Pathfinder May 2018 Professional

THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF NIGERIA
PATHFINDER
MAY 2018 DIET
PROFESSIONAL LEVEL EXAMINATIONS
Question Papers
Suggested Solutions
Examiner‟s Reports
Plus
Marking Guides
0
FOREWARD
This issue of the PATHFINDER is published principally, in response to a growing

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

Chartered Accountants of Nigeria (ICAN);
(ii) Unsuccessful candidates in the identification of those areas in which they

lost marks and need to improve their knowledge and presentation;
(iii) Lecturers and students interested in acquisition of knowledge in the relevant

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

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

students and those who assist them in their preparations for the Institute‟s
Examinations.
NOTES
Although these suggested solutions have been published under the
Institute‟s name, they do not represent the views of the Council of the
Institute. The suggested solutions are entirely the responsibility of their
authors and the Institute will not enter into any correspondence on them.
1
TABLE OF CONTENTS
PAGE
FOREWARD 1
CORPORATE REPORTING 3 – 37
ADVANCED TAXATION 38 – 67
STRATEGIC FINANCIAL MANAGEMENT 68 – 97
ADVANCED AUDIT AND ASSURANCE 98 – 127
CASE STUDY 128 - 161
2
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
PROFESSIONAL LEVEL EXAMINATION - MAY 2018
CORPORATE REPORTING
Time Allowed: 3¼ hours (including 15 minutes reading time)
INSTRUCTION: YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN

QUESTIONS IN THIS PAPER
SECTION A: COMPULSORY QUESTION (30 MARKS)

QUESTION 1
Komolafe Group carries on business as a distributor of warehouse equipment and

importer of fruit into the country. Komolafe was incorporated in 2008 to distribute
warehouse equipment. It diversified its activities during the year 2010 to include
the import and distribution of fruit, and expanded its operations by the acquisition
of shares in Kelvins in 2012 and Kelly in 2014.
Accounts for all companies are made up to December 31.
The draft statements of profit or loss and other comprehensive income for
Komolafe, Kelvins and Kelly for the year ended December 31, 2016 are as follows:
Komolafe Kelvins Kelly

N‟000 N‟000 N‟000
Revenue 91,200 49,400 45,600
Cost of sales (36,100) (10,926) (10,640)
Gross profit 55,100 38,474 34,960
Distribution costs (6,650) (4,274) (3,800)
Administrative expenses (6,950) (1,900) (3,800)
Finance costs (650) 0 0
Profit before tax 40,850 32,300 27,360
Income tax expense (16,600) (10,780) (8,482)
Profit for the year 24,250 21,520 18,878
Other comprehensive income for the year:
Items that will not be reclassified to profit or
loss in subsequent period
Revaluation of property 400 200 0
24,650 21,720 18,878
3
The draft statement of financial position as at December 31, 2016 are as follows:
Komolafe Kelvins Kelly

N‟000 N‟000 N‟000
Non-current assets
Property, plant and equipment (carrying amount) 70,966 48,546 26,126
Investments
Shares in Kelvins 13,300 000 000
Shares in Kelly 0 7,600 0
84,266 56,146 26,126
Current assets 3,136 18,050 17,766
87,402 74,196 43,892
Equity
Ordinary shares 16,000 6,000 4,000
Retained earnings 45,276 48,150 39,796
Current liabilities 26,126 20,046 96
87,402 74,196 43,892
The following information is available relating to Komolafe, Kelvins and Kelly.
(i) On January 1, 2012 Komolafe acquired 5,400,000, N1 ordinary shares in

Kelvins for N13,300,000 at which date there was a credit balance on the
retained earnings of Kelvins of N2,850,000. No shares have been issued by
Kelvin since Komolafe acquired its interest
(ii) At the date of acquisition, the fair value of the identifiable net assets of
Kelvins was N10m. The excess of the fair value of net assets is due to an
increase in the value of non depreciable land.
(iii) On January 1, 2014 Kelvins acquired 3,200,000, N1 ordinary shares in Kelly

for N7,600,000 at which date there was a credit balance on the retained
earnings of Kelly of N1,900,000. No shares have been issued by Kelly since
Kelvins acquired its interest. The fair value of the identifiable net assets of
Kelly at the date of acquisition approximates their book values.
(iv) During 2016, Kelly had made intra-group sales to Kelvins of N960,000 making
a profit of 25% on cost and N150,000 of these goods were in inventories at
December 31, 2016.
(v) During 2016, Kelvins had made intra-group sales to Komolafe of N520,000
making a profit of 25% on sales and N120,000 of these goods were in
inventories at 31 December 2016
(vi) An impairment test conducted at the year end did not reveal any impairment
losses.
(vii) It is the group‟s policy to value the non-controlling interest at fair value at the
date of acquisition. The fair value of the non-controlling interests in Kelvins
4
on January 1, 2012 was N1,000,000. The fair value of the 28% non-controlling
interest (direct and indirect) in Kelly on January 1, 2014 was N1,800,000.
Required:
Prepare for Komolafe Group:
a. A consolidated statement of profit or loss and other comprehensive income
for the year ended December 31, 2016. (13 Marks)
b. A consolidated statement of financial position as at December 31, 2016

(12 Marks)
c. In business combination, the consideration given by the acquirer to gain
control of the acquiree can be in different forms including deferred and
contingent considerations. While deferred and contingent considerations
represent amounts of consideration to be transferred in the future, the two
differ in nature and form.
Required:
Briefly distinguish between deferred and contingent consideration.
(5 Marks)
(Total 30 Marks)
SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE

QUESTIONS IN THIS SECTION (40 MARKS)
QUESTION 2
Set out below are the draft accounts of Wole-Adura Plc and subsidiaries and of
Maseru Associates. Wole-Adura acquired 40% of the equity capital of Maseru
Associates three years ago when the latter‟s retained earnings stood at N140m.
Abridged statement of financial position

Wole-Adura Plc Maseru
& Subsidiaries Associates
Nm Nm
Property, plant and equipment 990 595
Investment in Maseru Associates at cost 290 -
Loan to Maseru Associates 70 -
Current assets 450 175
Loan from Wole-Adura Plc. - (70)
1800 700
──── ────
5
FINANCED BY:
Ordinary shares of 50k each 1,125 350
Retained earnings 675 350
1800 700
──── ────
Abridged statements of profit or loss

Wole-Adura Plc Maseru
& Subsidiaries Associates
Nm Nm
Profit before tax 427.50 280.00
Tax expense (157.50) (105.00)
270.00 175.00
Additional information:
(i) Wole-Adura proposed a dividend of N225m.
(ii) Total market capitalisation is N5,625m.
Required:
a. Calculate each of these ratios for Wole-Adura Plc. and subsidiaries.
i. Earnings per share.
ii. Dividend cover.
iii. Earnings yield.
iv. Dividend yield. (4 Marks)
b. (i) Using the equity method, compute the earnings of the group
incorporating the associates. (4 Marks)
(ii) Compute the ratios in (a) above for the group. (4 Marks)
c. Comment on the ratios calculated in (a) and (b) above by pairwise

comparison. (3 Marks)
d. Extracts from the financial statements of Ikoku Plc. recently published are
as follows:
Statement of profit or loss for the year ended December 31, 2017
2017 2016
N‟m N‟m
Revenue 360 20
Cost of sales (150) (12)
Gross profit 210 8
Operating expenses (50) (3)
6
Operating profit 160 5
Interest expense (10) -
Tax expense (60) (2)
Profit for the year 90 3
Statement of financial position as at December 31, 2017

2017 2016
N‟m N‟m
Non-current assets
Property, plant & equipment 80 20
Current assets
Inventory 200 40
Trade receivables 70 25
Bank (50) 30
Total assets 300 115
Equity & liabilities

Ordinary shares of N1 each 60 40
Current liabilities
Trade payables 190 60
Current tax 50 15
300 115
Required:
Discuss the liquidity challenges of Ikoku Plc. during the year ended
December 31, 2017 from the extracts of the published financial statements.
(5 Marks)
(Total 20 Marks)
QUESTION 3
a. “IFRS 5 Non-current Asset held for Sale and Discontinued Operations” sets
out the principles governing the measurement and presentation of non-
current assets that are expected to be realised through sale rather than
through continuing use. The standard also deals with reporting the results of
operations that qualify as discontinued.
Required:
Discuss the conditions which must be met for a non-current asset to be
classified as being “held for sale” and explain the accounting treatment that
applies when such a classification is deemed appropriate. (7 Marks)
7
b. Bamgbose Plc. is a long-established travel agent, operating through a
network of retail outlets and online store. In recent years, the business has
seen its revenue from the online store grow strongly, and that of retail
outlets decline significantly. On July 1, 2017, the board decided to close the
retail network at the financial year end of December 31, 2017 and put the
buildings up for sale on that date. The directors are seeking advice
regarding the treatment of the buildings in the statement of financial
position as well as the treatment of the trading results of the retail division
for the year. The following figures are available at December 31, 2017.
Carrying amount of buildings ₦30.0 million
Fair value less costs to sell of buildings ₦25.8 million
Other expected costs of closure ₦5.85 million
Trading results:
Year ended December 31, 2017 Year ended December 31, 2016
Online store Retail Online store Retail
₦m outlet ₦m outlet
₦m ₦m
Revenue 58.5 13.5 48 18
Cost of sales 19.5 10.5 16.5 13.5
Gross profit 39 3 31.5 4.5
Operating costs (15) (7.5) (12) (7.5)
Profit before tax 24 (4.5) 19.5 (3)
Required:
i. Outline the conditions which must be met in order to present the
results of an operation as “discontinued” and the accounting
treatment that applies when such a classification is deemed
appropriate. (5 Marks)
ii. Draft the statement of profit or loss for Bamgbose Plc. for year ended
December 31, 2017 together with the comparative figures for 2016,
taking the above information into account. (8 Marks)
(Total 20 Marks)
QUESTION 4
a. Recording the substance of transactions, rather than their legal form, is an

important principle in financial reporting. The use of off-statement of financial
position financing arrangement enables companies to obtain financing without
showing debts in their books.
Required:
Describe how the use of off-statement of financial position financing can
mislead users of financial statements, making specific reference to THREE user
8
groups and giving examples where recording the legal form of transactions
may mislead them. (6 Marks)
b. Waasimi entered into the following transactions during the year ended March
31, 2018:
In March 2018, Waasimi factored some of its trade receivables to Asejere, a
finance house. Based on selected account balances, Asejere paid Waasimi 80%
of its book value. The agreement was that Asejere would administer the
collection of the receivables and remit a residual amount to Waasimi
depending upon how quickly individual customers paid. Any balance not
collected by Asejere after six months will be refunded to Asejere by Waasimi.
On April 1, 2017, Waasimi‟s freehold building had a carrying amount of

N15million and an estimated remaining useful life of 20 years. On this date,
Waasimi sold the building to Gbajumose for a price of N24million and entered
into an agreement with Gbajumose to lease back the building for an annual
rental of N2.6million for a period of five years.
The auditors of Waasimi have commented that in their opinion the building had
a market value of N20million at the date of its sale and to rent an equivalent
building under similar terms to the agreement between Waasimi and
Gbajumose would cost N1,600,000 per annum. Assume finance cost of 10% per
annum.
Required:
i. Briefly explain the major accounting issues involved in the above
transactions using the principles of substance over form. (5 Marks)
ii. State the appropriate accounting treatments of the various elements

identified. (6 Marks)
iii. State the classes of charges to be incurred and their appropriate

accounting treatments. (3 Marks)
(Total 20 Marks)
SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
IN THIS SECTION (30 MARKS)
QUESTION 5
a. Deferred tax can be determined adopting two perspectives that may result in
different numbers in the financial statements and tax computations. These
are statement of comprehensive income and statement of financial position,
perspectives.
9
Required:
Distinguish between the TWO perspectives of identifying deferred tax
balances in the financial statements. (4 Marks)
b. The following information relates to Tola Plc. as at December 31, 2017:
Note Carrying amount Tax base

Non-current assets N N
Plant and equipment 250,000 218,750
Receivables:
Trade receivables 1 62,500
Interest receivable 1,250
Payables
Fine 12,500
Interest Payable 2,500
Note 1
The trade receivables balance in the accounts is made up of the following
amounts:
Balances 68,750
Doubtful debt provision (Specific) (6,250)
62,500
Further information:
(i) The deferred tax balance as at January 1, 2017 was N1500.

(ii) Interest is taxed on a cash basis.
(iii) Allowances for doubtful debts are not deductible for tax purposes. Amounts
in respect of receivables are only deductible on application of a court order
to a specific amount.
(iv) Fines are not tax deductible.
(v) The tax rate is 30% for 2017. The government has not announced the tax rate
for 2018 but it is expected to rise to 36%.
Required:
Compute the deferred tax provision which is required as at December 31,
2017 and the charge to profit or loss for the period in accordance with IAS,
12 - Income Taxes. (11 Marks)
(Total 15 Marks)
10
QUESTION 6
Omotola Nigeria Plc is a conglomerate which operates in different sectors of the

economy. The company has many subsidiaries and associates across the six
continents of the world and its head office is located in Lagos, Nigeria. The shares
of the company are listed on the Nigerian Stock Exchange.
The company is trying to finalise its financial statements for the year ended April
30, 2018 and the following accounting issues are being considered by the chief
accountant based on the submission by the assistant accountant who is yet to
complete her professional examinations with the Institute of Chartered Accountants
of Nigeria. The functional and presentation currency of Omotola Nigeria Plc. is
Naira. The following transactions relate to the company:
(i) On May 1, 2017, Omotola Nigeria Plc. bought an investment property in

United States for $1,000,000. The company uses fair value model of IAS 40
to account for the investment property and the fair value at April 30, 2018 is
determined to be $1,200,000. The assistant accountant is unsure which
exchange rate to use in translating the investment property at the year
end and how to recognize any exchange difference that may arise.
(ii) On May 1, 2017, Omotola Nigeria Plc. acquired a wholly owned subsidiary in
United States of America. The goodwill that arose on the acquisition of this
subsidiary is $400,000.
In addition, the company invested in an equity instrument on the same date
which is measured at fair value through other comprehensive income (OCI)
in accordance with the requirements of IFRS 9.
Required:
a. In accordance with the requirement of IAS 21 - Effect of Changes in
Foreign Exchange Rates, discuss the treatment of foreign currency
transactions and the gain or loss arising therefrom. (7 Marks)
b. Discuss how the transaction in (i) will be accounted for in the financial
statements of Omotola Nigeria Plc. for the year ended April 30, 2018 in
accordance with IAS 21 (4 Marks)
c. Discuss how the transaction in (ii) will be accounted for in the financial
statements of Omotola Nigeria Plc. for the year ended April 30, 2018 in
accordance with IAS 21. (4 Marks)
(Total 15 Marks)
11
QUESTION 7
Some shareholders in Nigeria are becoming increasingly interested in the

environmental policies, impacts and practices of business entities given the
activities of some oil and gas and telecommunication companies. However financial
statements have not traditionally provided this information. As a result, there is
early indication that some listed companies in Nigeria are beginning to publish
sustainability report complying with the Global Reporting Initiative (“GRI”), an
organisation set up in 1997, to develop a sustainability reporting framework for
businesses. The GRI Sustainability Reporting Guidelines give guidance to entities
on how to measure and report on managements‟ approach to the economic,
environmental and social aspects that impact on their businesses.
Required:
a. Identify and explain the principal arguments against voluntary disclosure by
business entities of their environmental policies, impacts and practices.
(8 Marks)
b. Explain the nature of the information that could be disclosed by entities in
their external reports in respect of the economic, environmental and social
aspects, in order to comply with the GRI guidelines. (7 Marks)
(Total 15 Marks)
12
SOLUTION 1
(a) KOMOLAFE GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 2016
NOTE N‟000
Revenue 2 184,720
Cost of sales 3 (56,246)
Gross profit 128,474
Distribution costs 4 (14,724)
Administrative expenses 5 (12,650)
Finance costs (650)
Profit before tax 100,450
Income tax expense 6 (35,862)
Profit for the year 64,588
Other comprehensive income for the year
Items that will not be reclassified to profit or loss in
subsequent period
Revaluation of property 7 600
Total comprehensive income for the year 65,188
Profit attributable to:

Equity holders of the parent 8 57,162
Non-controlling interest 8 7,426
64,588
Total comprehensive income attributable to:
Equity holders of the parent 10 57,742
65,188
(b) KOMOLAFE GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT DECEMBER 31,
2016
Note N‟000
Non-current assets
Property, plant and equipment (carrying amount) 11 146,788
Intangible asset- Goodwill 13 7,040
Current assets 15 38,892

Total assets 192,720
Equity and Liabilities
Equity
Ordinary share 16,600
Retained earnings 16 113,283
Equity attributable to owners of parent 129,283
13
Total equity 146,452
Current liabilities 17 46,268
Total equity and liabilities 192,720
Working notes
1. Group Structure
Komolafe
NCI
10%
90% 01/01/2012
For: N13.3m
Kelvins
NCI 80% 01/01/2014

20% For: N7.6m
Kelly
Komolafe in Kelly
Indirect holding = 72%

NCI = 28%
2. REVENUE N'000
KOMOLAFE 91,200
KELVINS 49,400
KELLY 45,600
Less: Inter-group sales - in Kelly (960)
- In Kelvins (520)
184,720
3. COST OF SALES N‟000

KOMOLAFE 36,100
KELVINS 10,926
KELLY 10,640
Less: Inter-group sales - in Kelly (960)
- in Kelvins (520)
Unrealised Profit - in Kelly 30
- in Kelvins 30
56,246
14
4. DISTRIBUTION COSTS N'000
KOMOLAFE 6,650
KELVINS 4,274
KELLY 3,800
14,724
5. ADMINISTRATIVE EXPENSES N'000

KOMOLAFE 6,950
KELVINS 1,900
KELLY 3,800
12,650
6. INCOME TAX EXPENSES N'000

KOMOLAFE 16,600
KELVINS 10,780
KELLY 8,482
35,862
7. REVALUATION OF PROPERTY N'000

KOMOLAFE 400
KELVINS 200
600
8. Non-controlling Interest KOMOLAFE KELVINS KELLY NCI

N'000 N'000 N'000 N'000
Profit for the year 24,250 21,520 18,878
Less: Unrealised Profit (30) (30)
Adjusted Profit 21,490 18,848
Shares of Profit in Kelly
72% : 28% 13,571 (18,848) 5,277
Shares of Profit in
Kelvins 90% : 10% 19,341 (21,490) 2,149
57,162 ________ ________ 7,426
9. Total comprehensive
Income attributable to NCI N'000
Profit for the year (see 8 above) 7,426

Other comprehensive income:
Revaluation of property (200 x 10%)
20
7,446
15
10. Total Comprehensive Income Attributable to Owners of
Parent N'000
Profit for the year (see 8 above) 57,162

Other comprehensive income:
Revaluation of property (400 x 100%) 400
Revaluation of property (200 x 90%) 180
57,742
11. Property, plant and equipment (carrying amount) N'000

KOMOLAFE 70,966
KELVINS 48,546
KELLY 26,126
Fair value adjustment 1,150
146,788
12(a) Net Assets of the subsidiary -

KELVINS
Reporting Acquisition Post
Date Date Acquisition
N'000 N'000 N'000
Share capital 6,000 6,000 -
Fair value adjustment – Land 1,150 1,150
Unrealised profit – Inventory (30) ______ (30)
55,270 10,000 45,270
12(b) Net Assets of the subsidiary – KELLY

Reporting Acquisition Post
Date Date Acquisition
N'000 N'000 N'000
Share capital 4,000 4,000 -
Unrealised profit – Inventory (30) ______ (30)
43,766 5,900 37,866
16
13. Goodwill KELVINS KELLY TOTAL
N'000 N'000 N'000
Consideration transferred by the parent 13,300 6,840 20,140
Fair value of NCI at acquisition 1,000 1,800 2,800
14,300 8,640 22,940
100% of net assets of subsidiary
at acquisition (note 12) (10,000) (5,900) (15,900)
Goodwill 4,300 2,740 7,040
Note: the consideration transferred for the acquisition of KELLY is N7,600 x 90% i.e
N6,84m
GOODWILL – ALTERNATIVE SOLUTIONS
KELVINS N‟000 KELLY N‟000

Purchase consideration 13,300 Purchase consideration 7,600
NCI 10% 1,000 NCI 28% 1,800
Indirect (760)
Holdings
TOTAL CONSIDERATION 14,300 8,640
Fair value of net asset Fair Value of net asset
at acquisition (10,000) at acquisition (5,900)
Goodwill at acquisition 4,300 Goodwill at acquisition 2740
Impairment nil Impairment nil
Goodwill at reporting date 4,300 Goodwill at reporting date 2,740
14. Non-controlling Interest
KELVINS KELLY TOTAL

N‟000 N‟000 N‟000
NCI fair value at acquisition 1,000 1,800 2,800
Add: Shares of post-acquisition
Profit (45,270 x 10%); (37,868 x
28%) 4,527 10,602 15,129
Less: Shares of cost of investment in
Kelly (7,600 x 10%) (760) (760)
5,527 11,642 17,169
17
15. Current Assets N '000
KOMOLAFE 3,136
KELVINS 18,050
KELLY 17,766
Less: Unrealised Profit in Kelvins (30)
Unrealised Profit in Kelly (30)
38,892
16. Retained Earnings N'000
Komolafe 45,276
Add: Share of Post-acquisition profit
in Kelvins (45,270 x 90%) (Wn 12) 40,743
in Kelly (37,866 x 72%) (Wn 12b) 27,264
113,283
17. Current Liabilities N'000

KOMOLAFE 26,126
KELVINS 20,046
KELLY 96
46,268
(c) Deferred and contingent considerations

Deferred consideration arises when all or part of the cost of an acquisition is
deferred and does not become payable until a later date. In this case, the
amount of any deferred consideration is discounted to its present value at
the acquisition date to arrive at fair value as required by IFRS 3. Deferred
consideration should be included in the cost of acquisition (i.e. as part of the
consideration to acquire the acquiree).
Contingent consideration, on the other hand, arises when the final cost of the
consideration is contingent on (dependent on) certain future events. For
instance, an acquirer could agree to pay an additional amount if the
acquired subsidiary‟s profits exceed a certain level within a specified period
after the date of acquisition. Contingent consideration should be included in
the cost of acquisition (discounted to present value if the payment will occur
more than 12 months in the future). Contingent consideration must be
recognised at acquisition date as long as the fair value can be measured
reliably even though it is not probable that amount will be paid.
18
While both deferred and contingent considerations are measured at
acquisition and their date fair value recognized as part of cost of acquisition,
the two differ as follows:
- While subsequent settlement of contingent consideration is dependent on

the occurrence of certain future events, settlement of deferred
consideration is not dependent on any future event.
- While subsequent measurement of deferred consideration, that is not

equity is easier to determine the value is arrived at by unwinding of
discount, (systematic release of discount to finance cost) subsequent
measurement of contingent consideration that is not equity is not straight
forward as it is based on fair value which is determined in accordance
with IFRS 13.
- Whereas deferred consideration will surely be settled in the future,

contingent consideration may or may not be paid in the future.
- Contingent consideration is recognised at the date of acquisition as long

as the fair value can be measured reliably even though it is not probable
that the consideration will be paid (i.e. that the future event will occur).
However, there is no such requirement for deferred consideration.
EXAMINER‟S REPORT
The question tests the candidates‟ knowledge of preparation of Consolidated

statement of profit or loss and other comprehensive income, Consolidated
statement of financial position and the distinction between deferred and
contingent considerations.
Being a compulsory question, all the candidates attempted the question and
performance was above average.
Commonest pitfalls include:
- Lack of knowledge of how to analyse profit for the year and total
comprehensive income between owners of parent and NCI.
- Candidates inability to understand the difference between deferred and

contingent consideration.
- Poor calculation of goodwill, NCI, unrealised profit and retained earnings.
19
Candidates are advised to practice more questions before examination, as this is a
regular examinable section of the syllabus. Candidates are also advised to pay
more attention to the theoretical aspect of group accounting when preparing for
future examinations.
MARKING GUIDE Marks Total

1. (a) Revenue 21/3
Cost of sales 22/3
Distribution cost 11/3
Administrative expenses 11/3
Finance costs 1
/3
Income tax expense 1
Revaluation of property 1
Profit attributable to – non-controlling interest 1
Total comprehensive income
Attributable to:
- Equity of parent 1
- Non-controlling interest 1 13
(b) Goodwill 4
NCI 2
Retained earnings 2
Others 4 12
(c) - Deferred consideration 2

- Contingent consideration 2
- Conclusion 1 5
Total Marks 30
SOLUTION 2
(a) Computation of ratios for Wole Adura Plc and subsidiary

(i) Earnings per share:
Earnings/PAT 100 N270,000,000 100
× = 2,250,000,000 × = 12kobo
No. of ordinary shares outstanding 1 1
1,125,000,000
No of Ordinary Shares = = 2,250,000,000
0,5
(ii) Dividend cover:

Earnings/PAT 100 12 kobo
× = = 1.2 times
Dividend per share 1 10
20
OR
Dividend per share
PAT 270m
  1.2 times
Dividend 2250m
Dividend N225m 100
Note: DPS = No of ord. shares = 2,250m × = 10kobo
1
(iii) Earnings yield:

EPS 100 12 Kobo 100
× = 250 Kobo × = 4.8%
MPS 1 1
Market capitalisation N5,625m
Note: MPS = = = N2.50
No of ord. shares 2,250m
(iv) Dividend yield:

DPS 100 10 Kobo 100
× = 250 Kobo × = 4%
MPS 1 1
Note
PAT = Profit after tax
DPS = Dividend per share
EPS = Earnings per share
MPS = Market Price per share.
(b) Wole Adura Group Plc.

(i) Computation of earnings using equity method
N‟m
Profit before tax: Wole Adura Plc. and
Subsidiaries 427.5
Share of profit from Associate (Net of tax) 70
497.5
Income tax expense (157.5)
Profit for the year 340
21
EPS 340 100
(ii) = 2,250m × = 15.1kobo
No of ord.shares 1
15.11
Dividend Cover = = 1.51 times
10
15.11 100
Earnings Yield = × = 6.044%
250
10 100
Dividend Yield = × = 4.0%
250 1
(c) Comments
(i) There is an increase of 3.11 kobo in earnings per share of the
group. This is in excess of 12kobo EPS of Wole Adura Plc and
subsidiaries.
(ii) There is an increase of 0.31 times in dividend cover of the group.
This is in excess of 1.2 times Dividend Cover of Wole Adura Plc and
subsidiaries.
(iii) There is an increase of 1.244% in earnings yield of the group. This
is in excess of 4.8% earnings yield of Wole Adura Plc and
subsidiaries.
(iv) The dividend yield for the two entities remains constant.
(v) The inclusion of the N70m share of profit in Maseru Associates
impacted positively on all ratios computed.
Pairwise Comparison
Wole Adura Plc. and Subsidiaries Changes

Group
EPS 12kobo 15.11kobo 3.11k
Dividend Cover 1.2 times 1.51 times 0.31 times
Earnings Yield 4.8% 6.044% 1.244%
Dividend yield 4% 4% -
22
(d) To discuss the liquidity challenges during the year ended December 31,
2017, the following computations are necessary:
2017 2016 Change
Current Asset Ratio 300 – 80 115 – 20
300 - 60 115 40
0.92 1.27 (0.35)
Quick Ratio 220 - 200 95 – 40

300 - 60 115 - 40
0.08 0.73 (0.65)
Both the current ratio and quick ratio reduced drastically in 2017 compared
with 2016 by 28% and 89% respective probably due to:
(i) Bank overdraft of N50m compared with positive position of N30m
in 2016.
(ii) Higher inventory tied up of N200m compared with only N40m in
2016.
(iii) Trade payables increased by 216% in 2017 compared with 2016
from N60m to N190m.
(iv) Larger volume of business requires larger working capital which is
lacking here. Working capital dipped from N20m in 2016 to - N20m in 2017.
(v) Interest expense of N10m in 2017 as a result of heavy borrowing.
EXAMINER‟S REPORT
The question tests the computation of ratios and the interpretation of same for
decision making.
About 81% of the candidates attempted the question and performance was below
average.
The commonest pitfall was the inability of the candidates to interprete the
computed ratios correctly. Also, some candidates could not correctly applied
equity method to calculate the earnings of parent in associate company.
Candidates are advised not to limit their knowledge only to computation of ratios,
but also to interpretations of financial information in order to improve their
performance in future examinations.
23
(a) i. EPS 1
ii. Dividend cover 1
iii. Earnings yield 1
iv. Dividend yield 1 4
(b) i. Computation of earnings 4

ii. Ratio computation 4
(c) Comments on ratios

Changes in ratio figures 2
Comments on changes 1 3
(d) Liquidity Challenges

Current assets ratio and change 1
Quick ratio and change 1
Discussion 3 5
Total Marks 20
SOLUTION 3
(a) The conditions which must be met for a non-current asset to be classified
as being “held for sale” are:
(i) Management is committed to a plan to sell;
(ii) The asset is available for immediate sale;
(iii) An active programme to locate a buyer has been initiated;
(iv) The sale is highly probable;
(v) The sale should be completed, or expected to be so, within 12

months from the date of the classification;
(vi) The actions required to complete the planned sale would have been
made, and it is unlikely that the plan will be significantly changed or
withdrawn;
(vii) The asset is being actively marketed at a sales price that is

reasonable in relation to its fair value.
24
Accounting treatment
 Assets classified as held for sale must be presented separately on the

face of the statement of financial position and included in current
assets.
(b) (i) The condition which must be met in order to present the results of an
operation as “discontinued” are that the discontinued operation:
- represents either a separate major line of business or a

geographical area of operations;
- is part of a single co-ordinated plan to dispose of a separate

major line of business or geographical area of operations; or
- is a subsidiary acquired exclusively with a view to resale.
Accounting treatment
The total (or sum) of:
- the post-tax profit or loss of the discontinued operation, and
- the post-tax gain or loss recognised on the measurement at fair

value less costs to sell (or on the disposal) should be presented as a
single amount in the statement of profit or loss.
(ii) Bamgbose Plc

Statement of Profit or loss and other comprehensive income for the
year ended December 31, 2017
2017 2016
N‟m N‟m
Revenue 58.5 66
Cost of sales (19.5) (30)
Gross profit 39 36
Operating costs (20.85) (19.5)
W2
Profit for the year from continuing operations 18.15 16.5
Loss for the year from discontinued operations (8.7) -
W1
Profit for the year 9.45 16.5
25
Working W1
N‟M
The post-tax loss of the discontinued operation 4.5
The post-tax impairment loss recognized on the measurement
of the buildings at fair value less costs to sell (30 – 25.8) 4.2
Loss for the year from discontinued operations 8.7
Working W2
Operating costs:
As per the accounts 15
Other expected cost of closure 5.85
20.85
EXAMINER‟S REPORT
The question tests the knowledge of the provisions of “IFRS 5” and its application
in practical terms.
About 86% of the candidates attempted the question and performance was average.
Candidates‟ pitfalls was lack of understanding of the provisions of IFRS on

discontinued operations aspect of the standard and its practical application.
Candidates are advised to prepare very well for this stage of the examination and
completely cover the syllabus by using the ICAN Study Text which covers
extensively the required standards, including IFRS 5.

(a) IFRS 5 conditions for an asset to be classified as “held
for sale” – any 6 points @ 1 mark each 6
Accounting treatment – any 2 points @ ½ mark 1 7
(b) i. IFRS 5 conditions for an operation to be reported

as “discontinued” – any 2 points @ 1½ marks each 3
Accounting treatment – any 2 points @ 1 mark each 2 5
ii. Application: Statement of profit or loss and other

comprehensive income 6
Workings 2 8
Total 20
26
SOLUTION 4
(a) Substance over form states that economic or commercial substance of a

transaction override the legal form. Therefore, organization should always
record the economic substance of a transaction rather than their legal form.
The main problem of off-statement of financial position finance is that it

results in financial statements that do not faithfully represent the
transactions and events that have taken place. This implies that such
financial statements cannot be relied upon and as a result, any decision
made on the basis of the information contained in the financial statements
will be incorrect and misleading.
How the major user groups can be misled

i. Lenders of capital are especially concerned about the entity‟s gearing
position. When the borrowing is high, it increases risk.
ii. Suppliers are concerned with liquidity position of the entity. The
existence of consignment inventories may be relevant to trade
suppliers. Sometimes, consignment inventories and their related
current liabilities are not recorded on the statement of financial
position as the wording of the purchase agreement may be such that
legal ownership of the goods remains with the supplier until specific
event(s) occur.
iii. Investors are concerned with the entity‟s profitability performance.
Where borrowing is low, it becomes inexpensive and tax efficient with
promising returns to the shareholders.
iv. Management may not be able to use the asset to claim capital
allowance with the relevant tax authority, if it is off financial
statement, thereby understating asset by ignoring substance over
form rules.
v. Employees are also interested in the financial statements because of

their job security. If a facility that is not recorded in the company‟s
book attracts huge finance charges, if this continues for a long period,
it can negatively affect the organisation and may lead to staff
rationlisation in the future.
(b) i. Major accounting issues involved in the two transactions using the
principles of substance over form:
27
 Factoring
This is a common method of entities releasing the liquidity of
their trade receivables. The issue is whether the trade
receivables have been sold, or the income, from the finance
house for their „sale‟ should be treated as a short-term loan.
The main “substance issue” with this type of transaction is to
identify which party bears the risk relating to the asset. If the
risk lies with the finance house (Asejere), the trade receivables
should be removed from the statement of financial position. In
this case, it is clear that Waasimi still bears the risk relating to
slow and non-payment of trade receivables. The residual
payment by Asejere depends on how quickly the receivables are
collected, the longer it takes, the less the residual payment.
Any balance uncollected by Asejere after six months will be
refunded by Waasimi, which reflects the non-payment risk.
 Sales and Leaseback of freehold building
This is sales and lease back transaction. The substance was
that Waasimi needed loan, if not, an asset cannot be sold and
leased back immediately. It implies that the excess purchase
consideration of N4million (N24m – N20m) is “in substance” a
loan rather than sales proceeds (legal form) which is being
repaid through the excess (N1million per annum) of the rent
payments.
It should be indicated that the lease is an “Operating Lease”,
hence, the property should be treated as sold and derecognised.
ii. Appropriate accounting treatment
Factoring
Cash received from Asejere (80% of the selected receivables) should
be treated as a current liability (a short-term loan).
The difference between the gross trade receivables and the amount
received from Asejere (plus any amount directly from the credit
customers) should be recognised in statement of profit or loss.
Sale of freehold property
Sale of the property should be recorded at its fair value
(₦20million).
Profit on disposal would be ₦5million (₦20million – ₦15million).
28
The excess of ₦4million (₦24million – ₦20million) should be
treated as a loan (Non-current liability).
iii. Classes of charges to be incurred
Factoring
Administrative expenses in the form of factoring charges for Asejere
collecting receivables.
Finance cost reflecting the time taken to collect the receivables.
Impairment of trade receivables (bad debts).
Sale of freehold property

The total rental payment of ₦2.6 million should be split into three
elements as:
Property rental cost ₦1.6m

Finance cost (10% of ₦4m) ₦0.4m
Capital repayment of the loan ₦0.6m
₦2.6m
EXAMINER‟S REPORT
The question tests the principle of substance over legal form and the accounting
issues in the principle of substance over form; the relevant accounting treatments;
and classes of charges involved in the transactions
About 29% of the candidates attempted the question and performance was below
average.
Majority of the candidates were not familiar with the provisions of IFRS as it relates
to “factoring”, sales and lease back etc.
Candidates are advised to pay more attention to the provisions of IFRSs as well as
their practical applications.
(a) Explanation of substance over form 1½

How major user groups can be misled with examples 4½
6
29
(b) i. Major accounting issues 5
ii. Accounting treatments 6
iii. Classes of charges 3
14
Total Marks 20
SOLUTION 5
(a) The two perspective of identifying deferred tax balances are:
i. A statement of comprehensive income (income and expenses)

perspective:
 The differences arising in the period are identified by comparing

income and expenses recognized under IFRS to the equivalent
figures that are taxable or allowable under tax legislation; and
 The approach identifies the deferred tax expense or credit

recognized in the statement of comprehensive income for the
period (with the other side of the entry recognised as a liability
or asset).
ii. A statement of financial position (assets and liabilities) perspective:
 The differences are identified on a cumulative basis by

comparing the carrying amount of assets and liabilities under
IFRS to the carrying amount of the same assets and liabilities
according to the tax rules; and
 The approach identifies the deferred tax liability (or asset) that
should be recognised (with the movement on this amount
recognized as a credit or expense in the statement of
comprehensive income).
30
(b)
Carrying Tax base Temporary
amount difference
Non-current assets ₦ ₦ ₦
Plant and equipment 250,000 218,750 31,250
Receivables
Trade receivables 62,500 68,750 (6,250)
Interest receivable 1,250 - 1,250
Payables
Fine 12,500 12,500 -
Interest payable 2,500 - (2,500)

Temporary Deferred tax @
Differences 30%
Deferred tax liabilities 32,500 9,750
Deferred tax assets (8,750) (2,625)
7,125
Deferred tax @
30%
₦
Deferred tax as at January 1, 2017

1,500
Profit or loss balancing
figure 5,625
Deferred tax as at December 31,
2017 7,125
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of computation of deferred tax provision

in line with IAS 12.
About 52% of the candidates attempted the question and the performance was
below average.
Candidates‟ lack of adequate knowledge of the concept of deferred taxes lead to

the inability to use the data given to accurately compute and present deferred tax
provisions.
Candidates are advised to ensure a good coverage of the syllabus at this level of
the Institute examination.
31
(a) i. A statement of comprehensive income (income &
expenses) perspective 2
ii. A statement of financial position (assets and
liabilities) perspective 2 4
(b) Calculation of deferred tax as per statement of financial

position 9
Calculation of charges to profit or loss for the period 2 11
15
SOLUTION 6
(a) Treatment of foreign transactions and gain or loss arising therefrom
A company can have transactions that are denominated in foreign currency.

These must be translated into the company‟s functional currency for the
purpose of recording the transactions in its books of accounts and preparing
its financial statements in accordance with guidelines provided in IAS 21.
S/N Items or period of Applicable Treatments of gain or loss

translation or transaction rates
1. On initial recognition The spot rate on No exchange difference will arise,
the date of the therefore, no gain or profit.
transaction
2. Balances at the beginning Opening rate Any exchange difference should
of the year in statement of be recognized in profit or loss.
financial position
3. All items for statement of Average rate Any exchange difference should
profit or loss and other be recognized in profit or loss.
comprehensive income and
where the exchange rate
does not fluctuate
significantly over the period
4. Exchange difference before Rate ruling on Exchange rate difference to be
year end the day of recognized in profit or loss.
exchange
5. For year end balances the
following rules apply:
i. Monetary items i.e current Closing rate Any exchange gain or loss that
assets or current liabilities arises should be recognized in
profit or loss.
ii. non-monetary items such as Historical rate Therefore, no exchange
32
non-current assets, or rate at difference will arise.
depreciation non-current acquisition
liabilities
iii. non-monetary items Date of Gain or loss should be recognised
measured at fair value determining the in profit or loss and Other
fair value Comprehensive Income (OCI)
(b) How to account for investment property

i. Omotola Nigeria Plc. will have to translate the investment property
into its functional currency (Naira) on purchase at the end of the year.
ii. The recording in the books will be as follows:
 On the initial recognition, the $1 million should be translated at

the spot rate on May 1, 2017.
 At April 30, 2018, the fair value of $1.2m should be translated

using closing rate at the date of determining the fair value.
 Any exchange difference arising from this property should be

recognized in profit or loss.
(c) Accounting treatment for wholly owned subsidiary and other equity
investment
The financial statements of the subsidiary together with the goodwill arising
on the acquisition of the subsidiary will be treated as follows:
i. Treatment of acquisition of wholly owned subsidiary
 On acquisition use spot rate or the rate on the date of

acquisition.
 At the year-end, on April 30 2018, use closing rate.
 Any exchange difference arising on this exercise will be

recognised in other comprehensive income (OCI) and
accumulated in equity through other component of equity
(OCE).
ii. Treatment of equity investment
 The equity investment at fair value through other
33
comprehensive income (FVOCI) will be translated at initial
recognition using spot rate at the date of initial recognition –
May 1, 2017.
 At April 30, 2018, the fair value of this investment will be

translated using the exchange rate at the date of determining
the fair value.
 Any exchange gain or loss arising from the translation will be

recognised in OCI.
EXAMINER‟S REPORT
The question tests practical applications of IAS 21 - Effect of Changes in Foreign

Exchange Rate; IAS 40 - Investment Property and IFRS 9 – Financial instrument
About 69% of the candidates attempted and the performance was below average.
Commonest pitfalls was the inability of the candidates to discuss the treatment of
foreign currency transactions and their inclusion in the financial statements.
Candidates are advised to study all accounting standards and understand their
applications.
MARKING GUIDE
(a) Marks Total
Functional currency 1
- Foreign currency 1
- Applicable exchange rates 3½
- Treatment of exchange difference 1½ 7
(b) Translation to functional currency (Naira) 1

Recognition and presentation 3 4
(c) i. Accounting treatments of wholly owned subsidiary 2

ii. Accounting treatments of equity investment 2 4
Total Marks 15
SOLUTION 7
(a) Environmental reports are reports that give details of the entity‟s activities
and its impacts in the environment where they operate and the efforts of the
entity to reduce and clean up the impact.
The following are the principal arguments against voluntary disclosures:
34
i. Voluntary disclosures are of limited usefulness as they are not readily
comparable with other reporting entities;
ii. Voluntary information may not be audited and therefore the reliability
of the information is questionable and makes it less useful to decision
makers;
iii. The lack of comparability may mean that the cost of producing the
information outweighs the potential benefits to shareholders;
iv. Any cost incurred will reduce profit and subsequent potential returns
to shareholders;
v. Voluntary disclosures are part of the annual report which implies that
there is a risk of information overload and where this occurs, the
relevance and usefulness of the information is reduced;
vi. The disclosure of wrong environmental report may be used against

the entity if contended in a law court;
vii. Since voluntary disclosures are not regulated by laws, disclosures

tend to lack standardization;
viii. Information overload in voluntary disclosures may lead to window

dressing (creative accounting); and
ix. Voluntary disclosures will state the type of materials the business uses
in the course of their production, but will not mention the adverse
effect of the chemical components of these materials on the
community/environment., for example:
 In an oil and gas company like in this question, there will be water
pollution that will adversely affect the community/environment vis a
vis the farming/fishing of the community.
 Gas emission from power generation constitute health hazard but

voluntary disclosure will not mention this.
 Movement of heavy tractors/vehicles for the purposes of the business

will make the road to wear out on time and this will affect the well
being of the community which voluntary disclosure will never
mention.
35
(b) Information that could be disclosed by entities in their external reports in
order to comply with the Global Reporting Initiative (GRI) guidelines are as
follows:
i. The economic aspects are likely to contain information about how the
entity impacts on the economic conditions of its stakeholders and the
area in which it operates globally;
ii. An entity may also include its policies regarding local and global
economies and disclose targets and its performance to date;
iii. The environmental aspect provides information about how an entity

impacts on the environment and management‟s policies on waste,
emissions and pollution;
iv. Targets on wastage, emission and pollution are likely to be set and
strategies for achieving these and performance to date could also be
included;
v. The social aspect relates to the impact the entity has on the social systems
in which it operates in relation to human rights, labour practices
including employer/employee relations, occupational health and safety
precautions; and
vi. There could also be information on research and development in respect

of technologies for environmental conservation and environment-
conscious products and services.
Global Reporting Initiative (GRI) is a reporting guideline issued by the

Sustainability Accounting Standards Board to entities on how to measure
and report on management‟s approach to the economic, environmental
and social aspects that impact on their businesses.
EXAMINER‟S REPORT
The question tests the candidates‟ understanding of the principal arguments
against voluntary disclosures and information that could be disclosed in external
reports in respect of the economic, environment and social aspects.
About 64% of the candidates attempted the question and the performance was
below average.
Commonest pitfall was that most of the candidates failed to highlight the principal
arguments against voluntary disclosures.
36
Candidates are advised to cover all sections of the syllabus for better performance
in future examinations.
MARKING GUIDE
Marks Total
(a) Identification of principal arguments 4
Explanation of principal arguments 4 8
(b) Information disclosures in external reports:

- economic 2
- environmental 2
- social 2
Description of GRI 1 7
15
37
PROFESSIONAL LEVEL EXAMINATION – MAY 2018
ADVANCED TAXATION
Time Allowed: 31/4 hours (including 15 minutes reading time)

QUESTION 1
You are the tax controller of Rex Pharmaceuticals (Nigeria) Limited, having its head
office at Ketu in Epe local government of Lagos State.
In the past three years, the company had been subjected to an array of taxes by
different revenue authorities within Lagos State and indeed the entire country.
Apart from the Companies Income Tax, Withholding Tax is another tax that the
company‟s management is concerned about. The Managing Director is very much
worried that this multiplicity of taxes is taking its toll on the company‟s financials.
The company is already facing myriads of problems ranging from high cost of
capital which led to increase in cost of production and attendant reduction in
profit. The company‟s goods are becoming uncompetitive compared with imported
similar goods. The long term effect is either reduction in work force or relocation to
a more favourable economic environment. The Managing Director has invited you
to his office to discuss the following issues:
(i) Whether as a corporate body, the company ought to be subjected to myriads
of taxes beyond the corporate tax;
(ii) The jurisdiction of the tiers of government in the imposition and collection of
taxes;
(iii) Withholding Tax;
(iv) Pay-As-You-Earn (PAYE) as it affects the staff; and
(v) Capital Gains Tax
You have also been provided with the following information:
- The company‟s technical agreement with the foreign head office and the
need to remit funds;
- Non-resident directors are to receive N2,500,000;
- - Staff P.A.Y.E has been centralised;
38
- Dividend has been paid to shareholders in different parts of the country, and
those resident in Kogi State of Nigeria, received N375,000;
- Land for a factory in Abuja was purchased from Alhaji Garuba Maito who
resides in Kano;
- The company received N4,500,000 as net dividend from an associated
company, Laiketop Limited, for the year ended September 30, 2014;
- In the audited financial statements of Rex Pharmaceuticals for the year
ended December 31, 2015, a dividend of N9,500,000 was proposed. Out of
this amount, N3,500,000 was from dividend received from Laiketop Limited
while the balance was from a Total Profit of N22,500,000 from other trading
activities; and
- Out of the thirty employees in Abuja, five are resident in Suleja, Niger State.
You are required to prepare a memo to the Managing Director explaining the
following:
(a) i. Double/Multiple Taxation.
ii. Double Taxation Treaty.
iii. Multiple Taxation in Nigeria.
iv. Measures put in place to reduce cases of multiple taxation in Nigeria.
v. Withholding Tax with respect to (i) to (v).
vi. Penalty for non-deduction/remittance of Withholding Tax.
(12 Marks)
(b) The arms of government empowered to legislate on tax matters by the
Constitution. (4 Marks)
(c) Relevant tax authority and the Withholding Tax due, if any. (4 Marks)
(d) i. The appropriate description of the income received from Laiketop

Limited.
ii. The tax due from other trading activities of Rex Pharmaceuticals.
iii. Amount to be recouped by Rex Pharmaceuticals, if any.
iv. Net amount received by shareholders of Rex Pharmaceuticals.
v. Relevant section of the law to buttress your points in (i) and (ii) above.
(10 Marks)
(Total 30 Marks)
39
SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS IN
THIS SECTION (40 Marks)
QUESTION 2
(a) “Disposal” or “disposed of” are terminologies used frequently in relation to
chargeable oil owned by an oil producing company under the provisions of
the Petroleum Profits Tax Act Cap P.13 LFN 2004.
Required:
(i) Differentiate between “disposal” and “disposed of”. (2 Marks)
(ii) Discuss the following:

- Intangible drilling costs. (2 Marks)
- Oil mining lease. (1 Mark)
(b) Ibrahim Oil Nigeria Limited is an oil prospecting company which

commenced production in commercial quantity in 2008. Its accounting year
end is December 31. The company has provided the following Statement of
Profit or Loss for the year ended December 31, 2016:
N‟000 N‟000
Revenue (value of oil produced and exported) 2,455,200
Cost and expenses incurred:
Operating costs 952,500
Non-productive rent 63,200
Royalty on export sales 14,775
Depreciation of Property Plant and Equipment 65,400
Tangible drilling cost 53,800
Donation 2,500
Stamp duties 1,250
Repairs and renewal of machinery 2,000
Exploration and drilling costs 100,300
Custom duties on Plant and Machinery 1,130
Bad and doubtful debts 26,500
Pension and provident funds contribution 30,600
Interest paid 26,200
General expenses 11,050
Income tax provision 120,000
(1,471,205)
Net Profit 983,995
The following additional information is relevant:
(i) Exploration and drilling costs are in respect of cement and casing of:
N‟000
1 Appraisal well (oil field section 1)
st
50,300
40
2nd Appraisal well (oil field section 1) 27,600
3rd Appraisal well (oil field section 1) 22,400
100,300
(ii) Of the N26,500,000 bad and doubtful debts, N16,500,000 relates to
specific provision for bad and doubtful debts.
(iii) Plant and machinery acquired during the year at N30,000,000 was
located in territorial waters and continental shelf areas beyond 200
metres of water depth.
(iv) Pension and provident fund contribution were approved by the Joint
Tax Board.
(v) Donation was made to Boys Scout of Nigeria.
(vi) Interest paid was attributable to a loan obtained from an affiliated
company under terms prevailing in the open market.
(vii) 160,400 barrels of crude oil was produced and exported at a posted
price of $46 per barrel (exchange rate of N340 to 1 US$).
(viii) Capital allowances computed was N88,100,000.
Required:
Determine for management the following:
(i) Assessable Profit (9 Marks)
(ii) Chargeable Profit (3 Marks)
(iii) Chargeable Tax (2 Marks)
(iv) Total Tax Liability (1 Mark)
(Total 20 Marks)
QUESTION 3
a. Capital gains may be defined as gains arising from increases in the market
value of capital assets, to a corporate body or person who does not
habitually offer them for sale, and in whose hands they do not constitute
inventory-in-trade.
With respect to the Capital Gains Tax Act, you are required to explain:
(i) When a “disposal” is said to have taken place. (2 Marks)
(ii) What constitutes “incidental costs”? (2 Marks)
(iii) Under what circumstances can a “delayed remittance” relief be granted?
(2 Marks)
b. Alero Manufacturing Limited, Abeokuta, Ogun State, purchased a chargeable
asset on hire purchase in year 2014. The deposit paid for the purchase was
41
N800,000. The balance was to be paid in forty instalments of N75,000. The
cash price of the asset was N2,400,000.
Required:
Calculate the capital gains, assuming the asset was sold as detailed below:
i. For N4,200,000 after payment of thirty instalments. (7 Marks)
ii. For N4,500,000 after payment of all the instalments. (7 Marks)
(Total 20 Marks)
QUESTION 4
a. The tax authorities view any case of tax evasion seriously. They are
empowered to set aside tax avoidance schemes that result in artificial or
fictitious transactions. Tax evasion is usually more prevalent when the tax
system is perceived to be unfair.
You are required to:
Differentiate between Tax Avoidance and Tax Evasion. (5 Marks)
b. Engineer Kole Ahmed manages a wholly owned Nigerian engineering outfit
– Oduifa Construction Company Limited. The company is based at Ikeja and
was incorporated in February 2010.
Given the challenging economic environment in Nigeria and inconsistent
government policies, the company‟s management embarked on foreign
diversification of income. They sourced and secured some contracts in the
United Kingdom where they have operational activities in London.
Extracts from the Statement of Profit or Loss for the year ended December 31,
2015, for Lagos and London operations, are as follows:
Lagos London Total

Branch
(Translated
in Naira)
N N N
Revenue 68,000,000 70,200,000 138,200,000
Direct expenses (43,410,000) (44,050,000) (87,460,000)
Gross profit 24,590,000 26,150,000 50,740,000
Deduct: administrative expenses:
Staff salaries 1,200,000 1,440,000 2,640,000
Rent and rates 840,000 960,000 1,800,000
Motor vehicle expenses 136,000 148,000 284,000
Repairs and maintenance 92,000 106,500 198,500
Utilities – electricity, gas, water etc 76,840 81,000 157,840
Business insurances 55,000 60,000 115,000
42
Miscellaneous expenses 74,000 61,000 135,000
Audit fees 300,000 400,000 700,000
Bank charges and commissions 341,000 425,000 766,000
Foreign taxes suffered - 4,260,000 4,260,000
Depreciation 860,000 920,000 1,780,000
Net Profit 20,615,160 17,288,500 37,903,660
N725,000 was agreed with the Revenue as Capital allowances.
You are required to:

Compute the final tax liability of the company for the relevant assessment year.
(15 Marks)
(Total 20 Marks)
SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE QUESTIONS
IN THIS SECTION (30 Marks)
QUESTION 5
a. Section 5 of the Petroleum Profits Tax Act Cap P.13 LFN 2004, specifies that
“every person having possession of or control over any documents,
information, returns or assessment, lists or copies of such lists relating to tax
or petroleum operations or the amount and value of chargeable oil won by
any company who at any time communicates or attempts to communicate
such information or anything contained in such documents, returns, lists, or
copies to any person, shall be guilty of an offence”.
Required:
Advise on the extent to which the provision of the Act can be relied upon on
issues relating to:
i. Disclosure of information to authorised officers of foreign countries
who have double taxation agreement with Nigeria. (2 Marks)
ii. The performance of the duties of the Auditor-General for the

Federation or any officer authorised by him (2 Marks)
b. Ayokunle Oil Nigeria Limited engages in petroleum operations. The
company was incorporated in 2005 but commenced business in January
2010. It operates in the continental shelf at water depth of 155 metres. The
company makes up its accounts to December 31, each year.
43
The company has presented the following statement of activities for the year
ended December 31, 2016:
 Sales of crude oil:
Exported at $52 per barrel 120,500 barrels
Domestic at N12,250 per barrel 70,000 barrels
 Chargeable natural gas sold N300,800,000
 Income from other sources N 6,770,000
Expenses incurred:
N‟000
Intangible drilling cost 439,000
Custom duty 53,200
Salaries and other personnel costs 280,500
Royalty on oil exported 110,600
Royalty on local sales 41,200
Stamp duty 1,050
Donations 22,000
Transportation 72,070
Administration and general expenses 340,200
Bad debts 66,000
Pension contribution 21,000
Miscellaneous expenses 32,170
The following information was provided on the above statement:

 Capital allowances were agreed at N133,000,000.
 Plant and storage tank acquired and used during the year amounted
to N80,000,000.
 Depreciation of N105,000,000 was included in operating costs.
44
 Custom duty on plant and storage tank, N2,250,000, was included in
miscellaneous expenses.
 70% of custom duty was on essential items.
 The average exchange rate during the period was N365 to $1 (USA).
Required:
Determine for the relevant assessment year, the following:
a. Assessable Profit (7 Marks)
b. Chargeable Profit (3 Marks)
c. Chargeable Tax (1 Mark)
(Total 15 Marks)
QUESTION 6
Chief Bonny Chizaram is the Chairman/CEO of Chizaram group of companies. The
conglomerate operates in several states of Nigeria. The group‟s areas of business
interest spans across supply of building materials, transport and banking.
In 2012, at the instance of the Chairman, the group decided to diversify its business
into some African Countries by floating Obi Airlines Limited which was incorporated
in Ethiopia.
On May 25, 2016, as Chief Chizaram was in the executive lounge of Muritala
Mohammed International Airport, Lagos, awaiting departure, he met his long-time
friend and business colleague, Chief Roger Menkiti, who is also an entrepreneur.
During their discussion, Chief Menkiti wanted to know how beneficial it would be to
him should he decide to invest in Ethiopia. His areas of concern are mainly
Companies Income Tax and Tertiary Education Tax payable in Nigeria assuming he
decided to start an Airline business in Ethiopia.
Meanwhile, the financial results of Obi Airlines Limited for the year ended
December 31, 2015 are as shown below:
N N
Income from passenger flights on other routes 213,668,750
Income from cargo loaded into aircraft on other
routes 218,280,000
Income from passenger flights from Nigeria 54,401,275
Income from cargo loaded into aircraft from Nigeria 49,938,180
536,288,205
Deduct:
Depreciation 1,974,125
Staff salaries 14,373,968
General provision 215,050
Other expenses 579,913
17,143,056
Net Profit 519,145,149
45
Additional information included the following:
(i) Capital allowances were agreed with the relevant authority at 110% of
depreciation charged.
(ii) Other expenses include disallowable expenses of N425,000.
As the Tax Consultant, you are required to prepare computations showing:
a. Total Profits of Obi Airlines Limited for Nigerian tax purposes. (12 Marks)
b. Companies Income Tax Liability for the relevant year of assessment

(2 Marks)
c. Tertiary Education Tax Liability (1 Mark)
(Total 15 Marks)
QUESTION 7
Mr. Nwatakaibeya who studied in Germany and had been working there for over 20
years finally returned to Nigeria in 2015.
He has made some savings to start a new business and incorporated Nwatakaibeya
Investments Limited in January 2016. However, since returning to the country, he
has been inundated with stories of start-up and existing businesses that closed
shop as a result of harsh economic conditions.
Mr. Nwatakaibeya has read in newspapers that as a result of government‟s

determination to facilitate ease of doing business in Nigeria, the Federal
Government has periodically been reviewing and improving on the reliefs and
incentives available to corporate taxpayers. This has raised a ray of hope in Mr.
Nwatakaibeya and he is eager to have more information to avoid pitfalls.
Given his reservation about the current business climate in Nigeria:
a. Explain briefly SIX reliefs and incentives available to corporate taxpayers.

(12 Marks)
b. Outline THREE conditions a company must fulfill to qualify for tax incentives
for export oriented business. (3 Marks)
(Total 15 Marks)
46
NIGERIAN TAX RATES
1. CAPITAL ALLOWANCES
Initial % Annual %
Office Equipment 50 25
Motor Vehicles 50 25
Office Buildings 15 10
Furniture and Fittings 25 20
Industrial Buildings 15 10
Non-Industrial Buildings 15 10
- Agricultural Production 95 Nil
Plant and Machinery - Others 50 25
2. INVESTMENT ALLOWANCE 10%
3. RATES OF PERSONAL INCOME TAX

Consolidated relief allowance is computed at N200,000 or 1% of Gross Income
whichever is higher + 20% of Gross Income.
After the Consolidated relief allowance and tax exempt items have been
granted, the balance of income shall be taxed as specified in the tax table
below:
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
4. COMPANIES INCOME TAX RATE 30%

5. TERTIARY EDUCATION TAX (2% of Assessable Profit)
6. CAPITAL GAINS TAX 10%
7. VALUE ADDED TAX 5%
47
SOLUTION 1
MEMORANDUM
(a) Date: October 15, 2017
To: The Managing Director
From: Tax Controller
Subject: Re: Tax Matters
With reference to our discussion in your office on October 10, 2017, I wish to
comment as follows:
i. Double/Multiple Taxation
Double Taxation occurs when a taxpayer is outside his own country and
is subject to tax in both his country and country of residence. For
instance, income brought into Nigeria would have been subjected to tax
in the foreign country in accordance with that country‟s tax laws. If the
same income is further subjected to tax in Nigeria, this will amount to
double taxation.
Similarly, income accruing in Nigeria to a non-resident would have been

taxed in accordance with the Nigerian tax laws and if also taxed in the
foreign country where the taxpayer is domiciled, this amounts to double
taxation.
Multiple taxation is a situation in which more than one tier of

government charges tax or levies on the same income, assets or financial
transactions.
ii. Double Taxation Treaty

Where a Nigerian company earns foreign income which is included in its
Chargeable Profit for the year of assessment, and is subjected to Nigerian
tax, the foreign income received in Nigeria in most cases, would have
been taxed in the country where the income is derived from and also in
Nigeria where it is received. This results in double taxation as it would
appear that the company receiving the income is being penalized for
earning foreign income.
In order to minimize the negative effect on international trade, and to

attract foreign investment, Nigeria has signed bilateral taxation treaties
with many countries. Such treaties provide reliefs to Nigerian companies
earning foreign income already taxed.
48
iii. Multiple Taxation in Nigeria
This is a tax regime in which more than one tier of government levies or
taxes the same income, assets or financial transactions. An example is a
situation in which the Federal Inland Revenue Service assesses and
collects Value Added Tax (VAT) on taxpayers and some States Internal
Revenue Service also impose Sales Tax on the same taxpayer.
Multiplicity of taxes in Nigeria is affecting companies negatively to the
extent that a number of companies are either reducing their work force
or relocating to a more favourable economic environment.
iv. Measures put in place to reduce cases of Multiplicity of Taxes

The Federal Government issued Decree No 21 (Now an Act) under the
Laws of the Federation of Nigeria 2004 on Taxes and Levies (Approved
list for collection) No 21 September 30, 1998. The schedule listed the
taxes and levies to be collected by the Federal Government, State
Governments and Local Governments.
The 1999 Constitution also provides in Part II, that no tax should be
imposed on the same person by more than one State.
v. Withholding Tax
This is an advanced payment of tax which is deducted at source on
certain transactions and later applied (where it is not a final tax) as tax
credit to settle the income tax liability of the year to which the payment
that suffered the deduction relates.
Withholding Tax is deductible at the point of payment or when credit is

taken whichever comes earlier. Tax withheld is to be remitted within 21
days or the date the duty to deduct arises, whichever is earlier.
vi. Penalty for Non-Deduction/Non-Remittance

For non-deduction or non-remittance within 21 days, the company or
individual shall be liable to a penalty of 10% in addition to the amount of
tax not deducted/remitted plus interest at the prevailing commercial
rate.
(b) Legislative Powers on Tax Matters

The power to legislate on taxation rests on the National Assembly (Senate
and House of Representatives) and the State Assemblies.
(c) Deduction of Withholding Tax/ PAYE and Relevant Tax Authority

i. Fees on Technical Agreement - Withholding Tax payable to Federal Inland
Revenue Service
49
ii. Non - executive Directors - Withholding Tax on fees payable to
State Internal Revenue where such
directors are resident.
iii. Non - resident Director - Withholding Tax is the final tax and
it is payable to Federal Inland Revenue
Service.
iv. Dividend payable to - Withholding Tax to State Internal

shareholders Revenue Service where such individual
shareholders are resident and Federal
Inland Revenue Service in case of corporate
bodies.
v. Dividend payable to - Withholding Tax of N37,500 payable

individuals in Kogi State to Kogi State Internal Revenue Service
(KSIR)
vi. Land purchased from Alhaji- Capital Gains Tax to Kano State
Garuba in Abuja Internal Revenue Service
vii. Five employees in Suleja - PAYE to Niger State Internal Revenue

Service.
(d) (i) Since Rex Pharmaceuticals Limited received N4,500,000 from Laiketop
Limited net of tax, the amount received is regarded as Franked Investment
Income and is not assessable to further tax
N
Dividend received 4,500,000
Add: Tax at source (N4,500,000 x 1/9) 500,000
Gross Dividend received 5,000,000
Total Profit from trading activities 22,500,000
27,500,000
(ii) Profit to be taxed on trading activities
22,500,000
Companies Income Tax @ 30% 6,750,000
Since Rex Pharmaceuticals re-distributed N3,500,000, then it has to

re-coup 10% of the amount.
N
(iii) Franked Investment Income from Laiketop Ltd 4,500,000
Tax recouped (10% of N3,500,000) 350,000
4,850,000
50
N
(iv) Distribution from Rex Pharmaceuticals Ltd
yet to be taxed (N9,500,000 – N3,500,000) 6,000,000
Less: Tax @ source (600,000)
Net amount due to shareholders of Toyin
Pharmaceuticals Ltd. 5,400,000
(v) Section 80(3) of the Companies Income Tax Act Cap C21 LFN 2004 (as
amended) stipulates that dividend received after deduction of tax
prescribed, shall be regarded as Franked Investment Income of the
company receiving it and shall not be charged to further tax as part of
the profits of the recipient company. However, where such income is re-
distributed and tax is to be accounted for, on the gross amount of the
distribution, the company may set off Withholding Tax which it has
itself suffered on the same income.
It is hoped that my above comments will meet your expectation.
Regards,
O. O. Johnson
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of multiple taxation, double taxation

treaty, Withholding Tax and resultant penalties for failure to deduct/remit the
relevant taxes as they relate to corporate organisations involved in diversified areas
of operations.
Candidates‟ performance was average. The major pitfall was the inability of the
candidates to correctly or adequately explain the concepts of double/multiple
taxation as well as the incidence of double taxation. They also displayed
inadequate knowledge of the resultant penalties for failure to deduct/remit
Withholding Tax.
Candidates are advised to be more painstaking in identifying the specific

requirements of questions, before proffering solutions. They are also advised to
make use of the Institute‟s Study Texts and Pathfinder.
MARKING GUIDE
Correct address of memo Marks Marks
a. Explanation of the following;
Double/multiple taxation 2
Double taxation treaty 2
51
Multiple taxation in Nigeria 2
Measures put in place to reduce multiple taxation 2
Withholding Tax 2
Penalty for non-deduction 2 12
b. Legislative powers on tax matters 4
c. Withholding tax/relevant authority
(one mark each for any four points) 4
d. i. Description of income as Franked Investment Income 2
ii. Correct computation of tax on trading profit 2
iii. Correct computation of tax recouped 2
iv. Net amount received by Rex Pharmaceuticals 2
v. Mention of re-distribution of income and setting off
of Withholding Tax 2 10
30
SOLUTION 2
(a) i. In relation to chargeable oil owned by a company, disposal connotes

delivery, without sale, of chargeable oil to; while disposed-of means
chargeable oil delivered, without sale to a refinery or to an adjacent
storage tank for refining by the company.
- Intangible drilling costs: These are all expenditure for labour, repairs,
maintenance, hauling and supplies and materials (not being supplies
and materials for well cement casing or other well fixtures) which are
for or incidental to drilling, cleaning, deepening or completing wells
or the preparation thereof incurred in respect of:
 Determination of well locations, geological studies and
topographical and geophysical surveys preparatory to drilling;
 Drilling, shooting, testing and cleaning wells;
 Cleaning, draining and leveling land, road-building and the
laying of foundations; and
 Erection of rigs and tankage assembly and installation of
pipelines and other plants and equipment required in the
preparation of drilling of wells for production of petroleum.
- Oil Mining Lease: A lease granted to a company under the Minerals

Act, for the purpose of winning petroleum, or any assignment of such
lease.
52
(b) IBRAHIM Oil Nigeria Limited
Petroleum Profits Tax For 2016 Assessment Year
N‟000 N‟000
Export sales (W1) 2,508,656
Less: Allowable expenses
Royalty on export sales 14,775
Repairs and renewal of machinery 2,000
Exploration and drilling cost (N100,300-N22,400) 77,900
Custom duties on Plant and Machinery 1,130
Bad and doubtful debts 16,500
Pension and provident funds 30,600
General expenses 11,050
Tangible drilling cost 53,800
1,249,655
1,259,001
Loss brought forward -
1,259,001
Tertiary Education Tax (2/102 x N1,259,001) (24,686)
i. Assessable Profit 1,234,315

Less: Capital allowance:
Lower of:
85% of Assessable Profit (.85 x N1,234,315) 1,049,168
Less: 170% of PIA (1.7 x N6,000) 10,200
1,038,968
OR
Capital allowance for the year 88,100
PIA (W2) 6,000
94,100
(94,100)
ii. Chargeable Profit 1,140,215
Assessable tax @ 85% of chargeable profit 969,183

iii. Chargeable tax @ 85% of chargeable profit 969,183
Tertiary Education Tax 24,686
iv. Total Tax liability 993,869
53
Workings
1. Export Sales
N‟000
Based on posted price: (160,400 barrels x $46 x N340) = 2,508,655
Based on actual sales: (as per account) = 2,455,200
The practice of the Revenue Service is to pick the higher of the two
computations. Hence, export sales = N2,508,656,000.
2. Investment Tax Credit

Plant and machinery: cost (N30 million); Rate applicable = 20%
ITC (same as PIA) = N30 million x 20% = N6 million.
Note: No indication that Ibrahim Oil Nigeria Limited operates in a deep offshore
and inland basin production sharing contract, hence, no application of S.20 of
PPTA deduction to the company.
EXAMINER‟S REPORT
The question texts candidates‟ knowledge of the provisions of Petroleum Profits Tax
Act.
A sizeable number of the candidates attempted the question but performance was
below average.
The major pitfall was the inability of some of the candidates to differentiate
between “disposal” and “disposed of”. A good number of them displayed poor
knowledge and understanding of the requirements of intangible drilling costs and
oil mining lease.
Candidates are advised to prepare better for future diets of the examination by
making use of the Institute‟s Study Texts.
MARKING GUIDE
SOLUTION 2 Marks Marks
a. i. Correct explanation of “disposal” and “disposal of” 2
ii. Explanation of intangible drilling cost like labour,
repairs and maintenance 1
Mention of any two points in respect of the cost incurred 1
iii. Explanation of Oil mining lease 1 5
b. Correct heading of the solution ¼

Determination of the export sale 2
Allowable expenses
( ¼ mark each for 11 items) 2¾
54
Correct Tertiary Education Tax 1½
Correct Assessable Profit 2½ 9
Correct determination of Capital Allowance ½
Correct Chargeable Profit 2½ 3
Correct Chargeable Tax 2
Total Tax liability 1
20
SOLUTION 3
(a) i. “A disposal” can be said to have taken place:
- Whenever the ownership of an asset changes or when ownership
interest is divested from an asset either by sale, or by gift or by
exchange;
- When part - disposal must have taken place;
- On receipt of capital sum derived from an asset under the following:
 compensation money from any kind of damage or injury to an
asset, loss, destruction or dissipation of assets;
 capital sums received under a policy of insurance of the risk of any
kind of damage or injury to, or the loss or depreciation of assets;
 capital sums received in return for forfeiture or surrendering of
rights or for refraining from exercising rights; and
 capital sums received as consideration for use or exploitation of
assets (e.g. for copyright use)
- Loss of an asset through destruction, extinction or dissipation; and
- Where there is a settled property on the happening of certain events.
ii. Incidental Costs

These are costs that must be wholly and exclusively incurred for the
purposes of acquisition and disposal. They include the following:
- Fees, commission or remuneration for the services of a surveyor;
valuer, auctioner, accountant, agent or legal adviser;
- Costs of transfer or conveyance, including stamp duty;
- Costs of advertising to find a buyer or seller; and
- Costs reasonably incurred in ascertaining market value.
iii. Delayed Remittance Relief is granted where:

A person charged or chargeable for any year of assessment in respect of
chargeable gains accruing from the disposal of assets situated outside
Nigeria, was unable to transfer the gains. The following provisions shall
apply for the “relief” on showing that:
- The person was unable to transfer those gains to Nigeria;
55
- Inability to transfer the gains was due to the laws of the country
where the income arose, or to the executive action of the government
or to the impossibility of obtaining foreign currency in that territory;
- The inability was not due to any lack of reasonable endeavours on
the person‟s part; and
- Claims to be made in writing to the relevant tax authority within six
years after the year of assessment in which the gains accrued.
(b) Alero Pharmaceutical Company Limited
Computation of Capital Gains
N‟000 N‟000 N‟000
i. Disposal After 30 instalments
Sales Price 4,200
Less: Cost of the asset:
Deposit 800
Instalments paid (30 x N75,000) 2,250
Less: Interest element (30 x N35,000) (1,050) 1,200
(2,000)
Capital Gains 2,200
N‟000
ii. Disposal after full payment
Sales Price 4,500
Less: Cost of the assets:
Deposit 800
Full instalments (40 x N75,000) 3,000
Less: interest element (40 x N35,000) (1,400)
1,600
(2,400)
Capital Gains 2,100
Workings of Interest Element
N‟000
Deposit 800
Total payments by instalment (40 x N75,000) 3,000
Total hire purchase price 3,800
Less: Cash price (2,400)
Interest element per payment 1,400
Number of instalments 40
Interest per instalment 35
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of the Capital Gains Tax Act of the
syllabus.
56
Many Candidates attempted this question and performance was good.
The major pitfall of few candidates was lack of understanding of this area of the
syllabus which include the inability to explain correctly what constitutes „incidental
cost‟ as well as the incidence of „delayed remittance‟.
Candidates are advised to make use of the Institute‟s Study Texts in order to
improve on their performance in future diets.
MARKING GUIDE
a. i. Mentioning any two points on disposal 2
ii. Incidental cost (½ mark each for 4 points) 2
iii. Explanation of delayed remittance 1
Conditions for granting relief
(½ mark for any two points) 1 6
b. i. Disposal after thirty instalments:

Sales price 1
Costing of the asset:
Deposit 1
Instalments paid 1
Interest element 1
Correct cost value 1
Capital Gains 2 7
ii. Disposal after full payment

Sale price 1
Cost of the asset
Deposit 1
Instalment paid 1
Interest element 1
Correct cost value 1
Capital Gains 2 7
20
57
SOLUTION 4
(a) Tax Avoidance and Tax Evasion Can be Distinguished as Follows:
Tax Avoidance Tax Evasion

i. This is legal i. This is illegal
ii. Achievable through exploiting ii. Achievable through deliberate action
loopholes in the tax laws of fraud and deceit or rendering
incorrect returns
iii. Results in taxpayer paying minimum iii. Results in wilful default by taxpayer
tax possible without breaking the tax not paying correct tax or paying
law minimum tax through breaking of the
tax laws.
iv. Supported by the Courts in decided iv. Not supported by the Courts
cases
v. No criminal liability, no conviction v. Tax evader could be charged to court
for criminal offences with the
consequent fines, penalties and
sometimes, imprisonment
vi. When stretched to the extreme, the vi. At any level, the revenue will frown at
scheme could be disregarded. tax evasion
vii. No investigation by the revenue. Prior vii. The revenue office will institute an
years will not be re-opened. Will keep investigation. It has the power to open
to statute limitation. prior years assessments beyond the
statutory six – year limit.
(b) Oduifa Construction Company Limited
Lagos London Global

Operation Operation Operation
N N N
Net Profit per accounts 20,615,160 17,288,500 37,903,660
Disallowable:
Foreign tax suffered - 4,260,000 4,260,000
Depreciation 860,000 920,000 1,780,000
Adjusted/Assessible Profit 21,475,160 22,46 8,500 43,943,660
Capital Allowance (Wk 1) (350,281) (374,719) (725,000)
Total Profit 21,124,879 22,093,781 43,218,660
Companies Income Tax Payable 30% 6,337,464 6,628,134 12,965,598
Less: Double taxation relief (Wk 3) (3,314,067)
9,651,531
Capital Allowances
WK 1 Lagos operation London operation
860,000 920,000
N x725,000 N x725,000
1,780,000 1,780,000
= N350,281 = N374,719
58
Note 1 - The Capital Allowances were appropriated based on
depreciation available to the operations in both countries.
WK 2 Commonwealth Rate of Tax (CRT)

4,260,000
N x100 = 19.28%
22,093781
Nigerian Rate (NR) is 30%
Half of Nigerian Rate is 15%
Since the Commonwealth rate of tax exceeds one half of the Nigerian rate,
half of the Nigerian Rate of Tax is applicable for Double Taxation Relief.
Note 11 - Oduifa Construction Limited is a resident company.
WK 3 Double Taxation Relief

= 15% x N22,093,781
= N3,314,067
Double taxation rate = lower of half Nigerian rate or

Commonwealth rate.
Tertiary Education Tax = 2% of the global Assessable Profit
= 2% of N43,943,660
= N878,873
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of the difference between Tax Avoidance
and Tax Evasion as well as the computation of tax liability for a company that
diversified into other sources of income outside Nigeria.
A good number of the candidates attempted the question and performance was
good in part (a) of the question, whilst it was very poor in part (b).
Candidates‟ commonest pitfalls include inability to correctly compute the

Companies Income Tax payable, Double Taxation Relief claim as well as the
Tertiary Education Tax due. About 40% of the candidates that attempted the
question could not correctly identify the differences between Tax Evasion and Tax
Avoidance. A good number of the candidates that attempted this question had
problem in computing correctly the Total Profit from their London operational
activities.
Candidates are advised to be more discerning in analysing the requirements of a

question, especially where sources of income are diversified especially in terms of
location.
59
MARKING GUIDE
a. ½ mark each for any five points on tax avoidance 2½
½ mark each for any five points on tax evasion 2½ 5
b. Year of Assessment 1
Net Profit per Accounts 1½
Disallowable:
½ mark each 1½
Correct adjustment of Profit 1½
Computation of Total Profit 1½
Foreign tax suffered 1½
Computation of Double Taxation Relief 1½
Final tax liability 1½
Capital allowance 1½
Commonwealth rate of tax 1
Tertiary Education Tax rate 1 15
20
SOLUTION 5
(a) i. The obligation as to secrecy shall not prevent the disclosure of necessary
information to the authorised officers of the Government of such other
country as might be necessary for double taxation relief purposes.
ii. The Auditor-General for the Federation or any other officer authorised by
him, may not be prevented from having access to such records or
documents as may be necessary for the performance of his official duties.
The Auditor-General or any such official shall be deemed to be a person
employed in carrying out the provisions of the Act for the purposes of
secrecy.
(b) AYOKUNLE Oil Nigeria Limited

Petroleum Profits Tax For 2016 Assessment Year
N‟000 N‟000
Export sales ($52 x 365 x 120,500 barrels) 2,287,090
Domestic sales (N12,250 x 70,000 barrels) 857,500
Natural gas 300,800
Other income 6,770
3,452,160
Less: Expenses (Section 10)
Operating costs (N523,750-N105,000) 418,750
60
Intangible drilling cost 439,000
Custom duty on essentials (70% of N53,200) 37,240
Custom duty on non-essentials (30% of N53,200) 15,960
Salaries and other personnel costs 280,500
Royalty on oil exported 110,600
Royalty on local sales 41,200
Transportation 72,070
Administration and general expenses 340,200
Bad debts 66,000
Pension contribution 21,000
Miscellaneous (N32,170- N2,250) 29,920
2,033,270
1,418,890
Tertiary Education Tax (2/102 x N1,418,890) (27,821)
a. Assessable Profit 1,391,069
Less: Capital Allowance
Lower of:
85% of Assessable Profit (0.85 x N1,391,069) 1,182,409
Less: 170% of PIA (1.7 x N12,000) 20,400
1,162,009
OR
Capital Allowance for the year 133,000
Petroleum Investment Allowance/ITC 12,338
145,338
(145,338)
b. Chargeable Profit 1,245,731
Assessable Tax @ 85% of Chargeable Profit 1,058,871
c. Chargeable Tax 1,058,871
Workings on Investment Tax Credit (ITC or PIA)

Plant & storage tank (cost) N80,000,000;Rate = 15%
ITC = 15% of (N80,000,000 + N2,250,000) = N12,337,500
EXAMINER‟S REPORT
The question tests‟ candidates knowledge of the provisions of the Petroleum Profits
Tax Act Cap P13 LFN 2004.
A large number of candidates attempted the question. A high proportion of the

candidates that attempted this question demonstrated very poor understanding of
part (a) of the question relating to the disclosure of information to authorised
officers of foreign countries who have “double taxation agreements” with Nigeria
61
and (ii) the performance of duties by the Auditor-General for the Federation or any
officer authorised by him.
Candidates‟ commonest pitfalls included their inability to correctly compute both

the Chargeable Profit, Chargeable Tax as well as the Capital Allowances applicable
in Part (b) of the question.
Candidates are advised to improve on their performance in future diets of the

examinations by thoroughly and regularly going through past editions of the
Institute‟s pathfinders and Study texts.
MARKING GUIDE
Marks Marks
a. i. Correct explanation of disclosure of necessary
information 2
ii. Correct explanation of power of the Auditor-General
of the Federation to have access to record 1
The deemed person 1 4
b Assessable Profit 1
Determination of income ½
Section 10 expenses:
(½ mark for any ten correct points out of 13 points) 5
Determination of Tertiary education tax ½
7
Correct determination of Capital Allowance 1
(Distribute marks between the two alternatives)
ii. Chargeable Profit 2 3
iii. Chargeable Tax 1
15
SOLUTION 6
OBI AIRLINES LIMITED
i. Computation of Total Profits for 2016 Assessment Year
N N
Global income 536,288,205
Income from passengers flight from Nigeria 54,401,275

Income from cargo loaded into aircraft from
Nigeria 49,938,180
104,339,455
Global Adjusted Profit:
Net Profit as per Accounts 519,145,149
62
Add: disallowable expenses;
Depreciation 1,974,125
General provision 215,050
Other expenses 425,000
2,614,175
521,759,324
Total Profits liable to tax in Nigeria;

Adjusted/Assessable Profit
(97.29% x N104,339,455) 101,511,856
Less: Capital allowances (110% x N1,974,125) (2,171,538)
Total Profits 99,340,318
i. Computation of Companies Income Tax liability for 2016 Assessment Year
i.e. 30% of Total Profit

= 30% x N99,340,318
= N29,802,095.40
Minimum Tax (2% x N104,339,455)
= N2,086,789.10
Therefore, Companies Income Tax payable for 2016 Year of Assessment in

Nigeria is N29,802.095.40, since it is higher than the Minimum Tax.
ii. Computation of Tertiary Education Tax for 2016 Assessment Year
Tertiary Education tax = NIL
Workings/ Notes:
Global adjusted profit

a) Adjusted Profit Ratio = x 100
Global income
521,759,324
= N x 100 = 97.29%
536,288,205
b) According to the provisions of Section 1(2) of the Tertiary Education Trust

Fund (Establishment, Etc) Act, 2011, the company is not liable to Tertiary
Education Tax since it is a non-resident company.
Tertiary Education Tax is payable only by companies registered in Nigeria.
63
EXAMINER‟S REPORT
The question tests‟ candidates‟ understanding of the computation of Total Profits,

Companies Income Tax Liability as well as the Tertiary Education Tax Liability of a
company engaged in diversified areas of business.
Majority of the candidates attempted the question and a good number

demonstrated good understanding of the part (a) of the question. A few
candidates only displayed clear understanding of the parts (b) and (c) of the
question. Performance was above average as only a few candidates displayed
clear understanding of computation of the Companies Income Tax Liability and
Tertiary Education Tax.
The commonest pitfalls included the inability of a good number of the candidates
to correctly compute the Assessable Profits, correct year of assessment as well as
failure to realise that a company not duly incorporated in Nigeria is not subject to
Tertiary Education Tax as stated in Section 1 (2) of the Tertiary Education Tax Act
2011.
Candidates are advised to make use of the Institute‟s Study Text.
MARKING GUIDE
Marks Marks
Determination of income derived from Nigeria 2
Determination of income derived from other sources 2
Net profit per account 1
The disallowable expenses
(1 mark each for the three points) 3
Total profit liable to tax in Nigeria
Adjusted profit as determined 1
Capital allowances as determined 1
Total Profits 2 12
Companies Income Tax Liability 2
Tertiary Education Tax 1
15
64
SOLUTION 7
(1) Reliefs and incentives available to corporate taxpayers:
Reliefs are claims or provisions in tax laws which constitute reduction

on the amount of Assessable Profits in the Year of Assessment under
consideration.
Incentives, on the other hand, are claims or provisions in tax laws

which seek to reduce the amount of income tax payable in the Year of
Assessment under consideration.
a. Reliefs available to corporate taxpayers:
i. Loss relief – These are business losses which are only deductible from
same business profit indefinitely. The effect of which, is a reduction on
the amount of Assessable Profit in the computation of Total Profit.
ii. Application of the right of election – A rational taxpayer only applies

for the right of election if the total Assessable Profit for the second and
third years of assessment assessed together, on Actual Year Basis is
less than what was computed using the normal commencement rule.
It is a relief available on commencement of business.
iii. Capital Allowance – This is a relief for a company which has incurred
qualifying capital expenditure in any year of assessment, for the
purpose of the business. Capital Allowance will be deducted in full, or
restricted as the case may be, from the Assessable Profit, in order to
arrive at the Total Profit.
iv. Carry backward of unclaimed capital allowance on cessation – This is

a relief available to a taxpayer on cessation of business. Any
unclaimed Capital Allowance can be carried backward against the
remainder of Assessable Profit, that of the immediate preceding 5
years. Thus reducing the amount of Total Profit and the revenue
authority makes refund of tax which had been paid by the taxpayer.
v. Roll-over relief – This is where the proceeds on disposal of chargeable

assets of a particular class of chargeable asset is re-invested in the
acquisition of an asset of the same class. Where roll-over relief is
applicable, chargeable gain on the disposal is deferred and the
Capital Gains Tax is not computed, depending on the type of roll-over
relief whether full, partial or no roll-over.
65
vi. Investment Allowance – This is an additional allowance to the amount
of Capital Allowance already claimed on the qualifying capital
allowance. It is also deducted from Assessable Profit like Capital
Allowance.
Incentives available to corporate taxpayers:
i. Memorandum of Understanding (MOU) Credit – This is an incentive

available to joint venture operators in the petroleum industry. It is
normally deducted from the assessable tax in arriving at the
chargeable tax of the year of assessment.
ii. Investment tax credit – This is also available to a production sharing

contract operator. It is also used in reducing the assessable tax in
order to arrive at the chargeable tax.
iii. Pioneer Status – Profit of any company conferred with the pioneer
status, will be exempted from tax for initial 3 years and for additional
2 years if extension is sought and granted.
iv. Small business rates – a small business rate of 20% will be applicable
instead of the normal 30% for initial 3 years and for another 2 years, if
extended. For this to be applicable, turnover must be N1,000,000 and
below and the company must be among companies that qualify for
small business rate.
v. Exemption from Minimum Tax – As an anti-avoidance legislation,

companies will be required to pay minimum tax, if higher than the
normal tax effective from the fifth year of assessment. However,
certain companies are exempted from the application of minimum tax,
thereby paying the normal tax even when lower than the minimum
tax.
vi. Double Taxation Relief –This is to mitigate against the effect of double
taxation on foreign income, which is subject to foreign tax and
Nigerian tax.
b. Conditions a company must fulfill to qualify for tax incentives for export -
oriented business are as follows:
i. The company is 100% export oriented;
ii. The company produces or manufactures and exports during the

relevant year, and the export proceeds during the year is not
less than 75% of total turnover for the year; and
66
iii. The company repatriates at least 75% of earnings from its exports
back to Nigeria, and deposits same in a domiciliary account
maintained in a bank in Nigeria.
EXAMINER‟S REPORT
This is a question designed to examine candidates‟ understanding of the nature of
reliefs and incentives available to corporate taxpayers and the conditions that need
to be fulfilled by companies engaged in export oriented business in order to qualify
for tax Incentives.
Few candidates attempted the question and performance was below average as
majority of the candidates did not demonstrate a good understanding of the nature
of reliefs/incentives available to corporate taxpayers and the conditions to be
fulfilled by export-oriented businesses to qualify for tax incentives.
Candidates are advised to make use of the institute‟s Study Texts.
MARKING GUIDE
Marks Marks
1 mark each for any six reliefs 6
1 mark each for any six incentives 6 12
1 mark for any three conditions 3
15
67
PROFESSIONAL LEVEL EXAMINATION – MAY 2018
STRATEGIC FINANCIAL MANAGEMENT

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

QUESTION 1
Plateau Plc. (PT) is a Nigerian company that manufactures and sells innovative
products. Following favourable market research that cost N4,000,000, PT has
developed a new product. It plans to set up a production facility in Kano, although
its board had contemplated setting up the facility in an overseas country. The
project will have a life of four years.
The selling price of the new product will be N5,900 per unit and sales in the first
year to December 31, 2019 are expected to be 120,000 units, increasing by 5% p.a.
thereafter. Relevant direct labour and material costs are expected to be N3,400 per
unit and incremental fixed production costs are expected to be N60million p.a. The
selling price and costs are stated in December 31, 2018 prices and are expected to
increase at the rate of 3% p.a. Research and development costs to December 31, will
amount to N25 million.
Investment in working capital will be N30million on December 31, 2018 and this
will increase in line with sales volumes and inflation. Working capital will be fully
recoverable on December 31, 2022.
The company will need to rent a factory during the life of the project. Annual rent
of N20million will be payable in advance on December 31 each year and will not
increase over the life of the project.
Plant and machinery will cost N1billion on December 31, 2018. The plant and
machinery is expected to have a resale value of N300million (at December 31, 2022
prices) at the end of the project. The plant and machinery will attract 20%
(reducing balance) capital allowances in the year of expenditure and in every
subsequent year of ownership by the company, except in the final year when there
will be a balancing allowance or charge.
68
Assume a corporate tax rate of 20% p.a. in the foreseeable future and that tax flows
arise in the same year as the cash flows which gave rise to them.
The directors are concerned by rumours in the industry of research by a rival
company into a much cheaper alternative product. However, the rumours suggest
that this research will take another year to complete and, if it is successful, it will
take a further year before the alternative product comes on to the market.
An appropriate weighted average cost of capital for the project is 10% p.a.
Required:
a. Calculate, using money cash flows, the NPV of the project on December 31,
2018 and advise the company whether to proceed with the project or not.
(15 Marks)
b. Calculate and interpret the sensitivity of the project to a change in:
(i) The annual rent of the factory (2 Marks)
(ii) The weighted average cost of capital. (4 Marks)
c. If the board of PT decided to set up the manufacturing facility overseas,

advise the board on how political risk could change the value of the project
and how it might limit its effects. (4 Marks)
d. Discuss briefly FOUR real options available to PT in relation to the new

project. 5 Marks)
(Total 30 Marks)
SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE

QUESTION 2
Kazaure Limited has a cash surplus of N20m which the financial manager is keen
to invest in corporate bonds. He has identified two potential investment
opportunities in two different companies which are both rated A by the major credit
rating agencies.
Bond A
The issuer plans to raise N500m 2-year bond with a coupon rate of 10%. The bond is
redeemable at a premium of 8% to nominal value.
69
Bond B
The issuer plans to raise an N800m 3-year bond with a coupon rate of 12% and
redeemable at par.
The annual spot yield curve for government bonds is:

1-Year 9.50%
2-Year 10.40%
3-Year 10.50%
Extract from a major credit rating agency‟s website:

Table of spreads (in basis points)
Rating 1 -Year 2 -Year 3- Year
AAA 6 16 28
AA 15 25 40
A 20 30 50
Required:
a. For a nominal value of N1,000, calculate the theoretical issue prices of the
two bonds and indicate how many of each of the bonds Kazaure Limited can
buy assuming it invests in only one of them. (5 Marks)
Note: Calculate issue prices to the nearest N.
b. Irrespective of your answer in (a), assume Bond A is issued at ₦1,054 and

Bond B is issued at N1,026, calculate the yield to maturity of each bond at
the time of issue. (5 Marks)
c. Calculate the duration of each bond. What does duration measure?
(6 Marks)
d. If you expect interest rates to increase in the market, which of the two bonds,
A or B, would you like to buy and why? (4 Marks)
(No calculation is required) (Total 20 Marks)
QUESTION 3
Kehinde is a wholesaler who buys and sells a wide range of products, one of which
is electrical component TK. Kehinde sells 24,000 units of TK each year at a unit
price of N2,000. Sales of TK normally follow an even pattern throughout the year
but to protect the business against possible stock-out, Kehinde keeps a minimum
inventory of 1,000 units. Further supplies of TK are ordered whenever the inventory
falls to this minimum level and the time lag between ordering and delivery is small
and can be ignored.
70
At present, Kehinde buys all his supplies of TK from Ajoke Limited and usually
purchases them in batches of 5,000 units. His most recent invoice from Ajoke
Limited was as follows:
N‟000
Basic price: 5,000 units of TK at N1,500 per unit 7,500
Delivery charges:
Transport at N50 per unit 250
Fixed shipment charge per order 100
7,850
In addition, Kehinde estimates that each order he places costs him N50,000,
comprising administrative costs and the cost of sample checks. This cost does not
vary with the size of the order.
Kehinde stores TK in a warehouse which he rents on a long lease for N500 per
square metre per annum. Warehouse space available exceeds current requirements
and, as the lease cannot be cancelled, spare capacity is sublet on annual contracts
at N400 per square metre per annum. Each unit of TK in inventory requires 2
square metres of space.
Kehinde estimates that other holding costs amount to N1,000 per TK per annum.
Kehinde has recently learnt that another supplier of TK, Ema Limited offers
discounts on large orders. Ema Limited sells TK at the following prices:
Order size Price per unit

N
1 – 2,999 1,525
3,000 – 4,999 1,450
5,000 and over 1,425
In other respects, (i.e. delivery charges and the time between ordering and
delivery), Ema Limited‟s terms are identical to those of Ajoke Limited.
Required:
a. Calculate the relevant
i. cost per order
ii. holding cost per unit per annum (4 Marks)
b. Irrespective of your answers in (a) above and assuming cost per order of
N150,000 and holding cost per unit per annum of N1,800, calculate the
optimal re-order quantity for TK and the associated annual profit Kehinde
can expect from their purchase and sale, assuming that he continues to buy
from Ajoke Limited. (6 Marks)
71
c. Prepare calculations to show whether Kehinde should buy TK from Ema
Limited rather than from Ajoke Limited and, if so, in what batch size.
(7 Marks)
d. Discuss the key limitations of the method of analysis you have used?
(3 Marks)
(Total 20 Marks)
QUESTION 4
Sunmola Funds (SF) Plc. has a portfolio of short-term investments in the shares of
four quoted companies.
Company Holding
Tomiwa (T) 100,000 shares
Pascal (P) 155,000 shares
Binta (B) 260,000 shares
Yetunde (Y) 420,000 shares
You have the following additional information:
Company Beta Market Value Per Expected total return

Share on investment p.a
(Kobo) (%)
T 1.55 280 21.0
P 0.65 340 12.5
B 1.26 150 18.0
Y 1.14 9.5 18.5
The market risk premium is 10% per year and the risk free rate is 6% per year.
Required:
a. Estimate the Beta of SF Plc.‟s short-term investment portfolio. (4 Marks)
b. Recommend, giving your reasons, whether the composition of SF Plc.‟s short-

term investment portfolio should be changed using relevant calculations.
(10 Marks)
(Hint: Consider the alpha values of the shares and the propriety of investing
short-term funds in equity).
c. Explain THREE factors that a financial manager should take into account
when investing in marketable securities. (6 Marks)
(Total 20 Marks)
72
SECTION C: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE
QUESTION 5
Katangwa Limited will need to borrow ₦50 million in three months‟ time for a
period of six months. The company is concerned that interest rates are expected to
rise over the next few months.
Interest rates and forward rate agreements (FRAs) are currently quoted as follows:
● Spot 5.75 – 5.50
● 3 – 6 FRA 5.82 – 5.59
● 3 – 9 FRA 5.94 – 5.64
Required:
a. Explain how a forward rate agreement (FRA) may be useful to the company.
Illustrate this on the basis that interest rates
i. Rise to 6.50%
ii. Fall to 4.50% (8 Marks)
b. Compare the use of interest rate futures with FRA in this instance (4 Marks)
c. Explain how interest rate guarantees or short-term interest rate cap could be
used. (3 Marks)
(Total 15 Marks)
QUESTION 6
Okpara Plc. is a large publicly quoted company in the eastern part of Nigeria. It
operates in the home appliances industry with significant market share. In a recent
strategy meeting, the directors decided to pursue aggressive growth through
mergers in other parts of the country and along the ECOWAS sub-region.
Required:
Prepare a report to the Board of Directors of Okpara Plc. to address the following
matters:
a. SIX factors to be considered when choosing a target for acquisition.

(9 Marks)
b. FOUR factors which a bidding company should take into account in deciding
the form of consideration to be offered. (6 Marks)
(Total 15 Marks)
73
QUESTION 7
Nkata Plc. is a large publicly quoted company. The directors are currently debating
a number of issues, including the following:
(i) The role of non-executive directors in corporate governance.

(ii) Conflict of interest between directors and shareholders.
(iii) Bond covenants usually imposed by lenders.
Required:
a. Discuss the role of non-executive directors in the corporate governance of a
listed public company. (4 Marks)
b. Identify and discuss THREE areas where the interests of shareholders and
directors may conflict leading the directors to pursue objectives other than
maximizing shareholders‟ wealth. (6 Marks)
c. Identify FIVE examples of covenant that might be attached to bonds and
discuss briefly the advantages and disadvantages of each to companies.
(5 Marks)
(Total 15 Marks)
74
Formulae
Modigliani and Miller Proposition 2 (with tax)
𝑉𝐷
𝐾𝐸𝐺 = 𝐾𝐸𝑈 + 𝐾𝐸𝑈 − 𝐾𝐷 (1 − 𝑡)
𝑉𝐸𝐺
Asset Beta
𝑉𝐸 𝑉𝐷 (1 − 𝑇)
𝛽𝐴 = 𝛽𝐸 + 𝛽
(𝑉𝐸 + 𝑉𝐷 (1 − 𝑇)) (𝑉𝐸 + 𝑉𝐷 (1 − 𝑇)) 𝐷
Equity Beta
𝑉𝐷
𝛽𝐸 = 𝛽𝐴 + (𝛽𝐴 − 𝛽𝐷 ) (1 − 𝑡)
𝑉𝐸
Growing Annuity
𝑛
𝐴1 1+𝑔
𝑃𝑉 = 1−
𝑟−𝑔 1+𝑟
Modified Internal Rate of Return

1
𝑃𝑉𝑅 𝑛
𝑀𝐼𝑅𝑅 = 1 + 𝑟𝑒 − 1
𝑃𝑉𝐼
The Black-Scholes Option Pricing Model
C0 = S0N(d1) – Ee-rt N(d2)
𝑆
𝐼𝑛 0 + (𝑟 + 0.5𝜎 2 )𝑇
𝑑1 = 𝐸
𝜎 𝑇
d2= d1 - 𝜎 𝑇
The Put Call Parity
C + Ee-rt = S + P
Binomial Option Pricing

𝑢 = 𝑒 𝜎× 𝑇/𝑛
d = 1/u
𝑎 = 𝑒 𝑟𝑇 /𝑛
𝑎−𝑑
𝜋=
𝑢−𝑑
The discount factor per step is given by = 𝑒 −𝑟𝑇 /𝑛
The Miller-Orr Model

1
3 3
x Transaction Cost x Variance of Cash flows
𝑆𝑝𝑟𝑒𝑎𝑑 = 3 x 4
Interest rate as a proportion
75
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
76
SOLUTION ONE
(a) Calculation of NPV (N million)
Year 2018 2019 2020 2021 2022
Contribution (W1) 0 309 334 361 391

Fixed costs 0 (62) (64) (66) (68)
Rent (20) (20) (20) (20) 0
(20) 227 250 275 323
Tax (Company Tax) 4 (45) (50) (55) (65)
Plant & equipment/Scrap value (1,000) 38
Tax saved on C.A (W2 40 32 26 20 22
Working capital (W3) (30) (2) (3) (3) 300
NCF (1,006) 212 223 237 618
PVF at 10% 1 0.909 0.826 0.751 0.683
PV (1,006) 193 184 178 422
NPV = (N29,000,000)
Decision: Negative NPV therefore reject the project.

Workings
(1) Contribution per unit = N5,900 – N3,400 = N2,500
Year Nmillion
1 120,000 × N2,500 × (1.03) 309
2 120,000 × (1.05) × N2,500 × (1.03) 2
334
3 120,000 × (1.05) × N2,500 × (1.03)
2 3
361
4 120,000 × (1.05) × N2,500 × (1.03)
3 4
391
(2) Capital allowances (Nmillion)
Year Cost/WDV CAs at 20% Tax at 20%
0 1,000 200 40
1 800 160 32
2 640 128 26
3 512 102 20
4 410
Sale (300) 110 22
(3) Working capital (Nmillion)

Year 1 N30 × 1.05 × 1.03 = N32
2 N32 × 1.05 × 1.03 = N35
3 N35 × 1.05 × 1.03 = N38
77
(b) (i) The PV of the factory annual rent after tax is(N million):
N20 (1 – 0.2) × 3.487* = N56
(* = annuity factor at 10% years 0 - 3)
Sensitivity margin = 29/56 = 51.8%
The rent must fall by 51.8% to make the project viable.
(ii) Need to compute the IRR of the project.

Try 7%
Year 0 1 2 3 4
NCF (1,006) 212 223 237 618
PVF at 7% 1 0.935 0.873 0.816 0.763
PV (1,006) 198 195 193 472
NPV = 52
52
IRR = 7 + × 10 − 7 = 8.93 approx. 8.9
29 + 52
= 8.9%
The WACC would have to fall by (10 – 8.9)/10 = 0.11 = 11%.
(c) The risk is that political action will reduce the value of the project.
The measures that a foreign government might use include: Quotas;
Tariffs; Non-tariff barriers; Restrictions; Nationalisation; Minimum
shareholding; Blocked funds.
Strategies that can be used to limit the effects of political risk include:
Negotiations with the host government; Insurance; Production
strategies; Management structure.
(d) NPV only considers the cash flows associated with the new project. It
is possible that the project may be worthwhile as a result of the real
options associated with it and these include:
(i) Follow on options – PT has the opportunity at the end of four

years to continue production of the product. This might be
profitable or not. This is a call option.
78
(ii) Abandonment options – If the product is not popular and is a
failures, PT has the right to terminate the project early and sell
the equipment. This is a put option.
(iii) Timing options – It may be possible for PT to delay the
production of the product and wait until the rumours about the
rival company are either dispelled or are based on fact. This is
a call option.
(iv) Growth options – The rumours of an alternative product also

create growth options. PT could invest and hope that the
alternative product does not materialise. Wait and see if the
alternative product comes to market but competitors might
take a lead and not wait.
(v) Flexibility Options - If the new product is successful and

demand is greater than estimated, PT may expand production.
This is a call option.
EXAMINER‟S REPORT
This is a four-part question which tests the candidates‟ understanding of
investment decisions. The question covers NPV analysis, inflation, relevant and
irrelevant cash flows, working capital requirements and taxation.
Part (b) requires candidates to calculate and comment on the sensitivity of the
project to two of the inputs in the NPV analysis.
Part (c) requires candidates to consider the political risk of setting up the
manufacturing facility overseas and how the company may limit its effects.
About 95% of the candidates attempted the question.
In part (a), most candidates did not pay full attention to the timing of cash flows
and when they should be increased for price inflation and growth in quantity sold.
In part (b), most of the candidates had some difficulty, as the project produced a
negative NPV.
In part (c), a large number of the candidates could not identify political risks and
those who did, could not state how to limit its effects.
In part (d), very few candidates were able to identify the real options available to
the company. However, a disappointing number of them did not refer to the
scenario of the question.
79
Candidates should be prepared to apply their knowledge to varying scenarios.
MARKING GUIDE Marks Marks

a) Contribution 4
Fixed costs 1
Rent 1
Tax (Company Tax) 1
Plant 1
Tax savings on C.A 2
Working capital 2
Discount factor 1
NPV 1
Negative NPV and reject 1 15
b) i) PV of factory rent 1
Sensitivity ½
Interpretation ½ 2
ii) IRR 3
Sensitivity ½
Interpretation ½ 4
c) Possible political measures taken

by government 2
Strategies to limit effects 2 4
d) ½ mark per valid option, max 2

¾ mark per explanation of the point 3 5
30
SOLUTION TWO
(a) The government bond yield curve needs to be adjusted by the credit spread
for an A-rated company.
1-Year 2-Year 3-Year

Government bond annual spot yield curve 9.5 10.4 10.5
A-rated spread 0.2 0.3 0.5
A-rated yield curve 9.7 10.7 11.0
80
Calculation of issue price
Bond A
2
1 1
P0 = 𝑁100 + 𝑁1,180 = 𝑁1,054
1.097 1.107
Bond B
1 1 2 1 3
P0 = 𝑁120 + 𝑁120 + 𝑁1,120 = 𝑁1,026
1.097 1.107 1.11
Number of bonds that can be bought:

Bond A: N20,000,000/N1,054 = 18,975 bonds
Bond B: N20,000,000/N1,026 = 19,493 bonds
(b) Calculation of Yield to Maturity (YTM)

The YTM of each bond is the IRR of the related cash flows.
Bond A
Try 10%: NPV = -N1,054 + N1,00(1.736) + N1,080(0.826) = N11.68
Try 11%: NPV = -N1,054 + N1,00(1.713) + N1,080(0.812) = -N5.74
11.68
𝑌𝑇𝑀 = 10 + (11 − 10) = 10.67%
\
11.68 + 5.74
Bond B
Try11%: NPV = -N1,026 + N120(2.444) + N1,000(0.731) = -N1.72
YTM is approximately 11% (actually about 10.94%).
(c) Calculation of duration of the bonds

Bond A
Year CF PVF at 10.67% PV at 10.67% PV × n
(n) N N N
1 100 0.904 90.40 90.40
2 1,180 0.817 964.06 1,928.12
1,054.46 2,018.52
Duration = 2,018.52/1,054.46 = 1.914
Bond B
Year CF PVF at 11% PV PV × n
(n) N N
1 120 0.901 108.12 108.12
2 120 0.812 97.44 194.88
3 1,120 0.731 818.72 2,456.16
1,024.28 2,759.16
81
Duration = N2,759.16/N1,024.28 = 2.69
Duration measures the sensitivity of a bond‟s price to changes in interest
rates. It is a measure of interest rate risk associated with a bond. The higher
the duration, the higher the sensitivity and the higher the risk. Generally, the
higher the maturity of the bond, the lower the coupon rate and the lower the
yield to maturity (YTM), the higher the risk.
(d) If interest rates increase, prices of bonds are expected to fall. Bonds with
relatively higher durations will experience higher percentage drop in price in
response to the same percentage increase in interest rate. Therefore, to
minimise the risk of drop in price, Bond A, with lower duration will be
selected, holding other factors constant.
EXAMINER‟S REPORT
This question tests candidates‟ knowledge of key bond analysis, that is, pricing,
yield and duration.
About 20% of the candidates attempted the question. Only two candidates
produced excellent solutions, but the performance of the other candidates was
disappointing.
Despite the clear instruction that candidates should work with nominal value of
N1,000, about 80% of the candidates who attempted the question elected, at their
own risk, to work with a nominal value of N100.
The key challenges which the candidates faced in the question include the
following:
 Inability to deal with the credit spread and thereby incorrectly pricing the
bonds;
 Inability to calculate the YTM even when the bond prices were given; and
 Lack of understanding of the concept of duration and its meaning.
Candidates are advised to practise past examination questions as found in the

Pathfinders as a question similar to this was in a very recent examination.
82
MARKING GUIDE
Marks Marks
a) A rated yield curve 1
Issue price of bond A 1½
Issue price of bond B 1½
Number of bonds 1 5
b) Calculation of the yield to maturity of

- Bond A 2½
- Bond B 2½ 5
c) Calculation of duration
- Bond A 2
- Bond B 2
Interpretation of duration 2 6
d) Recommendation with appropriate

justification 4
20
SOLUTION THREE
(a) (i) Cost per order
₦
Fixed shipment charge 100,000
Administration cost 50,000
Total 150,000
Note: The variable delivery charge of ₦50 per unit is not relevant
when computing cost per order because it does not vary with the
number of orders made.
(ii) Holding costs per unit per annum.

₦
Opportunity cost of warehousing space = 2 × ₦400 800
Others 1,000
Total 1,800
83
(b) Calculation of EOQ
Annual demand = D = 24,000 units
Ordering cost = K = ₦150,000
Holding cost = H = ₦1,800
2𝐷𝐾 2 × 24,000 × 150,000

𝐸𝑂𝑄 = = = 2,000 𝑢𝑛𝑖𝑡𝑠
𝐻 1,800
Calculation of total costs

₦000
Holding Cost =
2,000
x N1,800 = 1,800
2
24,000
Ordering Cost = 2,000 x N150,000 = 1,800
Cost of holding base stock = 1,000 × ₦1,800 = 1,800
Purchase cost = 24,000 units × N1,550* = 37,200
Total relevant cost = 42,600
Total revenue = 24,000 × ₦2,000 = 48,000
Profit = 5,400
(* includes variable delivery charge of ₦50 per unit)
(c) Evaluation of quantity discount

We need to evaluate the following re-order quantities (ROQ)
ROQ Purchase price per unit
2,000 ₦1,500 + ₦50 = ₦1,550**
3,000 ₦1,450 + ₦50 = ₦1,500
5,000 ₦1,425 + ₦50 = ₦1,475
(** Assumed bought from Ajoke Ltd)
ROQ 2,000 3,000 5,000

Price (P) ₦1,550 ₦1,500 ₦1,475
₦000 ₦000 ₦000
𝑅𝑂𝑄
𝐻𝑜𝑙𝑑𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 = × 𝑁1,800 1,800 2,700 4,500
2
24,000
𝑂𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 = × 𝑁150,000 1,800 1,200 720
𝑅𝑂𝑄
Cost of holding base stock (no change) 1,800 1,800 1,800
Purchase cost = 24,000 × P 37,200 36,000 35,400
Total cost 42,600 41,700 42,420
Recommendation: Based on the above computations, Kehinde should

purchase batches of 3,000 from Ema Ltd. in order to minimise costs.
84
(d) The limitations of the above analysis are as follows:
(i) The model assumes that annual demand can be predicted and
constant usage applies throughout the year.
(ii) The relevant order cost (incremental cost) per unit is extremely
difficult to estimate. In practice most of the order costs are likely to be
semi-fixed.
(iii) The costs of placing an order are assumed to be constant and not to
vary with the size of the order.
(iv) Some of the holding costs are extremely difficult to estimate.

Examples include materials handling and obsolescence.
EXAMINER‟S REPORT
This question tests the candidates‟ knowledge of Economic Order Quantity (EOQ).
Part (a) tests the ability of the candidates to identify the relevant cost per order and
the holding cost per unit.
Part (b) tests the calculation of basic EOQ and part (c) tests their ability to evaluate
quantity discount.
Though some very few candidates produced very good solutions, large number of
them were found wanting.
The key problems include:
 The use of wrong formula;

 Inability to identify the values of the variables in the model (demand etc.);
and
 Inability to evaluate the variables needed when evaluating the quantity
discounted.
EOQ and discount were also tested in a recent examination. Candidates are
advised to make better use of past editions of the Pathfinders in their preparation
for the Institute‟s future examinations.
MARKING GUIDE
Marks Marks
a) i) Shipment charge ¾
Admin cost ¾
Total ½ 2
85
ii) Opportunity cost of
warehousing 1
Others ½
Total ½ 2
b) EOQ 2
Holding cost 1
Ordering cost 1
Base stock 1
Purchase cost ½
Total revenue ½ 6
c) Appropriate unit cost 1

Alternative ROQs 1
Holding costs 1
Ordering costs 1
Base stock 1
Total cost 1
Recommendation 1 7
d) 1 mark per valid point, max 3

20
SOLUTION FOUR
(a) The risk of Sunmola Funds (SF) plc.‟s short-term investment portfolio may be
measured by the weighted average beta of the four shares. The weighting is
by the market value of the shares.
Market value
N Beta N
T 280,000 1.55 434,000
P 527,000 0.65 342,550
B 390,000 1.26 491,400
Y 39,900 1.14 45,486
1,236,900 1,313,436
Portfolio beta = N1,313,436/N1,236,900 = 1.06
SF Plc.‟s short-term investment portfolio is slightly riskier than what is
obtainable in the capital market.
86
(b) The composition of the short-term investment may be examined from the
following two questions:
 Is the performance of the individual investments within the portfolio

satisfactory?
 Does the portfolio provide the most suitable form of short-term
investments for SF Plc.?
(i) The individual shares may be examined to establish if they are

expected to provide satisfactory return for the systematic risk
involved.
Using CAPM, the required return of each share is computed as follows:

T 6 + 1.55(16 - 6) = 21.5%
P 6 + 0.65(16 - 6) = 12.5%
B 6 + 1.26(16 - 6) = 18.6%
Y 6 + 1.14(16 - 6) = 17.4%
Next, we compute the expected excess return (i.e. the alpha value =
) and make recommendation.
Expected Required Alpha Remark/

return value value Recommendation
% % %
(a) (b) (a - b)
T 21.0 21.5 -0.5 Over-valued, sell
P 12.5 12.5 0 Properly valued, hold
B 18.0 18.6 -0.6 Over-valued, sell
Y 18.5 17.4 1.1 Under-valued, buy more
Based on the computations above, the shares in companies T and B are
not expected to give a satisfactory return relative to their systematic
risk and should be sold. The shares in P should be held, and further
shares should be purchased in Y.
However, none of the abnormal returns is large and any decision to buy
or sell might be influenced by this, as will the existence of transaction
costs. We are also assuming that the capital market is not efficient.
In addition, the analysis considers only systematic risk. If SF Plc. does

not have other investment and is not well diversified, systematic risk is
likely to under-estimate the risk to SF Plc. of these investments.
87
(ii) The portfolio is unusual for short-term investments. Short-term
investments are usually made for a specific purpose; for example, to
ensure cash is available for purchase of assets, payment of dividends,
taxes or creditors where a known amount of funds is required. Most
companies are not willing to tolerate much risk of price movement in
their short-term investments. This portfolio of investments, in ordinary
shares, is exposed to substantial price movements as share prices
change and the possibility that one or more of the companies could fail.
Although, the expected returns are relatively high, the risk of this
portfolio is very high relative to most portfolios of marketable
securities. Unless SF Plc. is happy to take such risks, it is recommended
that short-term investments should concentrate upon fixed interest
marketable securities such as Treasury Bills, Certificates of Deposit and
Bills of Exchange. Such investments involve much less risk of price
movement and default, and if held short-term, possible inflation may
not be a concern.
(c) The factors that a financial manager should take into account when
investing in marketable securities include:
i) Default risk. The risk that interest and/or principal will not be paid on
schedule on fixed interest investments. Most short-term investments in
marketable securities are confined to investments with negligible risk of
default;
ii) Price risk. The risk of the value of the investment changing, for
example, when interest rates change. Financial managers normally
wish to avoid substantial price risk;
iii) Marketability. Securities should normally be marketable at short

notice at close to the quoted market price;
iv) Taxation. Whether there are any special tax effects on the selected
marketable securities;
v) Yield. Managers will usually try to achieve the maximum yield possible
consistent with a satisfactory level of risk and marketability;
vi) Foreign exchange risk. If marketable securities are not denominated in

the domestic currency of the investor, foreign exchange risk must be
taken into account;
88
vii) The amount of funds to be invested. Some types of investment require a
minimum size of investment; and
viii) The period for which the investment is to be made. The type of
investment should be matched with the timing requirements of future
need for funds.
EXAMINER‟S REPORT
The question tests some basic concepts of portfolio theory and CAPM.
About 80% of the candidates attempted the question. 40% of the candidates who
attempted the question, scored 50% or above of the allocated marks.
Commonest pitfalls include the following:
 In part (a), using nominal value of the shares rather than market values;
 Wrongly calculating alpha value as required return minus expected return
rather than expected return minus required return;
 Wrong interpretation of alpha values; and
 Inability of the candidates to apply their knowledge to examination
questions. For example, in the final part of question (b), would any of the
candidate invest money needed to pay rent in six months time in equity?
This is just common sense!
We recommend that students should read widely, making use of the Institute‟s
Study Text, Pathfinder and other examination related text books.
MARKING GUIDE
Marks Marks
a) Computing market value 3
Portfolio beta 1 4
b) Required returns 2
Alpha values 2
Buy/hold/sell decision with Reasons 3
Propriety of the investment 3 10
c) ½ mark each for mentioning, max 1½

1½ marks each for explanation, max 4½ 6
20
89
SOLUTION FIVE
(a) Forward Rate Agreement (FRA)
Entering into a FRA will allow the company to effectively lock in an interest
rate for a specified future period, here for a six-month period, starting in 3
months' time and ending in 9 months' time. That is, we should use a 3 to 9
FRA which should lock us in to a borrowing rate of 5.94%.
The FRA is independent of the loan itself upon which the prevailing rate
must be paid. However, any difference between the actual rate and the FRA
rate will result in a cash flow from the FRA that offsets the higher or lower
interest cost.
Fixed Interest Rate
Net outcome 4.50% 6.50%
Actual rate 4.50% 6.50%
FRA rate (5.94%) (5.94%)
Gain/(loss) (1.44%) 0.56%
FRA Receipt/(Payment) ₦50m × (1.44%) × 6/12 = ₦50m ×0.56% x 6/12
= (₦360,000) = ₦140,000
Interest on ₦50m for 6 months (₦1,125,000) (₦1,625,000)
Net payment (₦1,485,000) (₦1,485,000)
Net payment at 5.94% is ₦50m × 5.94% x 6/12 = ₦1,485,000

Hence, the FRA has locked us in to a rate of 5.94%.
(b) Interest Rate Futures vs FRA

Interest rate futures have the same effect as FRAs, in effect locking in to an
interest rate. Unlike FRAs, however, they are standardised in terms of size,
duration and term and they are tradable on exchanges.
They are generally closed out prior to maturity with any gain or loss
offsetting any higher or lower interest cost when borrowing.
The standardisation in terms of size, duration and term may appear to
make them limited compared to FRAs, however, the ability to trade them
means that any hedge can be easily released at any time if conditions
change which is not the case for FRAs.
Since we, as borrowers, are concerned that rates may rise, we are looking
for a profit on these futures to offset the interest cost.
*
If rates rise, then futures‟ prices‟ fall (futures‟ price = 100  rate), hence, to
gain, we must sell interest rate futures.
90
(c) Interest rate guarantees or short-term interest rate caps offer the opportunity
to limit the impact of any adverse movement in interest rates whilst still
benefiting from any favourable rate movement.
They represent an interest rate option giving the holder the right, but not the
obligation, to deal at an agreed interest rate at a future maturity date.
This means that if rates rise, the option would be exercised by Katangwa Ltd.
locking the rate. If rates fall, however, Katangwa Ltd. would allow the option
to expire without exercising it, and benefit from the lower interest rate in the
market.
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of interest rate risk management
techniques.
Less than 20% of the candidates attempted it. Candidates demonstrated lack of
knowledge of the risk management section of the syllabus.
Commonest pitfalls exhibited by the candidates include:
 Lack of knowledge of the FRA terms;

 Inability to identify the particular term of the FRA to use; and
 Inability to analyse the outcomes of FRA.
Candidates are advised to make better use of the Institute‟s Study Text, past
editions of the Pathfinder and any other relevant text books.
MARKING GUIDE
Marks Marks
a) Explanation of the use of FRA in
hedging interest rate risk 2
Calculation of the net outcome of

fixed interest rate @:
4.5% 2½
6.5% 2½
Calculation of net payment @ 5.94% ½
Comment on the result of the
calculation of net payment @ 5.94% ½ 8
91
b) 1 mark per valid comparison, max 4
c) 1 mark per valid point given, max 3
15
SOLUTION SIX
Date: May 16, 2018
To: Board of Directors
From: Finance Controller
Topic: Acquisition targets and mode of financing
(a) Choosing acquisition targets
The criteria that should be used to assess whether a target is appropriate will
depend on the motive for the acquisition.
The main criteria that are consistent with the underlying motives include:
i. Benefit for acquiring undervalued company

The target firm should trade at a price below the estimated value of
the company when acquired. This is true of companies which have
assets that are not exploited;
ii. Diversification
If the objective is risk reduction, the target firm should be in a
business which is different from our own business and the correlation
in earnings should be low;
iii. Operating Synergy

The target firm should have characteristics that create the operating
synergy. Thus, the target firm should be in the same business in order
to create cost savings through economies of scale. Alternatively, it
should be able to create a higher growth rate through increased
monopoly power;
iv. Tax Savings

The acquisition of the target firm should provide a tax benefit in the
form of unused capital allowances to us;
92
v. Increase in debt capacity
This happens when the target firm is unable to borrow money or is
forced to pay high interest rates. The target firm should have capital
structure such that its acquisition will reduce bankruptcy risk and will
result in increasing its debt capacity;
vi. Access to cash resources

A company, with a number of cash intensive projects or products in
their pipeline, or heavy investment in Research and Development,
might seek a company that has significant cash resources or highly
cash generative product lines to support their own needs; and
vii. Access to technology

Some companies do not invest significantly in Research and
Development but acquire their enabling technologies by acquisition.
b. Purchase Consideration
The key factors that determine the form of purchase consideration include:
i. Liquidity
Clearly, the use of cash as consideration depends upon having
sufficient liquid resources available. Equity or debt securities, if used,
will not affect the firm‟s cash position;
ii. Control
The use of cash will not transfer control from the existing shareholders
but the use of equity shares and convertible bonds will lead to loss of
control;
iii. Gearing
The use of debt securities leads to increase in financial gearing and
associated financial risk. This may be acceptable if the takeover is
small or if there is previously unused debt capacity;
iv. Uncertainty over the value of the consideration

Shareholders in the target company are often less willing to accept
shares or convertible securities than cash because the value of shares
and hence the consideration is liable to fluctuation. With a cash offer
and an offer of bonds, the value of the consideration is known; and
93
v. Tax consideration
Cash as consideration will mean shareholders will be subject, if a
capital gain has accrued, to an immediate capital gains tax liability
on the profit on the sale of their shares in the target company. An
offer in the form of securities (equity or bond) will enable
shareholders to defer a capital gain tax payment until the gains are
realised.
Signed
Name
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of some basic theoretical concepts of

mergers and acquisitions.
More than 80% of the candidates attempted the question. About 10% of the
candidates that attempted the question scored zero.
Candidates are advised to put in greater effort to ensure their success in the
Institute‟s examinations.
MARKING GUIDE
Marks Marks
a) Report format 1
½ mark per valid factor mentioned, max 3
1 mark for explanation of the valid
points, max 5 9
b) ½ mark per valid factor mentioned 2

1 mark for explanation of the factors 4 6
Maximum 15
SOLUTION SEVEN
(a) The Board of Directors of a listed public company will usually consist of
executive directors, who hold specific responsibilities within the business (for
example, personnel director and non-executive directors), who do not have
specific responsibilities. Non-executive directors are usually employed on a
part-time basis and are not involved in day-to-day operational matters.
Nevertheless, executive and non-executive directors have the same legal
obligations towards the shareholders of the company.
94
Non-executive directors have a valuable role to play in the development of
strategy and in monitoring the actions of the executive directors. In carrying
out this role, non-executive directors are expected to challenge the decisions
of the executive directors and to highlight bad practices or poor
performance.
Non-executive directors should add value to the company in some way and
their ability to do so may depend, to a large extent, on the personal qualities
that they possess. They should normally bring to the company broad
experience of the commercial world as well as considerable expertise in their
particular field. These qualities may help to add value through identifying
new opportunities and developing new performance measures or improving
existing control systems. In addition, non-executive directors may be a
valuable source of new contacts for the company.
Non-executive directors can often provide objective and independent advice
to the Board of Directors. This should be of particular value during periods of
change or crisis, when a detached view can help the executive directors
maintain perspective.
(b) Takeovers
Directors often devote large amounts of time and money to defend their
companies against takeover. However, research has shown that shareholders
in companies that are successfully taken over often earn large financial
returns. On the other hand, directors of companies that are taken over
frequently lose their jobs. This is a common example of the conflict of
interest between the two groups.
Time horizon
Directors know that their performance is usually judged on their short-term
achievements; shareholders‟ wealth, on the other hand, is affected by the
long-term performance of the firm. Directors can frequently be observed to
be taking a short-term view of the firm which is in their own best interest but
not in that of the shareholders.
Risk
Shareholders appraise risks by looking at the overall risk of their investment
in a wide range of shares. They do not have „all their eggs in one basket‟
unlike directors whose career prospects and short-term financial
remuneration depend on the success of their individual firms.
Moral hazard
This deals with manager‟s interest in receiving all the perquisites of his
office like domestic staff, company cars, use of company‟s airplane; company
sponsored holiday trips with family abroad etc. Such moral hazards which
increase if the manager has no stake in the company tend to drain the
95
company‟s earnings which means reduction in the value of the company.
The shareholders wealth and the value of the company will reduce if these
incentives and demands of executive management is not kept in checks.
Working hours
Ordinarily, managers prefer to work for less hours than the stipulated
working period especially if the reward system does not recognise overtime
and hard work. The implication is that the earnings of the company will
reduce as well as share price and returns to shareholders. This will be more
pronounced with senior management if profit sharing or bonus payment is
not attached to profitability.
Dividend policy
Unfortunately, the remuneration of directors and senior managers is often
related to the size of the company, rather than its profits. For this reason,
executive management may favour a high retention policy which implies
growth in asset and size of the company. On the other hand, the
shareholders may favour a higher dividend payout which implies more
money for them to meet up with their needs
(c) Bond Covenants include:

i. Asset Covenant: This would govern the company‟s acquisition, use and
disposal of assets. This could be for specified types of assets or assets
in general;
ii. Financing Covenant: This covenant often defines the type and amount
of additional debt that the company can issue, and its ranking and
potential claim on assets in case of future defaults;
iii. Dividend Covenant: A dividend covenant restricts the amount of
dividend that the company is willing to pay. Such covenants might
also be extended to share repurchases;
iv. Financial Ratio Covenants: Fixing the limit of key ratios such as the
gearing level, interest cover, net working capital or a minimum ratio
of tangible assets to total debt;
v. Merger Covenant: Restricting future merger activity of the company;
vi. Investment Covenant: This concerns company‟s future investment

policy;
vii. Sinking Fund Covenant: This is a situation whereby the company
makes payments, typically to the bond trustees, who might gradually
repurchase bonds in the open market or build a fund to redeem
bonds; and
96
viii. Employees Covenant: This requires the regulation of the employment
and dismissal of key employees.
Advantages of covenants
i. The main advantage of covenant is that lenders may be prepared to
lend more money to the company if it provides the security of a
covenant; and
ii. Covenants may mean that the costs at which the company can borrow
money are lower.
Disadvantages of covenants
i. The main disadvantage of a covenant is that the company‟s actions

may be constrained; it may not be able to raise further funds beyond
the covenanted loans or undertake profitable investments; and
ii. Covenants may require the borrower to bear monitoring costs such as
provision of information, auditors‟ fees or trustee expenses.
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of basic concepts in finance, such as
agency problems, conflict of interest etc.
Over 80% of the candidates attempted the question, but performance was very
poor.
The major pitfall was lack of basic knowledge and understanding of rudimentary
concepts in financial management.
Candidates are advised to pay more attention to basic concepts in Strategic

Financial Management.
MARKING GUIDE
Marks Marks
a) Reasonable comment on roles
of executive directors 4
b) Identification of 3 areas of conflict
(1/2mark each) 1½
Discussion on the 3 areas identified
(11/2mark each) 41/2 6
c) Identification of any FIVE covenants
mentioned with explanations 5
15
97
ADVANCED AUDIT AND ASSURANCE
Time Allowed: 3¼ hours (including 15 minutes reading time)

SECTION A: COMPULSORY (30 MARKS)
QUESTION 1
a. You are a manager in Puposola & Company (Chartered Accountants) responsible for
the audit of the Honey Group (the Group), a quoted company. The Group‟s
main activity is steel manufacturing and it comprises of a parent company and
three subsidiaries. Your firm currently audits all components of the Group.
You are working on the audit of the Group‟s financial statements for the year
ended June 30, 2017. This morning, the audit engagement partner left a note
for you.
“Hello
I have gone through the draft consolidated financial statements and

accompanying notes which summarise the key audit findings and some
background information.
Although, at the planning stage, materiality was initially determined to be
N900,000, and was calculated based on the assumption that Honey Group is a
high risk client due to its listing status. However, due to a number of issues
that arose during the audit, there is a need to revise the materiality level for
the financial statements as a whole. The revised level of materiality should
now be N700,000.
Thank you.
The Group‟s draft consolidated financial statements, with notes referenced to
key audit findings, are shown below:
98
Draft Consolidated Statement of Comprehensive Income
Note June 30 2017 June 30 2016

Draft Actual
N‟000 N‟000
Revenue 1 98,795 103,100
Cost of sales (75,250) (74,560)
Gross profit 23,545 28,540
Operating expenses 2 (14,900) (17,500)
Operating profit 8,645 11,040
Share of profit of associate 1,010 900
Finance costs (380) (340)
Profit before tax 9,275 11,600
Taxation (3,200) (3,500)
Profit for the year 6,075 8,100
Other comprehensive income for the year, net of tax:
Gain on property revaluation 3 800 -----
Actuarial losses on defined benefit plan 4 (1,100) (200)
Other comprehensive loss (300) (200)
Total comprehensive income for the year 5,775 7,900
Notes: Key audit findings on statement of comprehensive income

1. Revenue has been stable for all components of the Group with the exception of
one subsidiary, Copesink Company, which witnessed a 25% decrease in revenue.
2. Operating expenses for the year to June 2017 is shown net of profit on a
property disposal of N2 million. Our evidence includes agreeing the cash
receipts to bank statement and sale documentation, and we have confirmed that
the property has been removed from the non-current asset register. The audit
junior noted when reviewing the sale document, that there is an option to
repurchase the property in five years‟ time, but did not discuss the matter with
management.
99
3. The property revaluation relates to the Group‟s head office. The audit team has
not obtained evidence on the revaluation, as the gain was immaterial based on
the initial calculation of materiality.
4. The actuarial loss is attributed to an unexpected stock market crash. The

Group‟s pension plan is managed by Axial Company, a firm of independent
fund managers who maintain the necessary accounting records relating to the
plan. Axial Company has supplied written representation as to the value of the
defined benefit plan‟s assets and liabilities at June 30, 2017. No other audit
work has been performed other than to agree the amount reported in the
financial statements to supporting documentation supplied by Axial Company.
Draft Consolidated Statement of Financial Position
Note June 30 2017 June 30 2016

Draft Actual
N‟000 N‟000
ASSETS
Non-current assets
Property, plant and equipment 81,800 76,300
Goodwill 5 5,350 5,350
Investment in associate 6 4,230 4,230
Non-current assets held for sale 7 7,800 -
99,180 85,880
Current assets
Inventory 8,600 8,000
Receivables 8,540 7,800
Cash and cash equivalents 2,100 2,420
19,240 18,220
Total assets 118,420 104,100
EQUITY AND LIABILITIES

Equity
Share capital 12,500 12,500
Revaluation reserve 3,300 2,500
Retained earnings 33,600 29,400
Non-controlling interest 8 4,350 4,000
Total equity 53,750 48,400
Non-current liabilities
Defined benefit pension plan 10,820 9,250
Long-term borrowings 9 43,000 35,000
Deferred tax 1,950 1,350
Total non-current liabilities 55,770 45,600
Currents liabilities
Trade and other payables 6,200 7,300
Provisions 2,700 2,800
100
Total current liabilities 8,900 10,100
Total liabilities 64,670 55,700
Total equity and liabilities 118,420 104,100
Notes: Key audit findings on statement of financial position

5. The goodwill relates to each of the subsidiaries in the Group. Management
has confirmed in writing that goodwill is stated correctly, and our other audit
procedure was to arithmetically check the impairment review conducted by
management.
6. The associate is a 30% holding in Jamil Company, purchased to provide
investment income. The audit team has not obtained evidence regarding the
associate as there is no movement in the amount recognised in the statement
of financial position.
7. The non-current assets held for sale relate to a trading division of one of the
subsidiaries, which represents one third of that subsidiary‟s net assets. The
sale of the division was announced in May 2017, and is expected to be
complete by December 31, 2017. Audit evidence obtained includes a review
of the sales agreement and confirmation from the buyer obtained in July
2017, that the sale will take place.
8. Two of the Group‟s subsidiaries are partly owned by shareholders external to
the Group.
9. A loan of N8 million was obtained in October 2016 at an interest rate of 2%,
payable annually in arrears. The terms of the loan have been confirmed from
the loan agreement provided by the bank. There was no repayment of the
loan in the books as at prior year end.
Required:
a. Explain why auditors may need to reassess materiality as the audit

progresses. (4 Marks)
b. Assess the implications of the key audit findings for the completion of
the audit.
Note:
Your assessment must consider whether the key audit findings indicate a risk
of material misstatement. Where the key audit findings refer to audit
evidence, you must also consider the adequacy of the audit evidence
obtained, but you do not need to recommend further specific procedures.
(18 Marks)
101
c. Discuss TWO advantages and TWO disadvantages of a joint audit being
performed on the financial statements. (8 Marks)
(Total 30 Marks)
SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF TTHREE

QUESTION 2
Audit firms have been castigated over the years by the public whenever their
clients have any financial or operational crises. The potential liability of auditors
has also become an important topic in recent years due to the growing complexity
of business and legal environment and increase in legal actions against auditors.
One reason put forward to explain the high number of legal actions against
auditors is the “expectation gap”.
Required:
a) Explain “expectation gap” and describe its THREE main elements. (5 Marks)
b) Discuss the strategies that could assist in closing the expectation gap.
(10 Marks)
c) i. Explain briefly the concept of professional skepticism. (2 Marks)
ii. Evaluate the importance of professional skepticism in the audit of
financial statements. (3 Marks)
(Total 20 Marks)
QUESTION 3
A new hotel opened for operations on February 1, 2016 in Abuja. The directors at
their board meeting of September 2016 selected December as the hotel‟s year end.
Also, from conception of the hotel, it was decided to fully computerise the hotel and
its operations. This will make the hotel stand out and attract clientele in the federal
capital territory where there are many other hotels with strong competition.
The room doors are electronically operated and use electronic cards for opening. If
a customer did not specify his/her duration and has the lock properly programmed,
the door will lock at 12 noon and the customer has to go back to the reception for
access. Furthermore, all accounting and other processes are computerised.
The IT company that handled the computerisation agreed to leave a member of

staff who will train the staff of the hotel for three months and ensure that the
system operates efficiently. Management believes that the staff will familiarise
themselves with the system within that period. The server handles all doors,
accounting processes including billing and determination of room occupancy rate
102
on daily basis. Various units of the hotel have desk-top units which key employees
use in both ordering and communication between themselves. The server is next to
the operations manager‟s office with the responsibility on him to oversee this in
addition to his other duties.
The last quarterly report on the hotel activities was not consistent with expectation,
and occupancy rate failed to agree with turnover. The management of the hotel
approached your firm of chartered accountants to be engaged as auditors to the
hotel. Your review and interactions as the leader of the audit team revealed the
information disclosed above.
Required:
Evaluate and apply the relevant general and application controls necessary to be
installed in the hotel‟s information environment. (Total 20 Marks)
QUESTION 4
You are the HR partner in Ekemode & Company (Chartered Accountants). As part of
continuous training programme of your firm, you are to organise an in-house
seminar to educate the staff of your firm on Rules of Professional conduct. You have
decided to emphasise the IFAC‟s Code of Ethics for Professional Accountants
published by the International Ethics Standard Board for Accountants (IESBA)
recently adopted by ICAN into their localised code called “The Professional Code of
Conduct and Guide for Members.”
Required:
a. Explain briefly the FIVE fundamental principles of the IFAC‟s Code of Ethics
for Professional Accountants. (7½ Marks)
b. Explain independence of mind and independence of appearance to the staff.

(5 Marks)
c. Explain briefly THREE general sources of threat to the fundamental principles
of the IFAC‟s Code of Ethics for Professional Accountants. (7½ Marks)
(Total 20 Marks)
SECTION C: YOU ARE REQUIRED TO ANSWER TWO OUT OF THREE

QUESTION 5
The management of QQ Limited had engaged an expert valuer, Segun & Company
in the valuation of its investment property situated at Ojo Oniyun Street, Victoria
Island for disclosure in the financial statements as at year end.
103
Required:
As auditors to QQ Limited;
a. Discuss the factors to be considered when assessing the objectivity of the expert
employed by management (5 Marks)
b. Explain the procedures to be performed by the auditor to assess whether the

work of the management expert provides sufficient and appropriate evidence
for the audit of the financial statements. (10 Marks)
(Total 15 Marks)
QUESTION 6
Reliance Ventures Limited has been trading in imported goods for many years. The
company‟s fortune has started to diminish as a result of current economic
environment. Your firm has been the auditor of the company in the last three years.
You have noticed that the shareholders‟ equity of the company has been eroded
and is currently in deficit. This condition has raised significant doubt on the entity‟s
ability to continue as a going concern.
Required:
Draft a briefing note for the audit team of the company. Your briefing note should:
(a) Identify and explain FOUR audit procedures to be performed by the audit
team to determine the going concern status of the company. (10 Marks)
(b) Discuss FOUR of the steps that the auditor should take if he considers that
the going concern assumption is invalid whereas management considers it
to be valid. (5 Marks)
(Total 15 Marks)
QUESTION 7
a. You are the accountant to Banana Follow Me Limited and the audit of the
financial statements for the year ended December 31, 2016 is currently
ongoing. The company is a cocoa processing entity with various factories
across the country. During the year end audit, the auditors, Akinfenwa &
Company. (Chartered Accountants), observed that the company purchased
200,000 units of XYZ Plc. shares during the year and that the company had
not recognised dividends on these shares as at year end.
Upon enquiry, the Managing Director of the company explained that the
shares were purchased ex-dividend and had promised to provide suitable
representations to confirm this. The auditors have verified this and are
104
satisfied with the explanation but expect representation letter which includes
all other relevant representations from the company.
Required:
As the accountant to the company, prepare the management representation
letter to be issued to the company‟s auditors. (8 Marks)
b. Management of Banana Follow Me Limited is planning to invest in all its

factories in order to attract more customers. The company has sufficient cash
to fund all its necessary capital expenditure. Most of the cash will be used to
invest in equipment and fittings while the remaining cash will be used for
the refurbishment of the factories.
The audit strategy relevant to the audit of the company reveals the existence
of a significant risk associated with money laundering, largely due to the
high volume of cash-based transactions. The majority of the customers
purchase cocoa in cash, and the company transfers its cash to overseas bank
accounts on a regular basis.
Required:
i. Discuss THREE requirements of an anti-money laundering programme
which the auditor of Banana Follow Me Limited should have in place for
detecting and reporting suspicion of money-laundering. (6 Marks)
ii. State ONE example of the criminal offences connected with money
laundering. (1 Mark)
(Total 15 Marks)
SOLUTION 1
(a) Materiality
Materiality is a matter of judgment and is commonly determined using a
numerical approach based on percentages calculated on revenue, profit
before tax and total assets. ISA 320: “Materiality in Planning and Performing
an Audit” requires that the auditor shall revise materiality for the financial
statements as a whole in the event of becoming aware of information during
the audit that would have caused the auditor to determine a different level of
materiality initially.
105
During the audit, the auditor becomes aware of a matter which impacts on the
auditor‟s understanding of the client‟s business and which leads the auditor to
believe that the initial assessment of materiality was inappropriate and must
be revised. For example, the actual results of the audit client may turn out to
be quite different to the forecast results on which the initial level of
materiality was based.
Also, a change in the client‟s circumstances may occur during the audit, such
as a decision to dispose a major part of the business. This again may cause the
auditor to consider if the previously determined level of materiality is still
appropriate.
If adjustments are made to the financial statements subsequent to the initial
assessment of materiality, then the materiality level may need to be revised
accordingly.
The initial calculation of materiality for the Honey Group was based on the
client‟s listing status and on an assumption that the group is a high risk client.
It is therefore important that events such as explained above, are taken into
account in assessing a new level of materiality for this client to ensure that
sufficient appropriate evidence is obtained to support the audit opinion.
b. Puposola & Company

(Chartered Accountants)
From: Audit Manager

To: The Audit Engagement Partner
Subject: Implications of Key Audit Findings
I refer to your note this morning regarding key audit findings on the audit of
Honey Group financial statements. Please find below, my viewpoint and
assessment of the implications of the key audit findings as noted:
KEY AUDIT FINDINGS ASSESSMENT OF THE IMPLICATION
OF THE AUDIT FINDINGS FOR THE
COMPLETION OF THE AUDIT
Statement of Comprehensive Income
i. Revenue has been stable for all components We need to verify that all revenues of
except for Copeskin with 25% decrease in Copeskin has been fully recorded and
revenue. that understatement of invoices or
under-billing did not occur.
106
ii. Operating expenses for the year ended The option to repurchase the property
June 2017 is shown net of profit on a after 5 years needs to be discussed
property disposal of N2 million. with management. If the option
results in a loan, then the N2m should
be adjusted and loan recognized
(possibly with interest). Inappropriate
treatment of the impact of the
repurchase option could result in
material misstatement of the financial
statements given the amount of
materiality used for audit.
iii. Property Revaluation We need to obtain sufficient and
appropriate audit evidence on the
revaluation. Since the transaction is
now considered material being
N900,000 and the revised materiality
level is N700,000, there is a likely risk
of material misstatement.
iv. Actuarial loss attributed to unexpected stock Representation letter would be
market crash. obtained from the management of
Honey Group.
We shall carry out more audit
procedures to verify the loss, which
may include obtaining expert opinion
such as Actuarial Practitioner or
Stocks expert.
Statement of Financial Position
v. Goodwill relates to each of the subsidiaries in The three subsidiaries are owned and
the group controlled by the Group. It is proper
to recognise the goodwill of each of
the subsidiaries at this time, however,
impairment would be assessed.
We have to pass adjustment journal to
recognize impairment of goodwill
attributable to the subsidiaries where
applicable.
vi. Associate is a 30% holding in Jamil Company There is need to obtain sufficient and
appropriate audit evidence regarding
this associate.
30% holding is significant and can
result in material misstatement.
vii. The non-current assets held for sale relate to The non-current assets held for sale
trading division of one of the subsidiaries. amounts to 331/3% of the net assets of
the subsidiary, which is very
significant.
107
Additional audit evidence is required
especially to determine likelihood of
the future sale.
viii. Two of the Group‟s subsidiaries are partly We need to ascertain the equity
owned by shareholders external to the Group. participation of the external
shareholders to determine the extent
of their interest in the subsidiaries.
We shall also obtain sufficient and

appropriate audit evidence to verify
external shareholders investment in
the subsidiaries.
The financial statements will be
materially misstated if the
investments are significant and not
corrected.
ix. Loan of N8m obtained in October 2016 at an We shall inquire from management
interest rate of 2%. regarding the reason for non-payment
of the amount that fell due in
December 2016. This may be an
indication of going concern issues.
We need to also check that interest

expense relating to the un-repaid loan
has been fully charged in the
statement of profit or loss and other
comprehensive income.
(signed)
Audit Manager
Puposola & Company
(Chartered Accountants)
(c) Advantages of joint audits

i. After the acquisition of a large subsidiary, using joint auditors may help the
transition process while the group auditors become familiar with the new
subsidiary. The „old‟ auditors should be familiar with the business of the
subsidiary and should pass their knowledge over to the parent company
auditors. For the parent company auditors, this should accelerate the process
of getting to know the business of the new subsidiary.
108
ii. Joint auditors may provide a higher level of technical expertise than either
audit firm could provide individually.
iii. Improved geographical coverage may be obtained for the audit, where each of
the joint auditors on its own does not have offices that cover all the
geographical locations of the component companies in the group.
iv. It has been suggested that two medium-sized accountancy firms might „join
forces‟ and tender for the audit of a company for which the auditors would
normally be one of the „Big 4‟ accountancy firms. This is possibly a way in
which medium-sized firms might try to „break the monopoly‟ of the Big 4 on
large company audits.
Disadvantages of joint audits

i. The extra cost to the client. It is likely to cost more to use two accountancy
firms than to use one.
ii. Possible inconsistencies between the two joint auditors in the audit methods
that they use. If so, there may be problems in reaching agreement on whose
audit method to use.
iii. The possible difficulty the two firms may have in agreeing the division of
work.
iv. Additional problems that will arise in monitoring and controlling the audit
work of two different firms.
v. The two firms may find it difficult to work well together, and each firm may try
to become the leading firm in the joint audit.
vi. If there is a claim against the auditors for negligence in the conduct of the
audit, there may be some difficulty in identifying which of the joint auditors is
potentially liable.
vii. Disagreement on sharing of fees
EXAMINER‟S REPORT
The question is in three parts. Part (a) tests candidates‟ knowledge on materiality;
Part (b) tests assessment of key audit findings while Part (c) tests their knowledge
on joint audit.
Being a compulsory question, almost all the candidates attempted the question and
performance was fair.
Candidates‟ commonest pitfall is their inability to assess correctly the implications

of key audit findings.
109
Candidates are advised to read the Institute‟s Study Text in details in preparing for
Marking Guide Marks Marks

1a. 1 mark each for any 4 points 4
b. ½ mark each for 9 key audit findings 4½
1½ marks each for any 9 points on
assessment of implication of key audit findings 13½ 18
c. 2 marks each for any 2 points on advantages 4
2 marks each for any 2 points on disadvantages 4 8
Total 30
SOLUTION 2
a. The expectation gap is the difference between what the users
of financial statements and other members of the public think that the
auditors should do and what the auditors are actually required by law and
the profession to do.
There are three main elements in the expectations gap, these are:
i. A standard gap: This occurs because of a perception that auditing
standards are more prescriptive than they actually are, and that
auditors have wide-ranging rules that they must follow;
ii. A performance gap: This occurs because of a perception that audit
work has fallen below the required standard; and
iii. A liability gap: This arises from a lack of understanding about the
auditor‟s liability and who the auditor may be liable to.
b. A number of strategies that could assist in closing the expectation

gap are discussed below.
i. The profession should attempt to improve the general level of
knowledge and understanding about the audit process. One of such
attempts has been made with the issuance of ISA 700, the auditing
standard on auditor‟s reports. This requires an audit report to include
an explanation of the nature of an audit;
ii. Controls over the auditing profession are important in enhancing

public confidence. For example, the European Union requires the
audit of companies whose shares are quoted on a stock market in the
European Union (EU) to be conducted in accordance with
International Auditing Standards (ISAs).
110
National oversight bodies such as Public Company Accounting
Oversight Board (PCAOB) in USA and Financial Reporting Council
(FRC) in the UK and Nigeria monitor the compliance of audit firms in
their conduct of audits by performing audit inspections.
iii. Significant guidance for auditors and management aimed at

increasing quality and addressing issues such as going concern has
been issued by standard setters, professional bodies and regulators.
There has been an increased focus on corporate governance and role
that audit committees play in companies, reducing inconsistences and
enhancing quality.
iv. Open and candid communication between internal and external

auditors, finance management and the audit committee is
increasingly being seen as critical in helping reduce the expectation
gap.
Such communication helps the audit committee to perform their

governance role transparently and realistically that will help achieve
effective risk management.
v. Enhanced communication between the parties and confirmation of

their respective roles and responsibilities should be presented in the
audit committee and directors reports to the shareholders. This will
motivate the users to be more aware of the various parties‟ roles and
responsibilities beyond the understanding they gain just from the
audit report.
vi. The expectation gap will hopefully narrow further as financial

reporting participants work together more effectively to improve the
deterrence and detection of financial reporting fraud.
c) i. The ISA 200 defines professional skepticism as “an attitude that

includes a questioning mind, being alert to conditions which may
indicate possible misstatement due to error or fraud and a critical
assessment of audit evidence”. They explicitly require the auditor to
plan and perform an audit with professional skepticism recognising
that circumstances may exist that cause the financial statements to be
materially misstated.
ii. Professional skepticism plays an important role in auditing and forms

an integral part of an auditor‟s skill. Professional skepticism is closely
111
interrelated with professional judgment. Both are essential to the
proper conduct of the audit and ensure quality audit.
Professional skepticism facilitates the exercise of professional
judgment by an auditor, regarding decision in the following arears:
 The nature, timing and extent of audit procedures to be

performed;
 Whether or not sufficient and appropriate audit evidence has been
obtained or more needs to be done to achieve the objectives of the
ISA 200;
 The evaluation of management‟s judgment in applying an entity‟s
applicable financial reporting framework; and
 The drawing of conclusions based on the audit evidence obtained,
for example, assessing the reasonableness of the estimates made
by management in preparing the financial statements.
EXAMINER‟S REPORT
The question tests candidates‟ knowledge on expectation gap.
About 90% of the candidates attempted the question but performance was poor.
The commonest pitfall was lack of understanding of strategies that could assist in
closing expectation gap and the importance of professional skepticism.
Candidates are advised to study the Institute‟s Study Text very well before entering
for future examinations.

2a. 2 marks for explaining the gap 2
1 mark each for the 3 elements of the gap 3 5
b. 2 marks each for any 5 points 10
c. Explanation of professional skepticism 2
1 mark each for any 3 illustrative examples 3 5
Total 20
SOLUTION 3
General Controls
General controls are controls over the environment in which the computer-based
information system is designed, developed, operated and maintained.
The main categories of general controls that an auditor would expect to find in a
computer-based information system are summarised in the table below.
112
Control Area Controls
Development of computer-based - Appropriate standards should be
information systems and applications established and enforced for designing,
developing, programming and
documenting each new system.
Suitable testing procedures should be

carried out on each new system.
viii.
ix. The design of a new system should be
approved formally by the management
and the system users.
x.
xi. There should be segregation of duties
between system designers and system
testers to reduce the risk of error or fraud
xii.
xiii. There should be suitable staff training in
the designing and testing of systems.
Documentation and testing of Formal testing procedures should be
programme changes applied for any change to an existing
programme.
There should be formal authorisation
procedures for programme changes.
There should be suitable staff training in
making and testing programme changes.
Prevention or detection of unauthorised There should be a segregation of duties

programme changes between programmers and computer
system operators.
All programme changes must be fully

documented.
Access to programme files must be

restricted.
Programme logs should be used to record

access to programme files
There should be anti-virus software to

prevent, detect or deal with malicious
changes to programme.
113
Back-up copies of files and programme
should be kept outside the computer
environment.
Prevention of the use of incorrect Standard operating procedures should be

programmes or data files performed by suitably-trained staff.
The scheduling of „jobs‟ for a computer

centre should specify the programme files
and data files to be used.
There should be effective supervision of

computer centre operations.
Review of operations should be carried

out regularly by management.
Prevention of unauthorised There must be restricted access to data
amendments to data files files that should be limited to authorised
personnel
- Transaction logs should be kept of all

- users of data files, and these should be
- reviewed by management.
Ensuring continuity of operations Secured back-up of programme files and
data files should be kept.
Measures should be implemented for the

protection of equipment against fire,
power failure and other hazards.
Disaster recovery programmes should be

in place so as to restore operation in the
event of major disaster that may put the
main computer systems out of operation.
There should be suitable maintenance

and service agreements for all major
externally acquired software.
114
Additional general controls that could be applied to the hotels information
environment are as follows:
GENERAL CONTROLS EVALUATION OF CONTROLS

1. Room door programmed to lock at This ensures that guests do not extend their
12 noon stay in the hotel without making further
payment.
This control will be adequate if the
automatic lock system neither malfunctions
nor gets manipulated.
Also, collaboration with guests by IT function
will circumvent the control and make it
ineffective.
2. Accounting and other procedures are The computerisation of accounting and other
computerised procedures will guard against human errors
and late recording of transactions.
However, the effectiveness of this control
depends on the continuous functioning of the
procedures installed.
3. Post-implementation support This arrangement ensures continuity of

arrangement operations. However, it is for a short period
of 3 months.
Adequate arrangement ought to be made to
replace the staff of the IT company or to put
in place adequate Continuity and Disaster
Recovery Plan.
4. Staff training Training of staff ensures that employees

understand what to do at any point in time
and are not likely to misuse the system or
cause it to malfunction.
However, it does not prevent collusion or the
tendency of staff to abuse the system or to
attempt fraudulent practices.
5. Server under the watch of the This is good control to ensure that the Server
Operation‟s Manager is not accessed by unauthorised persons to
corrupt or steal data.
However, it relies on the Operation‟s
Manager being physically present to monitor
the server,
115
A better control would be putting the server
in a secure enclosure where unauthorised
persons would not be able to have access to
it.
Also a camera could be installed to monitor
and record movements around the server
area.
Programme applications should be installed
on the server such as, Antivirus software,
firewall, etc.
Logical access such as password should be
implemented on the server to prevent
unauthorized access to data files.
A list of application controls that might be found in a computer system is set out below.
Input Authorisation
- Data for input should be authorised
before input.
- Data is input only by authorised
personnel.
Completeness
There should be checks to ensure that all
data has been processed. Checks might
consist of:
- Document counts (for example, counting
the number of invoices);
- Control totals;
- Checking output to input; and
- Review of output against expected values
(for example, is the total payroll cost
broadly in line with expectations).
Accuracy
There should be some checks within the
computer software on the validity of input
data items (data validation checks). These
may include:
- Check digits for key code items, such as
supplier codes, customer codes and
employee identification numbers;
- Range checks (a check on whether a

particular value or figure is feasible and
within a realistic range of values);
- Existence checks (a check on whether a
116
particular code exists);
- Review and reconciliation of output and
use of control totals.
Processing There should be checks that all input has
been processed and that processing is
complete. Checks might include:
- Control total;
- Batch totals (where the computer counts
the number of transactions in a processed
batch, and this is checked against a
manual record of the number of items in
the batch);
- Manual review; and
- On-screen warning that processing is not
complete.
Master files and standing data - Management review of master files and
standing data.
- Regular updates of master files.
- Record counts.
The auditor should review the application controls for each application to establish
whether they are effective „on paper‟. He should then carry out tests of controls to
establish whether the application controls are operating effectively in practice.
EXAMINER‟S REPORT
The question tests candidates‟ knowledge in respect of IT controls in a hotel

environment.
About 30% of the candidates attempted the question and their performance was
poor.
The commonest pitfall of the candidates was lack of technical ability to relate IT
controls to an hotel environment.
Candidates are enjoined to acquaint themselves with what operates practically in

the global audit environment when preparing for future examinations.

2 marks each for any 3 application controls 6
2 marks each for any 7 general controls 14
Total 20
117
SOLUTION 4
a) The fundamental principles of the code of conduct for Professional Accountants
are as follows:
i. Integrity: A professional accountant should be straight forward and honest
in all professional and business relationship;
ii. Professional competence and due care: A professional accountant has a
continuing duty to maintain professional knowledge and skill at the level
required to ensure that a client or employer receives competent
professional service based on current developments in practice, legislation
and techniques. A professional accountant should act diligently and in
accordance with applicable technical and professional standards when
providing professional services;
iii. Objectivity: A professional accountant should not allow bias, conflict of

interest or undue influence of others to override his or her professional or
business judgments;
iv. Confidentiality: A professional accountant should respect the confidentiality

of information acquired as a result of professional or business relationships
and should not disclose any such information to third parties without
proper and specific authority unless there is a legal or professional right or
duty to disclose. Confidential information should not be used for the
personal advantage of the professional accountant or third parties; and
v. Technical standard: A professional accountant should comply with relevant

laws and regulations and should avoid any action which discredits the
profession.
b) Independence of mind and independence of appearance

Independence of mind describes a state of mind that permits the auditor to
express a conclusion without being affected by influences or prejudices that
compromise within professional judgment. This allows the auditor to act with
integrity, exercise objectivity and professional skepticism.
Independence of appearance means the avoidance of facts and circumstances

that are so significant that a reasonable and informed third party, having
knowledge of all relevant information (including any safeguards applied)
would reasonably conclude that a firm‟s or a member of the assurance team‟s,
integrity, objectivity or professional skepticism has been compromised.
The presumption is that if an auditor is not independent in appearance then

they cannot possibly think with objectivity, that is, be independent in mind.
Even if this may not be technically true, it is a presumption that must be held in
order to protect the reputation of auditors
118
c) Threats to the fundamental principles are matters that could result in the
accountant or audit firm acting without integrity, sufficient competence,
ensuring confidentiality or in a way that discredits the profession. However,
threats to the fundamental principles are largely threats to the independence
and objectivity of the accountant or the audit firm.
The code recognizes the following general sources of threat to the fundamental
principles:
i. Self-interest threat: This arises when the accountant or the audit firm has a
financial interest or other interest in a matter. Typically, this means that the
accountant‟s decisions may be influenced by self-interest and the accountant
will therefore not act with objectivity and independence;
ii. Self-review threat: This occurs when an accountant is required to review or

re-evaluate (for a different purpose) a previous judgment he has made or
action that he has taken. Self-review threats can also apply to audit firm, for
example, if an audit firm prepared the financial statements for a client
company and then acted as auditor, it would be reviewing its own work and
would be reluctant to criticize or question it. This would be a threat to
objectivity and independence;
iii. Advocacy threat: This occurs when the accountant is in a position where he is
expected to defend or justify the position of the client and act as an advocate
for the client‟s position or point of view. This would be a threat to objectivity
and independence;
iv. Intimidation threat: This occurs when the accountant is deterred from acting
with objectivity due to threats against him or his firm. The nature of the
threat may be a threat by the client that it will take engagement away from
the firm unless it agrees with the point of view of the client management;
and
v. Familiarity threat: This occurs when the accountant becomes too sympathetic
with the client‟s position due to close relationship. For example, this may
occur due to a long association over many years in carrying out the annual
audit.
EXAMINER‟S REPORT
The question tests candidates‟ knowledge on IFACs Code of Ethics for Professional
Accountants.
About 95% of the candidates attempted the question and performance was very
good.
119
4a. ½ mark for each of the 5 principles 2½
1 mark for each of the explanations of the principles 5 7½
b. 2½ marks for independence of mind 2½
2½ marks for independence in appearance 2½ 5
c. 2½ marks each for any 3 general sources of
threats identified 7½
Total 20
SOLUTION 5
(a) When assessing the objectivity of an expert employed by management,

issues for the auditor to consider would include whether:
(i) the expert has a financial interest in the audit client, for example
shareholding;
(ii) the expert has a personal relationship with a senior manager in the
audit client; and
(iii) the fee paid for the expert‟s services was a fair commercial price.
(b) When assessing whether the work of management‟s expert provides

sufficient and appropriate evidence for audit purposes.
i. The auditor should review the terms on which the expert was engaged
by the audit client, such as the objective and scope of the expert‟s
work and whether the expert was notified that his work may be relied
on by the auditors.
ii. The auditor should obviously study the content of the expert‟s report
and the conclusions that the expert reached. Any assumptions used by
the expert may be significant (for example in making an asset
valuation) and the auditor should compare those assumptions with his
own understanding of the audit client‟s busin
iii. The auditor may also need to check the methods used by the expert.
For example, for the valuation of Investment Property, the method of
valuation used should be consistent with the requirements of IAS 40.
iv. If the expert has been used to provide a valuation, the date of the
valuation should be close to the end of the financial year of the audit
client so that it is current.
There may be additional evidence that the auditor could obtain to

confirm the evidence provided by the expert. For example, if a
property valuation expert has been used by the audit client to value a
number of properties, the auditor may be able to obtain some
120
additional evidence of the reliability of the valuations in a number of
ways:
- By inspecting some of the properties to assess their condition.
- By checking the cost of similar assets acquired by the audit client

during the financial year.
v. For assets acquired during the year, by comparing their cost with the
end-of-year valuation: unless there has been a large rise or fall in
property values during the year, current valuation should be fairly
close to original cost.
vi. By checking events after the reporting period: if any of the properties
has been sold since the end of the year, their sale value should be
compared with their end-of-year valuation. They ought to be similar
amounts.
vii. By obtaining representations from management that the key

assumptions used in arriving at estimated values are reasonable.
viii. Use of fair value accounting may require more frequent use of experts
by the auditor.
EXAMINER‟S REPORT
The question tests candidates‟ knowledge on the work of accountants‟ expert.
The commonest pitfall of the candidates was lack of knowledge in the area of the
syllabus tested.
Candidates are enjoined to thoroughly read the Institute‟s Study Text before sitting

5a. 2½ marks each for any 2 points 5
b. 2 marks each for any 5 points 10
Total 15
121
SOLUTION 6
(a) Going concern assumptions-audit procedures
Where events or conditions have been identified that may cast significant
doubt on the entity‟s ability to continue as a going concern, the auditor must
obtain sufficient appropriate evidence to determine whether in fact, a
material going concern uncertainty does exist. He does this by performing
additional audit procedures.
i. Discussion with management: Management should be asked to explain the

reasons why they consider the going concern assumptions to be valid. They
should also be asked about their future plans for the business. If the entity is
expecting to make a loss next year, the possible implications of this for the
going concern assumption should be discussed extensively.
ii. Obtain a cash flow forecast: A cash flow forecast should be obtained from
the entity and this should also be discussed with management; the
assumptions in the forecast should be checked and, if appropriate,
challenged. If the forecast shows a cash shortage, the auditor should discuss
with management their plans for obtaining the additional financing that will
be required.
iii. Review the sales order book: If this indicates a decline in sales orders, the
issue should be discussed with management.
iv. Review ageing of receivables: Check a list of ageing receivables and assess
the average time to pay. If customers are taking longer to pay, this may have
adverse implications for operational cash flow.
v. Consider whether planned capital expenditure by the entity may be

insufficient to support the business as a going concern in the future.
vi. If a key senior employee has left the business entity recently, the entity may
start losing key customers and key employees. This should be discussed with
management.
vii. Litigation: If the company is involved in continuing litigation and faces the
possibility of having to pay a large amount of money to settle the dispute,
the implication should be discussed.
viii. Information from the client entity‟s bank: If the client entity is expecting to
rely on continuing financial support from its bank, for example, a
continuation of its bank overdraft facility, the bank should be asked to
confirm that the finance will remain available.
ix. After discussing the issues with management: the auditor should obtain a
letter of representation from management confirming their opinion that the
entity is a going concern.
122
(b) The financial statements are the responsibility of management, and if the
auditor considers that the going concern assumption is invalid whereas
management considers it to be valid, the steps available to the auditor are
to:
i. Discuss the matter with management, having carried out audit

procedures to obtain more evidence;
ii. Try to persuade management to change their mind and prepare the
financial statements on a different basis (a break up basis);
iii. If management does not agree to change its view, consider making a
qualified audit report; and
iv. Unless all those charged with governance are also involved in managing
the entity, the auditor must communicate to those charged with
governance any events or conditions that may cast significant doubt on
the entity‟s ability to continue as going concern, such communication
must include the following:
 Whether the events or conditions constitute a material uncertainty;

 Whether the use of the going concern assumption is appropriate; and
 Whether the related disclosures in the financial statements are
adequate.
EXAMINER‟S REPORT
The question tests candidates‟ knowledge of going concern assumption.
The commonest pitfall of the candidates was inability to identify sufficient and
appropriate evidence to determine whether a material going concern issue exists.
Candidates should read the Institute‟s Study Text thoroughly before sitting for
Marking Guide Marks

6a. 2½ marks each for any 4 points 10
b. 1 /4 marks for each of the 4 points
1
5
Total 15
123
SOLUTION 7
a.
Akinfenwa & Co. (Chartered Accountants)
7, Idiogun Street,
Lanfenwa,
Ibadan.
(Date in full and must be after 31 Dec. 2016)
Dear Sir,
Management Representation Letter for the year ended 31 December 2016
This representation letter is provided in connection with your audit of the financial
statements of Banana Follow me Limited for the year ended 31 December 2016, for
the purpose of expressing an opinion as to whether these financial statements give
a true and fair view in accordance with the International Financial Reporting
Standards (IFRSs).
We confirm that, to the best of our knowledge and belief, having made such
inquiries as we considered necessary for the purpose of appropriately informing
ourselves.
Financial Statements
1. We have fulfilled our responsibilities, as set out in the terms of the audit
engagement dated ……….., for the preparation and fair presentation of
financial statements in accordance with IFRSs.
2. Measurement methods and significant assumptions used by us in making
accounting estimates, including those measured at fair value, are reasonable
(ISA 540).
3. Related party relationships and transactions have been appropriately accounted

for and disclosed in accordance with IFRSs (ISA 550).
4. All events subsequent to the date of the financial statements and for which
IFRSs require adjustment or disclosure have been adjusted or disclosed (ISA
560).
5. The effects of uncorrected misstatements are immaterial, both individually and

in the aggregate, to the financial statements as a whole. A list of uncorrected
misstatements is attached to the representation letter (ISA 450).
Information Provided
6. We have provided you with:
 Access to all information such as records, documentation and other matters
that are relevant to the preparation of the financial statements;
124
 Additional information that you have requested from us for the purpose of
the audit; and
 Unrestricted access to persons within the company from whom you

determined it necessary to obtain audit evidence.
7. We confirm to you that the company does not keep two or more different sets of
accounting books and does not have any off balance sheet set-offs as at the end
of the period.
8. All transactions have been recorded in the accounting records and are reflected
in the financial statements.
9. We have disclosed to you the results of our assessment of the risk that the
financial statements may be materially misstated as a result of fraud.
We have disclosed to you all information in relation to fraud or suspected fraud
that we are aware of and that affects the company and involves:
 Management;
 Employees who have significant roles in internal control or,
 Others where the fraud could have a material effect on the financial
statements (ISA 240).
10. We have disclosed to you allegations of fraud, or suspected fraud, affecting the
company‟s financial statements communicated by employees, former
employees, analysts, regulators or others. (ISA 240).
11. We have disclosed to you all known instances of non-compliance or suspected

non-compliance with laws and regulations whose effects should be considered
when preparing the financial statements. (ISA 250).
12. We have disclosed to you the identity of the company‟s related parties and all
the related party relationships and transactions of which we are aware and all
related party relationships and transactions have been appropriately accounted
for and disclosed in accordance with IFRSs.
13. We confirm that the company purchased 200,000 units of XYZ Plc shares during
the year and that these shares were bought ex-dividend.
14. We also have the positive intention and ability to hold the investment securities
as „available for sale‟, in accordance with IAS 39-Financial Instruments:
Recognition and Measurement.
Yours truly,
Signed on behalf of the Board of Directors by:

Chief Financial Officer
Managing Director
125
b(i) There are many elements which should be in place as part of an anti-money
laundering programme.
The audit firm must appoint a Money Laundering Reporting Officer (MLRO),
who should have a suitable level of seniority and experience; usually this
would be a senior partner in the audit firm. Suspicions of money laundering
should be reported to the MLRO, who considers whether the matter should
be referred to security agencies, prepares and keeps the appropriate
documentation.
There are also firm-wide elements of an anti-money laundering
programme. A training programme is essential to ensure that individuals
are aware of the relevant legislation and regulations regarding money
laundering. Individuals should also be trained in the firms identification,
record keeping, reporting policies, money laundering risk factors,
identifying such risk factors, appropriate response and tipping off offences.
An important part of anti-money laundering is customer due diligence or
know your client procedures. This means that audit firms must establish the
identity of clients using documents such as certificates of incorporation and
passports, and should obtain information about business activities in order
to gain an understanding of matters such as sources of income and the
rationale for business transactions.
Finally, the audit firm must ensure that it maintains records of client
identification procedures and of all transactions relevant to audit clients,
for example, the receipt of cash for services performed. This is important to
ensure that the audit firm does not inadvertently become party to a
transaction involving money laundering.
b(ii) The examples of criminal offences connected with money laundering

are:
 Failure by a person in the regulated sector to inform the appropriate party
of a knowledge or suspicion that another person is engaged in money
laundering; and
 Failure to make a disclosure which is likely to prejudice an investigation
into money laundering (tipping off).
EXAMINER‟S REPORT
The question tests candidates‟ understanding of management‟s representation

letter and anti-money laundering matters.
The commonest pitfall of the candidates was failure to distinguish between

management representation letter and management letter.
126
Candidates are enjoined to be familiar with the Institute Study Text when preparing

7a. - Giving name and address of auditor 1
- Stating date of report to be after year end 1
- Heading of subject matter of the letter 1
- Purchase of 200,000 units of XYZ Plc shares 1
- Closing remark and show signing of letter by
Managing Director or Chief Finance Officer or both 1
- Mentioning any other 3 out of the 13
other points in a letter of representation (1 mark each) 3 8
bi. Mentioning and explaining any 3 of
- Money Laundering Reporting Officer – (MLRO)
- Training
- Record Keeping
- Reporting policy
- Know your client
- Firm not inadvertently become party to the act
(2 marks for any 3) 6
bii. 1 mark for any one point 1 7
Total 15
127
CASE STUDY
Time Allowed: 4 hours (including reading time)
INSTRUCTION: YOU ARE TO USE THE CASE STUDY ANSWER BOOKLET FOR
THIS PAPER
DEEDEE „T‟ COMMUNICATIONS NIGERIA LIMITED
You are Margaret Dawodu, Consultant in the firm of Top Lev Consulting Services, a
firm of financial and tax practitioners. Your Managing Consultant, Daniel Adeolu,
has sent you an email (Exhibit 1) requiring you to prepare a report to be submitted
to Jake Foster, the Chief Executive Officer (CEO) of Deedee „T‟ Communications
Nigeria Limited (DCNL), one of your clients.
DCNL has requested your firm to carry out an appraisal of the company‟s operations
and advise on the best way to move forward.
The following time allocation is suggested:

Reading 1hour
Planning and calculation 1hour
Drafting report 2hours
4hours
128
LIST OF EXHIBITS
EXHIBIT DESCRIPTION
1. Email from Daniel Adeolu to Margaret Dawodu.

2. Letter from Gbenga Jamiu, the Chief Finance Officer of DCNL.
3. Summary of 3-year income statements of DCNL.
4. Summary of 3-year statements of financial position of DCNL.
5. Financial data of DCNL.
6. Highlights of loan approval in principle.
7. The economic environment.
8. The telecom industry.
129
Exhibit 1
TOP LEV CONSULTING SERVICES
(Financial and Tax Practitioners)
Email
To: Margaret Dawodu – Consultant

From: Daniel Adeolu – Managing Consultant
Re: Deedee „T‟ Communications Nigeria Limited
Date: October 17, 2017
As we discussed this morning during our Monday morning briefings, I would like
you to urgently work on the assignment recently given to us by Deedee „T‟
Communications Nigeria Limited (DCNL), one of our clients.
DCNL‟s board is considering how to move the company forward in the face of
economic challenges and dwindling disposable income in the country. As I made it
clear at our meeting this morning, DCNL wants our advice on their intending plans
to restructure their loan portfolio so as to position the company to overcome the
current economic challenges. The company would want us to advise them on the
best arrangement in respect of the restructuring of their loan commitments. At the
same time, DCNL would like to take additional medium term loan facility to finance
further expansion of its network. The board of DCNL would also want our opinion
on the current position of the company in the industry and to carry out an analysis
of the economic environment highlighting the company‟s strengths and weaknesses
as well as potential opportunities and threats in their business environment.
To help us in this assignment, the Chief Finance Officer (CFO) of the company,
Gbenga Jamiu, FCA, has sent the following documents to us:
i. 3 year, 2014 – 2016, summarised financial statements;
ii. Financial data in respect of the operations of DCNL;
iii. Highlights of the offer from the consortium of banks in respect of the
company‟s application for $150m medium term loan;
iv. Current economic outlook of the country, prepared by an independent
consultant; and
v. Detailed analysis of the telecoms industry in Nigeria, prepared by an
independent consultant.
These documents are marked Exhibits 3 to 8.
130
You are required to work on this assignment, using Exhibits 2 to 8 and draft a
report for my consideration. Your report should include:
1. The analysis of DCNL‟s current financial position, indicating the best way
DCNL could restructure its current loan portfolio and obtain further loan to
finance its network expansion. You should also carry out an analysis of the
viability or otherwise of the proposed network expansion; and
2. Business analysis of DCNL showing the company‟s strengths and weaknesses

and potential opportunities the company can tap and potential threats in the
business environment. You are also to suggest strategies the company
should follow to build on its core competencies, seize the opportunities and
avoid potential threats in the business environment.
131
Exhibit 2
3, Akin Osun Drive

Victoria Island
Lagos
The Managing Consultant

Top Lev Consulting Services
10, Dauda Street
Dolphin Estate
Ikoyi
Lagos.
October 12, 2017
Attention: Daniel Adeolu
Dear Sir,
RESTRUCTURING OF OUR LOAN PORTFOLIO AND BUSINESS ANALYSIS
As we discussed today, during our meeting in my office, and as a follow up to my

telephone conversation with you, I write to confirm that our board has agreed that
your firm should assist us in the planned restructuring of our loan portfolio and
other business analysis. This is to also intimate you with our board‟s expectations
from this current assignment your firm is to handle for us.
As I informed you during our meeting we are considering a strategic move to

increase the market share of Deedee „T‟ in Nigeria by 12 per cent. This will require
restructuring our existing bank facilities and taking additional medium term
facility to finance the rehabilitation and expansion of our networks.
The board of Deedee „T‟ has therefore chosen your firm to carry out an independent
analysis of the issues involved in this strategic move. Your firm is required to carry
out:
 An analysis of Deedee ‟T‟ s current financial health, and advise on the best
way the company could restructure its current loan facilities and the
additional loan required for its networks‟ rehabilitation and expansion. Your
analysis should include the viability or otherwise of this project; and
 A business analysis of Deedee „T‟ showing its strengths and weaknesses and
indicating the potential opportunities and threats in the company‟s business
132
environment. You are also to suggest strategies your firm thinks the board
should follow to build on its core competencies, seize opportunities and
avoid threats in the business environment.
To assist you in this assignment, I enclose herewith the following documents:

i. 3 year, 2014 – 2016, summarised financial statements;
ii. Financial data in respect of the operations of DCNL;
iii. Highlights of the offer from the consortium of banks in respect of the
company‟s application for $150m medium term loan;
iv. Current economic outlook of the country, prepared by an independent
consultant; and
v. Detailed analysis of the telecoms industry in Nigeria, prepared by an
independent consultant.
I would like you to treat this assignment with utmost dispatch as the board will be
meeting to consider your report in a fortnight. I will therefore look forward to
receiving your report next week.
Thanks for your usual assistance.
Yours faithfully,
For: Deedee „T‟ Communications Nigeria Limited
Gbenga Jamiu
Chief Finance Officer
133
Exhibit 3
Deedee „T‟ Communications Nigeria Limited

Summary income statement
for the year ended 31 December
2016 2015 2014

N‟m N‟m N‟m
Revenue 14,792 14,706 14,693
Other income 34 841 793
14,826 15,547 15,486
Operating costs:
Direct network and technology operating costs 2,352 1,881 1,635
Costs of handsets and other accessories 1,230 1,083 1,031
Interconnect and roaming costs 1,339 1,310 1,365
Staff costs 915 859 884
Selling, distribution and marketing expenses 1,919 1,841 1,717
Government and regulatory costs 519 589 575
Other operating expenses 1,427 1,143 960
9,701 8,706 8,167
EBITDA 5,125 6,841 7,319
Depreciation of property, plant and equipment (2,099) (1,956) (1,826)

Amortisation of intangible assets (475) (374) (325)
Impairment of goodwill (87) (50) (203)
(2,661) (2,380) (2,354)
Operating profit 2,464 4,461 4,965

Net finance costs 1,050 301 367
1,414 4,160 4,598
Net monetary gain 174 135 87
Share of results of joint ventures and
associates after tax (13) 123 421
Profit before tax 1,575 4,418 5,106
Income tax expense 835 1,132 1,336
Profit after tax 740 3,286 3,770
134
Exhibit 4
Deedee „T‟ Communications Nigeria Limited
Summary statements of financial position
as at 31 December
2016 2015 2014
N‟m N‟m N‟m
Non-current assets:
Property, plant and equipment 20,331 22,904 8,755
Goodwill and intangible assets 10,048 5,589 3,662
Investment in joint ventures and associates 2,667 3,555 2,551
Investments 1,184 997 385
Other non-current assets and deferred tax 847 1,034 1,354
35,077 34,079 16,707
Current assets:
Trade and other receivables 1,385 1,593 981
Other current assets 3,736 4,357 3,281
Restricted cash 103 174 89
Cash and cash equivalents 2,738 3,418 4,310
7,962 9,542 8,661
Total assets 43,039 43,621 25,368
Total equity:
Share capital 10,000 5,000 5,000
Reserves 5,924 10,184 8,344
15,924 15,184 13,344
Non-current liabilities:
Interest-bearing liabilities 17,500 17,500 3,947
Deferred tax and other non-current liabilities 1,842 1,985 1,314
19,342 19,485 5,261
Current liabilities:
Interest-bearing liabilities 1,964 2,251 1,381
Trade and other payables 4,514 4,048 3,323
Other current and tax liabilities 1,295 2,653 2,059
7,773 8,952 6,763
Total equity and liabilities 43,039 43,621 25,368
Note: Assume that any difference in reserves between the years has been
capitalised or paid as dividend.
135
Exhibit 5
FINANCIAL DATA
1. Analysis of revenue by product 2016:
Product Value % of
N‟m total
Outgoing voice 8,024 54.2
Incoming voice 1,387 9.4
Data 3,955 26.7
SMS 324 2.2
Devices 806 5.5
Others 296 2.0
Total 14,792 100
2. Market research survey

Research conducted by the marketing and research department of the company
reveals that after the rehabilitation and expansion of the company‟s networks,
revenue from the above products will increase as follows:
%
Outgoing voice 30
Incoming voice 25
Data 40
SMS 20
Devices 20
Others 10
The company‟s previous experience with this type of research shows that it is
always 85% accurate.
3. Additional operating costs:

It has been estimated that if the project is carried through, it will increase the
company‟s operating costs as follows:
Cost element %
Direct network and technology operating costs 20
Costs of handsets and other accessories 25
Interconnect and roaming 25
Staff costs 28
Selling, distribution and marketing expenses 12
Government and regulatory costs 25
Other operating expenses 15
136
Note:
For now, the company is not interested in the calculation of the net present value of
the project but wants to know the viability of the project using simple profit
analysis.
137
Exhibit 6
HIGHLIGHTS OF LOAN APPROVAL IN PRINCIPLE
1. Facility:
 Restructuring of existing loan facilities of $50m into medium term loan;
and
 Additional medium term loan of $100m.
2. Cost:
Arrangement fee 1% flat
Management fee 1% flat
Prime lending rate 14% p. a.
Spread over prime 2% p. a.
Effective rate 16% p. a.
Note: The prime lending rate is subject to changes as the Central Bank of
Nigeria‟s monetary policy rate changes from time to time.
3. Security: Guaranty bond issued by Deedee „T‟ of United Arab Emirates.
4. Repayment: Repayment will be in twenty (20) quarterly instalments with the

first repayment due after six months of drawdown of the additional loan.
Repayment and interest will be in United States of America dollar.
Note:
Assume an exchange rate of N350 to $1.0
138
Exhibit 7
THE ECONOMIC ENVIRONMENT
Nigerian economy experienced one of the most challenging years in recent history
in 2016. The economic challenges across the globe, the fall in international price of
crude oil, continuous scarcity of foreign exchange due to drop in foreign exchange
earnings from crude oil, volatility of exchange rate, absence of clear economic
roadmap and delay in the approval of 2016 budget played adverse roles leading to
the weak business and economic environment in the country.
The oil price crashed by 74%, from $115 per barrel in 2013 to average $39 per
barrel in 2016. This affected dollar inflow from $18 billion in 2015 to about $8.48
billion in 2016, which translated to a budget funding gap of about N2.2trn (1.93%
of GDP). Also, inflation reached a seven-year high from 6.8% in December 2015 to
18.3% in October 2016. The Naira exchange rate touches all-time low from N220
per dollar at the end of 2015 to N490 per dollar at the parallel market and from
N197 per dollar to N368 per dollar in the interbank market in 2016. The country
experienced a contraction in its GDP by 0.36, 2.06 and 2.24% in 2016 quarters 1, 2
and 3 respectively.
Consequently, business environment for private sector became more challenging

due to uncomplimentary economic policies, worsening infrastructure conditions,
higher costs of doing business and weak consumer demand. The year witnessed
significant shortfall of government revenue at both the federal and state levels by
40% and 52% respectively over the 2015 figures. This led to extended delays of
workers‟ salaries and non-payment of contractors with attendant adverse effect on
the private sector as a result of continuous fall in disposable income. In addition,
the year saw higher cases of factory closure, company relocation to nearby
countries, cut backs of operational levels with unemployment hitting a record high
of 29.8%. These culminated into negative growths of -0.4%, -2.06 and -2.24% in Q1,
Q2 and Q3 of 2016 respectively. Painfully, the country is currently “neck deep” in
economic recession. As a result of this, the country is standing at the verge of losing
its status as the largest economy in Africa to South Africa.
The government‟s refusal to float the national currency has also given room for
round tripping and other harmful practices that stifle and strangulate economic
growth. Some experts have opined that, there can be no meaningful change until
the government relaxes its stranglehold on the Naira and allows it to find its level
in the international market under the principles of free market economy.
On the other hand, the federal government is making efforts at revamping the
economy through policy intervention such as fiscal prudence, deregulation of the
downstream petroleum sector, adoption of flexible exchange rate regime,
introduction of Treasury Single Account, renewed interest on addressing the ease of
doing business across all sectors, fight against corruption and improvement in
security of lives and properties.
139
Nigeria therefore, remains a country with great potentials for both local and foreign
investments. However, this can only be harnessed if friendly business policies,
positive information and attitude are canvassed by the government while the
government makes effort to completely weaken terrorists‟ activities in the Northern
part of the country, manage appropriately the continuing restiveness in the Niger
Delta and douse the ethnic agitation going on at present in the country. But for
now, the economy remains in search of that optimal economic road map and policy
interventions that can deliver it from the ongoing recession.
140
Exhibit 8
THE TELECOM INDUSTRY
According to Nigerian Communication Commission (NCC), following the economic

recession in the country, average revenue per subscriber has dropped significantly.
Also, the subscriber base is shrinking, such that the leading telecoms companies
have reportedly lost three million customers in one month. However, this is
perceived by many analysts as a temporary situation which will vanish as the
country‟s economy comes out of recession. The telecom industry still promises a lot
of untapped opportunities globally, with the continuous development of IT
infrastructure in commercial transactions across the globe, expansion of
entertainment industry, mobile money transactions, etc.
An independent analyst has provided the following insights of the global telecom
industry from the period 2017 to 2020. He opined that the period from 2017 to
2020 will remain important in several ways. The use of mobile devices has risen
rapidly and the consumers are gazing at their mobile devices at least 9 billion
times a day as per the Global Mobile consumer survey. Smartphone usage across
the middle aged people has increased. In Nigeria, about 54 per cent of the
population is in the 15 – 64 age brackets, a huge potential for the telecom industry.
Growing smartphone usage brings profitable opportunities for all the subsectors in
telecom industry.
Political: The political environment is full of risks for the telecom sector. The
traditional political risks for telecom are the ones related to regulations, network
licensing, national radio spectrums and in case of certain nations, trade barriers.
Generally, these issues have affected the network operators and the effect has been
felt less by equipment and service providers. Governments across the world have
launched measures to monitor and control communications motivated by political
and security reasons. These measures are likely to go tougher in the country as
result of criminal and terrorist activities and hate messages being peddled on social
medias.
Economic: The role of economic factors is just as important as political factors in the
context of the telecom industry. The current recession in the country is hurting this
sector deeply. People were cutting back on their telecom spending due to
continuing drop in disposable income. The truth is that “the happier the economy,
the higher will be consumer spending on any product or service”.
Social: Social factors also have a deep influence on the industry and its
profitability. Connectivity is central to so many things including work and
entertainment. Globally, the use of internet based services has grown. A higher
number of people are using the social media for fun and business. From YouTube
videos to Netflix, video streaming services all require a very good connectivity. This
is the reason that the use of 4G has grown globally and some telecom operators in
Nigeria have invested in the 4G technology. Moreover, more and more people like
141
to remain connected on the go. This is a part of their lifestyle. For some, it is
because they are too busy with work and in case of others they cannot remain
disconnected with family and friends. Also, the use of mobile computing has
grown quite fast and so many features in these smartphones and tablets cannot be
used without a very good connection.
Technological: The entire telecom industry is based on technology and therefore

technological changes influence it deeply. The use of mobile computing is on the
rise. Around the world, IT is changing things like never before. It is central to
several things including business and productivity. Computers and cloud
computing have become the core of productivity. It is the telecom sector that stands
to gain the most from these technological trends. Smartphone and tablet sales have
kept growing and none of the two can be used fully without a fast connection.
Environmental: Smartphones are a large part of the e-waste generated every year.
In the light of the level of e-waste generated by both service and equipment
providers, the industry must focus on waste management and how to minimise its
environmental impact. The operators should invest in reducing their carbon
intensity.
Legal: Globally legal compliance gives rise to big risks for the telecom providers.
Apart from the common labour and employment laws, there are several other laws
and licenses that are essential to be complied with. In Nigeria, the NCC is the
regulatory authority overseeing the telecom sector. Recently, NCC has slammed a
huge fine on one of the operators for not complying with its regulations. There are
several laws including those related to telemarketing that the providers must
comply with. It is expected that more laws and regulations will be enacted in the
recent future that will affect the industry as a result of government‟s desire to
clamp down on unwholesome use of social media.
THE COMPANY
Deedee „T‟ Communications Nigeria Limited, trading as Deedee „T‟ Nigeria, is a
Nigerian company duly registered with the Corporate Affairs Commission (CAC) in
partnership with Nubai Development Company and Deedee „T‟ of United Arab
Emirates (UAE). In January 2007, the company acquired operating licence from the
Nigerian Communications Commission (NCC) which granted the company a mobile
licence and spectrum in the GSM 1700 and 800 MHz bands.
The company is a joint venture between Teko Investments Nigeria Limited, Nubai
Development Company and Deedee „T‟ of United Arab Emirates. The company‟s
shares are owned in the proportions of 40%, 20% and 40% respectively. With this
arrangement, Deedee „T‟, the technical partner, became the operator of the United
Access Licence of the company.
Deedee „T‟ Nigeria made its first official call on its network on January 15, 2008 in
the presence of officials from the NCC and the Senate of the Federal Republic of
142
Nigeria. In June of the same year, the company kicked off commercial operations
with 0808 your choice campaign which enabled subscribers choose special
numbers that are significant to them as their mobile numbers.
The company, since then, has grown geometrically, accumulating over 20 million
subscribers on its networks and providing employment to over 6,000 with a market
share of about 14 per cent. Over the years, Deedee „T‟ has made investments in
networks‟ infrastructures, roll out expansion, and development initiatives,
including Corporate Social Responsibility in innovation and academic excellence.
The company is the fourth largest operator in the telecom industry in Nigeria as at
today.
Propelled by its technical partner, Deedee „T‟ of UAE, the company has built up
state – of – the – art telecom infrastructure and taken a leadership position in
innovation and quality service delivery among the telecom operators in the
country. The company‟s internet access is faster and more regular than any of the
other operators. Deedee „T‟ recently launched a new innovative product called
“Franchise Experience Friendly Centres”. This is an innovation that affords quality
third party retail franchise holders with an opportunity to grow their franchise
operations, allowing for the provision of improved offers to end users, even in
remote locations.
To further strengthen the company‟s competitive position, the three investors

decided to make a strategic move of making the brand a strong competition to
existing operators. The board therefore, decided to carry out rehabilitation and
expansion of its network infrastructures, which is targeted at increasing the
company‟s market share by 12 per cent. To finance this, the board has approached
a consortium of eleven (11) banks to refinance the company‟s existing $50 million
loan facilities and take additional medium term loan of $100 million for
rehabilitation and expansion of its networks.
143
ICAN CASE STUDY 2018
First Marking
DATE CANDIDATE NO.
TIME MARKER NUMBER
Req 1 Req 2 Overall TOTAL

SA
CA
BC
NC
V
Total 8 8 4 20
SUPERVISOR CHECKER
SIGNATURE SIGNATURE
Changes made? 
144
REQUIREMENTS 1 – DCNL‟s Financial Analysis and Shareholders‟ Value Added
USES DATA AND INFORMATION APPROPRIATELY IDENTIFIES ISSUES AND OPTIONS
 Uses information provided in Exhibit 3 – summary of  Identifies the risk involved in dollar denominated loan.
income statement.  Identifies the risk of volatility in exchange rate.
 Uses information provided in Exhibit 4 – summary of  Identifies the need for DCNL to explore possibility of
statement of financial position. agreeing a fixed exchange rate with the consortium of
 Uses information in Exhibit 5 – operational financial banks.
data.  Identifies the possibility of currency swap – repayment in
 Uses information provided in Exhibit 6 – Highlights of Naira and not in dollar.
loan approval in principles.  Identifies the fact that DCNL earns its revenues in Naira
 Uses information provided in Exhibit 2. and not in dollars.
 Identifies the fact that the Nigerian economy is neck deep
in recession which is already affecting the performance of
the telecom operators.
V NC BC CA SA
V NC BC CA SA
APPLIES PROFESSIONAL SCEPTICIM AND ETHICS

USES PROFESSIONAL TOOLS AND KNOWLEDGE
 Recognises that we are not told whether the summarised.
 Calculates profitability ratios.  Recognises the risk involved in dollar dominated loan.
 Calculate activity ratios.  Recognises that the result of the market research survey
 Calculates leverage ratios based on the financial was carried out by DCNL‟s staff, it could have been padded.
statements.  Recognises that we do not have the industry average
 Prepares trend analysis to determine growth in figures to determine whether DCNL‟s performance is above
performance of DCNL. the industry average or below it.
 Prepares common size analysis to show trends in the  Recognises that the six months moratorium may not be
components of the financial statements. enough to complete the project and start to earn additional
 Prepares profitability analysis based on the principle of revenue from the project.
relevant revenues and costs as given in Exhibit 5.
 Calculate leverage ratios showing the effect of the loan.
V NC BC CA SA V NC BC CA SA
USES ANALYTICAL SKILLS (material points) written report EVALUATE SKILLS AND JUDGEMENT
 Determines the rate of growth in DCNL‟s operating  Recognises that DCNL‟s revenue is increasing yearly
performance. however, there was a sharp drop in other income in 2016.
 Determines how the loan, if taken, will affect the  Recognises that DCNL‟s operating cost is increasing more
operational performance of DCNL. rapidly that the revenue increasing.
 Determines the effect of the loan, if taken, on the  Recognises that there was a sharp drop in DCNL‟s operating
financial risk -leverage of DCNL. profit in 2016.
 Determines the effect of the loan, if taken, on the cash  Recognises that the gearing of DCNL is already very, high
flow of DCNL. and adding more loan to it will put DCNL in a precarious
situation.
 Recognises that the loan repayment will affect the cash flow
of the company negatively.
V NC BC CA SA
V NC BC CA SA
145
CONCLUSIONS
(Draws distinct conclusions under a heading)
 Concludes that the performance of the company has
reduced drastically in 2016.
 Concludes that the present debt profile of the company
is worrisome,
 Concludes that the loan will result in a negative cash
inflow based on the calculation of the project‟s cash
flow.
 Concludes that due to present volatility in exchange
rate in the country, it will be too risky to take a dollar
denominated loan.
 Conclusion that if the loan is taken, the financial risk of
the company will be so high that the company‟s
continuing in business will be impaired.
RECOMMENDATIONS (commercial/relevant)
 Recommends that the company should not take the

loan.
 Recommends that the company should explore the
possibility of injecting equity capital into the business.
 Recommends that the company should urgently tame
its rising operating costs.
 Recommends that the company should explore the
possibility of going for long term loan, such as bonds,
etc. instead of medium term bank loan.
 Recommends that the company should consider leasing
for the equipment required.
V NC BC CA SA
SA
CA
BC
NC
V
146
REQUIREMENT 2 Financial Due Diligence of BBNL
USES DATA AND INFORMATION APPROPRIATELY IDENTIFIES ISSUES AD OPTIONS
 Uses information in Exhibit 2.  Identifies that the economy of Nigeria is in recession..

 Uses additional information on Exhibit 7.  Identifies the declining disposable income. that is
 Uses information on Exhibit 8. already affecting all the Telecom operators in the
 Uses information on Exhibit 3. country.
 Uses information Exhibit 4.  Identifies that spending on communications is one of
the areas people can reduce their spending when they
experience a drop in their income.
 Identifies that the current recession may however be
temporary.
 Identifies that there is a global prospect for the telecom
industry.
 Identifies that IT revolution going on will further boost
the telecom‟s operators‟ ‟business across the globe.
V NC BC CA SA
V NC BC CA SA
APPLYING PROFESSIONAL SCEPTICISM AND ETHICS

USES PROFESSIONAL TOOLS AND KNOWLEDGE
(Written into report)  Understands that the influence of terrorist activities in
the Northern part of the country may continue to hinder
 Prepares PESTEL analysis of DCNL‟s operating
growth in telecom business.
environment.
 Understands that the restiveness in the Niger Delta
 Prepares a SWOT analysis for DCNL.
region may also affect the telecom business adversely.
 Identifies DCNL‟s core competence.
 Understands that there may be increase in government
 Identifies DCNL‟s competitive advantage.
regulations in the telecom industry to climb down on the
misuse of social medias.
 Expresses doubt whether this is an opportune time to
increase investments in the telecom industry in Nigeria.
EVALUATIVE SKILLS AND JUDGEMENT

USES ANALYTICAL SKILLS (material points) (Uses analytical heading)
 Analyses the economic environment using the industry. Evaluate each elements of the PESTEL model.
 Analyses the company‟s current position in the industry. Determines and evaluates the opportunities in the operating
environment.
 Analyses the opportunities in the economic environment.
Determines and evaluates the threats in the operating
environment.
 Analyses the competitive potentials of DCNL.
Determines and evaluates the strengths of DCNL.
Determines and evaluates the weaknesses of DCNL.
147
CONCLUSIONS
(Draws distinct conclusions under a heading)
 Comments that DCNL‟s innovation is a good competitive

advantage.
 Comments that DCNL‟s social responsibility initiatives is a

positive for the company‟s business.
 Comments that the telecom business still has a great

potential in Nigeria, giving the country‟s population.
 Comments that the economic recession in Nigeria may be

temporary and the economy will soon pick up giving the
current government interventions.
 Comment that the use of Smartphone‟s will continue to

grow in Nigeria since about 54% if te country‟s
population are within 15 to 64 age bracket.
V NC BC CA SA
RECOMMENDATIONS (commercial/relevant)
 Recommends that the company should continue to

improve and builds on its core competence – internet
connectivity.
 Recommends DCNL should continue to expand its

franchise operation.
 Recommends that DCNL should use its social

responsibility‟s posture to leverage on its business by
introduction specific products for some special festivals
across the country.
 Recommends that DNCL should introduce special offer

to students in tertiary institutions that enables them
have internet connectivity at cheaper rates.
V NC BC CA SA
SA
CA
BC
NC
V
Total 8
148
Appendices Main Report
Appendices R1: Content and style Report: Structure
Shows DCNL financial ratios. Sufficient appropriate headings.
Shows the DCNL‟s trend analysis. Appropriate use of paragraphs/sentences.
Shows DCNL‟s common size financial statements. Legible.
Shows the profitability analysis of the proposed loan. Correctly numbered pages.
Appendices R2: Content and style Report: Style and language
 Appendices R2: Comment and style  Relevant disclaimer (external report).

 Shows the summary of DCNL‟s PESTEL.
 Shows the summary of the strengths of DCNL.  Suitable language for the board.
 Shows the summary of opportunities in the
environment.
 Tactful/ethical comments.
 Shows the summary of threats in the environment.
 Acceptable spelling and punctuation.
CC
SC
IC
ID
NA
Total
149
Deedee 'T' Communications Nigerian Limited
Financial Statements Analysis 2014 - 2016
Income Statement:
2014 2015 2016
N'm % N'm N'm %
Revenue 14,693.0 100.0 14,706.0 100.0 14792 100.0 100.0
Other income 793.0 5.4 841.0 5.7 34 0.2 5.4
Gross Profit 15,486.0 105.4 15,547.0 105.7 14,826.0 100.2 105.4
Operating costs: -
Direct network and technology operating costs 1,635 11.1 1,881 12.8 2,352 15.9 11.1
Costs of handsets and other accessories 1,031 7.0 1,083 7.4 1,230 8.3 7.0
Interconnect and roaming costs 1,365 9.3 1,310 8.9 1,339 9.1 9.3
Staff costs 884 6.0 859 5.8 915 6.2 6.0
Selling, distribution and marketing costs 1,717 11.7 1,841 12.5 1,919 13.0 11.7
Government regulatory costs 575 3.9 589 4.0 519 3.5 3.9
Other operating costs 960 6.5 1,143 7.8 1,427 9.6 6.5
8,167 55.6 8,706 59.2 9,701 65.6 55.6
EBITDA 7,319 49.8 6,841 46.5 5,125 49.8
Depreciation of properties, plant and equipment 1,826.0 12.4 1,956.0 13.3 2,099 34.6 12.4
Amortisation of intangible assets 325.0 2.2 374.0 2.5 475 14.2 2.2
Impairment of goodwill 203.0 1.4 50.0 0.3 87 3.2 1.4
2,354 16.0 2,380 16.2 2,661 18.0 16.0
150
Operating profit 4,965 33.8 4,461 30.3 2,464 16.7 33.8
Net finance costs 367 2.5 301 2.0 1,050 7.0 2.5
4,598 33.8 4,160 28.3 1,414 9.6 31.3
Net monetary gain 87 0.6 135 0.9 174 1.2 0.6

Share of results of joint venture and associates after -
tax 421 2.9 123 0.8 -13 0.1 2.9
Profit before tax 5,106 34.8 4,418 30.0 1,575 10.6 34.8
Income tax expense 1,336 9.1 1,132 7.7 835 5.6 9.1
Profit after tax 3,770 25.7 3,286 22.3 740 5.0 25.7
Statement of Financial Position 2014 2015 2016

N'm % N'm % N'm %
Non-current assets:
Property, plant and equipment 8,755 34.5 22,904 52.51 20,331 47.2
Goodwill and intangible assets 3,662 14.4 5,589 12.81 10,048 23.3
Investment in joint ventures and associates 2,551 10.1 3,555 8.15 2,667 6.2
Investments 385 1.5 997 2.29 1,184 2.8
other non-current assets and deferred tax 1,354 5.3 1,034 2.37 847 2.0
16,707 65.9 34,079 78.13 35,077 81.5
151
Current assets:
Trade and other receivables 981 3.9 1,593 3.65 1,385 3.2
Other current assets 3,281 12.9 4,357 9.99 3,736 8.7
Restricted cash 89 0.4 174 0.40 103 0.2
Cash and cash equivalents 4,310 17.0 3,418 7.84 2,738 6.4
Total current assets 8,661 34.1 9,542 21.87 7962 18.5
Total assets 25,368 100.0 43,621 100.00 43,039 100.0
Equity:
Share capital 5,000 19.7 5,000 11.5 10,000 23.2
Reserves 8,344 32.9 10,184 23.3 5,924 13.8
Total equity 13,344 52.6 15,184 34.8 15,924 37.0
Interest bearing liabilities 3,947 15.6 17,500 40.1 17,500 40.7
Deferred tax and other non- current liabilities 1,314 5.2 1,985 4.6 1,842 4.3
Total non - current liabilities 5,261 20.7 19,485 44.7 19,342 44.9
Interest bearing liabilities 1,381 5.4 2,251 5.2 1,964 4.6
Trade and other payables 3,323 13.1 4,048 9.3 4,514 10.5
Other current and tax liabilities 2,059 8.1 2,653 6.1 1,295 3.0
Total current liabilities 6,763 26.7 8,952 20.5 7,773 18.1
Total equity and liabilities 25,368 100.0 43,621 100.0 43,039 100.0
152
REQUIREMENT 1
APPENDIX 1
Deedee 'T' communications
Trend Analysis - 2014 – 2016
Income Statetement
YEARS 2014 2015 CHANGE 2016 CHANGE
N'm N'm N'm % N'm N'm %
- -
Revenue 14,693.0 14,706.0 13.0 0.1 14792 86.0 0.6
- -
Other income 793.0 841.0 48.0 6.1 34 (807.0) -96.0
- -
Gross Profit 15,486.0 15,547.0 61.0 0.4 14,826.0 (721.0) -4.6
Operating costs:
Direct network and technology - -
operating costs 1,635 1,881 246.0 15.0 2,352 471.0 25.0
Costs of handsets and other - -
accessories 1,031 1,083 52.0 5.0 1,230 147.0 13.6
Interconnect and roaming costs 1,365 1,310 55.0 4.0 1,339 29.0 2.2
Staff costs 884 859 25.0 2.8 915 56.0 6.5

- -
Sellind, distribution and marketing costs 1,717 1,841 124.0 7.2 1,919 78.0 4.2
- -
Government regulatory costs 575 589 14.0 2.4 519 (70.0) -11.9
- -
Other operating costs 960 1,143 183.0 19.1 1,427 284.0 24.8
- -
8,167 8,706 539.0 6.6 9,701 995.0 11.4
EBITDA 7,319 6,841 478.0 6.5 5,125 (1,716.0) -25.1

Depreciation of properties, plant and - -
equipment 1,826.0 1,956.0 130.0 7.1 2,099 143.0 7.3
- -
Amortisation of intangible assets 325.0 374.0 49.0 15.1 475 101.0 27.0
Impairment of goodwill 203.0 50.0 153.0 75.4 87 37.0 74.0

- -
2,354 2,380 26.0 1.1 2,661 281.0 11.8
Operating profit 4,965 4,461 504.0 10.2 2,464 (1,997.0) -44.8
Net finance costs 367 301 66.0 18.0 1,050 749.0 248.8
4,598 4,160 438.0 9.5 1,414 (2,746.0) -66.0

- -
Net monetary gain 87 135 48.0 55.2 174 39.0 28.9
Share of results of joint venture and -
associates after tax 421 123 298.0 70.8 -13 (136.0) 110.6
Profit before tax 5,106 4,418 688.0 13.5 1,575 (2,843.0) -64.4
Income tax expense 1,336 1,132 204.0 15.3 835 (297.0) -26.2
Profit after tax 3,770 3,286 484.0 12.8 740 (2,546.0) -77.5
153
2014 2015 CHANGE 2016 CHANGE
N'm N'm N'm % N'm N'm %
Non-current assets:
- -
Property, plant and equipment 8755 22,904 14,149 161.6 20,331 2,573 11.2
Goodwill and intangible assets 3662 5,589 1,927 52.6 10,048 4,459 79.8
Investment in joint ventures and - -
associates 2551 3,555 1,004 39.4 2,667 888 25.0
Investments 385 997 612 159.0 1,184 187 18.8
other non-current assets and - - -
deferred tax 1354 1,034 320 (23.6) 847 187 18.1
16707 34,079 17,372 104.0 35,077 998 2.9
Current assets:
- -
Trade and other receivables 981 1593 612 62.4 1385 208 13.1
- -
Other current assets 3281 4357 1,076 32.8 3736 621 14.3
- -
Restricted cash 89 174 85 95.5 103 71 40.8
- - -
Cash and cash equivalents 4310 3418 892 (20.7) 2738 680 19.9
- -
Total current assets 8661 9542 881 10.2 7962 1,580 16.6
- -
Total assets 25368 43621 18,253 72.0 43,039 582 1.3
Equity:
Share capital 5,000 5,000 0 - 10000 5000 100.0

-
Reserves 8,344 10,184 1840 22.1 5924 -4260 41.8
Total equity 13,344 15,184 1840 13.8 15924 740 4.9
Interest bearing liabilities 3,947 17,500 13,553 343.4 17,500 0 -
Deferred tax and other non- current -
liabilities 1,314 1,985 671 51.1 1,842 -143 7.2
-
Total non - current liabilities 5,261 19,485 14,224 270.4 19,342 -143 0.7
-
Interest bearing liabilities 1,381 2,251 870 63.0 1,964 -287 12.7
Trade and other payables 3,323 4,048 725 21.8 4,514 466 11.5
-
Other current and tax liabilities 2,059 2,653 594 28.8 1,295 -1358 51.2
-
Total current liabilities 6,763 8,952 2,189 32.4 7,773 -1179 13.2
-
Total equity and liabilities 25,368 43,621 18,253 72.0 43,039 -582 1.3
154
APPENDIX 2
Deedee 'T' communications
Trend Analysis - 2014 – 2016
Income Statement
YEARS 2014 2015 2016
% % %
Revenue 100.0 100.0 100.0
Other income 5.4 5.7 0.2
Gross Profit 105.4 105.7 100.2
Operating costs: -
Direct network and technology operating costs 11.1 12.8 15.9
Costs of handsets and other accessories 7.0 7.4 8.3
Interconnect and roaming costs 9.3 8.9 9.1
Staff costs 6.0 5.8 6.2
Selling, distribution and marketing costs 11.7 12.5 13.0
Government regulatory costs 3.9 4.0 3.5
Other operating costs 6.5 7.8 9.6
55.6 59.2 65.6
EBITDA 49.8 46.5 34.6
Depreciation of properties, plant and equipment 12.4 13.3 14.2
Amortisation of intangible assets 2.2 2.5 3.2
Impairment of goodwill 1.4 0.3 0.6
16.0 16.2 18.0
Operating profit 33.8 30.3 16.7
Net finance costs 2.5 2.0 7.1
31.3 28.3 9.6
Net monetary gain 0.6 0.9 1.2
Share of results of joint venture and associates -
after tax 2.9 0.8 0.1
Profit before tax 34.8 30.0 10.6
Income tax expense 9.1 7.7 5.6
Profit after tax 25.7 22.3 5.0

2014 2015 2016
% % %
Non-current assets:
Property, plant and equipment 34.5 52.5 47.2
Goodwill and intangible assets 14.4 12.8 23.3
Investment in joint ventures and associates 10.1 8.1 6.2
Investments 1.5 2.3 2.8
155
other non-current assets and deferred tax 5.3 2.4 2.0
65.9 78.1 81.5
Current assets:
Trade and other receivables 3.9 3.7 3.2
Other current assets 12.9 10.0 8.7
Restricted cash 0.4 0.4 0.2
Cash and cash equivalents 17.0 7.8 6.4
Total current assets 34.1 21.9 18.5
Total assets 100.0 100.0 100.0
Equity:
Share capital 19.7 11.5 23.2
Reserves 32.9 23.3 13.8
Total equity 52.6 34.8 37.0
Interest bearing liabilities 15.6 40.1 40.7
Deferred tax and other non- current liabilities 5.2 4.6 4.3
Total non - current liabilities 20.7 44.7 44.9
Interest bearing liabilities 5.4 5.2 4.6
Trade and other payables 13.1 9.3 10.5
Other current and tax liabilities 8.1 6.1 3.0
Total current liabilities 26.7 20.5 18.1
Total equity and liabilities 100.0 100.0 100.0
156
APPENDIX 3
RATIOS ANALYSIS 2014 2015 2016
PROFITABILITY
Operating profit margin 4965/14693% 4461/14706% 2464/14792%

33.79% 30.33% 16.66%
Returns on total assets 5106/25368% 4418/43621% 1575/43039%

20.13% 10.13% 3.66%
Returns on capital employed (ROCE) 5106/18875% 4418/18,605% 1575/35266%
27.05% 23.75% 4.47%
Returns on equity 3770/13344% 3286/15184% 740/15924%
28.25% 21.64% 4.64%
LIQUIDITY
Current ratio 8661/6763 9542/8952 7962/7773
1.3:1.0 1.1:1.0 1.0:1.0
Quick ratio 8661/6763 9542/8952 7962/7773
1.3:1.0 1.1:1.0 1.0:1.0
cash ratio 4310/6763 3418/8952 2738/7773
0.6:1.0 0.4:1.0 0.4:1.0
ACTIVITY
Net assets turnover 14693/18875 14706/34669 14792/35266
0.8 0.4 0.4
Non-current assets turnover 14693/16707 14706/34079 14792/35077

0.9 0.4 0.4
Total assets turnover 14693/25368 14706/43621 14792/43039
0.6 0.3 0.3
Average days in receivable 981/14693*365 1593/14706*365 1385/14792*365

24days 40days 34days
SOLVENCY
Debts to equity 5261/13344% 19485/15184% 19342/15924%

39.43% 128.33% 121.46$
Debts/equity + debts 5261/18605% 19485/34669% 19342/35266%
28.30% 56.20% 54.85%
Interest cover 4965/367 4461/301 2464/1050

13.5 14.8 2.3
157
APPENDIX 4
DEEDEE 'T' COMMUNICATIONS NIGERIA
LIMITED
PROJECT VIABILITY
Current
ADDITIONAL REVENUE: value %Addition Amount Probability Net addition
N'000 N'000 N'000 N'm
Outgoing voice 8,024 30% 2407.2 0.85 2,046 2,046
Incoming voice 1,387 25% 346.75 0.85 295 295
Data 3,955 40% 1582 0.85 1,345 1,345
SMS 324 20% 64.8 0.85 55 55
Devices 806 20% 161.2 0.85 137 137
Others 296 10% 29.6 0.85 25 25
Total additional revenue 3,903 3,903
ADDITIONAL COSTS:
Direct network and technology operating
costs 2,352 20% 470 470 470
Cost of handset and other accessories 1,230 25% 308 308 308
Interconnect and roaming 1,339 25% 335 335 335
Staff costs 915 28% 256 256 256
Selling, distribution and marketing expenses 1,919 12% 230 230 230
Government regulatory costs 519 25% 130 130 130
Other operating costs 1,427 15% 214 214 214
1,943 1,943
ADDITIONAL FINANCE COSTS:
Amount of loan $150m
Exchange rate N350/$1.0
Naira amount N52,500m
Arrangement fee 1% N52,500m 525,000 525
Management fee 1% N52,500m 525,000 525
Interest per annum 16% N52,500m 8,085,000 8,085
9,450,000 9,135
Net cash flow 9,135,000
158
REQUIREMENT 2
APPENDIX 1
DEEDEE‟T‟ COMMUNICATIONS NIGERIA LIMITED
PESTLE ANALYSIS
1. POLITICAL
 Terrorist activities in the Northern part of the country.
 Restiveness in the Niger Delta.
 Ethnic agitations.
 Government regulations.
 Government clamp down on users of social media.
2. ECONOMIC
 Scarcity of foreign exchange.
 Volatility of exchange rate.
 Contractions in GDP.
 No economic roadmap.
 High cost of doing business.
 Declining disposable income.
 High unemployment rate – 29.8%.
 Economy in full blown recession.
3. SOCIAL
 Increasing number of people using the social media.
 Increase in the use of mobile computing.
 Increase in the use of smartphones and tablets.
 Increase in the use of internet based payments and money transfers.
4. TECHNOLOGICAL
 Continuing IT technological development is driving the telecom business.

 Smartphones and tablets have potential growth in telecom business.
5. ENVIRONMENT
 Telecom industry generates a lot of e-wastes.

 The rate of carbon intensity is high in the industry.
6. LEGAL
 Need to comply with NCC regulations.

 Need to comply with labour laws.
 Need to comply with the various regulations from all the states where they have
their masts.
 NCC‟s license required.
 Potential new law to clamp down on unwholesome use of social media.
159
o REQUIREMENT 2
APPENDIX 2
SWOT ANALYSIS
STRENGHTS:
 Innovative products;
 Initiatives on corporate social responsibility in innovation and academic
excellence;
 Fast and reliable internet access;
 Quality service delivery; and
 Built state- of- the- art telecom infrastructure.
WEAKNESSES:
 Declining profitability;
 Lack of fund to rehabilitate and expand networks; and
 High debt profile.
OPPORTUNITIES:
 Increase in development of internet driven IT technology;
 Increasing number of people using smartphones and tablets; and
 Increasing use of internet based payments and money transfers.
THREAT:
 Government‟s potential clamp down on social media users;
 Terrorist activities in the Northern part of the country; and
 Restiveness in the Niger Delta.
160
CASE STUDY EXAMINER‟S REPORT
The case is based on a telecom company that needs to assess its financial health
and requires additional loan facility to finance its planned network rehabilitation
and expansion.
Candidates are expected to review Exhibits 2 to 8 and report on:
a. The company‟s current financial position, indicating the best way the
company could restructure its current loan portfolio and additional loan
facility required. The candidates are also to carry out simple profit analysis
of the proposed network expansion using the concept of relevant revenues
and costs; and
b. The company‟s business environments, including the industry and internal

environment, to advise the company on how to build on its competencies,
ameliorate its weaknesses so as to seize opportunities and avoid threats
present in the national and global business environments.
Candidates show partial understanding of the requirements of the case but seem to
have forgotten PESTEL as a tool for analysing company‟s external environment.
Therefore, performance was poor as majority of the candidates did not score up to
50%.
The candidates„ commonest pitfalls are:
a. Inability to calculate relevant ratios accurately;

b. Lack of understanding of how to present trend and common size analyses of
the financial statements;
c. Inability to identify PESTEL and its components from the given scenario;
d. Inability to apply the principle of relevant revenues and costs in financial
decision; and
e. Inability to write a good report. Most candidates could not distinguish
between external and internal reporting.
For future examination, candidates are advised to:
(a) Familiarise themselves with the principles of report writing;

(b) Study and review the various strategy and performance management tools;
(c) Practise with the cases of previous diets before attempting the
examinations; and
(d) Understand that they need the knowledge and the skills they acquired in the
other subjects of the examination to succeed in Case Study examination.
161

Pathfinder May 2018 Professional

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Pathfinder May 2018 Professional

Uploaded by

Copyright:

Available Formats

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

(ii) Unsuccessful candidates in the identification of those areas in which they

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

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

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

STRATEGIC FINANCIAL MANAGEMENT 68 – 97

ADVANCED AUDIT AND ASSURANCE 98 – 127

CASE STUDY 128 - 161

Time Allowed: 3¼ hours (including 15 minutes reading time)

INSTRUCTION: YOU ARE REQUIRED TO ANSWER FIVE OUT OF SEVEN

SECTION A: COMPULSORY QUESTION (30 MARKS)

Komolafe Group carries on business as a distributor of warehouse equipment and

Accounts for all companies are made up to December 31.

Komolafe Kelvins Kelly

Komolafe Kelvins Kelly

The following information is available relating to Komolafe, Kelvins and Kelly.

(i) On January 1, 2012 Komolafe acquired 5,400,000, N1 ordinary shares in

(iii) On January 1, 2014 Kelvins acquired 3,200,000, N1 ordinary shares in Kelly

b. A consolidated statement of financial position as at December 31, 2016

SECTION B: YOU ARE REQUIRED TO ANSWER ANY TWO OUT OF THREE

Abridged statement of financial position

Abridged statements of profit or loss

c. Comment on the ratios calculated in (a) and (b) above by pairwise

Statement of financial position as at December 31, 2017

Equity & liabilities

a. Recording the substance of transactions, rather than their legal form, is an

On April 1, 2017, Waasimi‟s freehold building had a carrying amount of

ii. State the appropriate accounting treatments of the various elements

iii. State the classes of charges to be incurred and their appropriate

b. The following information relates to Tola Plc. as at December 31, 2017:

Note Carrying amount Tax base

(i) The deferred tax balance as at January 1, 2017 was N1500.

Omotola Nigeria Plc is a conglomerate which operates in different sectors of the

(i) On May 1, 2017, Omotola Nigeria Plc. bought an investment property in

Some shareholders in Nigeria are becoming increasingly interested in the

(a) KOMOLAFE GROUP

Profit attributable to:

(b) KOMOLAFE GROUP

Current assets 15 38,892

NCI 80% 01/01/2014

Indirect holding = 72%

3. COST OF SALES N‟000

5. ADMINISTRATIVE EXPENSES N'000

6. INCOME TAX EXPENSES N'000

7. REVALUATION OF PROPERTY N'000

8. Non-controlling Interest KOMOLAFE KELVINS KELLY NCI

Profit for the year (see 8 above) 7,426

Profit for the year (see 8 above) 57,162

11. Property, plant and equipment (carrying amount) N'000

12(a) Net Assets of the subsidiary -

12(b) Net Assets of the subsidiary – KELLY

GOODWILL – ALTERNATIVE SOLUTIONS

KELVINS N‟000 KELLY N‟000

14. Non-controlling Interest

KELVINS KELLY TOTAL

16. Retained Earnings N'000

17. Current Liabilities N'000

(c) Deferred and contingent considerations

- While subsequent settlement of contingent consideration is dependent on

- While subsequent measurement of deferred consideration, that is not

- Whereas deferred consideration will surely be settled in the future,