Series: MAY 2020

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CR – May 2020 – L3 – Q3a – Foreign Currency Transactions

Foreign currency transactions related to purchases, sales, and investment property with exchange rate variations and reporting implications.

Question

Medina Power Ltd has carried out certain transactions denominated in foreign currency during its financial year ended 31 October 2019 and has also conducted foreign operations through a foreign entity. Medina Power Ltd.’s functional and presentation currency is the cedi.

On 31 July 2019, Medina Power Ltd purchased goods from a foreign supplier for 16 million dinars. At 31 October 2019, the supplier had not yet been paid and the goods were still held in inventory by Medina Power Ltd.

On 31 July, Medina Power Ltd sold goods to a foreign customer for 8 million dinars, and it received payment for the goods in dinars on 31 October 2019.

Medina Power Ltd had also purchased an investment property on 1 November 2018 for 56 million dinars. At 31 October 2019, the investment property had a fair value of 48 million dinars. The company uses the fair value model in accounting for investment properties.

Medina Power Ltd wants advice on how to treat these transactions in the financial statements for the year ended 31 October 2019.

Required:
Discuss the accounting treatment of the above transactions in accordance with the advice required by the directors. (You should show detailed workings as well as a discussion of the accounting treatment used.)

Answer

Inventory and payable

The inventory and trade payable would be recorded initially at GH¢10 million (16 million dinars x GH¢0.6250).
At the year-end on 31 October 2019, the amount payable is still outstanding. It should be re-translated at the closing rate to GH¢12.3 million (16 million dinars x GH¢0.7692).
This creates an exchange loss of GH¢2.3 million (12.3 – 10) which should be recognized in profit or loss.
Unless it has been impaired, the inventory (a non-monetary asset) should be recorded at GH¢10 million at the year-end.

Sale of goods

The sale of goods should be recorded at GH¢5 million (8 million dinars x GH¢0.6250) as revenue and as a trade receivable.
Payment in dinars was received on 31 October 2019 and the actual cedi value of the dinars received was GH¢6.2 million (8 million dinars x GH¢0.7692).
This creates a gain on exchange of GH¢1.2 million (6.2 – 5) which should be recognized in profit or loss.

Investment property

The investment property should be recognized on 1 November 2018 at GH¢40 million (56 million dinars x GH¢0.7143).
At the year-end on 31 October 2019, the property should be recognized at its fair value of GH¢36.9 million (48 million dinars x GH¢0.7692).
The fall in fair value (40 – 36.9 = 3.1) should be recognized in profit and loss as a loss on investment property.
The property is a non-monetary asset and when a gain or loss on a non-monetary item is recognized in profit or loss, the element of the gain or loss relating to exchange rates is also recognized in profit or loss.

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Tags: Foreign Exchange, Investment properties, Monetary and non-monetary transactions, Revenue Recognition
Level: Level 3

Topic: Foreign currency
Series: MAY 2020

Topic: Foreign currency
Series: MAY 2020

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CR – May 2020 – L3 – Q3a – Foreign Currency Transactions

Foreign currency transactions related to purchases, sales, and investment property with exchange rate variations and reporting implications.

Question

On 31 July, Medina Power Ltd sold goods to a foreign customer for 8 million dinars, and it received payment for the goods in dinars on 31 October 2019.

Medina Power Ltd wants advice on how to treat these transactions in the financial statements for the year ended 31 October 2019.

Answer

Inventory and payable

The inventory and trade payable would be recorded initially at GH¢10 million (16 million dinars x GH¢0.6250).
At the year-end on 31 October 2019, the amount payable is still outstanding. It should be re-translated at the closing rate to GH¢12.3 million (16 million dinars x GH¢0.7692).
This creates an exchange loss of GH¢2.3 million (12.3 – 10) which should be recognized in profit or loss.
Unless it has been impaired, the inventory (a non-monetary asset) should be recorded at GH¢10 million at the year-end.

Sale of goods

The sale of goods should be recorded at GH¢5 million (8 million dinars x GH¢0.6250) as revenue and as a trade receivable.
Payment in dinars was received on 31 October 2019 and the actual cedi value of the dinars received was GH¢6.2 million (8 million dinars x GH¢0.7692).
This creates a gain on exchange of GH¢1.2 million (6.2 – 5) which should be recognized in profit or loss.

Investment property

The investment property should be recognized on 1 November 2018 at GH¢40 million (56 million dinars x GH¢0.7143).
At the year-end on 31 October 2019, the property should be recognized at its fair value of GH¢36.9 million (48 million dinars x GH¢0.7692).
The fall in fair value (40 – 36.9 = 3.1) should be recognized in profit and loss as a loss on investment property.
The property is a non-monetary asset and when a gain or loss on a non-monetary item is recognized in profit or loss, the element of the gain or loss relating to exchange rates is also recognized in profit or loss.

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Topic: Foreign currency
Series: MAY 2020

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CR – May 2020 – Q3b(i) – Ethical Issues in Contract Bidding

This question requires a discussion on the ethical issues related to conflict of interest, confidentiality, and professional behavior in a contract bidding scenario.

Question

You have just obtained your full membership with the Institute of Chartered Accountants (Ghana). Following this successful achievement, you have been appointed as the Head of Finance at Asasiyemedeh Company Limited, a Ghanaian company, which provides catering services. Your former employer, Akwaba Limited, is a large public sector organization operating in Accra, where, as the Financial Accountant, you had the opportunity to work on areas relating to financial accounting, procurement, contracts, and bids. One of Asasiyemedeh Company Limited’s major contracts is with Akwaba Limited, your former employer. The contract is now due for renewal, and Asasiyemedeh Company Limited is preparing a competitive bid for this contract.

You have been tasked to lead the team responsible for bidding for this contract, but you are concerned as a professional that you might breach confidentiality if you accept this role. You also suspect that your knowledge and experience of Akwaba Limited were seen as good reasons for appointing you to the position of Head of Finance at Asasiyemedeh Company Limited. You do not in any way want to let your new employer down as you are aware that the loss of such a major contract would have a significant effect on the financial performance of Asasiyemedeh Company Limited, and its performance-related bonus scheme for management members.

Required:
Discuss the ethical issues raised in the above scenario.

Answer

The ethical issues raised in the scenario include:

Objectivity:
There is a self-interest threat that arises due to the impact that losing Akwaba Limited’s contract would have on Asasiyemedeh Company Limited’s financial performance and reward policy. There is also an intimidation threat because other employees in the company may be affected by the financial implications of the contract not being renewed. Additionally, you may feel a strong desire to impress your new employer by helping to secure the renewal of the contract. The key question is whether you can safeguard against the self-interest threat posed by Asasiyemedeh Company Limited’s performance-related bonus scheme.
Confidentiality:
Clearly, there is a confidentiality threat here as you have worked with Akwaba Ltd in the past. Your previous employment with Akwaba Ltd has provided you with information which may be of value to Asasiyemedeh Company Limited. The principle of confidentiality prohibits the use of confidential information acquired as a result of your previous employment for your advantage or that of your current employer. While you have a responsibility to advance the legitimate aims of your employing organization, this should not extend to a breach of confidentiality. In this case, you (because of Asasiyemedeh Company Limited’s performance-related bonus) and Asasiyemedeh Company Limited stand to benefit from the confidential information about how bids are assessed at Akwaba Ltd. The principle would not be breached if you were in possession of information that was in the public domain, or if you were simply to use experience gained in your previous employment, so long as you do not use confidential knowledge that you acquired as a result of that employment. If you accept this role, can you ensure that you do not use confidential information relating to your former employer to your advantage or to the advantage of your current employer? You must be careful and professional as winning that contracts may leads to confidential breaches against you or your current employers perhaps from those bidders of the same contracts who might lose the bids
Professional Behavior:
You must demonstrate professionalism here. For example, what can you do to safeguard your reputation as a professional, the reputation of your employer, and the accountancy profession to which you belong? You must consider the Institute of Chartered Accountants (Ghana) code of ethics, applicable laws (procurement Act 914), and regulations, your current and previous contracts of employment, and your employer’s policies and procedures.

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CR – May 2020 – Q3b(i) – Ethical Issues in Contract Bidding

This question requires a discussion on the ethical issues related to conflict of interest, confidentiality, and professional behavior in a contract bidding scenario.

Question

Required:
Discuss the ethical issues raised in the above scenario.

Answer

The ethical issues raised in the scenario include:

Objectivity:
There is a self-interest threat that arises due to the impact that losing Akwaba Limited’s contract would have on Asasiyemedeh Company Limited’s financial performance and reward policy. There is also an intimidation threat because other employees in the company may be affected by the financial implications of the contract not being renewed. Additionally, you may feel a strong desire to impress your new employer by helping to secure the renewal of the contract. The key question is whether you can safeguard against the self-interest threat posed by Asasiyemedeh Company Limited’s performance-related bonus scheme.
Confidentiality:
Clearly, there is a confidentiality threat here as you have worked with Akwaba Ltd in the past. Your previous employment with Akwaba Ltd has provided you with information which may be of value to Asasiyemedeh Company Limited. The principle of confidentiality prohibits the use of confidential information acquired as a result of your previous employment for your advantage or that of your current employer. While you have a responsibility to advance the legitimate aims of your employing organization, this should not extend to a breach of confidentiality. In this case, you (because of Asasiyemedeh Company Limited’s performance-related bonus) and Asasiyemedeh Company Limited stand to benefit from the confidential information about how bids are assessed at Akwaba Ltd. The principle would not be breached if you were in possession of information that was in the public domain, or if you were simply to use experience gained in your previous employment, so long as you do not use confidential knowledge that you acquired as a result of that employment. If you accept this role, can you ensure that you do not use confidential information relating to your former employer to your advantage or to the advantage of your current employer? You must be careful and professional as winning that contracts may leads to confidential breaches against you or your current employers perhaps from those bidders of the same contracts who might lose the bids
Professional Behavior:
You must demonstrate professionalism here. For example, what can you do to safeguard your reputation as a professional, the reputation of your employer, and the accountancy profession to which you belong? You must consider the Institute of Chartered Accountants (Ghana) code of ethics, applicable laws (procurement Act 914), and regulations, your current and previous contracts of employment, and your employer’s policies and procedures.

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CR – May 2020 – Q3b(ii) – Ethical Actions in Contract Bidding

This question requires recommendations for maintaining ethical standards in a contract bidding situation involving a conflict of interest.

Question

Recommend the possible courses of action that you will take in order to be ethically responsible as expected from a Professional Accountant.

Answer

Possible courses of action

You should discuss the situation and your obligations with your managing director in the first place and, ask for your involvement in the preparation of the contract bid to be limited. For example, you may be able to contribute to aspects of the bid that do not in any way require you to refer to confidential knowledge about your previous employment with Akwaba Ltd.
If the managing director fails to understand the conflict that you are facing, probably he is not in your profession, you should request that you both discuss the matter with the board chairman or another member of staff. During these discussions, you should refer to the company’s ethical code, if it has one, as well as that of the Institute of Chartered Accountants (Ghana).
If there are no other formal channels available, you should make the entire board aware of your dilemma by writing formally to them. If necessary, you must refuse to take part in the bid without necessary safeguards being implemented.
Ultimately, disassociating yourself from Asasiyemedeh Company Limited may be the only solution. However, before taking such a step, you should seek legal advice on your employment.
Rights and responsibilities (subject to the rules and guidance of the Institute of Chartered Accountants, (Ghana)).
You should document, in detail, the steps that you take in resolving your dilemma, in case your ethical judgment is challenged in future periods.
Looking at this issue from Asasiyemedeh Company Limited’s perspective, it may be appropriate to suggest to the managing director or the board of your employer that a policy on conflicts of interest be developed and that the remuneration and bonus policy be reviewed in light of this contract bid with Akwaba Ltd.

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CR – May 2020 – Q3b(ii) – Ethical Actions in Contract Bidding

This question requires recommendations for maintaining ethical standards in a contract bidding situation involving a conflict of interest.

Question

Recommend the possible courses of action that you will take in order to be ethically responsible as expected from a Professional Accountant.

Answer

Possible courses of action

You should discuss the situation and your obligations with your managing director in the first place and, ask for your involvement in the preparation of the contract bid to be limited. For example, you may be able to contribute to aspects of the bid that do not in any way require you to refer to confidential knowledge about your previous employment with Akwaba Ltd.
If the managing director fails to understand the conflict that you are facing, probably he is not in your profession, you should request that you both discuss the matter with the board chairman or another member of staff. During these discussions, you should refer to the company’s ethical code, if it has one, as well as that of the Institute of Chartered Accountants (Ghana).
If there are no other formal channels available, you should make the entire board aware of your dilemma by writing formally to them. If necessary, you must refuse to take part in the bid without necessary safeguards being implemented.
Ultimately, disassociating yourself from Asasiyemedeh Company Limited may be the only solution. However, before taking such a step, you should seek legal advice on your employment.
Rights and responsibilities (subject to the rules and guidance of the Institute of Chartered Accountants, (Ghana)).
You should document, in detail, the steps that you take in resolving your dilemma, in case your ethical judgment is challenged in future periods.
Looking at this issue from Asasiyemedeh Company Limited’s perspective, it may be appropriate to suggest to the managing director or the board of your employer that a policy on conflicts of interest be developed and that the remuneration and bonus policy be reviewed in light of this contract bid with Akwaba Ltd.

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CR – May 2020 – L3 – Q1 – Consolidated Statement of Financial Position

Prepare the consolidated statement of financial position for Phato Ltd and its subsidiaries as at 30 September 2019, including relevant calculations for goodwill, non-controlling interest, and asset impairments.

Question

Phato Ltd, is a Public Limited Liability Company which operates in the service sector in Ghana. Phato Ltd has a business relationship with two other Ghanaian companies, Sakara Ltd and Saadi Ltd, which are public limited liability companies too. The draft statements of financial position of these three companies are as below as at 30 September 2019.

Phato Ltd GH¢ million	Sakara Ltd GH¢ million	Saadi Ltd GH¢ million
Assets:
Non-current assets
Property, plant, and equipment	460.0	150.0
Investment in subsidiaries
Sakara Ltd	365.0
Saadi Ltd	160.0
Investment in Azuri Ltd	24.0
Intangible assets	99.0	15.0
Total Non-current assets	948.0	325.0
Current assets	447.5	240.0
Total assets	1,395.5	565.0
Equity and liabilities:
Equity:
Share capital	460.0	200.0
Other components of equity	36.5	18.5
Retained earnings	447.5	221.0
Total equity	944.0	439.5
Non-current liabilities	247.5	61.5
Current liabilities	204.0	64.0
Total liabilities	451.5	125.5
Total equity and liabilities	1,395.5	565.0

Additional relevant information:

Phato Ltd, on 1 October 2017, acquired 60% of the equity interests of Sakara Ltd. The cost of the investment comprised cash of GH¢360 million. At acquisition, the fair value of the non-controlling interest in Sakara Ltd was estimated at GH¢146 million. The fair value of the identifiable net assets acquired totaled GH¢417.5 million, including retained earnings of GH¢159.5 million and other components of equity at GH¢13.5 million. The excess in fair value results from non-depreciable land.
Sakara Ltd, on 1 October 2018, acquired 70% of Saadi Ltd for GH¢160 million. The fair value of non-controlling interest was estimated at GH¢36 million. The fair value of the identifiable net assets of Saadi Ltd at acquisition was GH¢181 million, retained earnings GH¢53 million, and other components of equity GH¢10 million.
Phato Ltd acquired a 14% interest in Azuri Ltd for GH¢9 million on 1 October 2017. On 1 April 2019, Phato Ltd acquired an additional 16% interest in Azuri Ltd for GH¢13.5 million, achieving significant influence.
Phato Ltd purchased patents for GH¢5 million and incurred other development costs for product development.
Impairment tests were conducted on Sakara Ltd and Saadi Ltd.

Required:
Prepare the consolidated statement of financial position for the Phato Ltd Group as at 30 September 2019.

Answer

Phato Ltd Group
Consolidated Statement of Financial Position as at 30 September 2019

Assets	GH¢ million
Non-current assets
Property, plant, and equipment (460 + 150 + 155 + 44.5 + 18)	827.5
Goodwill (W3)	93.5
Intangible assets (99 + 15 + 17.5 – 4.5 -13.5)	113.5
Investment in Azuri (W7)	25.25
Total non-current assets	1,059.75
Current assets	812.5
Total assets	1,872.25

Equity and Liabilities	GH¢ million

Equity attributable to owners of parent

Share capital

460

Retained earnings (W5)

489.41

Other components of equity (W5)

38.05

Total Equity attributable to owners

987.46

Non-controlling interest (W4)

192.29

Total Equity

1,179.75

Non-current liabilities

355.5

Current liabilities

337.0

Total Liabilities

692.5

Total Equity and Liabilities

1,872.25

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CR – May 2020 – L3 – Q1 – Consolidated Statement of Financial Position

Prepare the consolidated statement of financial position for Phato Ltd and its subsidiaries as at 30 September 2019, including relevant calculations for goodwill, non-controlling interest, and asset impairments.

Question

Phato Ltd GH¢ million	Sakara Ltd GH¢ million	Saadi Ltd GH¢ million
Assets:
Non-current assets
Property, plant, and equipment	460.0	150.0
Investment in subsidiaries
Sakara Ltd	365.0
Saadi Ltd	160.0
Investment in Azuri Ltd	24.0
Intangible assets	99.0	15.0
Total Non-current assets	948.0	325.0
Current assets	447.5	240.0
Total assets	1,395.5	565.0
Equity and liabilities:
Equity:
Share capital	460.0	200.0
Other components of equity	36.5	18.5
Retained earnings	447.5	221.0
Total equity	944.0	439.5
Non-current liabilities	247.5	61.5
Current liabilities	204.0	64.0
Total liabilities	451.5	125.5
Total equity and liabilities	1,395.5	565.0

Additional relevant information:

Phato Ltd, on 1 October 2017, acquired 60% of the equity interests of Sakara Ltd. The cost of the investment comprised cash of GH¢360 million. At acquisition, the fair value of the non-controlling interest in Sakara Ltd was estimated at GH¢146 million. The fair value of the identifiable net assets acquired totaled GH¢417.5 million, including retained earnings of GH¢159.5 million and other components of equity at GH¢13.5 million. The excess in fair value results from non-depreciable land.
Sakara Ltd, on 1 October 2018, acquired 70% of Saadi Ltd for GH¢160 million. The fair value of non-controlling interest was estimated at GH¢36 million. The fair value of the identifiable net assets of Saadi Ltd at acquisition was GH¢181 million, retained earnings GH¢53 million, and other components of equity GH¢10 million.
Phato Ltd acquired a 14% interest in Azuri Ltd for GH¢9 million on 1 October 2017. On 1 April 2019, Phato Ltd acquired an additional 16% interest in Azuri Ltd for GH¢13.5 million, achieving significant influence.
Phato Ltd purchased patents for GH¢5 million and incurred other development costs for product development.
Impairment tests were conducted on Sakara Ltd and Saadi Ltd.

Required:
Prepare the consolidated statement of financial position for the Phato Ltd Group as at 30 September 2019.

Answer

Phato Ltd Group
Consolidated Statement of Financial Position as at 30 September 2019

Assets	GH¢ million
Non-current assets
Property, plant, and equipment (460 + 150 + 155 + 44.5 + 18)	827.5
Goodwill (W3)	93.5
Intangible assets (99 + 15 + 17.5 – 4.5 -13.5)	113.5
Investment in Azuri (W7)	25.25
Total non-current assets	1,059.75
Current assets	812.5
Total assets	1,872.25

Equity and Liabilities	GH¢ million

Equity attributable to owners of parent

Share capital

460

Retained earnings (W5)

489.41

Other components of equity (W5)

38.05

Total Equity attributable to owners

987.46

Non-controlling interest (W4)

192.29

Total Equity

1,179.75

Non-current liabilities

355.5

Current liabilities

337.0

Total Liabilities

692.5

Total Equity and Liabilities

1,872.25

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CR – May 2020 – L3 – Q2a – Government Grants for Factory Construction

Discuss the accounting treatment for a government grant received for the construction of a factory, showing calculations and relevant entries.

Question

On 1 January 2018, Asankragua Ltd (Asankragua) applied to a government agency for a grant to assist with the construction of a factory in Enchi. The proposed construction cost of the factory was GH¢52 million and the company projected that 350 people would be employed after completion. The land was already owned by Asankragua.

On 1 March 2018, the government agency offered to grant a sum amounting to 25% of the factory’s construction cost to a maximum of GH¢13 million. The grant aid was to be advanced on completion and would be repayable on demand if total employment at the factory fell below 300 people within 5 years of completion.

At the financial year end, 31 March 2018, Asankragua had accepted the offer of grant aid and had signed contracts for the construction of the factory at a total cost of GH¢52 million. Construction work was due to commence on 1 April 2018.

By 31 March 2019, the factory had been completed on budget, 400 people were employed ready to commence manufacturing activities, and the government agency agreed that the conditions necessary for the drawdown of the grant had been met.

On 1 April 2019, the factory was brought into use. It was estimated that it would have a ten-year useful economic life. On 1 June 2019, the government agency paid over the agreed GH¢13 million. In addition, the company sought and was paid an employment grant of GH¢1.2 million as employment exceeded original projections. This is expected to be payable annually for 5 years in total, at a rate of GH¢12,000 per additional person employed over 300 in each year. There are no repayment provisions attached to the employment grant.

The directors of Asankragua expect employment levels to exceed 350 people for at least 4 further years from 31 March 2020.

Required:
Demonstrate, showing calculations and relevant entries, how Asankragua Ltd should record the above transactions and events in its financial statements for years ended 31 March 2018, 2019, and 2020.

Answer

Year ended 31 March 2018:
No accounting entry is made in this financial year, as no transaction has yet been entered into. A capital commitment exists and should be disclosed in the notes. The grant approval should be disclosed also.

Year ended 31 March 2019:
At this date, the factory should be recorded at its cost of GH¢52 million. As all conditions for the payment of the grant have been met, recognition should be made of this amount receivable also. As the factory has not yet been brought into use, no depreciation will be charged for the year. Similarly, no amortisation of the grant will take place in the period.

Recognition of factory:
Dr Property, plant & equipment: GH¢52 million
Cr Cash: GH¢52 million (New factory constructed at a cost of GH¢52 million)

Recognition of grant:
Option 1:
Dr Government grant receivable (current asset): GH¢13 million
Cr Property, plant & equipment: GH¢13 million (Government grant approved, not received yet)

Option 2:
Dr Government grant receivable (current asset): GH¢13 million
Cr Deferred income – current liability: GH¢1.3 million
Cr Deferred income – non-current liability: GH¢11.7 million (Government grant approved, not received yet)

Year ended 31 March 2020:
There are several transactions to record based on the new factory. These are (1) depreciation and (2) amortisation of the grant. In addition, the cash was received from the government agency.

Receipt of grant:
Dr Cash: GH¢13 million
Cr Government grant receivable: GH¢13 million (Receipt of cash grant from government agency)

Option 1 (Depreciation of factory):
Dr Profit or loss: GH¢3.9 million
Cr Accumulated Depreciation – PPE: GH¢3.9 million (Depreciation of the cost of factory net of grant over 10 years)

Option 2 (Depreciation of factory):
Dr Profit or loss: GH¢5.2 million
Cr Accumulated Depreciation – PPE: GH¢5.2 million (Depreciation of gross factory cost over 10 years)

Amortisation of grant:
Dr Deferred income: GH¢1.3 million
Cr Profit or loss: GH¢1.3 million (Amortization of grant over 10 years, reflecting the proportional expensing of the factory to which the grant relates)

The employment grant relates entirely to the cost of employing staff in that year. Hence it should be entirely recognized as income in the year ended 31 March 2020.

Recognition of employment grant:
Dr Cash: GH¢1.2 million
Cr Profit or loss: GH¢1.2 million (Recognition of employment grant as income as received)

Initial recognition of the factory in 2019: 1 mark
Page 19 of 28
Recognition of the grant in 2019: 2 marks
Treatment of receipt of grant in 2020: 2 marks
Depreciation of factory in 2020: 1 mark
Treatment of amortization of grant: 1.5 marks
Recognition of employment grant: 1.5 marks

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CR – May 2020 – L3 – Q2a – Government Grants for Factory Construction

Discuss the accounting treatment for a government grant received for the construction of a factory, showing calculations and relevant entries.

Question

The directors of Asankragua expect employment levels to exceed 350 people for at least 4 further years from 31 March 2020.

Answer

Recognition of factory:
Dr Property, plant & equipment: GH¢52 million
Cr Cash: GH¢52 million (New factory constructed at a cost of GH¢52 million)

Recognition of grant:
Option 1:
Dr Government grant receivable (current asset): GH¢13 million
Cr Property, plant & equipment: GH¢13 million (Government grant approved, not received yet)

Receipt of grant:
Dr Cash: GH¢13 million
Cr Government grant receivable: GH¢13 million (Receipt of cash grant from government agency)

Option 1 (Depreciation of factory):
Dr Profit or loss: GH¢3.9 million
Cr Accumulated Depreciation – PPE: GH¢3.9 million (Depreciation of the cost of factory net of grant over 10 years)

Option 2 (Depreciation of factory):
Dr Profit or loss: GH¢5.2 million
Cr Accumulated Depreciation – PPE: GH¢5.2 million (Depreciation of gross factory cost over 10 years)

The employment grant relates entirely to the cost of employing staff in that year. Hence it should be entirely recognized as income in the year ended 31 March 2020.

Recognition of employment grant:
Dr Cash: GH¢1.2 million
Cr Profit or loss: GH¢1.2 million (Recognition of employment grant as income as received)

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Level: Level 3

Topic: IAS 20 and IAS 40)
Series: MAY 2020

Tags: Capital Commitment, Deferred Income, Factory Construction, Government Grants, IAS 20
Level: Level 3

Topic: IAS 20 and IAS 40)
Series: MAY 2020

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CR – May 2020 – L3 – Q2b – Capitalization of Borrowing Costs

Question

Dompoase Ltd incurred the following borrowing costs during the financial year 2018:

GH¢’000
Overdraft interest	12
Foreign currency loan interest (correctly translated into GH¢)	84
Foreign currency loan exchange differences on capital	140

In addition, a three-year fixed-rate GH¢2 million loan was taken out on 1 January 2018 at 6.5%. A loan set-up fee was charged at GH¢20,000. This increased the effective interest rate on the loan to 6.88%.

Required:
Determine the maximum amount that could potentially be capitalized as borrowing costs during the period (assuming an asset was being financed using all available finance).

Answer

GH¢’000
Overdraft	12
Foreign currency loan interest	84
Foreign currency loan exchange differences on capital	–
Effective interest on loan ((2,000 – 20) x 6.88%)	136.2

The maximum amount to capitalize is GH¢232.2k.

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CR – May 2020 – L3 – Q2b – Capitalization of Borrowing Costs

Question

Dompoase Ltd incurred the following borrowing costs during the financial year 2018:

GH¢’000
Overdraft interest	12
Foreign currency loan interest (correctly translated into GH¢)	84
Foreign currency loan exchange differences on capital	140

Required:
Determine the maximum amount that could potentially be capitalized as borrowing costs during the period (assuming an asset was being financed using all available finance).

Answer

GH¢’000
Overdraft	12
Foreign currency loan interest	84
Foreign currency loan exchange differences on capital	–
Effective interest on loan ((2,000 – 20) x 6.88%)	136.2

The maximum amount to capitalize is GH¢232.2k.

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CR – May 2020 – L3 – Q2c – Defined Benefit Pension Plan

Recommend the accounting treatment for a defined benefit pension plan with supporting calculations.

Question

Nzema prepares its financial statements in accordance with International Financial Reporting Standards (IFRS) with a financial year end of 31 December 2018. On 1 January 2018, Nzema commenced a defined benefit pension plan for a number of head office employees. Under the pension scheme, Nzema has an obligation to provide these staff with agreed post-employment benefits. Nzema carries the actuarial and investment risk associated with the pension scheme.

The following information has been compiled from workings by Nzema’s accounting staff and actuarial reports for the 2018 financial year:

GH¢
Interest income on plan assets	16,500
Employer contributions to plan	550,000
Current service cost	600,000
Interest on plan liability	18,000
Fair value of plan assets at 31/12/2018	580,000
Present value of plan obligation at 31/12/2018	620,000

The Accountant was not sure which accounting standard to apply when accounting for the pension scheme. The only adjustment made to account for the scheme was to expense the company’s contributions of GH¢550,000 for the 2018 financial year in the Statement of Profit or Loss and Other Comprehensive Income and to credit the ‘Cash’ account.

Required:
Recommend, with appropriate calculations, the necessary accounting treatment for this accounting issue.

Answer

The applicable accounting standard is IAS 19: Employee Benefits. Nzema’s pension plan is a defined benefit plan since Nzema has an obligation to provide agreed post-employment benefits and carries the actuarial and investment risk.

The employer contributions were accounted for incorrectly. Under IAS 19, a defined benefit liability (or asset) is recognized on the balance sheet as the present value of the defined benefit obligation minus the fair value of plan assets.

Workings – Calculation of Actuarial Gain/Loss:

Pension Asset:

Description	GH¢
Opening balance	0
Return on assets	16,500
Employer contributions	550,000
Remeasurement – Actuarial Gain	13,500
Closing balance (31/12/2018)	580,000

Pension Liability:

Description	GH¢
Opening balance	0
Interest Cost	18,000
Current Service Cost	600,000
Remeasurement – Actuarial Loss	2,000
Closing balance (31/12/2018)	620,000

Net Actuarial Gain:
GH¢13,500 (gain on pension assets) – GH¢2,000 (loss on pension liabilities) = GH¢11,500

Journal Entries:

Net Interest Expense (Profit or Loss):
Dr Net Interest Expense (Profit or Loss) GH¢1,500
Cr Pension Liability GH¢1,500
(Net interest expense: 18,000 – 16,500)
Current Service Cost (Profit or Loss):
Dr Current Service Cost GH¢600,000
Cr Pension Liability GH¢600,000
(Recognition of current service cost)
Actuarial Gain (Other Comprehensive Income):
Dr Pension Liability GH¢11,500
Cr Remeasurement – Actuarial Gain (Other Comprehensive Income) GH¢11,500
(Recognition of actuarial gain)
Correction of Previous Accounting Treatment:
Dr Pension Liability GH¢550,000
Cr Pension Contribution Expense (Profit or Loss) GH¢550,000
(Correcting previous entry where contributions were expensed)
Identification of the appropriate standard to be applied: 1 mark
Net interest expense to Profit or Loss: 1 mark
Actuarial gain on pension asset: 1 mark
Actuarial loss on pension liability: 1 mark
Net actuarial gain to OCI: 1 mark
Currents service cost: 1 mark
(Total: 20 marks)

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Series: MAY 2020

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CR – May 2020 – L3 – Q2c – Defined Benefit Pension Plan

Recommend the accounting treatment for a defined benefit pension plan with supporting calculations.

Question

The following information has been compiled from workings by Nzema’s accounting staff and actuarial reports for the 2018 financial year:

GH¢
Interest income on plan assets	16,500
Employer contributions to plan	550,000
Current service cost	600,000
Interest on plan liability	18,000
Fair value of plan assets at 31/12/2018	580,000
Present value of plan obligation at 31/12/2018	620,000

Required:
Recommend, with appropriate calculations, the necessary accounting treatment for this accounting issue.

Answer

Workings – Calculation of Actuarial Gain/Loss:

Pension Asset:

Description	GH¢
Opening balance	0
Return on assets	16,500
Employer contributions	550,000
Remeasurement – Actuarial Gain	13,500
Closing balance (31/12/2018)	580,000

Pension Liability:

Description	GH¢
Opening balance	0
Interest Cost	18,000
Current Service Cost	600,000
Remeasurement – Actuarial Loss	2,000
Closing balance (31/12/2018)	620,000

Net Actuarial Gain:
GH¢13,500 (gain on pension assets) – GH¢2,000 (loss on pension liabilities) = GH¢11,500

Journal Entries:

Net Interest Expense (Profit or Loss):
Dr Net Interest Expense (Profit or Loss) GH¢1,500
Cr Pension Liability GH¢1,500
(Net interest expense: 18,000 – 16,500)
Current Service Cost (Profit or Loss):
Dr Current Service Cost GH¢600,000
Cr Pension Liability GH¢600,000
(Recognition of current service cost)
Actuarial Gain (Other Comprehensive Income):
Dr Pension Liability GH¢11,500
Cr Remeasurement – Actuarial Gain (Other Comprehensive Income) GH¢11,500
(Recognition of actuarial gain)
Correction of Previous Accounting Treatment:
Dr Pension Liability GH¢550,000
Cr Pension Contribution Expense (Profit or Loss) GH¢550,000
(Correcting previous entry where contributions were expensed)
Identification of the appropriate standard to be applied: 1 mark
Net interest expense to Profit or Loss: 1 mark
Actuarial gain on pension asset: 1 mark
Actuarial loss on pension liability: 1 mark
Net actuarial gain to OCI: 1 mark
Currents service cost: 1 mark
(Total: 20 marks)

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Series: MAY 2020

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CR – May 2020 – Q4a – Capital Reduction Account

This question requires the preparation of a Capital Reduction Account for Sasasila Ltd following a reorganization.

Question

Sasasila Ltd has been operating profitably for a number of years. However, in recent times, the company has been making losses. Below is the statement of financial position as at 30 June 2019:

Assets	GH¢000
Non-Current Assets
Patents and copyrights	75,000
Land and buildings (net)	200,000
Plant and machinery (net)	150,000
Current Assets
Inventories	125,000
Trade receivables	125,000
Bank	37,500
Investments (cost)	100,000
Total Assets	812,500

Equity and liabilities:
Equity
Ordinary share capital (issued at GH¢10 each)	375,000
20% cumulative preference shares (issued at GH¢10 each)	175,000
Retained earnings	(75,000)
Non-current Liabilities
15% Debentures	125,000
Current Liabilities
Interest on debentures	18,750
Trade payables	93,750
Provision for business restructuring	50,000
Provision for legal damages & claims	12,500
Provision for warranties	37,500
Total Equity and Liabilities	812,500

Additional relevant information: The following scheme of reconstruction was approved by all parties as well as the High Court with the exception of only one ordinary shareholder:

The ordinary shares were to be reduced to GH¢5 per share.
The preference shares were to be reduced to GH¢7.5 per share and arrears in dividends for three years were to be canceled from the company’s books.
The fair values of the assets were agreed at the following values:
- Patents and copyrights: Nil
- Land and buildings: GH¢225,000
- Plant and machinery: GH¢75,000
- Investments: GH¢75,000
- Inventories: GH¢105,000
- Trade receivables: GH¢70,000
The balance on retained earnings is to be eliminated in full.
The liability for legal damages and claims was to be settled for GH¢10 million, and the provision for warranties reduced to GH¢27.5 million.
The accrued debenture interest was to be paid in cash.
Investments with a carrying amount of GH¢52.5 million were to be sold for cash at that value to strengthen the working capital position.
The amount set aside for business restructuring was to be eliminated as well.
The High Court directed a payment of GH¢0.2 million to a member who opposed the scheme for 50 ordinary shares held by him.

Prepare the Capital Reduction Account as at 30 June 2019.

Answer

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CR – May 2020 – Q4a – Capital Reduction Account

This question requires the preparation of a Capital Reduction Account for Sasasila Ltd following a reorganization.

Question

Sasasila Ltd has been operating profitably for a number of years. However, in recent times, the company has been making losses. Below is the statement of financial position as at 30 June 2019:

Assets	GH¢000
Non-Current Assets
Patents and copyrights	75,000
Land and buildings (net)	200,000
Plant and machinery (net)	150,000
Current Assets
Inventories	125,000
Trade receivables	125,000
Bank	37,500
Investments (cost)	100,000
Total Assets	812,500

Equity and liabilities:
Equity
Ordinary share capital (issued at GH¢10 each)	375,000
20% cumulative preference shares (issued at GH¢10 each)	175,000
Retained earnings	(75,000)
Non-current Liabilities
15% Debentures	125,000
Current Liabilities
Interest on debentures	18,750
Trade payables	93,750
Provision for business restructuring	50,000
Provision for legal damages & claims	12,500
Provision for warranties	37,500
Total Equity and Liabilities	812,500

Additional relevant information: The following scheme of reconstruction was approved by all parties as well as the High Court with the exception of only one ordinary shareholder:

The ordinary shares were to be reduced to GH¢5 per share.
The preference shares were to be reduced to GH¢7.5 per share and arrears in dividends for three years were to be canceled from the company’s books.
The fair values of the assets were agreed at the following values:
- Patents and copyrights: Nil
- Land and buildings: GH¢225,000
- Plant and machinery: GH¢75,000
- Investments: GH¢75,000
- Inventories: GH¢105,000
- Trade receivables: GH¢70,000
The balance on retained earnings is to be eliminated in full.
The liability for legal damages and claims was to be settled for GH¢10 million, and the provision for warranties reduced to GH¢27.5 million.
The accrued debenture interest was to be paid in cash.
Investments with a carrying amount of GH¢52.5 million were to be sold for cash at that value to strengthen the working capital position.
The amount set aside for business restructuring was to be eliminated as well.
The High Court directed a payment of GH¢0.2 million to a member who opposed the scheme for 50 ordinary shares held by him.

Prepare the Capital Reduction Account as at 30 June 2019.

Answer

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CR – May 2020 – Q4b – Statement of Financial Position for Sasasila Ltd

This question requires the preparation of a statement of financial position for Sasasila Ltd following its restructuring.

Question

Prepare the statement of financial position as at 31 December 2019 for Sasasila Ltd.

Answer

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CR – May 2020 – Q4b – Statement of Financial Position for Sasasila Ltd

This question requires the preparation of a statement of financial position for Sasasila Ltd following its restructuring.

Question

Prepare the statement of financial position as at 31 December 2019 for Sasasila Ltd.

Answer

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Series: MAY 2020

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CR – May 2020 – Q5 – Financial Performance and Position of Bossman Ltd

This question involves analyzing the financial performance and position of Bossman Ltd over three years using ratio analysis.

Question

Answer

To: Managing Director, Gamashie Ltd
From: An Accountant
Date: 01/01/19
Subject: The Financial Position and Performance of Bossman Ltd

Introduction:

This report is based on the financial statements of Bossman Ltd for the years 2016, 2017, and 2018. It includes an analysis of the financial performance and position, with attention to key financial ratios calculated from the attached statements.

Financial Performance:

Revenue Growth: Bossman Ltd has experienced consistent revenue growth at approximately 5% per annum from GH¢18,000,000 in 2016 to GH¢19,845,000 in 2018.
Gross Profit Margin: The gross profit margin improved in 2017 but fell in 2018, indicating fluctuations in cost management. The margins were:
- 2016: 42%
- 2017: 45%
- 2018: 40%
Operating Profit: Operating profit as a percentage of sales showed a similar trend to the gross profit margin. It increased from 25.5% in 2016 to 28.5% in 2017, before falling back to 25% in 2018. The decline in 2018 needs to be investigated to understand the reasons for the reduction.
Profit Before Tax (PBT): PBT decreased from GH¢3,882,000 in 2017 to GH¢3,909,000 in 2018, primarily due to increased finance costs. This indicates an increase in borrowing costs, which requires further investigation.

Financial Position:

Liquidity:
- Current Ratio: The current ratio improved from 0.78 in 2016 to 1.05 in 2018, indicating better liquidity. However, it was below 1 in 2016 and 2017, suggesting that the company may have struggled to meet its short-term obligations during those years.
- Quick Ratio: The quick ratio remained below 0.5 across all three years, highlighting potential issues with converting current assets (excluding inventory) into liquid assets. This indicates the company may be heavily reliant on inventory for liquidity.
Solvency:
- Debt Ratio: The debt ratio increased steadily over the three years from 38.9% in 2016 to 43.2% in 2018, suggesting the company’s reliance on debt financing is increasing. This should be monitored, as it may impact the company’s financial flexibility.
Efficiency:
- Receivables Collection Period: The collection period increased from 29.2 days in 2016 to 58.2 days in 2018. This could indicate deteriorating credit control or extended payment terms.
- Inventory Turnover: Inventory turnover worsened, increasing from 62 days in 2016 to 122.6 days in 2018. This may indicate overstocking or slow-moving inventory, which ties up working capital.

Conclusion:

Bossman Ltd has shown consistent revenue growth but declining profitability. Liquidity has improved, but the quick ratio is concerning. The company’s growing reliance on debt and the extended receivables and inventory turnover periods should be investigated further to identify potential risks to financial stability.

Appendix – Ratio Analysis:

Ratios	2016	2017	2018
Gross Profit Margin	42%	45%	40%
Operating Profit Margin	25.5%	28.5%	25%
Return on Capital Employed	23.6%	27%	24.1%
Debt Ratio	38.9%	41.4%	43.2%
Current Ratio	0.78	0.86	1.05
Quick Ratio	0.36	0.40	0.47
Receivables Collection Period (days)	29.2	43.6	58.2
Inventory Turnover Period (days)	62	94	122.6

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CR – May 2020 – Q5 – Financial Performance and Position of Bossman Ltd

This question involves analyzing the financial performance and position of Bossman Ltd over three years using ratio analysis.

Question

Answer

To: Managing Director, Gamashie Ltd
From: An Accountant
Date: 01/01/19
Subject: The Financial Position and Performance of Bossman Ltd

Introduction:

Financial Performance:

Revenue Growth: Bossman Ltd has experienced consistent revenue growth at approximately 5% per annum from GH¢18,000,000 in 2016 to GH¢19,845,000 in 2018.
Gross Profit Margin: The gross profit margin improved in 2017 but fell in 2018, indicating fluctuations in cost management. The margins were:
- 2016: 42%
- 2017: 45%
- 2018: 40%
Operating Profit: Operating profit as a percentage of sales showed a similar trend to the gross profit margin. It increased from 25.5% in 2016 to 28.5% in 2017, before falling back to 25% in 2018. The decline in 2018 needs to be investigated to understand the reasons for the reduction.
Profit Before Tax (PBT): PBT decreased from GH¢3,882,000 in 2017 to GH¢3,909,000 in 2018, primarily due to increased finance costs. This indicates an increase in borrowing costs, which requires further investigation.

Financial Position:

Liquidity:
- Current Ratio: The current ratio improved from 0.78 in 2016 to 1.05 in 2018, indicating better liquidity. However, it was below 1 in 2016 and 2017, suggesting that the company may have struggled to meet its short-term obligations during those years.
- Quick Ratio: The quick ratio remained below 0.5 across all three years, highlighting potential issues with converting current assets (excluding inventory) into liquid assets. This indicates the company may be heavily reliant on inventory for liquidity.
Solvency:
- Debt Ratio: The debt ratio increased steadily over the three years from 38.9% in 2016 to 43.2% in 2018, suggesting the company’s reliance on debt financing is increasing. This should be monitored, as it may impact the company’s financial flexibility.
Efficiency:
- Receivables Collection Period: The collection period increased from 29.2 days in 2016 to 58.2 days in 2018. This could indicate deteriorating credit control or extended payment terms.
- Inventory Turnover: Inventory turnover worsened, increasing from 62 days in 2016 to 122.6 days in 2018. This may indicate overstocking or slow-moving inventory, which ties up working capital.

Conclusion:

Appendix – Ratio Analysis:

Ratios	2016	2017	2018
Gross Profit Margin	42%	45%	40%
Operating Profit Margin	25.5%	28.5%	25%
Return on Capital Employed	23.6%	27%	24.1%
Debt Ratio	38.9%	41.4%	43.2%
Current Ratio	0.78	0.86	1.05
Quick Ratio	0.36	0.40	0.47
Receivables Collection Period (days)	29.2	43.6	58.2
Inventory Turnover Period (days)	62	94	122.6

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AA – May 2020 – L2 – Q3b – Audit and Assurance Risk Environment

Describe how you would verify the patents appearing in the financial statements of Tamale Pharma.

Question

Tamale Pharma specializes in the development of drugs for the pharmaceutical industry.

Required:
i) State how you could verify the following item appearing in the statement of financial position of Tamale Pharma as at 31 December 2018:

Patents.
(3.5 marks)

ii) State how you could verify the following item appearing in the statement of financial position of Tamale Pharma as at 31 December 2018:

Research and development.
(3.5 marks)

Answer

To verify patents in the financial statements of Tamale Pharma, the auditor would:

Examine Patent Documentation: Review the patent documents to verify ownership and the cost associated with the acquisition.
Check Patent Register: Ensure that a register of patents is maintained, detailing descriptions, costs, and net book values of the patents. Test a sample of patents from the register against the patent documentation.
Review Additions: For any additions during the year, verify the purchase documentation, such as board minutes or senior management approval, if applicable.
Amortization: Ensure that patents are amortized over their useful life, and recalculate the amortization for accuracy.
Impairment Consideration: Consider whether there are any circumstances that might require an impairment write-off of the patents and ensure any impairment has been correctly recorded.
(3.5 marks)

To verify research and development (R&D) costs in the financial statements of Tamale Pharma, the auditor would:

Verify Supporting Documentation: Examine supporting documents such as invoices and timesheets to ensure that only development costs are capitalized, and they meet the criteria specified in IAS 38.
Compliance with IAS 38 Criteria: Confirm that the development costs capitalized meet the IAS 38 criteria, including:
Probable economic benefits.
Intention to complete the asset.
Availability of resources to complete the project.
Ability to use or sell the asset.
Technical feasibility.
Reliable measurement of expenditure.
Project Evaluation Reports: Review project evaluation reports and consider consulting an independent expert for highly technical information.
Non-Current Assets Used: Verify that any non-current assets used in research and development have been properly capitalized and depreciated according to IAS 16.
(3.5 marks)

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AA – May 2020 – L2 – Q3b – Audit and Assurance Risk Environment

Describe how you would verify the patents appearing in the financial statements of Tamale Pharma.

Question

Tamale Pharma specializes in the development of drugs for the pharmaceutical industry.

Required:
i) State how you could verify the following item appearing in the statement of financial position of Tamale Pharma as at 31 December 2018:

Patents.
(3.5 marks)

ii) State how you could verify the following item appearing in the statement of financial position of Tamale Pharma as at 31 December 2018:

Research and development.
(3.5 marks)

Answer

To verify patents in the financial statements of Tamale Pharma, the auditor would:

To verify research and development (R&D) costs in the financial statements of Tamale Pharma, the auditor would:

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AA – May 2020 – L2 – Q3a – Audit and Assurance Evidence

Explain the main assertions about account balances and give examples from the audit of trade receivables.

Question

Audit Evidence requires the auditor to obtain sufficient, appropriate evidence to be able to draw reasonable conclusions on which to base the audit opinion. That evidence should be relevant to the financial statement assertions.

Required:
i) Explain the main assertions about account balances and provide an example of each one by reference to the audit of trade receivables. (8 marks)

ii) Identify FIVE (5) of the seven main audit testing procedures (e.g., inspection) and give an example of how each might be used in the audit of plant and machinery. State the assertion being tested in each case. (5 marks)

Answer

The main assertions about account balances are:

Completeness: All assets, liabilities, and equity interests that should have been recorded have been recorded. Example: Ensuring that all trade receivables are included in the financial statements by reconciling the trade receivables listing to the general ledger.

Accuracy, Valuation, and Allocation: Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts. Example: Verifying that trade receivables are stated at their net realizable value by reviewing subsequent cash receipts or evaluating the adequacy of the allowance for doubtful accounts.

Rights and Obligations: The entity holds or controls the rights to assets, and liabilities are the obligations of the entity. Example: Confirming that the receivables are the entity’s legal rights by sending direct confirmations to customers.

Existence: Assets, liabilities, and equity interests exist at the reporting date. Example: Verifying the existence of trade receivables by sending confirmations to customers to confirm balances at the year-end date.

Classification: Assets, liabilities, and equity interests have been recorded in the proper accounts. Example: Ensuring that trade receivables are classified as current assets in the financial statements.

Presentation: Assets, liabilities, and equity interests are appropriately aggregated or disaggregated and clearly described in the financial statements. Example: Using a disclosure checklist to verify that trade receivables are properly disclosed in accordance with IFRS/IAS requirements.

(8 marks)
ii)
The five main audit testing procedures and examples related to plant and machinery are:

Inspection: Physically inspecting plant and machinery to confirm their existence (testing the existence assertion).
Observation: Observing the maintenance of plant and machinery to confirm their condition and allocation (testing the accuracy, valuation, and allocation assertion).
Inquiry: Inquiring of management regarding useful lives and profitability of the plant (testing the valuation and allocation assertion).
Confirmation: Writing to third parties that hold the company’s plant to confirm its existence (testing the existence assertion).
Recalculation: Recalculating depreciation of plant and machinery to verify that the depreciation charge is correct (testing the accuracy, valuation, and allocation assertion).
(5 marks)

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AA – May 2020 – L2 – Q3a – Audit and Assurance Evidence

Explain the main assertions about account balances and give examples from the audit of trade receivables.

Question

Required:
i) Explain the main assertions about account balances and provide an example of each one by reference to the audit of trade receivables. (8 marks)

Answer

The main assertions about account balances are:

(8 marks)
ii)
The five main audit testing procedures and examples related to plant and machinery are:

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Tags: Audit evidence, Financial statement assertions, ISA 500, Trade receivables
Level: Level 2

Topic: Audit and Assurance Evidence
Series: MAY 2020

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AA – May 2020 – L2 – Q2d – Audit and Assurance Evidence

Describe the rights of an auditor in the event of a disagreement and threat of removal.

Question

Your client Abeka Ltd is threatening to remove your firm as auditors as a result of disagreement on account of the use of inappropriate accounting policies.

Required:
Describe THREE (3) rights as an auditor in relation to the disagreement and subsequent threat of removal. (3 marks)

Answer

The auditor has the following rights in the event of a disagreement and subsequent threat of removal:

Right to Receive Written Resolution: The auditor has the right to receive a copy of any written resolution proposal concerning their removal or any disagreements related to the audit.
Right to Attend and Speak at Meetings: The auditor has the right to attend and be heard at any meetings where a resolution regarding their removal is being discussed.
Right to Make Written Representations: The auditor has the right to make written representations to the company’s shareholders, explaining their position in the event of a proposed removal. These representations must be circulated to shareholders before any resolution for removal is passed.
(3 marks)

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Series: MAY 2020

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AA – May 2020 – L2 – Q2d – Audit and Assurance Evidence

Describe the rights of an auditor in the event of a disagreement and threat of removal.

Question

Your client Abeka Ltd is threatening to remove your firm as auditors as a result of disagreement on account of the use of inappropriate accounting policies.

Required:
Describe THREE (3) rights as an auditor in relation to the disagreement and subsequent threat of removal. (3 marks)

Answer

The auditor has the following rights in the event of a disagreement and subsequent threat of removal:

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AA – May 2020 – L2 – Q2c – Regulatory Framework and Audit Responsibilities

Comment on the powers of the Registrar General regarding auditor appointments in the scenario.

Question

The auditors of Obuasi Ltd resigned on 21 August 2019 after they had been validly appointed and accepted. The directors of Obuasi Ltd appointed Ofori Ansong and Co. Chartered Accountants as their new auditors on 10 October 2019. The Registrar General refused to accept Ofori Ansong and Co as auditors on the grounds that the directors had acted beyond their powers since the Registrar General has the power to appoint auditors.

Required:
Comment on the action of the Registrar General. (7 marks)

Answer

According to Section 134, Subsection 3 of the Companies Act 1963 (Act 179):

The first auditors of a company must be appointed within three months of incorporation or prior to delivering the particulars required under Section 27 of the Act to the Registrar.
Every existing company without auditors must appoint auditors within three months of the Act’s commencement.
Subsection 4(a) empowers the directors to appoint the first auditors or to fill a casual vacancy in the office of auditor.
Subsection 4(b) states that if a company does not have auditors for a continuous period of three months, the Registrar may appoint auditors.
Since the resignation of the previous auditors occurred on 21 August 2019 and Ofori Ansong and Co were appointed on 10 October 2019, the period between the resignation and the new appointment is less than three months. Therefore, the directors acted within their powers, and the Registrar General’s refusal to accept Ofori Ansong and Co was incorrect, as the directors had the right to fill the vacancy within the three-month period.

(7 marks)

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Topic: Regulatory Framework and Audit Responsibilities, Regulatory framework and processes
Series: MAY 2020

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AA – May 2020 – L2 – Q2c – Regulatory Framework and Audit Responsibilities

Comment on the powers of the Registrar General regarding auditor appointments in the scenario.

Question

Required:
Comment on the action of the Registrar General. (7 marks)

Answer

According to Section 134, Subsection 3 of the Companies Act 1963 (Act 179):

(7 marks)

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Topic: Regulatory Framework and Audit Responsibilities, Regulatory framework and processes
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AA – May 2020 – L2 – Q2b – Types of Audit and Assurance Engagements

Describe audit procedures to obtain sufficient evidence regarding inventory.

Question

ISA 501 – Audit Evidence – Specific Considerations for Selected Items deals with three specific items that may be contained within a set of general-purpose financial statements and for which the auditor may need to obtain sufficient appropriate audit evidence. It deals with specific considerations for inventory, litigation and claims, and segment information.

Required:
i) What should an auditor do to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory where inventory is material to the financial statements? (2 marks)

ii) What should an auditor do when physical inventory counting is conducted on a date other than the date of the financial statements? (2 marks)

Answer

To obtain sufficient appropriate audit evidence regarding the existence and condition of inventory, the auditor should:

Attend the physical inventory count unless it is impracticable.
Evaluate management’s instructions and procedures for recording and controlling the results of the entity’s physical inventory counting.
Observe the performance of management’s count procedures.
Inspect the inventory and verify its condition.
Perform test counts to ensure the inventory quantities are accurate.

(2 marks)

ii)

When physical inventory counting is conducted on a date other than the date of the financial statements, the auditor should perform audit procedures to obtain evidence about whether the changes in inventory between the count date and the reporting date have been properly recorded. This includes reconciling the physical count to the financial statement date and verifying that any movements in inventory after the count have been appropriately reflected in the accounting records.

(2 marks)

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Topic: Types of Audit and Assurance Engagements
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AA – May 2020 – L2 – Q2b – Types of Audit and Assurance Engagements

Describe audit procedures to obtain sufficient evidence regarding inventory.

Question

ii) What should an auditor do when physical inventory counting is conducted on a date other than the date of the financial statements? (2 marks)

Answer

To obtain sufficient appropriate audit evidence regarding the existence and condition of inventory, the auditor should:

Attend the physical inventory count unless it is impracticable.
Evaluate management’s instructions and procedures for recording and controlling the results of the entity’s physical inventory counting.
Observe the performance of management’s count procedures.
Inspect the inventory and verify its condition.
Perform test counts to ensure the inventory quantities are accurate.

(2 marks)

ii)

(2 marks)

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AA – May 2020 – L2 – Q2a – Audit Failure and Expectation Gap

Define the concept of materiality in the context of an audit.

Question

ISA 320: Materiality in Planning and Performing an Audit explains the concept of materiality and how it is used by the auditor in engagement to reach important conclusions regarding procedures and evidence obtained. The concept of materiality is a core concept in risk-based audit approaches.

Required:
i) Explain materiality. (2 marks)

ii) Briefly assess FOUR (4) ways materiality impacts an audit. (4 marks)

Answer

Misstatements or omissions are generally considered material, individually or in aggregate, if they can reasonably be expected to influence the economic decisions of users based on the financial statements. Materiality depends on the size of the omission or misstatement, judged in its particular circumstances. It provides a threshold or cutoff point rather than being a primary qualitative characteristic that information must have to be useful.

(2 marks)

The four ways materiality impacts an audit are as follows:

Selection of Audit Items: Materiality helps auditors determine which items to test, as material items must undergo substantive procedures.
Sampling Decisions: Materiality helps auditors decide whether to use sampling; for example, if all items in a population are material, sampling may not be appropriate.
Audit Opinion Formation: Materiality assists in determining what level of misstatement will result in a modified audit opinion.
Reassessment During Audit: Materiality is calculated during the planning stage and must be reassessed throughout the audit to ensure it reflects the conditions at the reporting date.

(4 marks)

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Level: Level 2

Topic: Audit Failure and Expectation Gap
Series: MAY 2020

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AA – May 2020 – L2 – Q2a – Audit Failure and Expectation Gap

Define the concept of materiality in the context of an audit.

Question

Required:
i) Explain materiality. (2 marks)

ii) Briefly assess FOUR (4) ways materiality impacts an audit. (4 marks)

Answer

(2 marks)

The four ways materiality impacts an audit are as follows:

Selection of Audit Items: Materiality helps auditors determine which items to test, as material items must undergo substantive procedures.
Sampling Decisions: Materiality helps auditors decide whether to use sampling; for example, if all items in a population are material, sampling may not be appropriate.
Audit Opinion Formation: Materiality assists in determining what level of misstatement will result in a modified audit opinion.
Reassessment During Audit: Materiality is calculated during the planning stage and must be reassessed throughout the audit to ensure it reflects the conditions at the reporting date.

(4 marks)

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AA – May 2020 – L2 – Q1b – Audit Failure and Expectation Gap

Identify and explain business risks in the provided scenario.

Question

Unbalanced and Co. Ltd. is a trading company at Abossey Okai. It deals in auto parts. It is owned by a husband and wife; Divine and Grace. Divine travels to South Korea twice a year to buy auto parts for the business whilst Grace runs the day-to-day administration of the shop.

Divine borrows (loans) from friends to add up to the company’s money to buy parts when he travels. These loans are repaid when the goods are sold back home. The loans are not receipted. Some of the loans are banked, others are not. The company’s money and the loans collected are changed into foreign currency, some through the bank, and others not through the bank. The company does not keep receipts for air tickets, hotel bills, and the expenses made by the owners. However, Divine can reel off what he paid without batting an eyelid.

Import duties are paid by bankers’ drafts, so those are clearly stated in the bank statements. Grace has a notebook in which she enters the daily sales but the records in the book are scanty. However, all import invoices are properly filed. Most of the sales are banked and the bank statements are readily available. Grace is assisted by one attendant.

The success of the business, you understand, depends on the vigilance and strictness of the owners.

Required:
i) Identify the business risks in the passage and explain why they are risks. (10 marks)

ii) What general factors would you consider when planning the audit? (5 marks)

Answer

i) The following business risks are noted from the scenario:

Currency Exchange Risk: Divine travels to South Korea to buy goods for resale, and the currency exchange rates may fluctuate. This can result in exchange rate losses that could negatively impact the company’s finances.
Risk of Mispricing Goods: There is a risk that the goods procured may be priced incorrectly, either underpriced or overpriced, which could distort profitability.
Unrecorded Loans: Loans are contracted but not recorded. This could lead to the actual loan amounts not being properly accounted for, which could distort the financial position of the company.
Misclassification of Sales and Loans: Banked loans may be recorded as sales, or vice versa, distorting the financial records of the company.
Unrecorded Expenses: Expenses such as air tickets and hotel bills are not receipted, which increases the risk that these expenses may be understated in the financial records.
Understated Sales: Although most of the sales are banked, inadequate record-keeping (as evidenced by scanty records in the sales notebook) could lead to sales being understated.
Control Risk: The reliance on the vigilance and strictness of the owners instead of a formal internal control system creates a control risk, where inadequate controls could lead to errors or fraud.
Documentation Risk: Inadequate documentation and record-keeping practices may lead to difficulties in tracking and verifying business transactions.

ii)

When planning the audit for Unbalanced and Co. Ltd., the following general factors should be considered:

Industry Nature: Understand the nature of the industry, including typical profit margins, regulatory framework, and any tax obligations or concessions applicable to the industry. This helps assess how income and expenditure are recognized.
Management’s Experience: Assess the experience and literacy levels of the directors, particularly Divine and Grace. Evaluate how often they travel for procurement, their profit expectations, and their personal and business expenditures.
Internal Controls: Review the controls established by the owners to monitor business activities, such as how sales, imports, purchases, and expenses are tracked. Evaluate if there are effective measures to prevent loss of inventory or funds.
Review Past Accounts: If available, examine the company’s previous financial accounts to identify any trends, issues, or risks that may affect the current audit.
Risk Evaluation: Isolate and evaluate the risks that could impact the financial statements, ensuring that the accounts are prepared by an independent person, if possible, to avoid potential biases or errors.

(5 marks)

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AA – May 2020 – L2 – Q1b – Audit Failure and Expectation Gap

Identify and explain business risks in the provided scenario.

Question

The success of the business, you understand, depends on the vigilance and strictness of the owners.

Required:
i) Identify the business risks in the passage and explain why they are risks. (10 marks)

ii) What general factors would you consider when planning the audit? (5 marks)

Answer

i) The following business risks are noted from the scenario:

Currency Exchange Risk: Divine travels to South Korea to buy goods for resale, and the currency exchange rates may fluctuate. This can result in exchange rate losses that could negatively impact the company’s finances.
Risk of Mispricing Goods: There is a risk that the goods procured may be priced incorrectly, either underpriced or overpriced, which could distort profitability.
Unrecorded Loans: Loans are contracted but not recorded. This could lead to the actual loan amounts not being properly accounted for, which could distort the financial position of the company.
Misclassification of Sales and Loans: Banked loans may be recorded as sales, or vice versa, distorting the financial records of the company.
Unrecorded Expenses: Expenses such as air tickets and hotel bills are not receipted, which increases the risk that these expenses may be understated in the financial records.
Understated Sales: Although most of the sales are banked, inadequate record-keeping (as evidenced by scanty records in the sales notebook) could lead to sales being understated.
Control Risk: The reliance on the vigilance and strictness of the owners instead of a formal internal control system creates a control risk, where inadequate controls could lead to errors or fraud.
Documentation Risk: Inadequate documentation and record-keeping practices may lead to difficulties in tracking and verifying business transactions.

ii)

When planning the audit for Unbalanced and Co. Ltd., the following general factors should be considered:

Industry Nature: Understand the nature of the industry, including typical profit margins, regulatory framework, and any tax obligations or concessions applicable to the industry. This helps assess how income and expenditure are recognized.
Management’s Experience: Assess the experience and literacy levels of the directors, particularly Divine and Grace. Evaluate how often they travel for procurement, their profit expectations, and their personal and business expenditures.
Internal Controls: Review the controls established by the owners to monitor business activities, such as how sales, imports, purchases, and expenses are tracked. Evaluate if there are effective measures to prevent loss of inventory or funds.
Review Past Accounts: If available, examine the company’s previous financial accounts to identify any trends, issues, or risks that may affect the current audit.
Risk Evaluation: Isolate and evaluate the risks that could impact the financial statements, ensuring that the accounts are prepared by an independent person, if possible, to avoid potential biases or errors.

(5 marks)

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AA – May 2020 – L2 – Q1a – Introduction to Audit and Assurance Engagements

Define and explain the concept of "true and fair view" in the context of ISA 700/701.

Question

The main objective of an audit is to enable the auditor express an opinion on the financial statements being audited. ISA 700/701 requires that the auditors’ opinion should state whether the financial statements give a true and fair view and are fairly presented in all material respects in accordance with applicable financial reporting framework where an unmodified opinion is expressed.

Required:
Explain what is meant by true and fair view. (5 marks)

Answer

There is no formal (legal or professional) definition of the term “true and fair view.” However, from general usage, the meaning of the term can be looked at from its components, namely:

True: The accounts are free from material misstatements and reflect the underlying records.
Fair: Implies that there is no undue bias in the financial statements or the way they have been presented.

Additionally, it suggests that judgment exercised in the preparation and auditing of the financial statements is properly aligned with appropriate financial reporting standards. Both directors and auditors must exercise judgment to ensure that the financial statements provide a “true and fair” or “present fairly” assurance, in line with financial standards, and that they can be relied upon.

(5 marks)

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AA – May 2020 – L2 – Q1a – Introduction to Audit and Assurance Engagements

Define and explain the concept of "true and fair view" in the context of ISA 700/701.

Question

Required:
Explain what is meant by true and fair view. (5 marks)

Answer

There is no formal (legal or professional) definition of the term “true and fair view.” However, from general usage, the meaning of the term can be looked at from its components, namely:

True: The accounts are free from material misstatements and reflect the underlying records.
Fair: Implies that there is no undue bias in the financial statements or the way they have been presented.

(5 marks)

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PT – May 2020 – L2 – Q5d – Overview of the Ghanaian Tax System and Fiscal Policy

This question asks to explain the key features of the 3-Tier Ghana National Pension Scheme, which applies to both public and private sector workers.

Question

What are the features of the 3-Tier Ghana National Pension Scheme?
(5 marks)

Answer

The features of the 3-Tier Ghana National Pension Scheme are as follows:

Three-Tier System:
It is a 3-tier scheme, with the first two being mandatory and the third tier voluntary.
Mandatory Tiers:
The first two tiers are mandatory for all workers, both in the public and private sectors.
Voluntary Third Tier:
The third tier is a voluntary, fully-funded provident fund and personal pension scheme, which is managed privately.
Contribution Breakdown:
Contributions to the scheme are split, with 13.5% going to the first tier (Social Security and National Insurance Trust – SSNIT) and 5% going to the second tier, which is managed by private fund managers.
Pension Benefits:
SSNIT pays the monthly pension, while the second-tier fund managers pay out the lump sum upon retirement.
Minimum Contribution Period:
The minimum contribution period is 180 months (15 years) to qualify for benefits under the scheme

Maximum Age for Entry:

The scheme is open to new members starting from 15 years of age, with a maximum entry age of 45 years.
Age Exemption:
Workers who were 55 years and above before the commencement of Act 766 are exempt from the new scheme but may choose to join.
Maximum Contribution:
The maximum contribution is currently capped based on a salary of GH¢25,000, which can be adjusted periodically by SSNIT and the National Pensions Regulatory Authority (NPRA)

/ul>
(Any 5 points @ 1 mark each = 5 marks)

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PT – May 2020 – L2 – Q5d – Overview of the Ghanaian Tax System and Fiscal Policy

This question asks to explain the key features of the 3-Tier Ghana National Pension Scheme, which applies to both public and private sector workers.

Question

What are the features of the 3-Tier Ghana National Pension Scheme?
(5 marks)

Answer

The features of the 3-Tier Ghana National Pension Scheme are as follows:

Three-Tier System:
It is a 3-tier scheme, with the first two being mandatory and the third tier voluntary.
Mandatory Tiers:
The first two tiers are mandatory for all workers, both in the public and private sectors.
Voluntary Third Tier:
The third tier is a voluntary, fully-funded provident fund and personal pension scheme, which is managed privately.
Contribution Breakdown:
Contributions to the scheme are split, with 13.5% going to the first tier (Social Security and National Insurance Trust – SSNIT) and 5% going to the second tier, which is managed by private fund managers.
Pension Benefits:
SSNIT pays the monthly pension, while the second-tier fund managers pay out the lump sum upon retirement.
Minimum Contribution Period:
The minimum contribution period is 180 months (15 years) to qualify for benefits under the scheme

Maximum Age for Entry:

The scheme is open to new members starting from 15 years of age, with a maximum entry age of 45 years.
Age Exemption:
Workers who were 55 years and above before the commencement of Act 766 are exempt from the new scheme but may choose to join.
Maximum Contribution:
The maximum contribution is currently capped based on a salary of GH¢25,000, which can be adjusted periodically by SSNIT and the National Pensions Regulatory Authority (NPRA)

/ul>
(Any 5 points @ 1 mark each = 5 marks)

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PT – May 2020 – L2 – Q3c – Income Tax Liabilities

Tax rules governing overtime and bonus payments under employment income.

Question

c) What are the taxation rules for overtime payments and bonus payments under employment income?
(7 marks)

Answer

Overtime Payments:

Where an employer makes a payment for overtime work to a qualifying junior employee during a year of assessment, and the payment is up to 50% of the basic salary of the employee for the month, the employer is required to withhold tax at the rate of 5% from the payment. Any excess above the 50% is taxed at 10%.

A junior employee is the one whose qualifying employing income does not exceed eighteen thousand currency points (GH¢18,000.00) per annum.

(2 points @ 1.5 marks = 3 marks)

Bonus Payments:

Where an employer pays a bonus to an employee during a year of assessment and the sum of the payment during the year does not exceed 15% of the annual basic salary of the employee, the employer is required to withhold tax from the gross amount of the payment at the rate of 5%.
If the bonus exceeds 15% of the annual basic salary of the employee, the employer shall add any excess above the 15% payments to the employment income of the employee for the year, and withhold tax from the payment in accordance with the income tax rates for resident individuals (i.e., the graduated rates).
Tax withheld under overtime and bonus is a final tax on the overtime or bonus payment and the payment shall not be included in calculating income derived by the employee from that employment.
Where an employer makes a payment for overtime to an employee who is not a qualifying junior employee, the payment would be included in calculating the income of that employee from the employment and taxed at the graduated rates.

(4 points @ 1 mark each = 4 marks)

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PT – May 2020 – L2 – Q3c – Income Tax Liabilities

Tax rules governing overtime and bonus payments under employment income.

Question

c) What are the taxation rules for overtime payments and bonus payments under employment income?
(7 marks)

Answer

Overtime Payments:

A junior employee is the one whose qualifying employing income does not exceed eighteen thousand currency points (GH¢18,000.00) per annum.

(2 points @ 1.5 marks = 3 marks)

Bonus Payments:

Where an employer pays a bonus to an employee during a year of assessment and the sum of the payment during the year does not exceed 15% of the annual basic salary of the employee, the employer is required to withhold tax from the gross amount of the payment at the rate of 5%.
If the bonus exceeds 15% of the annual basic salary of the employee, the employer shall add any excess above the 15% payments to the employment income of the employee for the year, and withhold tax from the payment in accordance with the income tax rates for resident individuals (i.e., the graduated rates).
Tax withheld under overtime and bonus is a final tax on the overtime or bonus payment and the payment shall not be included in calculating income derived by the employee from that employment.
Where an employer makes a payment for overtime to an employee who is not a qualifying junior employee, the payment would be included in calculating the income of that employee from the employment and taxed at the graduated rates.

(4 points @ 1 mark each = 4 marks)

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CR – May 2020 – L3 – Q3a – Foreign Currency Transactions

Foreign currency transactions related to purchases, sales, and investment property with exchange rate variations and reporting implications.

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CR – May 2020 – L3 – Q3a – Foreign Currency Transactions

Foreign currency transactions related to purchases, sales, and investment property with exchange rate variations and reporting implications.

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CR – May 2020 – Q3b(i) – Ethical Issues in Contract Bidding

This question requires a discussion on the ethical issues related to conflict of interest, confidentiality, and professional behavior in a contract bidding scenario.

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CR – May 2020 – Q3b(i) – Ethical Issues in Contract Bidding

This question requires a discussion on the ethical issues related to conflict of interest, confidentiality, and professional behavior in a contract bidding scenario.

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CR – May 2020 – Q3b(ii) – Ethical Actions in Contract Bidding

This question requires recommendations for maintaining ethical standards in a contract bidding situation involving a conflict of interest.

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CR – May 2020 – Q3b(ii) – Ethical Actions in Contract Bidding

This question requires recommendations for maintaining ethical standards in a contract bidding situation involving a conflict of interest.

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CR – May 2020 – L3 – Q1 – Consolidated Statement of Financial Position

Prepare the consolidated statement of financial position for Phato Ltd and its subsidiaries as at 30 September 2019, including relevant calculations for goodwill, non-controlling interest, and asset impairments.

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CR – May 2020 – L3 – Q1 – Consolidated Statement of Financial Position

Prepare the consolidated statement of financial position for Phato Ltd and its subsidiaries as at 30 September 2019, including relevant calculations for goodwill, non-controlling interest, and asset impairments.

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CR – May 2020 – L3 – Q2a – Government Grants for Factory Construction

Discuss the accounting treatment for a government grant received for the construction of a factory, showing calculations and relevant entries.

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CR – May 2020 – L3 – Q2a – Government Grants for Factory Construction

Discuss the accounting treatment for a government grant received for the construction of a factory, showing calculations and relevant entries.

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CR – May 2020 – L3 – Q2b – Capitalization of Borrowing Costs

Required: Determine the maximum amount that could potentially be capitalized as borrowing costs during the period (assuming an asset was being financed using all available finance).

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CR – May 2020 – L3 – Q2b – Capitalization of Borrowing Costs

Required: Determine the maximum amount that could potentially be capitalized as borrowing costs during the period (assuming an asset was being financed using all available finance).

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CR – May 2020 – L3 – Q2c – Defined Benefit Pension Plan

Recommend the accounting treatment for a defined benefit pension plan with supporting calculations.

Workings – Calculation of Actuarial Gain/Loss:

Journal Entries:

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CR – May 2020 – L3 – Q2c – Defined Benefit Pension Plan

Recommend the accounting treatment for a defined benefit pension plan with supporting calculations.

Workings – Calculation of Actuarial Gain/Loss:

Journal Entries:

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CR – May 2020 – Q4a – Capital Reduction Account

This question requires the preparation of a Capital Reduction Account for Sasasila Ltd following a reorganization.

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CR – May 2020 – Q4a – Capital Reduction Account

This question requires the preparation of a Capital Reduction Account for Sasasila Ltd following a reorganization.

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CR – May 2020 – Q4b – Statement of Financial Position for Sasasila Ltd

This question requires the preparation of a statement of financial position for Sasasila Ltd following its restructuring.

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CR – May 2020 – Q4b – Statement of Financial Position for Sasasila Ltd

This question requires the preparation of a statement of financial position for Sasasila Ltd following its restructuring.

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CR – May 2020 – Q5 – Financial Performance and Position of Bossman Ltd

This question involves analyzing the financial performance and position of Bossman Ltd over three years using ratio analysis.

Introduction:

Financial Performance:

Financial Position:

Conclusion:

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CR – May 2020 – Q5 – Financial Performance and Position of Bossman Ltd

This question involves analyzing the financial performance and position of Bossman Ltd over three years using ratio analysis.

Introduction:

Financial Performance:

Required:
Determine the maximum amount that could potentially be capitalized as borrowing costs during the period (assuming an asset was being financed using all available finance).

Required:
Determine the maximum amount that could potentially be capitalized as borrowing costs during the period (assuming an asset was being financed using all available finance).