anything on your question paper EXCEPT your examination
number.
8. A formula sheet and discount tables are provided with this examination paper.
WEDNESDAY, MAY 17, 2023
62
PERFORMANCE MANAGEMENT

QUESTION 1
Vestapricy and Company Limited is a manufacturing outfit located in Port Harcourt.

It produces a tracking device that is attached to motor vehicles. The device is
designed to help locate the whereabouts of stolen motor vehicles within the country.
The company‟s capital (or cash operating cycle) is the length of time between the
payment for purchased materials and the receipt of payment from selling the goods
made with the materials.
The table below gives information extracted from the annual accounts of Vestapricy
and Company limited for the past three years.
Extracts from Vestapricy and Company Limited annual accounts for 31 st

December 2020 to December 2022:
2020 2021 2022
N N N
Inventory:
Raw materials 108,000 145,800 180,000
Work in progress 75,600 97,200 93,360
Finished goods 86,400 129,600 142,875
Purchases 518,400 702,000 720,000
Sales 864,000 1,080,000 1,188,000
Trade receivables 172,800 259,200 297,000
Trade payables 86,400 105,300 126,000
63
Other information is as follow:
(1) All purchases and sales are on credit.
(2) Direct wages:
- 2021: N300,000
- 2022: N250,000
(3) Production expenses:

- 2021: N72,600
- 2022: N171,995
(4) The company‟s policy is that any data that will be used from the statement of
financial position in determining the working capital cycle period will be
average based.
Required:
a. i. Compute the cost of goods sold for 2021 and 2022. (3 Marks)
ii. Calculate the length of the working capital cycle (assuming 365 days
in the year) for 2021 and 2022. (7 Marks)
iii. List the actions that the management of the company might take to reduce
the length of the cycle. (5 Marks)
b. In 2023, the company (Vestapricy) decided to open a new small apple
shop in Owerri to be managed by a shopkeeper. The shopkeeper is
deciding on the number of boxes of special apples it hopes to buy each
day. A box of apples earns a contribution of N400 and costs N250.
Demand of apple is uncertain and could vary from 30 boxes to 10 boxes.
Any apple that is purchased but not sold will be thrown away at the end of
the day.
The shop keeper has decided that he will buy 10 boxes, 20 boxes or 30
boxes each day, and these are the only three options he wants to consider.
Required:
i. Construct the Pay-off table for this business in Owerri. (7 Marks)
ii. How many boxes should the storekeeper purchase if the decision is
based on:
The Maximax decision rule; The Maximum decision rule and The Minimax regret
decision rule? Give reasons for your decisions. (8 Marks)
(Total 30 Marks)
64
QUESTION 2
The local football club has asked for your advice on the number of programmes that
should be printed for each game. The cost of printing and production of programmes
for each game, as quoted by the local printer, is ₦1,000,000 plus ₦400 per copy.
Advertising revenue which has been agreed for the season represents ₦800,000 for
each game.
Programmes are sold for N150 each. A review of sales during the previous seasons
indicates that the following pattern is expected to be repeated during the coming
season of 50 games:
Number of programmes sold Number of games

10,000 5
20,000 20
30,000 15
40,000 10
Programmes not sold at the game are sold as waste paper to a paper manufacturer at
N100 per copy.
Assuming that the four quantities listed are the only possibilities, you are
required to:
a. Prepare a payoff table; (6 Marks)
b. Determine the number of programmes that would provide the highest profit if a
constant number of programmes were to be printed for each game; (4 Marks)
c. Explain why you should buy 30,000 or 40,000 copies, assuming one of these is
the most profitable quantity, despite the fact that the most probable sales are
20,000 copies per game; (2 Marks)
d. Calculate the profit which would arise from a perfect forecast of the numbers of
programmes which would be sold at each game. (4 Marks)
e. Discuss the major limitations at expected value criterion in decision making.

(4 Marks)
(Total 20 Marks)
65
QUESTION 3
Kenny Limited (KL) has been offered a contract that, if accepted, would significantly
increase next year‟s activity levels. The contract requires the production of 20,000 kg
of product X and specifies a contract price of N10,000 per kg. The resources used in
the production of each kg of X include the following:
Resources per kg of X
Labour:
Grade 1 2 hours
Grade 2 6 hours
Materials:
A 2 units
B 1 litre
Grade 1 labour is highly skilled and although it is currently under-utilised in the firm,
it is KL‟s policy to continue to pay grade 1 labour in full. Acceptance of the contract
would reduce the idle time of grade 1 labour. Idle time payments are treated as non-
production overheads.
Grade 2 is unskilled labour with a high turnover, and may be considered a variable
cost.
The costs to KL of each type of labour are
Grade 1 N400 per hour
Grade 2 N200 per hour
The materials required to fulfil the contract would be drawn from those materials
already in stock. Material A is widely used within the firm, and any usage for this
contract will necessitate replacement. Material B was purchased to fulfil an expected
order that was not received, if material B is not used for the contract, it will be sold.
For accounting purposes, FIFO is used. The various values and costs for A and B are:
A B
per unit per litre
(N) (N)
Book value 800 3,000
Replacement cost 1,000 3,200
Net realisable value 900 2,500
A single recovery rate for fixed factory overheads is used throughout the firm, even
though some fixed production overheads could be attributed to single products or
departments. The overhead is recovered per productive labour hour, and initial
estimates of next year‟s activity, which excludes the current contract, show fixed
production overheads of N60,000,000 and productive labour hours of 300,000.
Acceptance of the contract would increase fixed production overheads by
N22,800,000.
66
Variable production overheads are accurately estimated at N300 per productive
labour hour.
Acceptance of the contract would be expected to encroach on the sales and
production of another product. Y, which is also made by KL Limited. It is estimated
that sales of Y would then decrease by 5,000 units in the next year only. However,
this forecast reduction in sales of Y would enable attributable fixed factory overheads
of N5,800,000 to be avoided. Information on Y is as follows:
(per unit)
Sales price N7,000
Labour grade 2 4 hours
Materials: relevant variable costs N1,200
All activity undertaken by KL is job costed using full or absorption costing in order to
derive a profit figure for each contract. If the contract for X is accepted, it will be
treated as a separate job for routine costing purposes. The decision to accept or reject
the contract will be taken in sufficient time to enable its estimated effects to be
incorporated in the next year‟s budget and also in the calculations carried out to
derive the overhead recovery rate to be used in the forthcoming year.
Required:
a. Advise KL on the desirability of the contract (8 Marks)
b. Show how the contract, if accepted, will be reported on the routine job costing
system used by KL (6 Marks)
c. Briefly explain the reasons for any differences between the figures used in (a)
and (b) above. (6 Marks)
(Total 20 Marks)
QUESTION 4
Tayo Limited is a civil engineering company based in Benin. Contracts are carried out
under the supervision of project managers who are sent out from Head Office and
remain on site for the duration of the contract. The project manager recruits local
labour, and arranges for plant and materials to be provided by Head Office.
Some time ago, the company successfully tendered for two contracts which have now
become mutually exclusive. It is currently considering which of these to accept. Both
jobs would last for 12 months.
67
The following information about each contract is available:
Abuja Lagos
₦‟000 ₦‟000
Contract price 17,000 18,000
Penalty payment (i.e. a condition of the tender if
offered the job and it is not accepted) 1,600 800
Materials required:
In store (at cost) 2,000 2,400
Contracted for - 3,600
To be ordered (at current cost) 4,000 3,400
Labour required:
Project manager‟s salary 1,000 1,000
Travel, lodgings etc. 400 400
Local recruitment 7,000 5,600
Head office:
Plant depreciation 600 600
Interest on plant 200 200
General administration 800 800
Notes:
(i) The materials which would be used on the Abuja job have increased in money
value by 60% over their purchase cost. Tayo Limited has no other use for these
materials on any other contract apart from the Abuja one, but they could be re-
sold to other companies in the industry at 90% of their value. Transportation
and other selling costs would further decrease the cash inflow from the sale by
16.67% of the sales price.
(ii) The materials for the Lagos job have no other obvious use, but could be sold for
scrap if the contract were cancelled. The scrap value would be 10% of cost, and
costs of transport, etc. would be paid by the scrap merchant. It is likely,
however, that the materials could be used next year on another contract in
substitution for a different material normally costing 20% less than the cost of
the materials to be used on the Lagos contract.
(iii) Local labour can be hired as and when required.
(iv) Plant is depreciated on a straight line basis, and the interest on plant charge is
a nominal cost added for accounting purposes.
(v) The two contracts would require similar plant, although more plant would be
required for the Lagos than for the Abuja job. The plant not required on the
Abuja job would be sub-contracted out by Head Office for ₦200,000 per annum.
68
(vi) Head office administration costs are fixed at ₦2,500,000 for the coming year.
This excludes project managers‟ salaries.
Required:
a. Present the data to management in a form which will assist in making the
decision as to which job to undertake. Provide notes to explain the
principles which have been used in selecting the data and to support any
calculations made. (12 Marks)
b. Comment on the appropriateness of the approach used in your analysis.

(4 Marks)
c. List briefly any other factors which ought to be considered before finally
making the decision in this case. (4 Marks)
(Total 20 Marks)
QUESTION 5
A company is considering whether or not to invest in any of the two projects where
the initial cash investment would be N13,000,000 for A and N14,000,000 for B. The
project would have a five-year life, and the estimated annual cash flows are as
follows:
Project A
Year Cash inflows Cash outflows
N N
1 6,000,000 3,000,000
2 8,000,000 4,000,000
3 10,000,000 4,000,000
4 9,000,000 3,000,000
5 6,000,000 3,000,000
Total 39,000,000 17,000,000
Project B
Year Cash inflows Cash outflows
N N
1 10,000,000 5,000,000
2 9,000,000 4,000,000
3 8,000,000 3,000,000
4 8,000,000 3,000,000
5 4,000,000 2,000,000
Total 39,000,000 17,000,000
69
The company cost of capital is 10%.
The estimates of cash outflows are considered fairly reliable. However, the estimates
of cash inflows are much more uncertain. Several factors could make the annual cash
flows higher or lower than expected.
Factor 1: There is a 20% probability that government measures to control the Industry
will reduce annual cash inflows by 25%.
Factor 2: There is a 30% probability that another competitor will also enter the
market: this would reduce the estimated cash inflows by 10%.
Factor 3: There is a 40% probability that demand will be stronger than expected. The
company would not be able to supply more products to the market, but it would be
able to sell at higher prices and cash inflows would be 5% higher than estimated.
Required:
a. Calculated the expected net present value of the two projects. (10 Marks)
b. Which of the Projects will be more profitable? (5 Marks)

(Total 15 Marks)
QUESTION 6
TK is a theme park. The following information is available for the forthcoming month:
Forecast daily ticket sales and prices

Ticket Price per
sales ticket
Pre-booked discounted ticket 1,500 N580
Standard ticket 8,000 N780
Premium family ticket (admits 4 people) 675 N3,700
The theme park will be open for 30 days in the month.
Costs
Variable costs per person per day are forecast to be N2050
Fixed costs for the month are forecast to be N130,000,000
Pricing information
The sales of pre-booked discounted tickets and standard tickets will be restricted to
1,500 and 8,000 per day respectively for the forthcoming month. It is forecast that all
of these tickets will be sold.
70
A premium family ticket admits four people to the theme park and allows them to go
to the front of the queues in the theme park. The price of a premium family ticket has
been set at N3,700 in order to maximise the profit from the sale of these tickets for
the month.
Market information shows that for every N100 increase in the selling price of a
premium family ticket, the demand would reduce by 25 tickets. For every N100
decrease in the selling price, the demand would increase by 25 tickets.
The theme park has adequate capacity to accommodate any level of demand for the
premium family tickets. It is to be assumed that four people would always be
admitted on every premium family ticket sold.
Sales of the different ticket types are independent of each other.
Equipment hire
TK is considering hiring some automated ticket reading equipment for the
forthcoming month. The hire of this equipment would increase fixed costs by
N5,000,000 for the month. However, variable costs per person would be reduced by
8% during the period of the hire.
Required:
a) Calculate the financial benefit of hiring the equipment for the forthcoming
month given its impact on variable cost and the price charged for premium
family tickets. (11 Marks)
b) It has now been realised that a competing theme park is planning to offer
discounted ticket prices during the forthcoming months. It is thought that this
will reduce the demand for TK‟s standard tickets. TK will not be able to reduce
the price of the Standard Tickets for the forthcoming month.
Discuss the sensitivity of the decision to hire the equipment to a change in the
number of standard tickets sold per day. (Note: your answer should include
the calculation of the sensitivity). (4 Marks)
(Total 15 Marks)
71
QUESTION 7
Kola Plc produces and sells a brand of security padlock keys. Its budget for next year
is as follows:
N‟000 N‟000
Sales 18,000
Materials (15,000 kg) 1,800
Labour (42,000 hours) 7,560
Variable production overheads (absorbed
on labour hours) 2,520
Fixed production overheads (absorbed on
labour hours) 1,260
Administration overheads (absorbed on
labour hours) 2,520 15,660
Profit 2,340
When reviewing the budget, the company is approached by a customer asking for a
quote for a special security padlock keys - superior lock. Kola Plc is a bit
apprehensive about the order since they tried a similar venture at the end of last year
and made heavy losses as shown below:
N N
Sales (200 units) 960,000
Materials (500kg) 54,000
Labour (5,000 hours) 840,000
Variable production overheads (N42/hour) 210,000
Fixed production overheads (N24/hour) 120,000
Administration overheads - (N36/hour) 180,000 1,404,000
Loss (444,000)
Further research showed that the time taken for the first 50 units of these was 1,800
hours and the first 100 units took 3,000 hours.
The customer is insistent that Kola Plc at least quotes a price for his requirement of
400 units though part of Kola plc‟s reluctance to do so arises from the fact that the
order would divert labour away from the planned production of the regular padlock
keys and the company has found it impossible to recruit more staff. If the contract is
taken on, the same type of material would be used as for the regular padlock keys,
fixed production overheads of N150,000 and N30,000 of administration costs would
be incurred.
Required:
Calculate the minimum price Kola plc should quote for the 400 units of the special
padlock keys. (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
4
x Transaction Cost x Variance of Cash flows
𝑆𝑝𝑟𝑒𝑎𝑑 = 3 x
Interest rate as a proportion
Annuity Table
Present value of an annuity of 1 i.e. 1 - (1 + r)-n
r
Where r = discount rate
n = number of periods
Discount rate (r)

Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1
2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2
3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2.487 3
4 3·902 3·808 3.717 3·630 3.546 3.465 3·387 3·312 3·240 3·170 4
5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3.890 3·791 5
6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4.486 4·355 6
7 6·728 6.472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7
8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8
9 8·566 8·162 7·786 7.435 7·108 6·802 6·515 6·247 5·995 5·759 9
10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6.418 6·145 10
11 10·368 9·787 9·253 8·760 8·306 7·887 7.499 7·139 6·805 6.495 11
12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7'161 6·814 12
13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13
14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14
15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1
2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2
3 2.444 2.402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3
4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2.690 2·639 2.589 4
5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5
6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3.498 3.410 3·326 6
7 4·712 4·564 4.423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7
8 5·146 4·968 4.799 4·639 4.487 4·344 4·207 4·078 3·954 3·837 8
9 5·537 5·328 5·132 4·946 4·772 4·607 4.451 4·303 4·163 4·031 9
10 5·889 5·650 5.426 5·216 5·019 4·833 4·659 4.494 4·339 4·192 10
11 6·207 5·938 5·687 5.453 5·234 5·029 4·836 4·656 4.486 4·327 11
12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4.439 12
13 6·750 6.424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13
14 6·982 6·628 6·302 6·002 5·724 5.468 5·229 5·008 4·802 4·611 14
15 7·191 6·811 6.462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15
.
74
75
SOLUTION 1
(a) i. Computation of Cost of goods sold for 2021 and 2022
2021 2022
N N
Opening raw Material 108,000 145,800
Materials Purchased 702,000 720,000
Cost of material available 810,000 865,800
Less Closing Material 145,800 180,000
Cost of material used 664,200 685,800
Direct Wages 300,000 250,000
Prime Cost 964,200 935,800
Production expenses 72,600 171,995
1,036,800 1,107,795
Add Opening work in progress 75,600 97,200
Less Closing work in Progress (97,200) (93,360)
Production costs 1,015,200 1,111,635
Add opening Finished goods 86,400 129,600
Less Closing finished goods (129,600) (142,875)
Cost of goods sold 972,000 1,098,360
i. Length of working capital cycle (Assuming 365 days in a year) for 2021 and
2022
Working capital cycle for 2021

Holding Period for raw material stock = [(Opening +Closing )/2] x 365
Purchases
= [(108,000 + 145,800)/2] x 365 = 66 days
702,000
Production period for Work in Progress = [(Opening +Closing) /2] x 365
Cost of goods sold
= [(75,600 + 97,200)/2] x 365 = 33 days
972,000
Holding period for Finished goods = [(Opening +Closing )/2] x 365
Cost of goods sold
[(86,400 + 129,600)/2] x 365 = 41 days
972,000
Collection period for receivables = [(Opening +Closing )/2] x 365
Sales
= [(172,800 + 259,200)/2] x 365 = 73 days
1,080,000
Less Payment period for payable = (Opening +Closing)/2] x 365
Purchases
= (86,400 + 105,300)/2 x 365 = (50 days)
702,000
Working capital cycle 163 days
Working capital cycle for 2022
76
Holding Period for raw material stock = [(Opening +Closing)/2] x 365
Purchases
= [(145,800 + 180,000)/2] x 365 = 83 days
720,000
Production period for Work in Progress = [(97,200 + 93,360)/2 x 365 = 32 days
1,098,360
Holding period for Finished goods = [(Opening +Closing)/2] x 365
Cost of goods sold
= [(129,600 + 142,875)/2] x 365 = 45 days
1,098,360
Collection period for receivables = (Opening +Closing)/2] x 365
Sales
= [(259,200 + 297,000)/2] x 365 = 85 days
1,188,000
Less Payment period for payable = [(Opening +Closing )/2] x 365
Purchases
= [(105,300 + 126,000)/2] x 365 = (59 days)
720,000
Working capital cycle 186 days
(iii) Actions that the management of the company might take to reduce the
length of the cycle:
 Reduce the period raw materials are held in inventory by adopting a JIT
system
 Improve the throughput of the products by adopting efficient
manufacturing equipment and process
 Reducing finished goods holding period by producing to order.
 Reducing the length of time customers take to pay by offering early
settlement discount.
 Negotiate for longer credit period with suppliers
 Company need to improve on sales strategy to sell more maybe open new
markets or they should plan to reduce the sales target to reduce the
amount of finished goods left at the end of the year.
(b)i. Payoff Table

Constructing the Payoff table
Course of Action Demand of 10 boxes Demand of 20 boxes Demand of 30 boxes
N N N
Buy 10 boxes (4000 – 2500)=1500 (4000 - 2500)=1500 (4000 – 2500)=1500
Buy 20 boxes (4000 – 5000)= (1000) (8000 – 5000)=3000 (8000 – 5000)=3000
Buy 30 boxes (4000 – 7500)= (3500) (8000 – 7500)= 500 (12000 – 7500)=4500
77
Payoff table
N N N
Buy 10 boxes 1500 1500 1500
Buy 20 boxes (1000) 3000 3000
Buy 30 boxes (3500) 500 4500
ii. Number of boxes based on maximum decision rule

Course of action Maximum of maximum returns
Buy 10 boxes 1500
Buy 20 boxes 3000
Buy 30 boxes 4500
Decision: Buy 30 boxes

Number of boxes based on maximin decision rule
Course of action Maximum of minimum returns
Buy 10 boxes 1500

Buy 20 boxes (1000)
Buy 30 boxes (3500)
Decision: Buy 10 boxes

Minimax regret decision rule
Constructing the regret Payoff table

N N N
Buy 10 boxes (1500 – 1500)= 0 3000 – 1500=1500 4500 – 1500)=3000
Buy 20 boxes 1500 – (-1000) = 2500 (3000 – 3000)= 0 4500 – 3000)=1500
Buy 30 boxes 1500 – (-3500) =5000 3000 – 500= 2500 4500 – 4500= 0
Regret Payoff table

N N N
Buy 10 boxes 0 1500 3000
Buy 20 boxes 2500 0 1500
Buy 30 boxes 5000 2500 0
Number of boxes based on Minimax regret decision rule

Course of action Minimum of Maxi regret returns
N
Buy 10 boxes 3000
Buy 20 boxes 2500
Buy 30 boxes 5000
Decision: Buy 20 boxes which delivers minimum of the maxi regrets.
78
Examiner‟s report
This is a compulsory question that is in two parts. The first part tests candidates
ability to determine company‟s cost of goods sold and working capital cycle period.
The second part is on decision making under situation of uncertainty as it affects
maxi-max decision rule, mini-max decision rule and maxi-min regret decision rule.
The question being a compulsory question was well attempted.
Performance of the candidates was average.
The major pitfalls are the inability of most candidates to use average stock in
determining the working capital cycle and correctly set out the payoff matrix table.
It is hereby recommended that candidates should use ICAN study manual and other
Performance Management text books in preparing for future Institute‟s examination.
Marking guide
Mark Marks
s
a) i Cost of goods sold 2021 and 2022
(30 ticks @1/10 mark) 3
ii Length of working capital cycle for 2021 and 2022
(28 ticks @1/4 mark) 7
iii Factors that will reduce length of working capital
cycle
(any 5 points @1 mark) 5 15
b) i Pay off table
(21 ticks @1/3 mark) 7
ii  Maximax (5 ticks @½ mark) 2½
 Maximax (5 ticks @½ mark) 2½
 Minimax Regret (6 ticks @½ mark) 3 8 15 30
SOLUTION 2
PAY OFF TABLE (N600)

a. Course of Prob. State of Nature (Demand)
Action 10,000 20,000 30,000 40,000
10,000 0.1 2,700 2,700 2,700 2,700
20,000 0.4 5,700 5,200 5,200 5,200
30,000 0.3 8,700 8,200 7,700 7,700
40,000 0.2 11,700 11,200 10,700 10,200
79
Cost of copies Cost of Unsold copies N600
a. N200 + (250 x 10) + (300 x 0) = 2,700
b. N200 + (250 x 10) + (300 x 0) = 2,700
c. N200 + (250 x 10) + (300 x 0) = 2,700
d. N200 + (250 x 10) + (300 x 0) = 2,700
e. N200 + (250 x 10) + (300 x 10) = 5,700
f. N200 + (250 x 20) + (300 x 0) = 5,200
g. N200 + (250 x 20) + (300 x 0) = 5,200
h. N200 + (250 x 20) + (300 x 0) = 5,200
i. N200 + (250 x 10) + (300 x 20) = 8,700
j. N200 + (250 x 20) + (300 x 10) = 8,200
k. N200 + (250 x 30) + (300 x 0) = 7,700
l. N200 + (250 x 30) + (300 x 0) = 7,700
m. N200 + (250 x 10) + (300 x 30) = 11,700
n. N200 + (250 x 20) + (300 x 20) = 11,200
o. N200 + (250 x 30) + (300 x 10) = 10,700
p. N200 + (250 x 40) + (300 x 0) = 10,200
State of Nature (N‟000)

Course of Action Prob. 10,000 20,000 20,000 40,000
10,000 0.1 N270 N270 N270 N270
20,000 0.4 N2,280 N2,080 N2,080 N2,080
30,000 0.3 N2,610 N2,460 N2,310 N2,310
40,000 0.2 N2,340 N2,240 N2,140 N2,040
b. Maximax Decision Rule

course of Action Maximum Profit
10,000 270
20,000 2,080
30,000 2,310
40,000 2,040
*Least Cost yields highest profit

Decision: 10,000 copies
c. The production or printing of the programmes involves incurring fixed cost. The
larger the volume printed, the lower will be the cost of printing per copy.
Therefore, printing 30,000 or 40,000 copies will be an optimistic decision
informed by the need to maximise the benefit that is derivable from the fixed
cost of printing.
80
d. Profit from perfect forecast: N‟000
Result without perfect information (270 + 2080 + 2310 + 2040) (6,700)
Result with perfect information (270 + 270 + 270 + 270) (1,080)
5,620
e. Limited of expected value criteria

i. It depends on subjective probability
ii. Only useful for repetitive outcome and not for one-off
iii. The expected value might not be one of the possible outcome
iv. It does not give a view of the risk involved
v. it is a weighted average of all possible outcomes.
Examiner‟s report
The question is on decision making under uncertainty and tests candidates‟ ability to
answer questions on maxi-max decision rule and decision on perfect information.
The question was well attempted.
The Performance of the candidate was average.
The major pitfall observed was the inability of candidates to set out the Payoff matrix
table and decipher the process of computing values when there is perfect
information.
It is hereby recommended that candidates should use ICAN study manual on

Performance Management when preparing for future Institute‟s examination.
Marking guide
a. Pay off table
 15 ticks @1/5 mark) 3
 15 ticks @1/5 mark) 3 6
b. Number of programmes
(8 ticks @½ mark) 4
c. Most profitable quantity
(4 points @½ mark) 2
d. Profit from perfect forecast
e. Major Limitations
(4 points @1 mark) 4 20
81
SOLUTION 3
(a) Relevant costs and relevant revenues from acceptance of contract

(₦‟000) (₦‟000)
Sales revenue (20,000 kg at ₦10,000) 200,000
Relevant costs:
Labour (20,000 × 6hrs × ₦200) 24,000
Materials
A (20,000 × 2 units × ₦1,000 replacement cost) 40,000
B (20,000 × 1 litre × 2,500 NRV) 50,000
Variable overheads b (20,000 × 8hrs × ₦300) 48,000
162,000
Add increase in fixed costs 22,800
Net incremental costs 184,800
Add
Loss on product Y
Lost contributionc (5,000 × ₦3,800) 19,000
Fixed costs avoidedd (5,800) 13,200 198,000
Excess of relevant revenues over relevant costs 2,000
Advice: In view of the fact that the Contract achieved excess of relevant revenue over
relevant cost, the Contract is therefore desirable.
Notes
i. Grade 1 labour is not an incremental cost.
ii. Variable overheads vary with production labour – 8 labour hours per unit are
used, causing variable overheads to increase by ₦300 per hour. Grade 1 labour
is not an incremental cost, but it does cause variable overheads to increase.
iii. Lost contribution
Selling price 7,000
Less
Grade 2 labour (4 hrs × ₦200) 800
Materials 1,200
Variable overheads (4 hrs × ₦300) 1,200 3,200
Contribution 3,800
iv. Assumed fixed costs represent incremental costs or incremental savings.
82
(b) To calculate the product cost for job costing purposes it is necessary to
calculate the fixed overhead rate. The calculation is as follows:
Fixed overheads Director labour hours
Initial budget ₦60,000,000 300,000
Plus contract ₦22,800,000 160,000a
Less product Y (₦5,800,000) (20,000) = (4hrs × 5,000)
₦77,000,000 440,000
Fixed overhead absorption rate = ₦175/hour (₦77,000,000/440,000hrs).

Note
a
The fixed overhead rate is per productive labour hour. Grade 1 labour hours
represent additional productive labour hours. If the contract is not accepted
then grade 1 labour hours will be non-productive. Total productive hours
relating to the contract = 2,000 × (2 hours + 6 hours) = 160,000 hours
The job costing contract will be reported as follows:

(₦000) (₦000)
Direct labour:
Grade 1 (20,000×2hrs×₦400) 16,000
Grade 2 (20,000×6hrs×₦200) 24,000 40,000
Direct materials:
A (20,000×2units×₦800) 32,000
B (20,000×1litre×₦3,000) 60,000 92,000
Variable overheads
20,000×8hrs×₦300 48,000
Fixed overheads
20,000×8hrs×₦175 28,000 76,000
Total cost (208,000)
Sales revenue 200,000
Reported loss (8,000)
c. The difference between the relevant cost profit of ₦2,000,000 and the routine
cost loss of ₦8,000,000 arises because of the different ways in which costs are
determined in each statement. A reconciliation and summary of the difference is
as follows:
Difference
₦000 Explanation
Grade 1 labour 16,000 Not charged as a relevant cost because it is
„sunk‟ and will be incurred anyway.
Material A (8,000) Replacement cost is relevant but book value
is the routing charge.
Material B 10,000 Book value overstate the charge – realisable
value is the relevant cost.
83
Fixed overheads 5,200 Routine costing passes on overheads that
would be incurred anyway. The relevant cost
is simply the incremental cost.
Effect on product Y (13,200) Routine costing ignores the loss of
contribution from Y – relevant costing takes it
into account
10,000
Examiner‟s report
The question test‟s candidate‟s ability to answer questions on relevant costing.
The Performance was above average.
The major pitfall observed was candidate inability to decipher relevant costs of
material, labour and overhead cost elements in situations involving replacement
costs, realisable value of materials and replacement costs.
It is hereby recommended that candidates should use ICAN Study Text on

Performance Management when preparing for future Institute‟s examination.
Marking guide
a Desirability of the contract
b Routine job casting
c Differences between (a) and (b)
(Any 4 points @1½ marks) 6 20
SOLUTION 4
TAYO LIMITED
a) Consequences of undertaking the:
Abuja Lagos
Contract contract
₦‟000 ₦‟000 ₦‟000 ₦‟000
Contract revenue 17,000 18,000
Sale of materials held for the Abuja contract
(Note 1) 2,400
Saving in material purchases by alternative use
of materials for Lagos contract (note 2) 4,800
Hire of plant 200 _______
₦22,000 ₦20,400
84
Incremental costs:
Materials to be ordered (note 3) 4,000 3,400
Project manager‟s travel, lodging, etc. 400 400
Local labour 7,000 5,600
Penalty for cancelling the other contract 800 1,600
12,200 11,000
Excess of revenue/savings over
incremental costs ₦9,800 ₦9,400
Notes:
i. If the Lagos job is undertaken, sales of materials no longer required for the
Abuja job would be:
₦‟000
Current market price = ₦2,000 × 1.60 = 3,200
Sales value = ₦3,200 × 90% 2,880
Less transport cost (16.67%) 480
Net sales revenue 2,400
ii. If the Abuja job is undertaken, the materials for the Lagos job might be re-used
on a different contract, thereby saving the purchase of additional materials:
₦‟000
Materials held 2,400
Contracted for 3,600
Cost of unwanted materials 6,000
Saving in purchases on different contract (80%) ₦4,800
iii. The materials contracted for to carry out the Lagos job must be paid for
whatever happens. Although not yet received, they must be paid for whichever
(if either) contract is undertaken. It is therefore not an incremental cost
chargeable to the Lagos contract.
For similar reasons, materials already held are not an incremental cost to their
respective contracts. The alternative use of materials not required, is however,
significant - and this has been taken into account on the revenue side of the
analysis.
iv. It is assumed that the project manager‟s salary is a fixed cost, whichever
contract (if either) is undertaken. Incremental labour costs are therefore travel,
lodgings etc. and local labour.
v. The penalty cost of failing to undertake one contract should be treated as a

consequential cost of undertaking the other contract.
vi. The excess of revenue/savings over incremental costs calculated for each
contract shows the comparative effect on profits of undertaking each job in
preference to the other. The difference between the two figures (₦9,800,000
85
and ₦9,400,000) shows that there is a difference between the two projects of
₦400,000 in favour of the Abuja job.
b. The approach used has assumed that one project or the other will be
undertaken. Some costs have already been incurred (some materials, plant);
other costs have been committed (project manager‟s salary, head office
administration) and others are notional (interest on plant).
These are not relevant to any decision about the future action. The only relevant
considerations should be:
i. future revenues or cash savings as a consequence of the decision;

ii. future costs, incurred as an additional expense as a consequence of the
decision.
In the situation in part (a), incremental revenues are the revenues from the
contract undertaken, alternative uses of materials held but not required and hire
of plant. Incremental costs are only those additional costs which would be
incurred as a result of the decision to undertake one of the contracts.
The cost accounting profit or loss recorded for each contract might be:
Abuja: ₦17,000,000 – ₦16,000,000 = ₦1,000,000
Lagos: ₦18,000,000 – ₦18,200,000 = (₦200,000)
These figures are irrelevant to a decision because the costs include past,
committed or notional costs, and other revenues and penalty costs to the company
are ignored.
c) Other factors to consider are:

i. the constraints on working which make the contract mutually exclusive. If
there is a shortage of labour, funds etc. it might be possible to overcome
and carry out both projects;
ii. the likelihood of another contract being offered for the same period of
time, which is more profitable than either the Abuja or Lagos jobs;
iii. loss of goodwill and future contracts by not undertaking either project;
iv. reliability of the prospective customer in each contract
v. reliability of costs forecasts, labour availability etc. on both contracts. The
net difference between the two jobs, ₦400,000, is relatively small and
sensitivity/risk analysis will be very important;
vi. the preference for the Lagos contract (by ₦400,000) has assumed that the
alternative use for the Lagos contract materials will exist. It is only a
likelihood, however. Failure to obtain this saving would shift the
preference strongly in favour of accepting the Lagos job.
86
Examiner‟s report
The question test‟s candidates ability to answer questions on relevant costing
and decision making.
The major pitfall observed was candidates‟ inability to decipher relevant costs of
material, labour and overhead in situations involving replacement and historical
costs.
It is hereby advised that candidates should use ICAN study manual on Performance
Management when preparing for future institute‟s examination.
Marking guide
a Date to assist Decision Making
b Comment on Appropriations
(Any 4 points @ 1mark) 4
c List of factors
(Any 4 points @ 1mark) 4 20
SOLUTION 5
a. Calculate the expected net Present value of the two Projects

Computation of joint Probability distribution
S/N Factor 1 Factor 2 Factor 3 Workings Joint
Probability
1 YES YES YES 0.2 x 0.3 x 0.4 0.024
2 YES YES NO 0.2 x 0.3 x 0.6 0.036
3 YES NO NO 0.2 x 0.7 x 0.6 0.084
4 NO NO NO 0.8 x 0.7 x 0.6 0.336
5 NO NO YES 0.8 x 0. 7 x 0.4 0.224
6 NO YES YES 0.8 x 0.3 x 0.4 0.096
7 YES NO YES 0.2 x 0.7 x 0.4 0.056
8 NO YES NO 0.8 x 0.3 x 0.6 0.144
Total 1.000
87
Impact on inflow
S/N Joint Inflow impact Result Final
Probability expected
value
1 0.024 1 - 0.25 -0.10 + 0.05 0.70 0.0168
2 0.036 1 -0.25 – 0.10 0.65 0.0234
3 0.084 1 – 0.25 0.75 0.0630
4 0.336 1-0.0 1.00 0.3360
5 0.224 1 +0.05 1.05 0.2352
6 0.096 1 -0.10+ 0.05 0.95 0.0912
7 0.056 1 – 0.25 + 0.05 0.80 0.0448
8 0.144 1 – 0.10 0.90 0.1296
1.000 0.9400
Thus the EV of considering the 3 factors is 0.94. Therefore the NPV of Project A
and B are:
Project A
Year Cash inflow EV of Cash Net Discount PV of cash
Cash outflow Cash flow rate 10% flow
flow
N‟000 N‟000 N‟000 N‟000 N‟000
0 - (13000) (13,000) 1.000 (13000)
1 6000 x 0.94 5640 (3000) 2640 0.909 2399.76
2 8000 x 0.94 7520 (4000) 3520 0.826 2907.52
3 10000 x 0.94 9400 (4000) 5400 0.756 4002.40
4 9000 x 0.94 8460 (3000) 5460 0.683 3729.18
5 6000 x 0.94 5640 (3000) 2640 0.621 1639.44
NPV +1678.30
Project B
Year Cash inflow EV of Cash Net Cash Discount PV of cash
Cash flow outflow flow rate 10% flow
N‟000 N‟000 N‟000 N‟000 N‟000
0 - (14000) (14,000) 1.000 (14000)
1 10000 x 0.94 9400 (5000) 4400 0.909 3999.60
29000 x 0.94 8460 (4000) 4460 0.826 3683.96
38000 x 0.94 7520 (3000) 4520 0.756 3417.12
48000 x 0.94 7520 (3000) 4520 0.683 3087.16
54000 x 0.94 3760 (2000) 1760 0.621 1092.96
NPV +1280.80
b. Project A will be more profitable with a higher NPV of N1,678,300
88
Examiner‟s report
The question test‟s candidates‟ ability to provide solutions on investment appraisal
decision with sensitivity components.
The major pitfall observed was the candidates‟ inability to decipher the sensitivity
issues that bother on factors that affect the cash inflows for both Projects A and B.
Management when preparing for future Institute‟s examination.
Marking guide
a. Expected Net Present Value

 Joint Probability
(9 ticks @1/6 marks) 1½
 Impact on cashflow
(9 ticks @1/6 marks) 1½
 (7 ticks @1 mark) 7 10
b. The more profitable project
(10 ticks @½ mark) 5 15
SOLUTION 6
a) Current Position
Particulars Pre-booked Standard Premium Family
Sales Price per ticket ₦580 ₦780 ₦3,700
No of ticket 1,500 8,000 675
Monthly sales in quantity 30 x 1500 =45,000 240,000 20,250
Monthly Fixed Costs N130,000,000

Determination of Optimal price of Premium family:
P = a + bx
Where a = Maximum Price at which no Premium Ticket will be sold:
b = Changes in P = Price Elasticity
Changes in X
Marginal cost = Variable Cost = N2050 x 0.92 = N1886

100
b  4
 25
89
Therefore:
p  a  bx
P  a  4x
3,700  a  4675 
 a  2700
a  3700  2700
a  6,400. Therefore P  6,400  4 x
Converting to Total Revenue

TR=P x Q
6,400  4 x x
 6,400 x  4 x 2
TR
MR   6,400  8 x
x
MC  VC  1886
Pr ofit is max imized where
MR  MC
6,400  8 x  1,886
 8 x  1,886  6,400
 8 x  4,514
x  4,514 /  8
x  564units
Contribution: Pre-booked Standard Premium
Ticket Ticket
Price 580 780 6,400
Variable Cost (1,886) (1,886) (1,886)
(1,306) (1,106) 4.514
Tickets sold per month 45,000 240,000 16,920
(58,770,000) (265,440,000) (76,376,880)
Total Quantity for the month 1500 x 30=45,000; 8,000 x 30=240,000; 564 x
30=16,920
Total Contribution
Prebooked Ticket (58,770,000)

Standard Ticket (265,440,000)
Premium Ticket 76,376,880
(247,833,120)
Decision: No financial benefit unless it is undertaken for corporate
social responsibility
90
b. Sensitivity Analysis
Variable Cost Savings from Standard Ticket [(2,050 – 1,886) x 8,000 x 30]
= 39,360,000
Hiring Cost of equipment = (5,000,000)
34,360,000
Examiner‟s report
The question tests candidates‟ ability to provide solutions on optimal pricing,
marginal cost and sensitivity implication on hire of ticketing equipment.
The major pitfall observed was the candidates‟ inability to decipher the method
to be used to compute the marginal revenue as well as determine the sensitivity
components of hire of the ticketing equipment.
Management when preparing for future Institute‟s examination.
Marking guide
a Financial benefit and Premium Price Charged

b Sensitivity Analysis
(4 ticks @1 mark) 4 15
SOLUTION 7
Working Notes
 The contract time for the 400 units is calculated using the learning curve
technique. The company has already produced 200 units and now needs to
produce another 400, i.e. 600 in total.
 The learning rate is computed as follows:

Cumulative Cumulative Cumulative Average
Quantity Hours Hours per unit
50 1,800 36
100 3,000 30
1
The learning rate is therefore 30/36 = 83 /3%
 The contract time can now be determined using the learning curve formula:
Y = axb
91
Where:
Y = Cumulative average time for the cumulative output of 600 units
A = the average time for the first batch i.e. 36 hours
Output level desired 600

x= = = 12
Number of units in the 1st bacth 50
Log of .83333
b= = −0.263
Log of 2
:. Y = 36(12)-0.263 = 18.73 hours
Total hours for the 600 units= 600 x 18.73 = 11,238 hours
Less: Total hours for the first 200 units

already produced 5,000 hours
Hours now required 6,238 hours
 Contribution per labour hour. This is necessary because labour is in short supply.
Any labour hour used on the special order entails opportunity cost. From the
budget statement.
N‟000 N‟000
Sales 18,000
Materials 1,800
Labour 7,560
VOH 2,520 11,880
Contribution 6,120
Budgeted labour hours 42,000
Contribution/hour = 6,120,000 ÷ 42,000 = ₦145.71
Calculation of minimum price

₦
Materials 1,000kg x N1,800,000 = 120,000
15,000
Labour 6,238 x 7,560,000 = 1,122,840

42,000
VOH 6,238 x 2,520,000 = 374,280

42,000
Direct fixed costs = 180,000
Opportunity cost of
labour 6,238 x ₦145.71 908,939
Minimum price N2,706,059
92
Examiner‟s report
This question tests candidates‟ ability to use relevant costing approach to determine
the minimum price to quote for special security padlock considering the learning
effect on labour hours.
The question was fairly attempted.
However, the performance was average.
The major pitfall observed was candidate inability to take note of the implication of
learning effect on labour and variable overhead cost.
It is hereby recommended that candidates should use ICAN study manual on

Performance Management when preparing for future Institutes‟ examination.
Marking guide
The Minimum Price
(15 ticks @1 mark) 15
93

1. Check your pockets, purse, mathematical set, etc. to ensure that you do not
have prohibited items such as telephone handset, electronic storage device,

number.
7. All solutions should be written in BLUE or BLACK INK. Any solution written
in PENCIL or RED INK will not be marked.
THURSDAY, MAY 18, 2023

94


QUESTION 1
a. The following information relates to the accounts of Dovet State Government
for the year ended December 31, 2022:
DR CR
N‟M N‟M
Land and buildings (cost) 387,500
Long-term investments 187,500
Equipment and furniture 67,500
Accumulated depreciation:
- Land and building 40,000
- Motor vehicles 30,000
- Equipment and furniture 21,250
Motor vehicles (cost) 145,000
Federation account allocation 287,500
VAT allocation 87,500
Grants from Federal Government 33,750
Internally generated fund 97,500
Grant from donor agency 25,000
Personnel emolument 125,000
Maintenance of premises 5,000
Consolidated Revenue Fund charges 32,500
Overhead expenses 25,000
Miscellaneous expenditure/income 37,500 61,250
Loan notes 250,000
Current assets/liabilities 38,750 36,250
Consolidated Revenue Fund (CRF) 81,250
Total 1,051,250 1,051,250
95
The following additional information is also relevant:
(i) Loan interest outstanding at the end of the year was N12.5 billion.
(ii) Depreciation on tangible assets is charged at the following rates on
cost:
- Building is 5% (cost of land is N250 billion)
- Motor vehicles is 20%
- Equipment and furniture is 15%
(ii) A building costing N12.5 billion with accumulated depreciation of N5
billion was sold for N11.25 billion. This transaction has not been adjusted
in the accounts.
(iv) Interest on receivable amounted to N10 billion.
You are required to prepare:

i. Statement of financial performance of the State for the year ended
December 31, 2022. (10 Marks)
ii. Statement of financial position as at December 31, 2022.
(12 Marks)
b. Financial statements provide information that meets a number of qualitative
characteristics in financial reporting.
Required:
Discuss FOUR characteristics of financial reporting. (8 Marks)
(Total 30 Marks)
QUESTION 2
a. The revised Local Government Financial Memoranda (1991), spells out the
administrative guidelines, the existing checks and balances and roles of officers
of local governments.
Required:
Identify THREE objectives and FIVE contents of Local Government Financial
Memoranda. (8 Marks)
96
b. Bureau of establishments and training of Waso State awarded a contract to one
of its Government Business Entities (GBE), Unity Enterprises for the supply of
stationery for use in the various MDAs in the State. It had the following
transactions for the year ended December 31, 2020:
(i) The Bureau issued purchase order to Unity Enterprises for the supply of
1,250,000 reams of duplicating papers at the cost of N1,200 per unit.
The item was supplied as specified five months after the award on May
31, 2020;
(ii) Another award for the supply of 5,000 training bags to Unity Enterprises
at the cost of N2,500 per bag. The invoiced amount was fully paid and
the training bags delivered on June 30, 2020;
(iii) During the year, 1,100,000 reams of duplicating papers were issued
from store to user departments and 4,500 training bags were also
issued from store for training activities during the year;
(iv) At physical verification of inventory carried out, 25,000 reams of the

duplicating papers were damaged by floodwater; and
(v) The bureau transferred 25,000 reams of the duplicating papers to its
outstation office during the year.
Required:
Record the above transactions as journal entries in the books of Bureau of
Establishments and Training of Waso State. (12 Marks)
(Total 20 Marks)
QUESTION 3
a. Sections 42 and 44 of Pension Reform Act (PRA) 2014 established Pension

Transitional Arrangements Directorate (PTAD) for public service of the
Federation and Pension Transitional Arrangements Directorate (PTAD) for the
Federal Capital Territory (FCT) respectively.
Required:
i. Identify SEVEN functions of the PTAD as contained in PRA, (2014).
(7 Marks)
ii. Identify THREE powers, which National Pension Commission has over
Pension Transitional Arrangements Directorate for public service of the
Federation and Federal Capital Territory. (3 Marks)
97
b. Two accountants in the Ministry of Finance of Welfare State were in a debate as
to which basis of accounting for revenue and expenditure should be adopted in
the state. Five bases of accounting for the finance of the state were put forward
i.e. accrual basis, cash basis, modified cash basis, modified accrual basis and
commitment basis.
As a student of public sector accounting, explain any FOUR bases under the
following headings:
i. Concepts of the FOUR bases.

ii. THREE merits of cash basis.
iii. THREE merits of accrual basis. (10 Marks)
(Total 20 Marks)
QUESTION 4
a. In the course of writing Medium-Term-Expenditure Framework (MTEF) report,

a lot of issues relating to states in the Federation were integrated into the
report, in line with Fiscal Responsibility Act (2010).
Required:
i. Explain the TWO requirements of the Fiscal Responsibility Act, as it

affects time lag for the preparation of MTEF and submission to the
National Assembly. (3 Marks)
ii. Identify FIVE documents that should accompany the estimates of revenue
and expenditure of the Nigeria‟s annual budget to the National Assembly
(NASS). (5 Marks)
b. On assumption of office, the head of Bureau of Establishments and Training of

Takuro State organised a training for government officials across all the
Ministries, Departments and Agencies (MDAs), in the state, to acquaint them
with the importance of public sector accounting as a tool for efficient and
effective performance of their job.
Required:
As one of the facilitators of the training workshop:
i. Identify and explain FOUR objectives of public sector accounting that
you will discuss at the workshop. (6 Marks)
ii. Identify SIX external users of public sector accounting reports,
highlighting their information needs. (6 Marks)
(Total 20 Marks)
98
INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF

THE THREE QUESTIONS IN THIS SECTION
QUESTION 5
a. A national economy requires the involvement of government to thrive and

alsoher presence will lubricate the livelihood of the citizens.
Required:
i. Identify and explain FIVE reasons why government intervenes in the
economy. (71/2 Marks)
ii. Identify and explain FIVE macroeconomic objectives in Nigeria.
(71/2 Marks)
(Total 15 Marks)
QUESTION 6
Sometimes, countries contracting loan obligations are able to choose between

different sources of credits. They could therefore make a decision based on the most
favourable conditions.
Required:
a. Identify and explain FOUR of such criteria for decision-making. (6 Marks)
b. Explain TWO main principles that guide the Paris Club debt rescheduling
process. (4 Marks)
c. Discuss FIVE problems facing state governments in financing projects from
capital markets. (5 Marks)
(Total 15 Marks)
QUESTION 7
Government like any other economic units needs funds, which can be raised from
various sources for the purpose of financing its activities.
Required:
a. Differentiate between:
i. Public revenue and public receipts and state their sources. (3 Marks)
ii. Oil and non-oil revenue. (2 Marks)
b. Discuss FIVE problems associated with revenue allocation in Nigeria.
(10 Marks)
(Total 15 Marks)
99
SOLUTION 1
a.i) Dovet State Government

Statement of financial performance for the year ended
December 31, 2022
Revenue: N‟m N‟m
Federation account allocation 287,500
VAT allocation 87,500
Grants from Federal Government 33,750
Internally generated revenue 97,500
Grant from donor agency 25,000
Miscellaneous income 61,250
Interest on investment 10,000
Profit on sale of building (W 1) 3,750
Total revenue 606,250
Expenditure:
Personal emolument 125,000
Maintenance of premises 5,000
Consolidated revenue charges 32,500
Overhead expenses 25,000
Interest on loans 12,500
Depreciation (W 2) - Buildings 6,250
- Motor vehicles 29,000
-Equipment and furniture 10,125
Miscellaneous expenses 37,500
Total expenditure 282,875
Surplus for the year 323,375
Consolidated Revenue Fund b/f 81,250
Consolidated Revenue Fund c/f 404,625
ii. Dovet State Government

Statement of financial position as at December 31, 2022
N‟m N‟m
Non-current assets (W 5) 455,875
Long term investments 187,500
Current assets
Current assets (W 3) 60,000
Total assets 703,375
Liabilities:
Non current liabilities
Loan notes 250,000
Current liabilities:
100
Current liabilities (W 4) 48,750
Total liabilities (298,750)
Net assets 404,625
Equity
Consolidated Revenue fund 404,625
Total 404,625
Workings
N‟m
1 Profit on sale of building
N 11,250 – (N 12,500 – N 5,000) 3,750
2 Depreciation:
Building N(387,500- (250,000+12,500) @ 5%) 6,250
Motor vehicles (N145,000 @ 20%) 29,000
Equipment and furniture (N 67,500 @ 15%) 10,125
3 Current assets
Current assets b/f 38,750
Add: - Proceeds from sale of building 11,250
- Interest receivable 10,000
Current assets c/f 60,000
4 Calculation of total current liabilities

Current liabilities b/f 36,250
Loan interest 12,500
Current liabilities c/f 48,750
5 Non-current assets schedule
Equipment
Land and and Motor
buildings furniture vehicles Total
Cost: N‟m N‟m N‟m N‟m
Bal. /bf 375,500 67,500 145,000 600,000
Disposal (12,500) - - (12,500)
Bal. c/f 375,000 67,500 145,000 587,500
Depreciation:
Bal. b/f 40,000 21,250 30,000 91,250
Disposal (5,000) - - (5,000)
Charged for the year 6,250 10,125 29,000 45,375
Bal. c/f 41,250 31,375 59,000 131,625
Carrying amount 333,750 36,125 86,000 455,875
101
(b) Qualitative characteristics of financial reporting
Qualitative characteristics of financial reporting are as follows:
i. Understandability
Information is understandable when users might reasonably be expected to
comprehend its meaning. For this purpose, users are assumed to have a
reasonable knowledge of the entity‟s activities and the environment in which it
operates, and to be willing to study the information. Information about complex
matters should not be excluded from the financial statements merely on the
grounds that it may be too difficult for certain users to understand.
ii. Relevance
Information is relevant to users if it can be used to assist in evaluating past,
present or future events or in confirming, or correcting, past evaluations. In order
to be relevant, information must also be timely.
iii. Materiality
The relevance of information is affected by its nature and materiality. Information
is material if its omission or misstatement could influence the decisions of users or
assessments made on the basis of the financial statements. Materiality depends on
the nature or size of the item or error judged in the particular circumstances of its
omission or misstatement. Thus, materiality provides a threshold or cut-off point
rather than being a primary qualitative characteristic which information must
have if it is to be useful.
iv. Reliability
Reliable information is free from material errors and bias, and can be depended
on, by users, to represent faithfully that, which it purports to represent.
v. Faithful representation
Financial reports represent economic phenomena (economic resources, claims
against the reporting entity and effects of transactions and other events and
conditions that change those resources and claims) by depicting them in words
and numbers.
To be useful, financial information must not represent relevant phenomena, but it

must also faithfully represent the phenomena that it purports to represent. A
perfect faithful representation would have three characteristics. It would be:
 Complete – the depiction includes all information necessary for a user to
understand the phenomenon being depicted, including all necessary
descriptions and explanation;
102
 Neutral –the depiction is without bias in the selection or presentation of
financial information; and
 Free from error – where there are no errors or omissions in the description
of the phenomenon, and the process used to produce the reported
information has been selected and applied with no errors in the process.
vi. Prudence
Prudence is the inclusion of a degree of caution in the exercise of the judgments
needed in making the estimates required under conditions of uncertainty, such
that assets or revenue are not overstated and liabilities or expenses are not
understated. However, the exercise of prudence does not allow, for example, the
creation of hidden reserves or excessive provisions, the deliberate understatement
of assets or revenue, or the deliberate overstatement of liabilities or expenses,
because the financial statements would not be neutral and, therefore, not have
the quality of reliability.
vii. Comparability
Information in financial statements is comparable when users are able to identify
similarities and differences between that information and information in other
reports.
Comparability applies to the:
 Comparison of financial statements of different entities; and
 Comparison of the financial statements of the same entity over periods

of time.
An important implication of the characteristic of comparability is that users
need to be informed of the policies employed in the preparation of financial
statements, changes to those policies and the effects of those changes. It is
important that financial statements show corresponding information for
preceding periods, because users wish to compare the performance of an
entity over time.
Timeliness If
There is an undue delay in the reporting of information it may lose its relevance.
To provide information on a timely basis, it may often be necessary to report
before all aspects of a transaction If there is an undue delay in the reporting of
information it may lose its relevance. To provide information on a timely basis, it
may often be necessary to report before all aspects of a transaction are known,
thus impairing reliability. Conversely, if reporting is delayed until all aspects are
known, the information may be highly reliable but of little use to users who have
had to make decisions in the interim. In achieving a balance between relevance
and reliability, the overriding consideration is how best to satisfy the decision-
making needs of users.
103
ix. Balance between benefit and cost
The balance between benefit and cost is a pervasive constraint. The benefits
derived from information should exceed the cost of providing it. The evaluation of
benefits and costs is, however, substantially a matter of judgment. Furthermore,
the costs do not always fall on those users who enjoy the benefits. Users other
than those for whom the information was prepared may also enjoy benefits. For
these reasons, it is difficult to apply a benefit-cost test in any particular case.
Nevertheless, standard-setters, as well as those responsible for the preparation of
financial statements and users of financial statements, should be aware of this
constraint.
Examiner‟s report
Part ai. and ii. of the question test candidates‟ knowledge on the preparation
of financial performance and financial position of the state government, while
part (b) requires the candidates to discuss characteristics of financial reporting
in accordance with IPSAS 3 – Accounting Policies, Changes in Accounting
Estimates and Errors.
As a compulsory question, all the candidates attempted the question and their
performance was above average.
The common pitfalls were the inability of the candidates to calculate the
depreciation to be charged to the statement of financial performance. Also,
candidates were unable to properly discuss characteristics of financial
reporting in accordance with IPSAS 3.
Candidates are advised to have adequate knowledge of the relevant provisions of

International Public Sector Accounting Standards (IPSAS) and to make use of Pathfinder
and Study Text of the Institute for better performance in the Institute‟s future
examinations.
Marking guide
Marks Marks
a.i. Statement of financial performance:
Title ½
Calculation of total revenue 3
Determination of total expenditure 3¼
Stating of surplus for the year 1
Determination of Consolidated Revenue Fund c/f 1¼
Workings 1 10
ii Statement of financial position:
Title ¼
Stating of total non-current assets 6
Determination of total assets 1½
Calculation of total liabilities 1½
Determination of net assets ½
104
Recognition of net equity ½
Workings 1¾ 12
b. Qualitative characteristics of financial reporting
Identification of four qualitative characteristics of financial 2
reporting
Explanation of the qualitative characteristics identified 6 8
Total 30
SOLUTION 2
a. The objectives of the Financial Memoranda:

i. To serve as administrative guidelines, which facilitate day-to-day running of local
governments;
ii. To expressly highlight the implications of disbursing government fund and property
unjustly without proper authority and approval;
iii. To facilitate recording of local government financial transactions in the appropriate
accounting method; and
iv. To serve as a learning tool for officers on first appointment or on transfer to a new
section.
The contents of Local Government Financial Memoranda:

i. The format of budget and budgetary control;
ii. The financial responsibilities of the Chairman and other accounting officers of a
local government;
iii. The responsibilities of the Local Government Secretary, Treasurer and Heads of
Departments;
iv. The responsibilities of the Internal Auditor as they relate to audit alarm;
v. The powers and functions of the Auditor-General for Local Government;
vi. The various financial offences and their respective sanctions;
vii. The means of revenue collection and control;
viii. Main books of accounts kept in the Local Government; and
ix. The custody, accounting and control of stores.
105
b. Bureau of Establishment and Training of Waso State
Preparation of journal entries
S/N Particulars Dr Cr
N‟000 N‟000
i. Inventory- Stationary account (1,250,000 @N1,200 each) 1,500,000
Payable- Unity Enterprises account 1,500,000
Being purchase of 1,250,000 reams of duplicating papers
at N1,200 per ream on May 31, 2020
ii. Inventory- Training bags account (5,000 @ N2,500 each) 12,500

Bank account 12,500
Being purchase of 5,000 training bags at N2,500 per bag
paid for on June 30, 2020
iii. User departments:

- Duplicating papers account (1,100,000 @ 1,320,000
N1,200 each)
- Training bags account (4,500 @ N2,500 each) 11,250
Inventory - Duplicating papers account 1,320,000
- Training bags account 11,250
Being issuance of 1,100,000 reams of duplicating
papers and 4,500 training bags to user departments
during the year
iv. Non-personal advance account (25,000 @ N1,200 each) 30,000

Inventory – Duplicating papers account 30,000
Being 25,000 reams of duplicating papers damaged by
flood water during the physical verification of inventory
v. Outstation account (25,000 @ N1,200 each) 30,000

Inventory – Duplicating papers account 30,000
Being transferred of 25,000 reams of duplicating papers
transferred to its outstation.
Examiner‟s report
Part (a) of the question requires the candidates to identify objectives and contents of
revised Local Government Financial Memoranda (1991) while part (b) tests the
candidates‟ knowledge of the preparation of journal entries to record financial
transactions.
Few of the candidates attempted the question and their performance was below
average.
106
The common pitfalls were the inability of the candidates to identify objectives and
contents of revised Local Government Financial Memoranda (1991). Also some
candidates were unable to prepare journal entries and state the narration correctly.
Candidates are advised to make use of the Pathfinder and Study Text of the Institute for
better performance in the Institute‟s future examinations.
Marking guide
Marks Marks
a. Identification of three objectives of Local Government
Financial Memoranda 3
Identification of five contents of Local Government Financial
Memoranda 5 8
b. Preparation of journal entries
Title 1
Correct journal entries of the transactions 6
Narration of the journal entries 5 12
Total 20
SOLUTION 3
a. i. Functions of the Pension Transitional Arrangements Directorate (PTAD)

The functions are as follows:
 Implementation of policies, rules and regulations relating to pension matters
under the Defined Benefit Scheme (DBS);
 Ensure accurate payments are made to authentic pensioners under the civil
service jurisdiction;
 Facilitate the maintenance of an accurate and comprehensive database of
pensioners under its jurisdiction;
 Management and maintenance of pensioners‟ records and files;
 Prepare budgetary estimates for existing pensioners as well as outstanding
liabilities and benefits of pensioners with genuine complaints;
 Prepare and submit the monthly payroll of civil service pensioners and issue
payment instructions to the Office of the Accountant-General of the
Federation(OAGF), through the Government Integrated Financial Management
Information System (GIFMIS) platform for direct payment to pensioners;
 Respond to pensioners‟ complaints, relating but not limited to, non-/under-
/over-payment of pensions, gratuities, death benefits, etc.;
 Carry out monthly payment analysis and payroll review and ascertain deficits
in pension payments;
 Carry out prepayment audit of all payment vouchers;
 Carry out compliance audit to ensure government financial rules and
regulations are complied with in all financial transactions;
107
 Review of financial statements– transcripts, bank reconciliations, pensioners‟
statement of claims etc.;
 Safeguarding the assets of the department;
 Periodic examination of systems and processes, certification of payment
vouchers and other accounting books and records by use of internal audit
stamp;
 Production of monthly audit reports; and
 Collaborate with Pension Support team and ensure periodic verification of civil
service pensioners.
(ii) Powers of the Commission over Pension Transitional Arrangements Directorate

The Commission shall have power to:
 Regulate and supervise the activities of the Federal Government
Pension Transitional Arrangements Directorate (PTAD) and the Federal
Capital Territory Pension Transitional Arrangements Directorate to
ensure compliance with the provisions of the Pension Reform Act;
 Intervene to administer and render technical support and advice on the
management of the various Pension Transition Administration
Directorates as per the directive of the President of the Federal
Republic; and
 Ensure that the Federal Government Pension Transitional Arrangements
Directorate and the Federal Capital Territory Pension Transitional
Arrangements Directorate operate under the rules, regulations and
directives issued by the Commission from time to time.
(b) i. Concepts
 Cash basisis the basis of accounting under which revenue is recorded
only when cash is received and expenditure recognised only when cash
is paid, irrespective of the fact that the transactions might have
occurred in the previous accounting period. This is a simple method of
recording financial transactions in the public sector. The cash basis
measures cash flows at the time those flows actually take place.
 Accrual basis - The basis records expenditures and revenues when they
become due (that is in many cases before the associated cash flows take
place). It records assets and liabilities and is therefore associated with
the production of statements of financial position. It is also associated
with providing depreciation on assets with finite lives.
108
 Modified accrual is similar to the full accruals basis, but it is simpler
because it does not involve the capitalisation of non-current assets or
the provision of depreciation of non-current assets.
 Modified cash basis-Under this basis, the books of accounts are left
open for a maximum of three months after the end of the year, so as to
capture substantial amount of income or expenses relating to the year
just ended. It allows a short period of time after the year-end for
settling liabilities of the year just ended (and treats this expenditure as
occurring in the year just ended).
 Commitment basis- It is a basis that records anticipated expenditure

evidenced by a contract or a purchase order. In public sector financing,
budgetary and accounting systems are closely related to the
commitment basis.
ii. Merits of cash basis of government accounting
 It is simple to understand;
 It eliminates the existence of receivables and payables;
 It permits easy identification of those who authorised payments
and collect revenue;
 It allows for comparison between the amount provided in the
budget and that actually spent;
 It saves time and is easy to operate;
 It permits the delegation of work in certain circumstances; and
 The cost of tangible assets is written off in the year of purchase,
resulting in fewer accounting entries.
iii. Merits of accrual basis of government accounting
 It takes a realistic view of financial transactions;

 It reveals an accurate picture of the state of financial affairs at
the end of the period;
 It could be used for both economic and investment decision-
making as all parameters for performance appraisal are
available;
 It aligns with the „matching concept; and
 It makes allowances for the diminution in the value of assets
used to generate the revenue of the enterprise.
109
Examiner‟s report
Part (ai.) of the question requires candidates to identify the functions Pension
Transitional Arrangements Directorate (PTAD) as contained in Pension Reform Act
(PRA) 2014 while part (aii) requires the candidates to identify the powers, which
National Pension Commission has over the Pension Transitional Arrangements
Directorate of the Federation and Federal Capital Territory.
Part (b) of the question requires the candidates to explain the concepts and bases of
public sector accounting including the merits of cash basis and accrual basis.
Few candidates attempted the question and their performance was below average.
The common pitfalls were the inability of the candidates to identify the functions
Pension Transitional Arrangements Directorate (PTAD) and the powers, which
National Pension Commission has over the Pension Transitional Arrangements
Directorate of the Federation and Federal Capital Territory.
Candidates are advised to read widely and ensure they have adequate knowledge of
relevant provisions of Pension Reform Act (PRA) 2014 and other extant regulations.
Pathfinder and Study Text of the Institute are relevant learning materials on this
aspect of the syllabus for better performance in future examinations
Marking guide
Marks Marks
a. i. Identification of seven functions of the Pension Transitional
Arrangements Directorate 7
Identification of three powers of the Pension Transitional
ii. Arrangements Directorate 5 12
b. i. Explanation of four bases of accounting 4

ii. Identification of three merits of cash basis 3
iii. Identification of three merits of accrual basis 3 10
Total 20
110
SOLUTION 4
a. i. Requirements of the Fiscal Responsibility Act as it affect time lag for

preparation of Medium-Term Expenditure Framework (MTEF) and notifying
the National Assembly.
Section 11 of the Fiscal Responsibility Act, 2007:

 Requires preparation and submission to the National Assembly, a
medium-term expenditure framework for the next three financial
years on which the National Assembly will deliberate. This would
have to be done not later than six months from the commencement of
the Act; and
 Subsequently, not later than four months before the next financial
year, commences a medium-term expenditure framework for the next
three financial years will be prepared for the National Assembly‟s
consideration.
ii. Documents that should accompany the estimates of revenue and expenditure
of the Nigeria‟s annual budget:
 A macro-economic framework setting out the three financial years,
the underlying assumptions and an evaluation and analysis of the
macro-economic projection for the preceding three financial years;
 Fiscal strategy document setting out:
 Federal Government‟s medium-term financial objectives;
 The policies of the Federal Government for the medium term
relating to taxation, recurrent expenditure borrowings, lending
and investment and other liabilities;
 The strategies, economic, social and developmental priorities
of government for the next three financial years; and
 An explanation of the financial objectives, strategic, economic,
social and developmental priorities and fiscal measures;
 An expenditure and revenue frameworks which set out:
 Estimates of aggregate revenue for the federation for each
financial year, based on the pre-determined commodity
reference price adopted and tax revenue projections;
 Aggregate expenditure for each of the next three financial
years;
 Minimum capital expenditure projection for the federation for
each of the next three financial years; and
 Aggregate tax expenditure projection for the federation for
each of the next three financial years.
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 A consolidated debt statement indicating and describing the fiscal
significance of the debt liability and measures to reduce the liability;
 A statement on the nature and fiscal significance of contingent
liabilities and quasi-fiscal activities and measures to offset the
crystallisation of such liabilities. The estimates and expenditure
stated above should be:
 Based on reliable and consistent data;
 Targeted at achieving the macro-economic projection; and
 Consistent with and derive from the underlying assumptions
contained in the fiscal strategy document.
b. i. Objectives of public sector accounting
The main objectives of public sector accounting are as follows:

 Determining the legitimacy of transactions and their compliance
with the statutes and accepted norms.
Public sector disbursements should accord with the provisions of
the Appropriation Act and Financial Regulations. There should be
due authorisation for all payments so as to avoid
misappropriation;
 Providing evidence of stewardship.
The act of rendering stewardship is being able to account
transparently and diligently for resources entrusted. Government
and public sector officers are obliged to display due diligence
and sense of probity in the collection and disposal of public
funds;
 Assisting planning and control.
The future is full of risks and uncertainties. Therefore, mapping
out strategic plans prevents an organisation from drowning in
the tides. Plans of actions provide the focus of activities, which
are being pursued. The unforeseen circumstance is built into
plans so as to prevent or at least reduce corporate failure. Public
sector establishments should act in accordance with the
„mandate theory‟ of governance. Control measures are adjuncts
to skillful planning. They assist in avoiding unnecessary
deviations from the pursuit of the original objectives set;
 Ensuring objective and timely reporting
Users of public sector accounting information are anxious to
bridge their knowledge gaps on government activities. Therefore,
they value prompt and accurate statistics to evaluate
government performance;
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 Examining the costs incurred and the benefits derivable
In public sector organisations, it is difficult to measure costs and
benefits in financial terms. The analysis of cost-benefit assesses
the economic and social advantages (benefits) and
disadvantages or inconveniences (costs) of alternative courses of
actions, to ensure that the welfare of the citizens are well
provided for;
 The various sources of finance
Identifying and highlighting various sources of revenue
receivable to execute both recurrent expenditure and capital
projects is part of the responsibilities of the management. This
objective is very important and statutory for governments of all
tiers in order to meet their respective statutory responsibilities to
the citizens in form of dividends of democracy; and
 Proffering solutions to challenges affecting quality decision-
making process
By all extant laws and policies, public sector is charged with the
underlined responsibilities to put in place all mechanism to
identify any form of challenges that may hinder smooth
administration of the sector by proffering solutions to any form of
problems. Based on the above skill process, decision-making
process can be enhanced and made more efficient.
ii. External users and their information needs:
 National Assembly: Used for budget process and for carrying out
their oversight functions;
 Members of the public: To have knowledge of budget and
expenditure in order to evaluate the performance of the government;
 Foreign countries: To have idea of the finances of government
towards foreign direct investments;
 Foreign financial institutions such as International Monetary Fund
(IMF), World Bank, Department for International Development
(DFID), United Nations Children‟s Fund (UNICEF), etc.): To determine
the extent of indebtedness of the country with a view to granting it
loans, aids and loan forgiveness;
 Creditors: To ascertain the extent of loan capability of the country;
and
 Researchers: Academic researchers who intend to investigate certain
areas of public sector may need to make use of public sector
financial reports to advice the governments for future planning and
better governance.
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Examiner‟s report
Part (ai) of the question requires the candidates to explain requirements of Fiscal
Responsibility Act as it affects time lag for the preparation ofhe Medium–Term
Expenditure Framework (MTEF) and submission to the National Assembly while, part
(aii) of the question requires the candidates to identify the documents that should
accompany the estimates of revenue and expenditure of the Nigeria‟s annual budget
to the National Assembly. Part (b) requires the candidates to identify the external
users of public sector accounting reports and highlighting their information needs.
Few of the candidates attempted the question and performance was average.
The common pitfalls were the inability of the candidates to explain the two
requirements of the Fiscal Responsibility Act and the documents that should
accompany the estimates if revenue and expenditure of the Nigeria‟s annual budget
to the National Assembly (NASS).
Candidates are advised to read widely and ensure they have adequate knowledge of
relevant provisions of MTEF and other regulations relating to public sector account for better
performance in the Institute‟s future examinations. The Pathfinder and Study Text of
the Institute are relevant learning materials on this aspect of the syllabus.
Marking guide
Marks Marks
a. i. Explanation of two requirements of the Fiscal Responsibility
Act as it affects time lag for preparation of MTEF and notifying
the National Assembly 3
ii. Identification of any five documents that should accompany
the estimates of revenue and expenditure of the Nigeria‟s 5 8
annual budget
b.i. Identification of any four objectives of public sector 2
accounting
Explanation of objectives identified 4 6
ii. Identification of external users of public sector accounting

information 3
Highlighting one information need of each of the external
users identified 3 6
Total 20
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SOLUTION 5
i. Reasons why government intervene in the economy
 Political and social ideologies (market failure argument)

The operation of market mechanism presupposes that the economic activities
are guided by rational expectations, that is, profitability. The need for
government can be explained by the existence of political and social
ideologies, which is different from the principle of consumer‟s behaviour
guided by utility satisfaction. More importantly, market forces left alone
cannot perform all economic functions. Therefore, there is need to guide,
regulate and supplement market forces under certain circumstances.
 Allocation of resources
The claim that market mechanism leads to efficient allocation of resources is
based on the conditions of perfect competition, which presupposes the
existence of free entry and exit, perfect knowledge of the market, mobility of
factors and lack of preferential treatment among other factors. Government
regulations and other measures are required to ensure the presence of these
conditions, as market on its own will not guarantee their existence.
 Healthy competition
It is the role of government to ensure that competition exists in the production
of goods and services. It is therefore expected to improve quality and increase
quantity of output. However, in the absence of regulation, competition may
become inefficient or at best reduced to decreasing cost.
 Legal structure
An important factor for effective and efficient market system is the legal
structure that guarantees punishment for violators of rules and regulations. It
is the responsibility of government to ensure strict adherence to rules and
regulations otherwise abuse becomes an albatross to economic growth and
development.
 Externalities (natural resources)
The case of externalities may be a potent factor to explain the rationale for
government intervention. Even if the legal structure is provided and all
barriers removed, certain goods and services cannot be provided through the
market system due to the presence of externalities that cause distortion
between private and public appraisal of projects. Externalities can only be
tackled through public policy. 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 it is expected.
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 Economic objectives
The economic objectives of full employment, general price stability, optimum
growth rate, equitable distribution of income as well as soundness of foreign
account cannot be brought about automatically, even in the most highly
developed financial economy. Therefore government policies and other
measures are to achieve these objectives.
 Strategic or security
Governments, set up public enterprises because of the very nature of the
projects, for example currency and mint 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 the public
enterprises.
 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, the movement of the economy can be
guided.
iii. Macroeconomic objectives in Nigeria
 Full employment
Full employment occurs when resources especially human capital are fully
engaged in productive activities that will contribute to increase in the volume
of output. It describes a situation where able-bodied people who are willing to
work at the prevailing wage rate are able to find job. It does not imply 100 per
cent employment but rather something around 95 per cent.
 General price stability
This implies moderate fluctuations (upward and downward movement) in the
general price level of goods and services over a given period. A rise in the
price level of goods and services that is less than 3 percent is considered good
as such will stimulate investment for growth and development. Higher rise in
price level say over 7 percent means a fall in the purchasing power of a unit of
currency and hence unacceptable.
 Equitable distribution of income
A fair or equitable distribution of income means that the gap between the poor
and the rich is not too wide but sufficient enough to create incentive for hard
work. There should be no concentration of wealth in the hands of few
individuals but rather fair spread among the people.
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 Increased economic growth rate
This means a steady and non-inflationary increase in the volume of output of
goods and services of the nation. It is the primary objective of the government
to pursue policies that will enhance steady rise in national output that will not
be inflationary.
 Soundness of foreign account or balance of payment equilibrium
The country‟s trade position with the rest of the world should be such that will
not permit or allow persistence deficit or surplus. Any deficit or surplus should
be promptly addressed to avoid being regarded as unfair dealings with other
countries.
Examiner‟s report
Part (ai) of the question requires the candidates to explain reasons why government
intervenes in the economy, while part (aii) requires the candidates to explain the
macroeconomic objectives in Nigeria.
Most of the candidates attempted the question and their performance was below
average.
The common pitfalls were the inability of the candidates to explain reasons why
government intervenes in the economy. Also, the candidates were unable to identify
macroeconomic objectives of the government.
Candidates are advised to make use of Pathfinder and Study Text of the Institute for
better performance in the Institute‟s future examinations.
Marking guide
Marks Marks
i. Identification of any five reasons why government intervene in
the economy 2½
Explanation of reasons identified 5 7½
ii. Identification of any five macroeconomic objectives in Nigeria 2½

Explanation of macroeconomic objectives identified 5 7½
Total 15
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SOLUTION 6
a. Criteria for decision making while choosing from different sources of

international loans.
i. The comparative rates of interest

In using comparative interest rates to decide between loan offers, the
nominal rate of interest is rarely used. Instead comparison of loans
from different countries or market sources is based on the real rate of
interest, which takes into consideration the rate of inflation in the
creditor countries.
Furthermore, the way the interest on the loan is charged as well as the
manner of its calculation is important, as these would determine the
amount to be charged. Some creditor sources might charge interest at a
fixed rate, that is, a flat rate percentage of the full loan or at a variable
rate, which fluctuates over the life of the loan and in accordance with
financial market conditions.
ii. The possibility of the loan being project-tied

Where loans are applied for the execution of specific projects, a further
consideration of interest rate charges may focus on the returns or
benefits from the project to be financed by the loans. In such instances,
the project is subjected to appropriate comparative minimum unit-cost
tests using national or international yardsticks. If the project is
supposed to be profit yielding, it must be ensured that there is a
positive internal rate of return, which is at least equal to the cost of
borrowing, while projects in the area of social services, or
infrastructures are considered on the basis of their cost-benefit ratios.
iii. Degree of concessionality

Another criterion for loan selection where several sources of external
loans are being considered is the degree of concessionality of such a
loan, that is, the extent of “softness” or otherwise of the loan. The
degree of concessionality is measured by the percentage of grant
element present in the loan. Loans have various degrees of
concessionality depending on their source and nature. Where a loan
has a grant element of 100 percent, it is regarded as being totally
concessional.
iv. Repayment ability

One of the underlying principles on which loan terms and conditions
are considered before selection is the repayment ability of the
borrowing country. This is of mutual benefit to the donor as well as the
recipient of the loan. Before taking a loan it must be ensured that the
projects and programmes for which the loan is being sourced will
eventually provide sufficient income from which the debt can be
serviced as and when due. A further consideration of the repayment
118
ability is the socio-political condition of the country. Where the
government in power does not command popular credibility, it may be
difficult for such to access foreign loans.
b. Principles of debt rescheduling process

There are three main principles that guide the Paris Club rescheduling process.
These principles are discussed briefly below.
i. Imminent default
This principle applies to the debtor country and requires the debtor
nation to prove that it will not be able to meet its external debt service
obligations unless it is granted a relief. This proof can be shown
through accumulation of debt service arrears. The IMF balance of
payments projections of the country also serve the purpose, as these
projections always provide an indication of the country‟s economic
position. This requirement is very important, as a debtor country will
be denied access to the rescheduling process without the Club being
satisfied that this condition has been fulfilled.
ii. Burden sharing
The principle of burden sharing applies to the creditor countries. It
requires the creditors to be prepared to share fairly and equitably the
burden of the rescheduling in the proportion of their individual
exposure to the debtor countries. In effect, the creditor must agree to
provide the debtor country with relief that is commensurate with their
exposure. The counterpart, from the point of view of debtors, is the
principle of comparability of treatment, which extols the need for
debtors to treat creditors equitably in meeting the debt service
obligations.
iii. Conditionality
This principle, which is generally regarded as the “golden rule” of the
Paris Club of Creditors also, applies to the debtor countries. It requires
the debtor nation to put in place an IMF structural adjustment
programmes before approaching the Club for rescheduling process.
Sometimes such programmes determine the type of agreement, which
the official creditors would be prepared to reach with the debtor
country.
c. Problems facing state government in financing projects through

capital market
The problems include:
i. Poor situation of accounting on the part of a state government;
ii. Lack of qualified personnel to effectively evaluate, appraise and
monitor projects;
iii. Poor performance of existing state government projects which act
as disincentive to potential investors;
119
iv. Inability of government to package and market viable projects to
the investing public;
v. Lack of awareness of the potential of the investing public;
vi. Preference for short-term investments by the public; and
vii. Increased debt accumulation by state governments can reduce
the capacity for further borrowing from the capital market.
Examiner‟s report
Part (a) of the question requires candidates to explain the criteria for decision
making when contracting loan obligations from different sources of credits, while
part (b) asks the candidates to explain main principles that guide the Paris Club
debt-rescheduling process. Part (c) requires the candidates to discuss problems
facing state governments in financing projects from capital markets.
Most of the candidates attempted the question and their performance was average.
The commonest pitfalls were the inability of the candidates to explain the criteria for
decision-making and main principles that guide the Paris Club debt-rescheduling
process. Also, candidates could not correctly discuss problems facing state
governments in financing projects from capital markets.
Candidates are advised to make use of the Pathfinder and Study Text of the Institute
for better performance in the future examinations.
Marking guide
Marks Marks
a Identification of any four criteria for decision making 2
Explanation of four criteria identified 4 6
b. Identification of any two principles that guide the Paris Club
rescheduling process 1
Explanation of the principles identified 3 4
c. Discussing five problems facing state government in financing
projects through capital market 5
Total 15
SOLUTION 7
a i. Public revenue refers to income generated by government from its activities or

operations. In other words it is a segment of total funds needed to finance
government activities. It may be difficult to provide a complete list of all the
sources of public receipts. However, the common and important ones include
taxes, fees, fines, borrowings, disposal of assets, income from public
undertakings, gifts, donations, licenses, royalties, rents, rates, levies, printing of
currency, and so on.
120
Public receipts cover receipts from all sources; public revenue is a narrower
concept and does not include borrowings, printing of currency, grants, gifts
and donations, sale of public assets and reimbursement.
ii. There are two broad sources of revenue to the federal government of Nigeria
as usually specified in the country‟s annual budget. These are the oil revenue
and non-oil revenue. The oil revenue sources include proceeds of crude oil
sales, NNPCL earnings, royalties, signature fees and so on. The non-oil revenue
comprises personal income tax, company income tax, excise duty, import and
export taxes, value added tax, stamp duties, etc. There are also the
independent revenue sources like fees, fines, levies, investment income,
licences, rent, rates, etc.
The oil revenue has remained the principal source of government funding as it
generates most of the foreign exchange earnings for the country. Though there
are other non-oil activities contributing to gross domestic product, their
contributions in terms of revenue generation have been minimal due to low
revenue diversification.
b. The problems of revenue allocation in Nigeria

i. Over-dependence on oil revenue
The discovery and subsequent exploration of oil in Nigeria and its high
yielding revenue has continued to undermine the development of the
hitherto buoyant agriculture and other viable sectors such as industry,
mining and human capital development. Consequently, oil revenue has
become the major source on which the country critically depends. This
has with time led to the evolving of “a leech syndrome” among the
component units of the federation thereby making the states dependent
on the handouts from the Federation Account. The leech nature of most
of the states makes them an economic appendage of the central
government and has eroded the autonomy of the federating units. This,
in a way, established a master-servant relationship between the federal
government and the component units. The current revenue sharing
formula encourages laziness and idleness as states rely heavily on the
federal allocation- a situation that makes most states, perhaps,
excluding Lagos, parasitic in nature feeding voraciously on the
Federation Account.
ii. Conflicts over revenue sharing formula

Revenue sharing among the component units of the Nigerian federation
has been, from inception, replete with agitations, controversies and
outright rejections due to elevation of political rather than economic
considerations in making decisions. The process of revenue sharing is
inundated with conflicting criteria that were, often times, rejected by
majority of the states. Consequently, several attempts at revenue
sharing (both vertically and horizontally) have been made, yet no
121
revenue sharing formula and principles have been considered
acceptable among and within the tiers of government at any point in
time. Due to the foregoing, the determining factor in revenue allocation
strongly revolved around political rather than economic criteria,
thereby making revenue allocation issue in Nigeria contentious and
thorny.
iii. Agitation for resource control

The historical facts of the use of the principle of derivation havebeen a
source of inter-regional or states conflict, rivalry and antagonism. The
major fall out of the down play of the principle of derivation, which
stipulates that the component units of a system should be able to
control some of their own resources as they desire, is the agitation for
resource control that has taken criminal dimensions in most of the oil
producing communities and states of the Niger Delta. There have been
multifarious cases of kidnapping, vandalism of oil pipelines and
installations, desperations and high scale violence.
iv. Increasing fiscal units

The rapid changes in the number of fiscal units that is not guided by
economic and political philosophy led to creation of states that are
fiscally and financially unviable and consequently increased demand
for increased share of the "national cake". Many states in Nigeria will
blame their inactivity and ineffectiveness on low or lack of allocation
from the federation account rather than become inventive and
innovative in ideas that will cause increase in their mobilisation of
resources. The increase in the number of fiscal units in Nigeria from 3
to 4, 12, 19, 21, 30 and 36 within a period of three and a half decades
is contrary to what obtains in older and other federations thereby
contributing to the unending resource control controversy.
v. Unstable constitutional framework

The absence of a permanent and generally acceptable legal structure in
the form constitution may result in chaotic tendencies. For instance, the
last constitutional conference in the United States of America was in
1787 and only 27 amendments have been made as at 1999 as opposed
to Nigeria in which several constitutional conferences had taken place
since independence without general acceptability. In addition, states in
Nigeria do not really have the statutory power to raise taxes and collect
the proceeds and as such the problem had centered not on who should
raise but how the proceeds should be shared. Therefore, expenditure
and tax or revenue assignment is inundated with ambiguity and
inefficiency. A good example is the case of issuance of road worthiness
certificate by Lagos State Ministry of Transport, which became a legal
tussle between the government and some activists.
122
viii. Lack of political will
The absence of sincere desire on the part of public office holders to
address the challenges of revenue sharing is aptly reflected in the
refusal to convoke a conference of leaders of various groups and ethnic
nationalities that may lead to design of acceptable resource allocation
scheme. Even where such conferences have been convoked in the past,
the will to implement suddenly disappears from the initiators.
Examiner‟s report
Part (ai) of the question asks the candidates to differentiate between public
revenue and receipts and to state their sources, while part (aii) requires the
candidates to differentiate between oil and non-oil revenue. Part (b) requires
the candidates to discuss problems associated with revenue allocation in
Nigeria.
Most of the candidates attempted the question and their performance was
above average.
The common pitfalls were the inability of the candidates to differentiate

between public revenue and public receipts and state their sources. Also, few
candidates were unable to discuss problems associated with revenue
allocation in Nigeria.
Candidates are advised to make use of the Pathfinder and Study Text of the
Institute for better performance in the Institute‟s future examinations.
Marking guide
Marks Marks
a. i. Definition of revenue and public receipts stating two sources 3
each
ii. Definition of oil and non-oil revenue with one example each 2 5
b. Identification any five problems associated with revenue

allocation 2½
Explanation of five problems identified 7½ 10
Total 15
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ICAN/231/Q/B6 Examination No.........................

CORPORATE STRATEGIC MANAGEMENT & ETHICS
the examination hall. You will be stopped from continuing with the examination
and liable to further disciplinary actions including cancellation of examination
result if caught.

number.
THURSDAY, MAY 18, 2023
124
CORPORATE STRATEGIC MANAGEMENT & ETHICS
QUESTION 1
Oyinbo Industries Limited is a medium-scale enterprise involved in the processing
and packaging of local (traditional) food items for the Nigerian market. Its product
portfolio includes Instant Elubo Powder, Instant Pounded Yam Powder, and Instant
Beans Powder, all of which have been successful in the Nigerian market. The
company hopes to expand its market coverage to the United States, United Kingdom,
France, Canada, and United Arab Emirates, which are believed to be viable new
markets for the products.
To achieve these goals, the company hopes to start by strengthening its position in
the Nigerian market. To this end, the management hopes to improve the market
share, sales growth, and profitability of each business unit. In pursuit of these
objectives, the company expanded its portfolio by introducing the following products
into the market: Instant Plantain Powder, Instant Soya Beans Powder, and Garri
Ijebu.
The table below shows current market and sales growth for each product:
Instant Elubo Instant Pounded Instant Beans *Instant *Instant Soya

Powder Yam Powder Powder Plantain Powder Beans Powder
Market Sales Market Sales Market Sales Market Sales Market Sales
Growth Growth Growth Growth Growth Growth Growth Growth Growth Growth
Rate Rate Rate Rate Rate Rate Rate Rate Rate Rate
2020 High Low High High High High High - High -
2021 High Low High High High Low High - High -
2022 High High High High High Low High Low High Low
*Products introduced into the market in 2021

The company‟s current market growth rate for each of the products is over 10%. The
fast-growing nature of the market is attributable to population growth and the
growing concern about the hygenic conditions of food items sold in the open market.
The company hopes to take advantage of this opportunity to become the biggest
producer and exporter of processed and packaged food items in the country.
125
Competitors of Oyinbo Industries Limited are largely cottage industries and small-
scale producers, but command substantial share of the market. Entry into the
industry is not regulated. Most of the firms in the industry rely on small farmers in
the rural areas of the country, and they are many. As part of its growth plan going
forward, Oyinbo Industries Limited plans to acquire a large expanse of land in Kwara
State for farming. The firm hopes to use this farm to secure supply of the needed raw
materials.
The Company also hopes to strengthen its relationship with a local fabricator of
processing equipment, which supplies the plants and machinery that the firm needs.
The technology that is used in the industry has remained largely unchanged in the
last 20 years.
In pursuance of its growth strategy, the firm plans to leverage on its extensive
distribution network and internal production capabilities to increase its market share
of existing products and push the sales of the new commodities. However, the
incessant power failure and frequent breakdown of the company‟s equipment
constitute a major concern for the management of the company.
Required:
Advise the management of Oyinbo Industries Limited on:
a. Potential strategies to adopt for each product that support the company‟s
strategic direction, using the Ansoff Growth Vector Analysis. (13 Marks)
b. How to achieve sustainable competitive advantage, using Michael Porter‟s Six
Principles (6 Marks)
c. Key elements of the business environment, using the PESTEL framework.
(6 Marks)
d. The type of integration strategy being pursued and its possible drawbacks.
(5 Marks)
(Total 30 Marks)
126
QUESTION 2
Every business venture has some measure of risk exposure that must be identified,
measured, and adequately prepared for. Indeed, each business entity should have in
place a good risk management strategy.
As a risk manager, clarify the following in ways that will be comprehensible to a

greenhorn in business.
a. Risk identification. (5 Marks)
b. Importance of ranking risks. (3 Marks)
c. Examine the impact of risks on categories of stakeholders. (12 Marks)
(Total 20 Marks)
QUESTION 3
The code of corporate governance prescribes corporate governance disclosures for

listed companies.
a. Explain the contents of a corporate governance statement. (12 Marks)
b. Not all information that corporate entities can provide are mandatory. Explain
the justifications and drawbacks of voluntary disclosure in corporate
governance reports. (8 Marks)
(Total 20 Marks)
QUESTION 4
Richard and his wife, Rachael, have just retired as top level managers from one of
the biggest oil companies in the country. They have earned vast personal wealth and
have ample investments in several blue-chip companies. Rachael, being a food
technologist with passion for healthy living, convinced Richard to start a company
that would produce organic drinks and foods from only natural ingredients. She also
suggested that the company adopt environmentally friendly manufacturing processes
and consider the wellbeing of all employees and other stakeholders.
The primary reason for establishing the company is to fulfill a passion, build a
sustainable and socially impactful business and not to aggressively pursue profit.
Hence, both Richard and Rachael are happy to just break even at the initial stage of
the business and later record minimal profits.
As an expert in business ethics, you are required to:

a. Identify the alternative ethical stances that are available to Richard and
Rachael and the ones implied in the scenario given. (4 Marks)
127
b. Discuss the Gray, Owen and Adams‟s classification of groups of people and
their views of the relationship between business organisations and society.
(14 Marks)
c. Which of the classifications in (b) above is relevant to Richard and Rachael?
(2 Marks)
(Total 20 Marks)

QUESTION 5
Creative and critical thinking are essential skills that chartered accountants should
possess for optimal performance.
a. Differentiate between creative and critical thinking. (4 Marks)

b. Explain the modes through which creative thinking are expressed. (8 Marks)
c. Explain how creative thinking of employees benefit their employers. (3 Marks)
(Total 15 Marks)
QUESTION 6
a. Using the Kohlberg‟s stages of moral development, identify and explain the
reasons why individuals make their decisions when faced with moral dilemma.
(12 Marks)
b. Explain the criticisms of Kohlberg‟s stages of moral development. (3 Marks)
(Total 15 Marks)
QUESTION 7
Gbam Telecoms Plc, a leading mobile phone and internet communications company,
is planning to roll out its 5th Generation (5G) spectrum. As a new product, the 5G
spectrum promises customers high speed internet with immense possibilities in
computing, big data management, robotics and other numerous benefits. While a
section of the populace believes that the roll-out is a welcome development, others
express reservations about the 5G technology. Within Gbam Telecoms Plc, some
employees believe that the erratic nature of the country‟s power supply could
damage the 5G transponders. Also, the high cost of diesel would increase the
company‟s operating costs, thus making the product largely unaffordable to
prospective consumers. There are also security threats to the company‟s facilities due
to heightened insecurity in the country. The umbrella trade union for the company‟s
employees is also agitating for pay rise and hazard allowance should the company
go ahead with the 5G roll-out. Some experts believe that the market for 5G spectrum
in the country today is negligible because most telecommunication and internet
devices used by consumers in the market are not 5G-compliant. There are also reports
that the competitors of Gbam Telecoms Plc are studying how the market will respond
128
to Gbam Telecoms‟ 5G spectrum before deciding to enter the market. In addition, a
study carried out in Europe concluded that 5G spectrum may be hazardous to the
health of people living close to 5G transponders. There is also news about the
development of new and better technologies called 6G and 7G, which may make 5G
become obsolete within a short period of time.
Consequently, the management of Gbam Telecoms Plc is concerned about the

attendant risks that are associated with the 5G spectrum roll-out.
a. Advice the management of Gbam Telecoms Plc on the enteprise and

operational risks that could be associated with the roll-out of 5G spectrum
using information contained in the given scenario. (11 Marks)
b. Suggest to Gbam Telecoms Plc the key elements that should be contained in
the company‟s Risk Management System. (4 Marks)
(Total 15 Marks)
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SOLUTION 1
i. The Ansoff growth vector analysis believes in the existence of a link between
current and future products and markets of firms. The Ansoff growth vector
analysis is summarised with a 2X2 matrix
Product
Existing products New products
Existing market Market penetration strategy Product

development
strategy
Market
New market Market development Diversification
strategy strategy
The table shows potential strategy to pursue for existing and new products in
existing and new market,
From the given scenario, all of Oyinbo Foods Limited‟s products are in a high
growth market. Also, all of them have varying degrees of sales growth. The
table below shows the potential strategies to adopt for each product in the
existing market.
Product Sales Market New or Potential strategies

Growth Growth Existing
Product
Instant Elubo Powder High High Existing Market penetration
strategy
Instant Pounded Yam Powder High High Existing Market penetration
strategy
Instant Beans Powder High High Existing Market penetration
strategy
Instant Plantain Powder Low High New Product development
strategy
Instant Soya Beans Powder Low High New Product development
strategy
The table above shows the potential strategies to adopt for all products in the local
market based on the information contained in the scenario and using the Ansoff
growth vector matrix. However, the firm is hoping to export these products into the
international market which are new markets. Strategies for these new (international)
market are:
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Product Product Potential strategies
Instant Elubo Powder Existing Market development strategy
Instant Pounded Yam Existing Market development strategy
Powder
Instant Beans Powder Existing Market development strategy
Instant Plantain Powder New Diversification
Instant Soya Beans Powder New Diversification
Market penetration: selling more of the existing products in its existing market. The
high growth rate of the market will make this strategy easier and more successful.
Aggressive marketing will help the firm to increase sales.
Product development: Producing new products or altering existing products to give

more value to the customer in existing market.
Market development: Opening up new markets for existing products.
Diversification: Introducing new products into new markets.
ii. Michael Porter proposed six principles that can help a firm achieve sustainable
competitive advantage. These are:
 Principle 1: The strategic goal of the firm should be to achieve superior

long-term return on investment.
 Principle 2: The strategy must offer unique value proposition to the

customer. The value proposition is a combination of price and benefits that
competitors do not offer;
 Principle 3: There should be a distinctive value chain. In other words, a

firm should perform similar activities to competitors, but in a different way
that offers more value to customers;
 Principle 4: Selected strategy will always involve trade-off. That is by

selecting one set of strategic option, a company inevitably chooses not to
select alternative options;
 Principle 5: All different elements in the strategy and in the value- chain
should link together and reinforce each other; and
 Principle 6: There should be continuity of strategic direction. There should

be consistency in the application of the chosen strategy.
iii. Application of the PESTEL model into the scenario is as follows:

 P:Political Environment
Political factors that could have strong influence on business entities and
other organisations.
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The scenario suggests a stable political environment that will have neutral
impact on the business because no mention was made about any political
factor;
 E: Economic environment
Economic influences on an entity‟s wellbeing. Examples include: market
growth, population changes, Gross Domestic Product variations etc.
From the given scenario, the company operates in a high growth market
which provides opportunity for the company to grow its sales;
 S: Social environment
This is the socio-cultural factors inherent in the operating environment of
the firm that influences its wellbeing. Examples include the attitude,
beliefs and customs of the people.
The demand for the firm‟s product is indigenous to most of the consumers.
As such the success of the firm in the market is in part, tied to the people‟s
tradition;
 T: Technology environment
Changes in science and technology that may positively or negatively affect
the firm‟s output, process or sales.
From the given scenario, the technology environment has been stable for
over 20 years;
 E: Ecological environment
Factors inherent in the physical environment that can influence the firm‟s
performance. Such factor includes flood, hurricane and other forms of
natural disaster. It also includes availability of vegetation which supports
living; and
The case study suggests a stable ecology environment because no such

factors was mentioned.
 L: Legal environment
Laws and regulations affecting an entity.
iv. The firm is planning to pursue a backward integration.
This is when an entity enters the product market of its suppliers.
Drawbacks of backward integration are:
 Inefficiencies: Backward integration could distract the company from its

core activity in which it had developed competencies since inception. This
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distraction could affect the level of efficiency in its core activity;
 Substantial investment: funds that could have been used for other
activities would be used in setting up the new business; and
 The company will have to start climbing the learning curve of the new
business in the area of management and operations.
Examiner‟s report
This compulsory question on strategic management tests in Part:
a. The use of Ansoff Growth Vector Analysis to determine the appropriate

strategies for products in line with a company‟s strategic direction;
b. The use of Michael Porter‟s Six Principles to achieve sustainable competitive
advantage;
c. The use of PESTEL framework to discuss key elements of a business
environment; and
d. Identification of integration strategy adopted in a scenario and highlighting
the drawbacks of the strategy.
Virtually all the candidates attempted this question as it was compulsory.
Most of the candidates performed poorly in this question, especially in parts which
required application of the principles to the scenario.
The common pitfalls were inability of many candidates to apply the concepts and
frameworks to the scenario. Also, a good number of the candidates were not familiar
with Ansoff Growth Vector Analysis and Michael Porter‟s Six Principles to achieve
competitive advantage.
In preparation for future examinations, candidates should endeavour to cover the

syllabus fully and master the art of applying principles to situations, as this is the
distinguishing feature between examination at the foundation and skills levels.
Marking guide
Marks per Number of Sub-total Total

Point point/s
a. Ansoff Matrix 1
/4 10 21/2
Drawing the matrix 1
/2 1 1
/2
Potential strategies (Local
Market) 1
/2 5 21/2
Potential strategies
(international market) 1
/4 10 21/2
Explanation of potential
strategies 1 4 4
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Identification of products for
international market 1 1 1
13
b. Porter‟s six principles 1 6 6
6
c. PESTEL
Mentioning 1
/4 6 11/2
Definitions 1
/4 6 11/2
Relating each environmental
factor with the scenario 1
/2 6 3
6
d. Identification of type of
integration 1 1 1
Definition of backward
integration 1 1 1
Drawbacks 1 3 3
5
Total 30
SOLUTION 2
a. Risk identification is the first stage in a system of risk management.
i. A company needs to understand what risks it faces, both in its

environment and markets (strategic risks) and internally (operational
risks).
ii. There are no standard rules about how risks should be identified. In a
large company, it might be appropriate to identify risks at different levels
in the organisation – on a group-wide basis, and for each business division
and for each department or function.
iii. Management might be responsible for identifying strategic risks/business

risks for the company, but the internal auditors or external auditors might
be more efficient at identifying operational risks (and suggesting suitable
internal controls to mitigate the risks).
iv. Many large companies set up risk committees to identify risks. These are
committees of managers from several departments or functions. Each
member of the committee is responsible for reporting on a particular
category of risk or risks in a particular geographical area of the company‟s
operations. The committee meets regularly to discuss risks and their
potential significance, and changes in these risks.
b. Risks identified by a company will vary in importance. Some risks might be

unimportant, or easily controlled. Some other risks will be very significant.
Having identified risks, it is necessary to assess the importance of each risk, in
order to:
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i. Be able to rank the risks in order of significance (order of priority);
ii. Identify the risks that are the most significant; and
iii. Identify the significant risks where control measures are urgently needed.
c. Risks for a company also create risks for its stakeholders. Management should
be aware of the impact of the company‟s risks on stakeholders, because the
risks for stakeholders could affect the attitude and the behaviour of
stakeholders towards the company.
The impact of a company‟s risks on risks for stakeholders varies and depends on
circumstances. The impact of company‟s risk on stakeholders is disclosed as
follows:
i. Employees
Employees are exposed to several risks in their job. These include the risk
of a loss of job, and the threat to health or safety in the work that they do.
Employment benefits might be threatened. These risks to employees can
be affected by risks that face their company.
Jobs may be threatened by the strategic choices taken by a company. If a

company makes the wrong strategic decisions, and the company loses
money, many employees could lose their jobs.
Safety risks for a company might be measured in terms of the risk of

serious injuries and minor injuries to employees over a given period of
time. (For example, a company might assess its current safety measures in
terms of the expected number of serious injuries per 1,000 employees per
year.)
The risk appetite of some employees might differ from the risk appetite of
the company and the board‟s policy on risk. For example, a „rogue trader‟
working in the financial markets for a bank might be willing to take high
risks for the company because the potential benefits for him personally (a
large cash bonus for making large trading profits) exceeds the risk (the
possible loss of his job).
ii. Investors
When investors buy the shares of a company, they have some expectation
of the sort of company it is and the returns they might expect from their
investment. For example, an investor might buy shares in a company
expecting it to be a high-risk company which could achieve a very high
rate of growth in the share price. Or an investor might buy shares in a
company because the company is stable and can be expected to pay a
regular annual dividend.
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The board of directors should try to ensure that the risk appetite of the
company is consistent with the risk appetite of its shareholders (and other
stock market investors). A company should not expose itself to strategic
risks that expose the investors to a risk to their investment that the
shareholders would consider excessive. When a company increases its
exposures to strategic risk, many existing shareholders might decide to sell
their shares and switch to investing in a lower-risk company. Investors
with a larger risk appetite might buy the shares.
The board of directors should keep shareholders informed about the

significant risks that the company faces, so that investors can assess their
own investment risk. (In Nigeria and the UK, for example, stock market
companies are now required by law to include disclosures about risks in
their annual narrative report to shareholders, the business review).
iii. Lenders
The main risks to a company‟s lenders from the company‟s own risks are
that the company will not pay what it owes.
A high-risk company is a high credit risk. The liquidity risk and insolvency
risk facing a company has an impact on the credit risk for a supplier or
lender. When a company asks a bank for a loan, the bank will assess the
credit status of the company, and it will make its decision to lend on the
basis of whether it thinks that the company will be able to pay back the
loan with interest and on schedule.
iv. Communities and the public

Communities and the public are exposed to risks from the actions of
companies, and the failure by companies to control their risks.
Risks to the public include:

 The consequences for the country of a decline in the business
activities and profits of a company due to recession, especially when
the company is a major employer;
 Health and safety risks from failures by a company to supply goods

that meet with health and safety standards;
 Risks to the quality of life from environmental pollution, due to a

failure by the company to control its environmental/pollution risks;
 Risks to a local community also arise from economic risks faced by

the company. If a company is forced to close down a production plant
in an area where it is a major employer, the economy of the entire
community would be affected;
 Pressure groups and popular action groups come into existence

because „activist‟ members of the general public believe that their
136
well-being is threatened. The cause of the perceived threat is often
the activities of companies; and
 Some companies take risk-based decisions that expose them to

considerable strategic risk without necessarily considering fully the
risk impact on the general public or local communities. For example,
an energy company planning to construct a new nuclear power
station should consider the long-term risks to the community – and
the general public – not just their own business risks in relation to
costs.
v. Governments
For governments, companies are a source of economic wealth for the
country. They create additional economic activity which creates extra
wealth, and they provide employment and tax revenues for the
government. They also act as the vehicle through which the government
provide infrastructures and public services such as road, potable water,
electricity, etc. Therefore, when such companies that were given contracts
to provide such goods and services fail, the ability of the government to
deliver public goods could be hampered.
vi. Customers
Some risks facing companies also have an impact on their customers.
A company might face operational risks from human error or system
breakdown in its operations. Errors and delays in providing goods and
services have an impact on business customers. For example, if a company
is late in supplying a key component to a business customer, the customer
will be late in supplying its own customers. Errors and delays work their
way through the entire supply chain.
Product safety risks for a company are also a risk for customers who use
them. For example, manufacturers of food products, drink products and
medicines and drugs need to consider the potential risk to customers from
weaknesses in their own safety controls.
vii. Business partners

There are risks in joint ventures for all the joint venture partners. A
company in a joint venture might try to dominate decision-making to
reduce the risk that the joint venture will not operate in the way that they
want it to.
However, by reducing its exposures to risk in a joint venture, a company

will affect the risks for the other joint venture partners.
Risks in partnerships can be controlled for all the partners – to some extent
– by clear terms in the contract agreement between the partners, and by
monitoring performance of the partnership.
137
viii. Suppliers
Loss of business: if the business is not growing, there will be no supply.
Loss of revenue to suppliers due to the failure of customers‟ businesses.
Negative impact on supplier‟s cash flow caused by customers‟ inability to

pay.
Examiner‟s report
This question on risk management, tests risk identification, importance of ranking
risks and the impact of a company‟s risks on its stakeholders.
About 80% of the candidates attempted this question, with good performance.
The few candidates who performed poorly could not state the importance of ranking
risks.
Candidates are advised to endeavour to grasp the essence of principles to the

practice of the profession.
Marking guide
Description Marks per No. of Sub-total Total

point Points
a Stage of risk
identification in the
risk management
process 1
/2 1 1
/2
Relevance of risk
identification 11/2 3 41/2
5
b Ranking of risk 1 3
3
c Impact of risk on
stakeholders
 Mentioning 1
/2 6 3
 Explanation 11/2 6 9
12
Total 20
SOLUTION 3
a. Specific contents of corporate governance statement vary across different

countries. However, best practice requires corporate governance statement to
contain the following:
i. Statement about the modus operandi of the board, including high level
statements about which matters are reserved for the board and which
138
decisions are delegated to the management;
ii. Names of the chairman, CEO, senior independent directors and chairmen
of the nominations, audit, and remunerations committee;
iii. The names of non-executive directors that the board considers to be

independent. Reasons should be given where this is appropriate;
iv. The other significant commitments of the chairman, and changes in these
commitments during the year;
v. A statement about the performance evaluation of the board, and how this
has been conducted;
vi. A statement about the steps the board has taken to ensure that the
directors are informed about the opinion of the company‟s major
shareholders;
vii. A section of the company‟s annual report describing the work of the
remunerations committee;
viii. A description of the remunerations committee;

ix. An explanation of the directors‟ responsibility for preparing financial
statements;
x. A statement by the directors that the company is a going concern;
xi. A report that the board has carried out a review of the company‟s system
of internal control;
xii. If the company does not have an internal audit department, the reason
why it does not;
xiii. If the company‟s auditors provide non-audit services to the company, an

explanation of how the auditors‟ objectivity and independence are
safeguarded;
xiv. The terms of reference for the nominations, remunerations and audit
committee;
xv. The terms and conditions of appointment of Non-Executive Directors
(NED); and
xvi. When papers are sent to shareholders for a general meeting where there
will be a proposal to elect or re-elect a NED, a statement by the board on
why the individual should be elected must be made.
b. Justifications for voluntary disclosure are:
i. Voluntary disclosures could be used for public relations and marketing

through the provision of positive information about the company to the
public. This could be a means to attracting investors and impressing other
users of the company‟s published reports;
139
ii. Providing information on voluntary basis might persuade the government
or financial services regulator that compulsory disclosure and regulation
are not necessary;
iii. Companies might publish social and environmental reports out of a

genuine ethical and cultural beliefs in the responsibilities of the company
to society and the environment; and
iv. A company might use voluntary disclosure as a way of improving

communication with its shareholders.
Drawbacks of voluntary disclosure are:
i. It is the prerogative of companies to include or exclude some information

which might be useful to some of the company‟s stakeholders.
ii. Due to the fact that such information is presented in a very positive form,
its reliability could be in doubt.
Examiner‟s report
This question tests knowledge of the contents of a corporate governance statement in
an annual report, justification and drawbacks of voluntary disclosures in corporate
governance reports.
About 70% of the candidates attempted this question, but performance was poor.
The poor performance was attributable to the confusion of the contents of a corporate
governance statement with elements of corporate governance by many candidates.
Candidates are admonished to study the contents of the syllabus well and carefully
respond to questions in the examination.
Marking guide
Description Mark per Number of Sub-total Total

point points
a Content of corporate
governance statement 1 12 12
12
b Justification 2 3 6
Drawbacks 2 1 2
8
Total 20
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SOLUTION 4
a. Ethical stances
i. Stance 1: Maximising short-term shareholder interests (the „least ethical‟ of

the four stances), which usually is to make profit.
ii. Stance 2: Maximising long-term shareholder interests.
iii. Stance 3: Multiple stakeholder obligations: recognising obligations to

different stakeholder groups.
iv. Stance 4: Being a shaper of society.
Inferences from the scenario

The stance may be inferred as stance 3 or stance 4. These are:
i. Stance 3: There is a commitment to wellbeing of employees and other

stakeholders.
ii. Stance 4: The Company is interested in shaping society.
b. Gray, Owen, and Adams‟ classification

i. Pristine capitalists
This position is dominant in the world of accounting and finance. The only
responsibility of a company is to make money for its shareholders and to
maximise shareholder wealth.
Shareholders have invested the risk capital and are the legal owners of
their company. It therefore follows that only the shareholders should have
any right to decide the strategies and policies of the company.
This pristine capitalist view is based on rational self-interest and putting
individual self-interest before the collective benefits of society as a whole.
The market economy is a good thing. There are no environmental
problems because human beings are inventive and adaptable: the market
economy will find solutions to the world‟s environmental problems.
ii. Expedients
Individuals who have an „expedient‟ view also believe that the main aim
of a company is to maximise the wealth of its shareholders. However, some
concessions have to be made at times to other stakeholders in order to put
the company in a stronger position strategically. By doing so, it is more
likely to maximise shareholder‟s wealth.
A simple example may be that a company may pursue a policy to protect

the environment, or may support a charity, to improve its reputation and
customer loyalty.
141
This „expedient‟ position is taken by people with a longer-term view than
pristine capitalists, who recognise that economic success can only be
achieved by companies by accepting certain social responsibilities.
iii. Proponents of the social contract

These individuals believe that companies and other organisations exist at
the will of society, and there is a „social contract‟ between the company
and the society in which it operates. Companies therefore have a
responsibility and an obligation to respond to the needs of society.
A company must therefore act in accordance with standards of behaviour

that society finds acceptable. If it does not, society will not allow the
company to continue. This is a right-based perspective in which the rights
of all human beings are considered significant. Holders of this view would
argue that government regulation might be necessary for the market
economy because free market prices do not properly reflect all the effects
that companies have on society and its environment (for example,
pollution and other environmental damage).
iv. Social Ecologists

Individuals taking this position are concerned for the social environment.
They believe that companies and other large organisations have been
responsible for creating social and environmental problems. They should
therefore be held responsible for dealing with those problems and finding
solutions to them.
v. Socialists
These individuals believe that there should be a significant re-adjustment
in the ownership of assets and in the structure of society. They criticise all
forms of domination, including the governments of a nation state,
concentrated economic power (large companies) and authoritarianism.
vi. Radical Feminists

These individuals believe that society and social systems are dominated by
an aggressive masculine view of the world. This is harmful and wrong.
There is an urgent need for more feminine values to guide attitudes, such
as care, compassion, and co-operation.
vii. Deep Ecologists/Deep Greens

These individuals are at the opposite extreme to pristine capitalists. They
believe that human beings have no greater right to existence than any
other form of life. Ethical decisions should be based on concerns for all
forms of life.
c. The classifications relevant to Richard and Rachael is that of the Social

Ecologists because they showed concern for the environment by the insistence
that all their products and processes must be environmentally friendly.
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Examiner‟s report
This business ethics question requires candidates to:
a. Identify alternative ethical stances;

b. Discuss Gray, Owen and Adams‟ classification of people‟s views on relationship
between organisations and society; and
c. Apply Gray, Owen and Adams‟ classification to a scenario.
About 70% of the candidates attempted this question, with average performance.
The average performance was due to poor discussion of the Gray, Owen and Adams‟
classification by some candidates and inability of some to apply the classification to
the scenario.
Candidates are advised to pay particular attention to application of principles and

concepts to scenarios.
Marking guide
point points
a Alternative ethical
stance 1
/2 4 2
Inferences from the
scenario 1 2 2
4
b Grey, Owen, and
Adam classification:
Identification 1 7 7
Explanation 1 7 7
14
c Relevance of
classification:
Identification of social 1 1 1
ecologist
Justification 1 1 1
2
Total 20
SOLUTION 5
a. The differences between creative thinking and critical thinking are:
Creative thinking is described as:
i. Making and communicating connections to think of many possibilities;

ii. Thinking and experiencing in various ways and use different points of
view;
143
iii. Thinking of new and unusual possibilities; and
iv. Giving guidance in generating and selecting alternatives.
Critical thinking is described as:
i. Analysing and developing possibilities to compare and contrast many

ideas;
ii. Improve and refine ideas;
iii. Make effective decisions and judgments; and
iv. Provide a sound foundation for effective action.
b. Creative thinking are expressed in the following modes:
i. Analysis
Creative thinking usually starts with a clear understanding of the matter at
hand. Many problems are usually complex, hence, requires a process of
analysis to break them down to simpler units which can be easily
managed. This requires critical examination of materials, including texts,
data, plans, designs, budgets, etc.
ii. Open-mindedness
To think creatively, one must remove any preconceived ideas, assumptions
or biases to provide opportunities for fresh ideas and perspectives. This
requires open mindedness.
iii. Problem-solving
One of the main benefits of creative thinking is in problem-solving, most
especially, when the problem is not following a usual trend or pattern.
New models or thoughts may be required to address them.
iv. Organisation
Organisation is an essential part of creativity. To be creative one must be
able to thread patterns which may not be easily discernible by all to form
a logical or physical whole. A creative mind will be able to put together
the pieces of a jig saw puzzle to form a whole picture. This is organisation.
Though at the analytical stage it seems the pieces are disorganised as they
are dissembled, thus creating a similitude or disorganisation usually
associated with creative people.
v. Communication
People will only appreciate your creative idea or solution if you
communicate it effectively. You need to have strong written and oral
communication skills. Creative thinking requires effective listening to fully
understand the issues involved.
144
c. Benefits of creative thinking are:
i. Generates new sources of income or enhances existing source, through
innovation.
ii. Creates new products.
iii. Finds new uses for existing products.
iv. Creates new markets.
v. Leads to improved bottom lines.
Examiner‟s report
This question on soft skills requires candidates to distinguish between creative and
critical thinking, explain modes of expression of creative thinking and discuss
benefits employees‟ creativity to organisations.
About 50% of the candidates attempted this question.
Despite the fact that the requirements of the question are direct, performance was
poor.
It is obvious that many candidates are not conversant with this aspect of the
syllabus, as many could neither distinguish between creative and critical thinking,
nor explain modes of expression of creative thinking.
Candidates and their trainers are enjoined to pay particular attention to the study of
soft skills in the syllabus, as these skills are crucial to becoming future-ready
chartered accountants.
Marking guide
Description Marks per Number of Sub-total Total
point points
a. Features of creative
thinking 1 2 2
Features of critical
thinking 1 2 2
4
b. Modes of expressing
creative thinking:
Mentioning 1 4 4
Explanation 1 4 4
8
c. Benefits of creative
thinking 1 3 3
3
Total 15
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SOLUTION 6
a. Kohlberg‟s stages of moral development are
i. Stage 1: Obedience and punishment orientation:
At Stage 1, individuals judge right and wrong on the basis of the direct
consequences for them of the actions they take. An action is bad if the
individual knows that he (or she) will be punished for it. The worse the
punishment, the greater the moral wrong. An action is good if the
individual knows that he will receive some benefits.
ii. Stage 2: Individualism and exchange

At Stage 2, the individual (often a child) recognises that there is no single
view of what is right and what is wrong. Different individuals have
different points of view. Each individual is also free to pursue his or her
own personal interests, and will therefore want to do what is in his or her
own best interest. When faced with a moral dilemma, the individual‟s
decision is based on: „What‟s in it for me?‟
iii. Stage 3: Good interpersonal relationships

The Individual now enter society and see morality as more than making
deals for personal benefit. The individual believes that they should live
up to the expectations of family, friends and the community. The
individual is aware of the approval or disapproval that they receive from
other people, and try to live up to their expectations. The individual enjoys
respect and gratitude, and their moral outlook is based on how this will be
obtained.
iv. Stage 4: Maintaining social order

At Stage 4, the individual is concerned with society as a whole, and the
need to maintain social order. The focus is on respect for social
conventions, authority and obeying the law, because these are important
for maintaining society.
v. Stage 5: Social contract orientation

Individuals think about society differently from the conventional way. They
take the view that a good society is one in which there is a „social contract‟
in which everyone works towards the common benefit of society.
They recognise that people are different and have the right to their own
views and opinions.
vi. Stage 6: Universal ethical principles

At this stage, moral reasoning is based on abstract „universal‟ ethical
principles. The individual queries the validity of laws, and considers that
laws are only valid if they are based on justice. Individuals have an
obligation to disobey unjust laws. An individual makes moral decisions
146
because they are right, not because they are a means to an end, or
because the action is legal or expected.
b. Criticisms of the Kohlberg‟s stages of moral development are:
i. At Stages 5 and 6, individuals put their own principles above society and
the law, which is a dangerous moral stance to take.
ii. Some critics believe that Kohlberg‟s views have a cultural bias, because
his ideas are based on Western philosophical traditions. His views might
not apply to non-Western cultures;
iii. Some expert argue that Kohlberg‟s views had a gender bias. Kohlberg
argued that moral thinking is based on reasoning linked to a sense of
justice – rules, rights and abstract principles. Gilligan argued that for
women, morality and ethical views are not based on these concepts of
justice, but on concern for interpersonal relationships and the ethics of
care and compassion; and
iv. It is also believed that Kohlberg‟s stages of moral development lack

empirical evidence.
Examiner‟s report
This question requires candidates to use Kohlberg‟s stages of moral development to
explain individuals‟ decision-making in situations of moral dilemma and highlight
criticisms of the stages.
About 60% of the candidates attempted this question. General performance was
above average.
The candidates who performed poorly could not critique the stages as required by the
question.
Candidates must develop the skill for critical appraisal of issues, concepts, and
principles, as it is essential for the practice of the profession of accountancy.
Marking guide
point points
a. Kohlberg‟s stage of
moral development:
Mentioning 1 6 6
Explanation 1 6 6
12
b. Criticism 1 3 3
3
Total 15
147
SOLUTION 7
a. Enterprise risks, also called strategic risks, speculative risks, or two-way risks,
are said to exist when future outcome of a decision can be good or bad for the
firm. They are risks that must be borne as the firm strives to make profit.
Enterprise risks are mostly unavoidable.
Based on information contained in the scenario, the enterprise risks that Gbam
Telecoms Plc may face in the new 5G spectrum business are as follows:
i. Risk of loss as a result of lack of adequate patronage of 5G spectrum

service by customers;
ii. Competitors may offer the same service at a cheaper cost leading to
reduced patronage;
iii. A new but better technology might make 5G obsolete;
iv. The risk that 5G might have some adverse effects on the health of people;
and
v. Risk that consumers might not change their devices to those with 5G
capabilities.
Operational Risks or Pure Risks are:

 Those risks that an adverse event might occur; and
 This kind of risks are mostly controllable.
The operational risks that Gbam Telecoms might incur, include:

i. The risk that the 5G technology might not actually work in Nigeria;
ii. Heightened insecurity in the country could put the company‟s equipment
at risk;
iii. Rising energy costs might drive up operational costs, prices, and
consequently reduce demand;
iv. The rise in operational costs occasioned by the demand for a pay rise and
hazard allowance by employees through the trade union; and
v. Risk of disruption in the roll-out plan due to work stoppages caused by

industrial disputes arising from employees‟ demand for pay rise and
hazard allowance.
b. Elements of a Risk Management System are:
i. A culture of risk awareness must be entrenched in the entity. Employees

within the organisation must be aware of the risk appetite of the firm and
work within this tolerance level to optimise organisational outcomes;
ii. A system of identifying, assessing and measuring risks must be
established. This will facilitate effective risk management;
148
iii. An efficient and effective risks information communication system must be
in place to provide the decision maker with adequate and timely
information to facilitate effective risk management; and
iv. Effective monitoring and feedback mechanism should be in place to
ensure that risk management strategies are modified, changed or updated
as necessary.
Examiner‟s report
This question requires candidates to advise on enterprise and operational risk
management and discuss key elements of a company‟s risk management
system.
About 70% of the candidates attempted this question, but performance was just
average.
Some candidates could not differentiate between enterprise and operational

risks. A substantial number of them could not discuss elements of a risk
management system. The poor attempts could only be attributed to inadequate
preparation by the affected candidates, as this topic is often tested.
Candidates are admonished to prepare well before registering for the

examination.
Marking guide
DESCRIPTION Mark per Number of Sub-total Total
point points
a. Definition of
enterprise risk 1 1 1
Enterprise risks from
the given scenario 1 5 5
Definition of
operational risk 1 1 1
Operational risks from
the given scenario 1 4 4
11
b. Elements of risk 1 4 4
management system
4
Total 15
149
TAXATION

number.
8. Tax and Capital Allowances rates are provided with this examination paper.
TUESDAY, MAY 16, 2023
DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO
150
TAXATION

QUESTION 1
Fadeke, Femi, Kola and Gbenga have been in partnership as medical practitioners for
eight years. The statement of profit or loss for the year ended December 31, 2021 is
as follows:
N N
Gross income 224,500,000
Direct expenses (48,700,000)
Gross profit 175,800,000
Deduct:
Salaries and wages 72,000,000
Rent and rates 1,500,000
Transport and travelling 825,000
Telephone and telex 210,000
Motor running expenses 680,000
Allowance for doubtful debts 310,000
Miscellaneous expenses 1,450,000
Other professional charges 360,000
Audit fees 500,000
Bank charges and commission 1,122,500
Depreciation 1,240,600
Interest on loan:
Fadeke 300,000
Femi 240,000
Kola 180,000
Gbenga 150,000
Interest on capital:
Fadeke 1,250,000
Femi 1,250,000
Kola 1,250,000
Gbenga 1,250,000
Passage and leave allowance:
Fadeke 660,000
Femi 660,000
151
Kola 660,000
Gbenga 660,000 88,708,100
Net profit for the year 87,091,900
(i) Included in salaries and wages is N1,200,000 paid for each of the partners.
(ii) Rent and rates comprise:
N
Rent paid to partner – Fadeke 1,440,000
Rates 60,000
1,500,000
(iii) Miscellaneous expenses:
These include:
Donation to a church in the hometown of Fadeke 50,000
Allowance paid to the domestic staff of Femi 240,000
Cost of repairs and maintenance of the residence of
each partner totaling 840,000
Office repairs 320,000
1,450,000
(iv) Captial allowances agreed with the revenue was N980,000

(v) Profits are to be shared equally amongst the partners
(vi) Fadeke and Femi are married with three and two children, respectively
(vii) Fadeke has a life assurance policy of N960,000 on which she pays N96,000
annually as premium
(viii) Fadeke maintains her aged father who is over 68 years
Required:
For the relevant assessment year:
a. Compute the income of the partnership (5 Marks)
b. Compute the income tax liability of each of the partners (25 Marks)
(Total 30 Marks)
152
INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF THE

THREE QUESTIONS IN THIS SECTION
QUESTION 2
The Personal Income Tax Act Cap.P8 LFN, 2004 (as amended) defines “employment”,
whilst the Labour Act Cap.L1 LFN, 2004 (as amended), defines “contract of
employment.”
An individual‟s liability to income tax is often determined according to whether or

not a person receiving the income is resident in a State for a particular year of
assessment. A taxpayer is, therefore, liable to the tax authority of the territory in
which he is deemed to be resident for a year of assessment.
Required:
a. Differentiate between “contract of employment” and “contract for employment”.
(8 Marks)
b. Explain the rules guiding the determination of residence for SIX categories of
individuals for tax purposes. (12 Marks)
(Total 20 Marks)
QUESTION 3
Taxation has been defined as the imposition of compulsory levies on individuals and
entities by governments in most countries in the world. The primary objective of
taxation is essentially to generate revenue or raise money for government
expenditure on social welfare.
You were appointed as the accountant of Specks Nigeria Limited on August 31, 2022.
Based on self assessment, the company filed the audited financial statements for
year ended December 31, 2021, together with its tax computations on June 7, 2022,
and the relevant tax liabilities were fully paid on same date.
On August 31, 2022, the Federal Inland Revenue Service raised an assessment that
was not in line with the tax returns. At the meeting of the directors held in September
2022, this issue was discussed and you were mandated to quickly address same so
that the assessment would not become final and conclusive.
Required:
a. When will an assessment become final and conclusive? (5 Marks)
b. Discuss the following in relation to objection and appeal procedures:
(i) Time limit for objection and appeal (4 Marks)
(ii) Contents of a notice of objection (4 Marks)
(iii) Amendment of assessment and notice of refusal to amend (NORA)
(7 Marks)
(Total 20 Marks)
153
QUESTION 4
As part of the induction programme for the newly recruited staff of your firm of tax
consultants, you have been saddled with the responsibility of making a presentation
on companies income tax computation for beginners during the firm‟s training
session.
You are provided with the following information relating to Wizzy-Baddo Limited,
which commenced business on September 1, 2020:
Adjusted
Profit
(N)
Period to December 31, 2020 6,937,500
Year ended December 31, 2021 9,300,500
The following assets were acquired as follows: N

June 5, 2020 – Land and building 5,467,500
July 1, 2020 – Motor vehicle 10,000,000
October 15, 2020 – Machinery 4,375,000
February 28, 2021 – Furniture 3,458,000
May 1, 2021 – Delivery van 4,750,000
Required:
For the relevant assessment years;
a. State the basis periods for assessable profits and qualifying capital expenditure
(5 Marks)
b. Compute the capital allowances (15 Marks)
(Total 20 Marks)

INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT ANY TWO OUT OF THE
THREE QUESTIONS IN THIS SECTION
QUESTION 5
Multiple taxation is a tax regime under which various and similar taxes are imposed
on taxpayers by different tiers of government. This has become a national problem
discouraging taxpayers from performing their civic responsibilities.
The 1999 Constitution of the Federal Republic of Nigeria seeks to eliminate multiple
taxation at all levels of government as provided for in Part II, paragraph 7 to 10.
154
Required:
a. Explain FOUR Constitutional and other possible solutions provided on how to
eliminate multiple taxes. (10 Marks)
b. State FIVE possible causes of multiple taxation. (5 Marks)
(Total 15 Marks)
QUESTION 6
Fountain Hotels Limited is a group of hotels located in many parts of North Central
Nigeria providing accommodation and other hospitality services. It renders its
returns at the end of each month in accordance with the Value Added Tax Act 2004
(as amended).
The following are the details of the transactions for the month of July 2022:
N
VAT on outdoor catering services 600,000
VAT on food 360,000
VAT on drinks 240,000
VAT on other vatable hotel services 270,000
VAT on drinks purchased 150,000
VAT on foodstuff purchased 210,000
VAT on kitchen equipment 480,000
VAT on professional services 240,000
You are also provided with the following additional information:

(i) 30% of outdoor catering services were on credit
(ii) 20% of food and drinks were on credit
(iii) Other vatable hotel services were paid for in full.
(iv) 25% VAT on drinks and foodstuff purchased were on credit.
(v) VAT on kitchen equipment and professional services were paid for in full.
Required:
a. Compute the VAT remittable to the Federal Inland Revenue Service in respect of
July 2022 transactions. (9 Marks)
b. Write short notes on the following:

(i) Revenue VAT (2 Marks)
(ii) Zero rated supplies and services (2 Marks)
(iii) VAT on export (2 Marks)
(Total 15 Marks)
155
QUESTION 7
The Federal Government in a bid to further boost the growth in foreign exchange
earnings, create new jobs, facilitate economic diversification, industrialisation and
provide access to foreign technology, came up with its export processing zones (EPZs)
policy.
EPZ is regarded as a customs area where an enterprise is allowed to import plant,

machinery, equipment and raw materials, process them, and then export them to the
world market, under security and without paying duty.
To facilitate better understanding of the above assertions, the Managing Director of a

would-be client approached you for the explanations of the relevant provisions of the
Nigerian Export Processing Zones Act Cap. N107 LFN 2004 (as amended) and
Companies Income Tax Act Cap. C21 LFN 2004 (as amended).
Required:
a. Discuss SIX special tax incentives for enterprises operating in an export
processing zone. (12 Marks)
b. Explain the penalties for non-compliance with section 55(1) of CITA (as
amended). (3 Marks)
(Total 15 Marks)
156
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 & Fittings) 50 Nil
Public Transportation Motor Vehicle 95 Nil
Ranching and Plantation Expenditure 30 50
Plantation Equipment Expenditure 95 Nil
Research and Development Expenditure 95 Nil
Housing Estate Expenditure 50 25
Motor Vehicle Expenditure 50 25
Agricultural Plant Expenditure 95 Nil
Furniture and Fittings Expenditure 25 20
2. INVESTMENT ALLOWANCE 10%
3. RATES OF PERSONAL INCOME TAX
Graduated tax rates and consolidated relief allowance of N200,000 or 1% of Gross
Income, whichever is higher + 20% of Gross Income.
Taxable Income Rate of Tax

(N) (%)
First 300,000 7
Next 300,000 11
Next 500,000 15
Next 500,000 19
Next 1,600,000 21
Over 3,200,000 24
After the relief allowance and exemption had been granted, the balance of income
shall be taxed as specified in the tax table above.
4. COMPANIES INCOME TAX RATE: 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)
6. COMPANIES INCOME TAX RATE 30%
7. TERTIARY EDUCATION TAX (2% of Assessable Profit)
8. CAPITAL GAINS TAX 10%
9. VALUE ADDED TAX 7.5%
10. HYDROCARBON TAX 15% (Petroleum prospecting
License and Marginal Fields
Companies)
30% (Petroleum Mining Lease
Companies)
157
SOLUTION 1
a) Fadeke, Femi, Kola and Gbenga

Computation of computed income of the partnership
For the year ended December 31, 2021 (Assessment year 2022)
N N
Net profit for the year 87,091,900
Add:
Allowance for doubtful debts 310,000
Donation to a church in the home town of Fadeke 50,000
Allowance paid to the domestic staff of Femi 240,000
Repairs and maintenance of the residence of each partner 840,000
Depreciation 1,240,600 2,680,600
Adjusted profit 89,772,500
Capital allowances (980,000)
Computed income 88,792,500
b) Computation of partners‟ income tax liabilities
Fadeke Femi Kola Gbenga Total
N N N N N
Share of profit 22,198,125 22,198,125 22,198,125 22,198,125 88,792,500
Interest on loan 300,000 240,000 180,000 150,000 870,000
Interest on capital 1,250,000 1,250,000 1,250,000 1,250,000 5,000,000
Passage and leave
allowance 660,000 660,000 660,000 660,000 2,640,000
Partner‟s salary 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000
Rent 1,440,000 0 0 0 1,440,000
Tax exempt items 27,048,125 25,548,125 25,488,125 25,458,125 103,542,500
Life insurance premium (96,000) 0 0 0 (96,000)
Gross income 26,952,125 25,548,125 25,488,125 25,458,125 103,446,500
Consolidated relief allowance
N200,000 or 1% of gross
income, whichever is higher
plus 20% of gross income (5,659,946) (5,365,106) (5,352,506) (5,346,206) (21,723,764)
Chargeable income 21,292,179 20,183,019 20,135,619 20,111,919 81,722,736
Income tax liability
First N300,000 @ 7% 21,000 21,000 21,000 21,000 84,000
Next N300,000 @ 11% 33,000 33,000 33,000 33,000 132,000
Next N500,000 @ 15% 75,000 75,000 75,000 75,000 300,000
Next N500,000 @ 19% 95,000 95,000 95,000 95,000 380,000
Next N1,600,000 @ 21% 336,000 336,000 336,000 336,000 1,344,000
Next N18,092,179 @ 24% 4,342,123 4,342,123
Next N16,983,019 @ 24% 4,075,925 4,075,925
Next N16,935,619 @ 24% 4,064,549 4,064,549
Next N16,911,919 @ 24% 4,058,861 4,058,861
Income tax payable 4,902,123 4,635,925 4,624,549 4,618,861 18,781,458
158
Withholding tax:
Rent (144,000) (144,000)
Interest on loan (30,000) (24,000) (18,000) (15,000) (87,000)
Net income tax payable 4,728,123 4,611,925 4,606,549 4,603,861 18,550,458
Examiner‟s report
The question tests candidates‟ knowledge of the computation of income of a
partnership and the income tax liabilities of partners.
This being a compulsory question, about 100% of the candidates attempted the
question. The performance of the candidates was average.
The commonest pitfalls of the candidates were their inability to identify allowable
expenses in the determination of computed income of the partnership and compute
the consolidated relief allowance.
Candidates are advised to read widely and be conversant with the provisions of the
Personal Income Tax Act Cap. P8 LFN 2004 (as amended) before sitting for
subsequent examinations to enhance better performance.
Marking guide
a) Computation of the income of the partnership Marks Marks

Heading - Name ½
- Computation of computed income ½
- Assessment years ½
Net profit ½
Allowance for doubtful debts ½
Donation to church ½
Domestic allowance ½
Repairs and maintenance ½
Depreciation ½
Capital allowances ½ 5
159
b) Computation of partners‟ income tax liabilities
Share of profit – (½ mark each for any correct amount) 2
Interest on loan – (½ mark each for any correct amount) 2
Interest on capital - (½ mark each for any correct amount) 2
Postage and leave allowance - (½ mark each for any correct amount) 2
Partners‟ salary - (½ mark each for any correct amount) 2
Rent ¼
Life insurance premium ¼
Consolidated relief allowance – (¼ mark each for any correct amount) 1
Income tax liability:
(1/2 mark each for any correct amount) 12
Withholding tax - Rent ½
- Interest on loan (1/4 mark for each correct amount) 1 25
Total 30
SOLUTION 2
(a) Contract of employment and contract for employment

The Personal Income Tax Act Cap. P8 LFN 2004 (as amended) defines
employment to include any appointment or office, whether public or otherwise,
for which remuneration is payable, and “employee” and “employer” shall be
construed accordingly.
However, the Labour Act 1994, defines a contract of employment as “any

agreement whether written or verbal, expressed or implied, whereby one
person agrees to serve the employer as a worker.”
A contract for employment is an agreement whereby a person is engaged as

an independent contractor, such as a self-employed person or vendor engaged
for a fee to carry out an assignment or a project for the company. In a contract
for employment, there is no employer-employee relationship in the contract
and the self- employed person is not covered by the Labour Act.
An individual under a contract of employment is commonly referred to as an

employee, while an individual under a contract for employment is referred to
as an independent contractor or self-employed person. The following
distinctions can be drawn between a contract of employment and a contract
for employment:
i. An individual under a contract of employment earns remuneration (that

is, salary), while an individual under a contract for employment earns
profit;
ii. An individual under a contract of employment is assessed to tax on
160
actual year basis, while an individual under a contract for employment
is assessed to tax on preceding year basis;
iii. A self-employed person is required to register for value added tax, while
an employee is not required to do so; and
An employee has the right not to be unlawfully dismissed and to receive

redundancy payment and other employment rights, while a self-employed
person does not have such rights.
(b) Residence of different categories of individuals

Liability to income tax is often determined according to whether a person
receiving income is resident in a State for a particular year of assessment.
A taxpayer is therefore liable to the tax authority of the territory in which he
is deemed to be resident for a year of assessment. The following rules guide
the determination of residence:
(i) An individual whether in employment or whose only sources of income
are unearned income is deemed to be resident for a year of assessment
in the territory in which he has a place available for his domestic use in
Nigeria on the first day of January of the assessment year, and does not
include any hotel, rest house or other place at which he is temporarily
lodging;
(ii) An executor is deemed to be resident in the territory in which the

deceased individual was last deemed to be resident or would have been
deemed to be resident if the law had been in force prior to the date of
his death;
(iii) A trustee of any trust or settlement is deemed to be resident where all

the income of the settlement or trust for a year of assessment arises.
Where the income arises in more than one territory or where the tax
authority cannot be determined, the Federal Inland Revenue Service is
the tax authority;
(iv) Partners in partnership are deemed to be resident where the principal

office or the place of the partnership is situated on the first day of that
year or is first established during the year;
(v) A village or an indigenous community is deemed to be resident in the

territory in which the community is found;
(vi) An itinerant worker is deemed to be resident where he is found in a
year of assessment;
(vii) An individual not being a person assessable by FIRS (S. 2, 1 (b) ) who
holds a foreign employment on the 1st day of January in a year of
assessment or who first becomes liable to income tax in Nigeria for that
year by reason of his entering that employment during that year, shall
be deemed to be resident for that year in the territory in which the
161
principal office of his employer is situated on that day or on the day his
foreign employment commences as the case may be; and
(viii) An individual whose only source of earned income arising in Nigeria on

the 1st day of January in a year of assessment was a pension, or who
had a place or principal place on that day shall be deemed to be
resident for that year in the territory in which that place or principal
place of residence was situated on that day.
Examiner‟s report
The question tests candidates‟ knowledge of the differences between “contract of

employment” and “contract for employment”, and rules guiding the determination of
residence of individuals for tax purposes.
About 60% of the candidates attempted the question but the performance was
average.
The commonest pitfalls of the candidates were their inability to differentiate between
“contract of employment” and “contract for employment”. Some of the candidates
could not explain the rules guiding the determination of residence of individuals for
tax purposes.
Candidates are advised to read widely by making use of relevant texts on taxation of
individuals, ICAN Pathfinder and Study Text.
Marking guide
Marks
a) Differentiation between “contract of employment” and “contract
for employment”
(2 marks each for any correct point subject to a maximum of 4 points) 8
b) Explanation of the rules guiding the determination of residence

for six different categories of individuals for tax purposes
(2 marks each for any correct point subject to a maximum of 6 points) 12
Total 20
162
SOLUTION 3
a) Final and conclusive assessment
An assessment raised on a company is said to be final and conclusive where:
i. No valid objection or appeal has been lodged against the amount of

total profit assessed on a company within the time statutorily allowed
for that purpose; or
ii. The amount of total profit has been agreed by the taxpayer after his
objection; or
iii. The amount of total profit has been determined on appeal.
b) i. Time limit for objection and appeal

If any company disputes a tax assessment raised on it by the tax
authority, it may give a notice of objection, to the Federal Inland
Revenue Service, seeking a review or revision of the assessment.
However, the time limit for objection is within thirty days from the date
of service of the notice of assessment.
Also, a company aggrieved by an assessment or demand notice made

upon it by the FIRS or aggrieved by any action or decision of the FIRS,
such as refusal to amend an assessment; may appeal against such
decision or assessment or demand notice within thirty days from the
date on which a copy of the order or decision which is being appealed
against is made, or deemed to have been made by the FIRS.
ii. Contents of a notice of objection

In line with the provision of Section 69 of Companies Income Tax Act
Cap C21 LFN 2004 (as amended), for a notice of objection to be valid,
it must:
 Be in writing, delivered in persons, by courier service or via

electronic mail and addressed to the Chairman, Federal Inland
Revenue Service;
 State the grounds of objection, namely:
 Amount of assessable and total profits of the company for

the relevant assessment year; and
 Amount of tax which the taxpayer claims is payable for the

year of assessment.
 Be raised within thirty days of the date of service of the notice of

assessment.
163
iii. Amendment of assessment and refusal to amend If any company
disputes an assessment raised on it by the FIRS, it may apply to the
FIRS, by notice of objection in writing, delivered in person, by courier
service, email or any other electronic means, as directed by the Service,
to review and revise the assessment made upon it. Therefore, the
company must ensure that its objection:
 Is made within thirty days from the date of service of the notice
of assessment; and
 Contains the ground of objection to the assessment, that is:
 The amount of assessable and total profits of the company
for the relevant year of assessment; and
 The amount of tax payable for the year, which the
company claims should be stated on the notice of
assessment.
On receipt of the notice of objection referred to above, the FIRS may
require the company giving the notice of objection to furnish such
particulars as the FIRS may deem necessary and to produce all books or
other documents relating to the profits of the company, and may
summon any person who may be able to give evidence relating to the
assessment to attend for examination by an officer of the FIRS on oath
or otherwise.
In the event of any company assessed, which has objected to an
assessment made upon it, agreeing with the FIRS as to the amount at
which it is liable to be assessed, the assessment shall be amended
accordingly, and notice of the tax payable shall be served upon such
company.
However, if the company fails to agree the amount at which the
company is liable to be assessed with the FIRS, the FIRS shall give
notice of refusal to amend the assessment as desired by such company
and may revise the assessment to such amount as the FIRS may,
according to the best of its judgement, determine and give notice of its
revised assessment and of the tax payable together with the notice of
refusal to amend the revised assessment.
Examiner‟s report
The question tests candidates‟ knowledge of when an assessment can be final and
conclusive. Additionally, candidates are expected to explain objection and appeal
procedures.
About 50% of the candidates attempted the question but the performance was
average.
The commonest pitfall of the candidates was their inability to explain the
amendment of assessment and notice of refusal to amend (NORA).
164
Candidates are advised to read widely and make use of the Institute‟s Pathfinder and
Study Text in their preparations for subsequent examinations.
Marking guide
Marks Marks
a) When an assessment is final and conclusive
i No valid objection 1
ii. No valid appeal 1
iii. Time statutorily allowed (30 days) 1
iv. Total profit agreed by the taxpayer after objection 1
v. Total profit has been determined on appeal 1 5
b) i. Time limit for objection and appeal
Notice of objection 1
Time limit for objection (30 days after the date of
receipt of assessment) 1
Appeal against such decision or assessment 1
Time limit for appeal against such decision or
assessment (30 days after the date of receipt of refusal
to amend) 1 4
ii. Contents of a notice of objection
 Be in writing ½
 Addressed to the Chairman (FIRS) ½
 State grounds of objection
- Amount of assessable and total profits 1
- Amount of tax payable 1
 Notice of objection to be raised within 30 days
of the date of service of notice of assessment 1 4
iii. Amendment of assessment and notice of refusal of
amend (NORA)
 Notice of objection must be in writing and
delivered in person, courier servicer or any
electronic device 1
 Objection to be filed within 30days from the
date of service of the notice of assessment 1
 Grounds of objection:
- Amount of assessable and total profits 1
- Amount of tax payable 1
 Furnishing of such particulars as the FIRS may
deem necessary 1
 Agreeing with the FIRS as to the amount at
which it is liable to be assessed 1
 FIRS shall give notice of refusal to amend the
assessment 1 7
Total 20
165
SOLUTION 4
a) Wizzy – Baddo Limited
Determination of basis periods for assessable profit
Year of assessment Basis period

2021 1/9/2020 - 31/12/2020
2022 1/1/2021 – 31/12/2021
Determination of basis periods for qualifying capital expenditure (QCE)
Year of assessment Basis period

2021 1/9/2020 - 31/12/2020
2022 1/1/2021 – 31/12/2021
166
b) Computation of capital allowances
for 2021 and 2022 assessment years
Assessment I.A Land and Motor Machinery Furniture Delivery Capital

year AA building vehicle 50% van allowances
Inv. A 15% 50% 25% 25% 50%
10% 25% 10% 20% 25%
2021 Cost N N N N N N
(1/9/20 -
31/12/20) I.A 5,467,500 10,000,000 4,375,000 - - -
AA (820,125) (5,000,000) (2,187,500) - - 8,00,625
(154,913) (416,667) (182,292) - - 753,872

Inv A
(154,913) - - 437,500
________ 9,198,997
W.D.V c/f 4,492,462 4,583,333 2,005,205
to A.Y
2022
2022
(1/1/21 –
31/12/21)
Cost - - - 3,458,000 4,750,000 -
I.A - - - (864,500) (2,375,000) 3,239,500
AA (464,738) (1,250,000) (546,875) (518,700) (593,750) 3,374,063

W.D.V c/f 6,613,563
to A.Y.
2023 4,027,724 3,333,333 1,458,333 2,074,800 1,781,250
Examiner‟s report
The question tests the candidates‟ knowledge of the determination of basis periods
and computations of capital allowances on commencement of business.
About 70% of the candidates attempted the question but performance was fair.
The commonest pitfalls of the candidates were their inability to ascertain the basis
periods and prorate annual allowance on commencement of business.
Candidates are advised to read ICAN Study Text and Pathfinders when preparing for
subsequent examinations to ensure better performance in future.
167
Marking guide
(a) Basis periods for assessable profits and QCE Marks Marks
Name of company ½
Heading - assessable profit ¼
2021 assessment year ½
Basis period - 1/9/2020 – 31/12/2022 ½
- 1/1/2021 – 31/12/2021 ½
Heading - qualifying capital expenditure (QCE) ¼

Basis period - 1/9/2022 – 31/12/2022 ½
- 1/1/2021 – 31/12/2021 ½ 5
(b) Computation of capital allowances
Heading - Computation of capital allowances ½
- 2021 and 2022 assessment years ½
Cost (½ mark each for any correct amount) 1½
Initial allowance (½ mark for any correct amount) 1½
Total of initial allowance 1
Annual allowance (½ mark for each correct amount) 1½
Total of annual allowance ½
Cost (½ mark each for any correct amount) 1
Initial allowance (½ mark for any correct amount) 1
Total of initial allowance 1
Investment allowance 1
Annual allowance (½ mark for any correct amount) 2½
Total of annual allowance ½ 15
Total 20
SOLUTION 5
(a) The 1999 Constitution of the Federal Republic of Nigeria seeks to
eliminate multiple taxation at all levels of government as provided for in
Part II, Paragraphs 7 to 10, which state that:
i. In the exercise of its powers to impose any tax or duty on:
 Capital gains, incomes or profits or persons other than
companies; and
 Documents or transactions by way of stamp duties.
The National Assembly may, subject to such conditions as it may

prescribe, provide that the collection of any such tax or duty or the
administration of the law imposing it, shall be carried out by the
government of a state or other authority of a state.
168
ii. Where an Act of the National Assembly provides for the collection of
tax or duty on capital gains, incomes or profit or the administration
of any law by an authority of a state in accordance with paragraph 7
thereof, it shall regulate the liability of persons to such tax or duty in
such manner as to ensure that such tax or duty is not levied on the
same person by more than one state.
iii. A House of Assembly may, subject to such conditions as it may

prescribe, make provisions for the collection of any tax, fee or rate
or for the administration of the law providing for such collection by
a local government council.
iv. Where a law of a House of Assembly provides for the collection of

tax, fee or rate or for the administration of such law by a local
government council in accordance with the provisions hereof, it
shall regulate the liability of persons to the tax, fee or rate in such
manner as to ensure that such tax, fee or rate is not levied on the
same person, in respect of the same liability by more than one local
government council.
Other possible solutions to multiplicity of taxes in Nigeria include:

i. Streamlining the number of taxes in Nigeria in view of the low yields of
many of the taxes. This will involve the review of current statutory
provisions in Nigeria;
ii. Reviewing all the existing taxes in Nigeria and harmonise where
necessary, as recommended by various study groups;
iv. Reviewing the Constitution to address the overlap in taxing rights and
limit the number of taxes that can be imposed by different levels;
iv. Abolishing any unorthodox method of tax collection and implementing
technology for tax administration; and
v. Limiting the number of revenue agencies.
(b) The possible causes of multiple taxation in Nigeria are:
i. The number of taxes which local governments have constitutional rights

to collect is a major cause of multiple taxation;
ii. Lack of funding, particularly, for most States may result in multiple
taxation where the Service attempts to source for funds through levying
of tax notwithstanding whether such tax is being levied either by the
Federal or local governments;
v. Some of the State governments deliberately deny their local

governments the revenue due to them. Consequently, a local
169
government as a way of survival, desperately and aggressively focuses
on any revenue drive that will generate revenue to them;
iv. Lack of tax education and awareness;
v. All the tiers of government usually fail to adequately fund their

departments and agencies;
vi. Multiplicity of revenue agencies;
vii. Overlapping taxing rights as contained in the Constitution and the

Taxes and Levies (Approved List for Collection) Act, Cap. T2 LFN, 2004;
and
viii. Manual tax administration system and unorthodox tax collection.
Examiner‟s report
The question tests candidates‟ understanding of the possible causes, and

constitutional and other possible solutions to the elimination of multiple taxation.
About 80% of the candidates attempted the question but performance was fair.
The commonest pitfalls of the candidates were their inability to explain the
constitutional provisions on how to eliminate multiple taxation.
Candidates are advised to read widely before sitting for the Institute‟s examinations
and be abreast of developments in tax matters.
Marking guide
Marks Marks
(a) Elimination of multiple taxes
For stating that:
- The 1999 Constitution of the Federal Republic
of Nigeria seeks to eliminate multiple taxation; 1
- The National Assembly provides for the collection of

any duty or tax and it shall be carried out by the
government of a State or any other authority; 1
- An Act of National Assembly regulates the liability of

persons to specified taxes and such taxes shall not be
levied on the same person by more than one State; 1
- A House of Assembly makes provisions for the collection

of specified taxes, levies, etc; and 1
170
- A House of Assembly shall ensure that the tax is not
levied on the same person in respect of the same
liability by more than one local government council. 1
Other possible solutions

(1 mark each for any correct solution) 5 10
(b) Causes of multiple taxation

(1 mark each for any 5 correct solutions) 5
15
SOLUTION 6
(a) Fountain Hotels Limited

VAT remittable to the Federal Inland Revenue Service (FIRS)
In respect of July 2022 transactions
Output VAT N N
VAT on outdoor catering (70% of N600,000) 420,000
VAT on drinks (80% of N360,000) 288,000
VAT on foodstuff (80% of N240,000) 192,000 900,000
Less
Input VAT
VAT on drinks (75% of N150,000 ) 112,500
VAT on foodstuff (75% of N210,000) 157,500 (270,000)
Amount remittable 630,000
NOTE
Based on the provisions of the Finance Act, 2019, VAT remittance is now
“cash based” as against “invoice based”.
(b) i. Revenue VAT

This is the tax payable on the sale of taxable goods or services
which is ultimately paid by the final consumer of the goods or
services.
171
ii. Zero-rated supplies and services
Certain goods and services are classified as zero-rate. These goods and
services are within the ambit of VAT Act, but the applicable rate is 0%.
These include:
- Non oil exports;
- Goods and services purchased by diplomats; and
- „Humanitarian donor funded project includes project undertaken
by non- government organisations, religious and social clubs or
societies recognised by law whose activity is not for profit and in
the public interest.
iii. VAT on export

All exported goods and services are exempted from VAT. This is in line
with the concept of destination principle, which allows for value added
taxes to be retained by the country where the taxed product is being
sold / consumed.
Examiner‟s report
The question tests the candidates‟ knowledge of computation of VAT remittable to
Federal Inland Revenue Service (FIRS), taking into consideration hotel services
rendered on credit and credit purchases made.
Over 80% of the candidates attempted the question and performance was above
average.
The commonest pitfall was the candidates‟ inability to compute VAT remittable to
Federal Inland Revenue Service (FIRS), taking into consideration hotel credit services
rendered and credit purchases made.
Candidates are advised to read relevant study materials, VAT Act and circulars issued
by FIRS for subsequent examinations.
Marking guide
(a) Remittance of VAT to FIRS Marks Marks

Heading - Name ½
- VAT remittable to FIRS ½
- In respect of July 2022 ½
transactions
Output VAT - Outdoor catering 1½
- VAT on drinks 1½
- VAT on foodstuff 1½
Output VAT - VAT on drinks 1½
- VAT on foodstuff 1½ 9
172
(b) i. Revenue VAT
(1 mark each for any two points) 2
ii. Zero-rated supplier and services
(1 mark each for any two points) 2
iii. VAT on export

Exemption of exported goods from VAT 1
Concept of destination principle 1 6
Total 15
SOLUTION 7
(a) Special tax incentives for enterprises in an export processing zone – section
18(1) of Nigeria Export Processing Zones Act Cap. N107 LFN 2004 (as
amended).
Approved enterprises within the zones shall be entitled to the following

incentives:
i. Legislative provisions pertaining to taxes, levies, duties and foreign
exchange regulations shall not apply within the zones;
ii. Repatriation of foreign capital investment in the Zones at any time with
capital appreciation of the investment;
iii. Remittance of profits and dividends earned by foreign investors in the

zones;
iv. No import or export licenses‟ shall be required;
v. Up to 25% of production may be sold in the customs territory against a

valid permit and on payment of appropriate duties;
vi. Rent-free land at construction stage; thereafter rent shall be as

determined by the authority;
vii. Up to 100% foreign ownership of business in the zones allowable; and
viii. Foreign managers and qualified personnel may be employed by

companies operating in the zones.
Export processing zone allowance – section 35 of CITA (as amended)

i. An export processing zone allowance is granted to a company, which
has incurred expenditure in its qualifying building and plant equipment
in an approved manufacturing activity in an export processing zone.
The rate is 100% capital allowance in any assessment year but the
company will not be entitled to an investment allowance. Only the tax
173
written down value of the assets shall be carried forward at the end of
the tax holidays.
ii. The profit or gains of a 100 percent export oriented undertaking

established within and outside an export free zone shall be exempt from
tax for the first three consecutive assessment years provided that;
 The undertaking is 100 percent export oriented;
 The undertaking is not formed by splitting or breaking up or

reconstructing a business already in existence;
 It manufactures, produces and exports articles during the

relevant year and the export proceeds form 75 per cent of its
turnover;
 The undertaking is not formed by transfer of machinery or plants

previously used for any purpose to the new undertaking or
where machinery or plant previously used for any purpose is
transferred does not exceed 25 per cent of the total value of the
machinery of the undertaking; and
 The undertaking repatriates at least 75 per cent of the export

earnings to Nigeria and places it in a domiciliary account in any
registered and licensed bank in Nigeria.
b. Companies registered and operating in the zone shall comply with the
provisions of section 55(1) of CITA (as amended) and render returns in the
manner prescribed therein, to the Federal Inland Revenue Service, in order
to enjoy the exemption from taxes, levies, duties and foreign exchange
regulations in accordance with section 8 of the Act and relevant provisions
of BOFIA 2020.
All penalties prescribed in CITA and the Federal Inland Revenue Service
(Establishment) Act, 2007, may apply to such companies in the event of
non-compliance with section 55(1) of CITA.
Examiner‟s report
The question tests the candidates‟ knowledge of the special tax incentives and
penalties for enterprises operating in an export processing zone.
About 80% of the candidates attempted the question but the performance was below
average.
The commonest pitfall was the candidates‟ inability to explain special tax incentives
for enterprises operating in an export processing zone.
174
Candidates are advised to pay attention to this particular aspect of the syllabus.
Marking guide
Marks
a. Special tax incentives
(2 marks each for any six incentives) 12
b. Penalties for non-compliance with Section 55 (1) of CITA (as

amended)
Penalties prescribed in CITA and FIRS (Establishment) Act, 2007 3
Total 15
175

May 2023 Pathfinder - Skills Level

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THE INSTITUTE OF CHARTERED

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

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

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

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

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

AUDIT AND ASSURANCE 37 - 61

CORPORATE STRATEGIC MANAGEMENT & ETHICS 124 - 149

TAXATION 150 – 176

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

SKILLS LEVEL EXAMINATION – MAY 2023

TUESDAY, MAY 16, 2023

DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO

SKILLS LEVEL EXAMINATION – MAY 2023

INSTRUCTION: YOU ARE REQUIRED TO ATTEMPT FIVE OUT OF SEVEN

SECTION A: COMPULSORY QUESTION (30 MARKS)

(ii) The revenue includes N69,250,000 for an item of office equipment

b. Some new trainee accountants in your organisation were engaged in a

SECTION B: OPEN-ENDED QUESTIONS (40 MARKS)

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

c. Babanriga Nigeria Limited acquired a factory machine for N10million on

Income tax expense (28,670) (5,790)

Equity and liabilities N‟000 N‟000

Non-current assets N‟000 N‟000

(iii) The balances in respect of office equipment are after charging

(iv) The freehold property was purchased on October 1, 2021 for

SECTION C: OPEN-ENDED QUESTIONS (30 MARKS)

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

b. Many accountants believe that Block-Chains Technology will enhance the

b. IAS 16 prescribes the principles and the valuation methods in recognising

Describe the TWO methods of valuation recognised in IAS 16 on property,

Wk 2: Cost of sales ₦'000

Wk 3: Other incomes ₦'000

Wk 4: Administrative expenses ₦'000

Wk 5: Distribution cost ₦'000

Wk 6: Financial assets ₦'000

Wk 7: Finance cost ₦'000

Wk 8: Income tax expense ₦'000

WK 10: Trade receivables N‟000

Wk 11: 3% Redeemable loan notes N‟000

Wk 12: Deferred tax liabilities N‟000

Wk 13: Proposed ordinary dividend

Above subject refers.

Following your request, I have prepared a brief on the financial ratios

Earnings Per Share (EPS):

iv. It can be manipulated by changing the number of shares through stock

v. EPS is not useful for companies with no earnings or negative earnings.

ii) Preparation of statements of changes in equity

iii) Preparation of statement of financial position

b) Preparation of internal memo

(b) Content of director‟s report – CAMA 2020

(c) Babanriga Nigeria Limited

31/12/2021 Depreciation (800) (1,125) 325 30% 98

b) Content of director‟s report-CAMA 2020

b i. Computation of goodwill on acquisition ₦'000 ₦'000

Candidates are advised to pay more attention to preparation of group accounts

bi) Calculation of goodwill on acquisition

(ii) Deferred tax liability as at September 30, 2022

Temporary Deferred tax