pathfinder inter nov2010
TRANSCRIPT
THE INSTITUTE OF CHARTERED ACCOUNTANTS
OF NIGERIA
NOVEMBER 2010 INTERMEDIATE EXAMINATION
Question Papers
Suggested Solutions
Plus
Examiners‟ Reports
PATHFINDER
INTERMEDIATE EXAMINATION - NOVEMBER 2010 2
FOREWORD
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
subjects contained herein, and
(iv) The profession in improving pre-examinations and screening processes, and so
the professional performance of candidates.
The answers provided in this publication do not exhaust all possible alternative
approaches to solving the questions. Efforts have been made to use the methods
which will save much of the scarce examination time. Also, in order to facilitate
teaching, questions may be altered slightly so that some principles or application of
them 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.
PATHFINDER
INTERMEDIATE EXAMINATION - NOVEMBER 2010 3
TABLE OF CONTENTS
SUBJECTS
PAGES
COSTING AND QUANTITATIVE TECHNIQUES 4 - 29
AUDIT AND ASSURANCE 30 - 52
TAXATION 53 – 79
BUSINESS COMMUNICATION AND RESEARCH METHODOLOGY 80 - 103
PATHFINDER
INTERMEDIATE EXAMINATION - NOVEMBER 2010 4
ICAN/102/P/1 EXAMINATION NO…………………
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
INTERMEDIATE EXAMINATION – NOVEMBER 2010
COSTING AND QUANTITATIVE TECHNIQUES
Time allowed – 3 hours
SECTION A
PART I MULTIPLE CHOICE QUESTIONS (20 Marks)
1. Identify one of the following that is NOT a method of remuneration
A. Time work.
B. Unagreed group scheme.
C. Payment by result.
D. Group bonus scheme.
E. Profit sharing and co-partnership.
2. Choose ONE of the following that is NOT a main source of collection of overhead
A. Direct expenses book.
B. Invoices.
C. Stores requisition.
D. Wages analysis book.
E. Journal entries.
3. Which of the following is NOT a method of recovering overheads?
A. Percentage on cost of direct materials
B. Standard budget rate
C. Percentage on cost of direct wages
D. Percentage on prime cost
E. Machine hour rate
4. The characteristics of obsolete stocks EXCLUDE one of the following:
A. Low turnover ratio.
B. No demand at present.
C. May be required in future.
D. Can be retained.
E. Scrapped because they have market value.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 5
5. To which of the following should an internal auditor be responsible?
A. Managing Director
B. Chief Accountant
C. Financial Controller
D. General Manager Finance
E. Top Management
6. Policy decision on profitability is NOT made using
A. comparison of total profit to unit profit.
B. percentage of profit to sales.
C. labour turnover ratio.
D. stock turnover ratio.
E. contribution related to key factor.
7. “Added Value” or “Value Added” can be defined as
A. sales value less the cost of purchased materials.
B. sales value less the cost of purchased materials and services.
C. sales value less the labour and materials costs.
D. sales value less fixed and variable costs.
E. sales value less material cost only.
8. Choose ONE of the following that cannot be apportioned on the basis of floor
area:
A. Rates.
B. Rent.
C. Security.
D. Lighting.
E. Cleaning.
9. Causes of discrepancies between actual stocks and recorded stocks EXCLUDE
A. non-receipt of goods in time to store.
B. errors of incorrect recording and calculation.
C. under or over issues not noted.
D. shrinkage, pilferage, evaporation, losses due to breaking bulk.
E. loss or non-use of Good Received Notes,(GRN).
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 6
10. First in First out (FIFO) characteristics do NOT include ONE of the following:
A. It is an actual cost system.
B. It renders cost comparison easy.
C. Oldest items are issued out first.
D. Unrealized profits do not exist.
E. Stock valuation is based on recently acquired materials.
11. Which of the following is a cost driver?
A. An item of production overhead
B. Any cost incurred by the vehicle driver
C. A common cost which is shared over cost centres
D. Any cost relating to transport
E. An activity which generates cost
12. The following data relates to stock item SSR: Ordering cost is N40 per order,
stockholding cost is 24% per unit per annum and annual demand is 12,000 at
N100 per unit. What is the economic order quantity?
A. 500 units
B. 400 units
C. 200 units
D. 220 units
E. 250 units
13. What is the area which does not contravene any of the constraints in a typical
linear programming problem called?
A. Optimum area
B. Acceptable region
C. Critical region
D. Feasible region
E. Rejection region
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 7
14. In the Simplex Method, the inequalities in the constraints are re-written as
equations by introducing
A. extra constraints.
B. slack variables.
C. minimum error.
D. a constant.
E. dummies.
15. An activity has 9 weeks and 13 weeks time estimates with probabilities of 0.6
and 0.4 respectively. What is the expected time for the activity in weeks?
A. 22.0
B. 23.0
C. 10.6
D. 11.5
E. 11.0
16. What is the estimated time of an activity with optimistic, pessimistic and most
likely times of 6 weeks, 24 weeks and 15 weeks respectively?
A. 15weeks
B. 90 weeks
C. 45 weeks
D. 7.5 weeks
E. 30 weeks
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 8
1
9 9 12
0
0 0 5
3
12
14
17. In the diagram above, what is the value of the earliest starting time X?
A. 12
B. 14
C. 16
D. 21
E. 28
18. Which of the following is correct in relation to Part of Activity-on-Arrow Network
diagram shown above?
A. A and C must finish before B can start
B. A and C must finish before D can start
C. A only must finish before D can start
D. C only must finish before B can start
E. C only must finish before D can start
1
3
X
14
LS
T
ES
T
A
C
B
D
9
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 9
19. A critical path is made of activities A, B and C. The optimistic O, pessimistic P
and most likely M estimates (in weeks) are given in the table below.
ACTIVITY OPTIMISTIC TIME
(weeks)
MOST LIKELY TIME
(weeks)
PESSIMISTIC TIME
(weeks)
A 5.6 7.5 15.5
B 3.5 5.5 8.5
C 4.0 7.0 11.0
Assume normal distribution, calculate the Standard Deviation (SD) of the
finished event.
A. 4.778.
B. 3.65.
C. 2.1859.
D. 1.9105.
E. 0.78.
20. In an activity-on-arrow network diagram, the last head event has earliest start
time and latest finish time of 28 months each. What is the duration of the
critical path of the network?
A. 28 months
B. 56 weeks
C. 14 months
D. 1month
E . 0 month
PART II SHORT-ANSWER QUESTIONS (20 Marks)
1. Budgeted overhead for cost centre divided by budgeted units of absorption
basis is called ………………
2. In contract costing, the value of work done which is not yet recognized in the
profit and loss account is shown in the balance sheet as …………………
3. The introduction of an incentive scheme will be worthwhile provided that the
increased output can be sold at a price which is in excess of the ………………..
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 10
4. The formula for allocating non-manufacturing overhead based on the ability of
the products to bear such costs is given as ……………………..
5. The file of all individual accounts supporting the total control account is called
the ……….
6. The only two major types of variances are price and………………
7. Machine breakdown or lack of materials or tools gives rise to
………………variance.
8. A situation where variances outside pre-determined limits are investigated and
necessary action taken can be said to be an extension of the use of
……………………
9. In the balance sheet method of preparing a cash forecast, where the asset side
total is lower than the liability side total reveals a ………………………
10. In a Zero Based Budgeting System, the document that forms its foundation is
called……….
11. The expense which should be allowed for the level of activity achieved is called
…………
12. In a break-even chart, the space between the sales line and the total cost line is
called ……………
13. The probability of throwing a total of 9 with two fair dice is ……………..
14. If the probability of an event is 0.6, then the probability of its complement is
............
15. The relationship between Laspeyre‟s index IL, Paasche‟s index I
P and Fisher‟s
index IF is represented by ………………………
16. The corrected price of a commodity as a percentage of the price in the base
period is referred to as ……………..
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 11
17. In transportation problem, slack variables stand for ……………resources.
18. The sum of floats of activities on the critical path is…………………
19. An activity that does not consume time or resources is a/an …………………
20. A path through the network with same earliest start times and latest start times
is the......
SECTION B ATTEMPT ANY FOUR QUESTIONS (60 Marks)
QUESTION 1
a. In a manufacturing process, state any five essentials of material control that are
required prior to actual use in production. (5 Marks)
b. Storekeeping can make substantial contribution to efficient operation. State any
five activities involved in storekeeping. (5 Marks)
c. “Material Requirement Planning (MRP) is aimed at maintaining smooth
production flows”. Explain what it entails and the requirements for the
operation of the system. (5 Marks)
(Total 15 Marks)
QUESTION 2
Goke Limited is a construction company that has just won the construction of 2km
drainage and 1km road projects titled projects 101 and 204 respectively from
Dagbolu Local Government with effect from January. Details of data relating to
project 101 which was over 80% completed as at December are as follows:
N‟ 000
Material delivered directly to site 1,750
Materials from the company 670
Plants purchased 1,500
Plants taken to site (cost N4.5m) 2,700
415
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 12
Materials on site as at end of the year
Materials transferred to project 204 855
Site wages paid 1,070
Sub –contract costs 850
Fuel and diesel 400
Other expenses 340
Insurance paid 180
Cost of work certified 4,750
Value of work certified 5,200
Progress payment 4,680
The contract sum is N7.5 million and estimated cost to completion is put at N960,000.
Depreciation is calculated at 20% per annum on cost, site wages unpaid as at date
amounted to N250,000 while insurance paid was for a period of 2 years due to the
discount offered. 10% of work certified is retained by the Local Government.
Required:
Prepare the contract account for project 101 and show whether profit can be taken.
Show balance sheet entries. (Total 15 Marks)
QUESTION 3
Ogbuefi Limited produces three products, all of which use the same machine with
available 55,000 hours per period. The standard costs of the products per unit are:
Bak1 Bak II Bak III
Maximum demand(units) 3,000 5,000 3,500
Direct labour N N N
-processing(N 7.50/hr) 30 45 45
-finishing(N 4.50/hr) 18 9 18
Variable overhead 42 36 32
Total variable cost 130 140 140
Selling price 200 250 225
Price of complimentary
Product 185 215 200
Fixed cost for the period is N650,000
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 13
Required:
(a) Calculate the deficiency in machine hours for the next period. (4 Marks)
(b) What is the most appropriate production sequence for the products?
(5 Marks)
(c) Determine which product(s) and quantity (if any) that should first be
bought out. (4 Marks)
(d) Calculate the net profit of Ogbuefi Limited. (2 Marks)
(Total 15 Marks)
QUESTION 4
There are 160 agents of TOLU INSURANCE PLC selling motor (M), home (H) and life (L)
insurance policies to their customers at Ikeja. In the last month of the last quarter, 42
of the agents sold only motor policy, 30 agents sold only home policy and 24 agents
sold life policy only while 18 agents did not sell any policy. 22 of the agents sold both
motor and home policies, 16 sold both home and life policies while 20 sold both motor
and life policies.
Required:
(a) Draw the Euler-Venn diagram for the insurance company with the given data
clearly indicated. (4 Marks)
(b) Determine the number of agents who sold:
(i) at least one of the three policies. (2 Marks)
(ii) all the policies (3 Marks)
(iii) each of the policies (6 Marks)
(Total 15 Marks)
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 14
QUESTION 5
The table below shows the prices and sales of five commodities for 2004 and 2009:
2004 2009
Commodity Price (N) Quantity ( kg) Price (N) Quantity (kg)
Rice A 5000 55 8000 55
Beans B 4000 97 7000 97
Sugar C 300 22 700 22
Salt D 250 25 750 20
Garri E 1000 50 1800 60
Use 2004 as the base year to calculate the
(a) Laspeyre‟s index number (6 Marks)
(b) Marshal and Edgeworth‟s index number. (9 Marks)
(Total 15 Marks)
QUESTION 6
The weekly cost of production C(q) (N`000) and unit price p(q) (N`000) of a special
capsule are respectively expressed as C(q) = 200 + 46q + q2
; p(q) = 200 – q (
For q < 200) where q is the number of kilogrammes of capsule produced and sold.
Required:
(a) Obtain expressions for marginal revenue, marginal cost and marginal profit.
(5 Marks)
(b) Determine the production level and price that will maximise profit using the
information in (a) above; (5 Marks)
(c) Determine the price elasticity of demand at the production level that
maximises profit. Comment on your result. (5 Marks)
(Total 15 Marks)
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 15
SOLUTIONS TO SECTION A
PART I MULTIPLE CHOICE QUESTIONS
1. B
1. A
2. B
3. A
4. E
5. C
6. B
7. C
8. A
9. B
10. E
11. C
12. D
13. B
14. C
15. A
16. E
17. A
18. C
19. A
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 16
WORKINGS
12. EOQ = 20024100
40000,1222
CC
DCO
Where CO = cost of ordering
CC = carrying cost , and
D = annual demand
15. Expected time = (9 × 0.6) + (13 × 0.4) = 5.4 + 5.2 = 10.6 (C)
16. Estimated time = 156
)15(4246
(A)
17. EST = max of { 9 + 12 = 21, 14 + 14 = 28 }
EST of X = 28 (E)
19.
2
0
6
ttSD
p
1859.26
411
6
5.35.8
6
6.55.15222
(C)
Examiners‟ Report
The questions test a sizeable proportion of the syllabus.
All candidates attempted this part of the paper.
Performance was average as about half of the candidates scored 50% and above.
Candidates will do better in future if they cover adequately the entire syllabus
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 17
PART II SHORT-ANSWER QUESTIONS
1. overhead absorption rate
2. work in progress
3. costs of production
4. estimated non-manufacturing overhead
estimated manufacturing costs
5. subsidiary ledger
6. volume
7. idle time
8. management by exception
9. bank overdraft position
10. decision package
11. flexible budget allowance
12. angle of incidence
13. 1/9
14. 0.4
15. cpf III
16. Price index
17. unused
18. zero
19. dummy activity
20. critical path
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 18
WORKINGS
13. Sample space for totals
1 2 3 4 5 6
1 2 3 4 5 6 7
2 3 4 5 6 7 8
3 4 5 6 7 8 9*
4 5 6 7 8 9* 10
5 6 7 8 9* 10 11
6 7 8 9* 10 11 12
Pr{9}=
9
1
36
4
14. Let A be the event
P(Ac
) = 1 – P(A)
= 1 – 0.6
= 0.4
EXAMINERS‟ REPORT
The questions cover a good proportion of the syllabus. Almost all the candidates
attempted the questions.
Performance was poor. Less than 20% of the candidates scored 50% and above.
Candidates were, in most cases, unable to recall simple costing and QT terminologies.
Improved performance will be achieved if candidates prepare harder and better for
subsequent examinations.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 19
SOLUTIONS TO SECITON B
QUESTION 1
1a. The essentials of material control prior to actual use in production are as
follows:
(i) Materials of the appropriate quality and specification should be
purchased only when required and appropriately authorized.
(ii) Material should be properly inspected and received.
(iii) Appropriate storage facilities should be provided and stock levels
physically checked on a regular basis.
(iv) The documentation, accounting and controls at each stage should
be well designed and effective.
(v) The supplier chosen should represent an appropriate balance
between quality, price and delivery times.
(vi) Direct materials used in production should be charged to
production on an appropriate and consistent pricing basis.
(vii) Stock must be well organized to ensure that stock quantities on
hand are available when required.
b. Storekeeping is an important function and makes substantial contribution to
efficient operations in any organization. Storekeeping functions include the
following:
(i) Receipt of parts and materials from suppliers
(ii) Efficient and speedy issue of required materials, tools etc.
(iii) Organizing storage in logical sequence, thus ensuring that items can be
located easily.
(iv) Organizing stock checks either on a continuous or a periodic basis so as
to be able to provide accurate stock figure, when required.
(v) Protecting items in store from damage and deterioration.
(vi) Securing the store from pilferage, theft and fire.
c. Material Requirement Planning is a system that converts a production schedule
into a listing of the materials and components required to meet that schedule,
so that adequate stock levels are maintained and items are available when
needed. It is concerned with the following:
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 20
(i) Maximizing the efficiency in timing of orders for raw materials or parts
that are placed with suppliers.
(ii) Efficient scheduling of the manufacture and assembly of the final
product.
The operation of a material requirement planning requires the following:
(i) A master production schedule showing the quantities and timing
required for the finished product.
(ii) A bill of material which shows the breakdown of each finished product
into sub-assemblies, components and raw materials.
(iii) An inventory file containing the balance on hand, scheduled receipts and
numbers already allocated for each material.
(iv) A parts manufacturing and purchasing file containing lead times of all
purchased items and lead times and production sequences of all sub-
assemblies and components produced internally.
EXAMINERS‟ REPORT
The question tests candidates‟ knowledge of:
Essentials of materials and production control
Storekeeping functions
Material Requirement Planning
About 95% of the candidates attempted this question.
Performance was below average as 30% of the candidates who attempted the question
scored 50% and above.
Major shortcomings include the following:
Candidates lacked understanding of the requirements of the question.
Many candidates confused storekeeping functions with valuation of store
materials.
MRP (Materials Requirement Planning) was taken in many instances as
Materials Requisition Notes.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 21
It is recommended that:
Candidates should endeavour to cover all aspects of the syllabus diligently.
Speculation as to areas of concentration should be discouraged among
candidates as much as possible.
QUESTION 2 GOKE LIMITED
PROJECT 101
N‟000 N‟000
Material direct to site 1,750 Material c/d 415
Material from store 670 Material transferred 855
Plant depreciation 300 Insurance c/d 90
Plant depreciation 900 W.I. P c/d 600
Wages 1,070 Cost of work certified 4,750
Wages accrued 250
Sub-contact costs 850
Fuel & Diesel 400
Other expenses 340
Insurance 180
6,710 6,710
Cost of work certified 4,750 Value of work certified 5,200
Profit for the year 450
5,200 5,200
Material b/d 415 Wages 250
Insurance b/d 90
W.I.P b/d 600
Before any profit can be taken for the year it is necessary to estimate the overall
project outcome
N‟000 N‟000
Contract value 7,500
Cost to date 5,350*
Future cost 960 6,310
Expected overall profit 1,190
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 22
From the above, the profit taken in the account is reasonable.
*Cost to date = Total cost – material c/d – insurance c/d – material transferred
= 6,710 – 415 -855 – 90 = 5,350
Balance sheet extract
N‟000
Stock
Material on site 415
W.I.P 600
Debtors
Amount recoverable on contract 520
Prepayment
Insurance 90
Liabilities
Wages accrued 250
EXAMINERS‟ REPORT
The question tests candidates‟ knowledge of Contract Costing and Accounts.
About 80% of the candidates attempted the question.
Performance was very poor as less than 10% of the candidates who attempted this
question scored 50% and above.
Major pitfalls were as follows:
Inability to display understanding of posting in Contract Accounts.
Many candidates could not comment on the reasonableness of the notional
profit taken.
A good number of the candidates were unable to display the Balance Sheet
Extracts.
It is recommended that candidates should improve on the quality of their preparation
and tuition for future examinations.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 23
QUESTION 3
OGBUEFI LIMITED
(a) Computation of Deficiency in Machine Hours
Bak I Bak II Bak III Total
Hours Hours Hours Hours
Processing hrs/unit 4 6 6
Finishing hrs/unit 4 2 4
Total hrs/unit 8 8 10
Maximum Demand (units) 3,000 5,000 3,500
Maximum hrs required 24,000 40,000 35,000 99,000
Available Hours (55,000)
Deficiency in Machine Hours 44,000
(b) Determination of most appropriate production sequence
Bak I Bak II Bak III
N N N
Selling price/unit 200 250 225
Total variable cost/unit 130 140 140
Contribution per unit 70 110 85
Required Machine hour/unit 8 8 10
Contribution per machine
Hour N8.75 N13.75 N8.50
Ranking: 2nd
1st
3rd
Sequence:
BAK II – 1st
to be considered for production.
BAK I – 2nd
to be considered for production.
BAK III – 3rd
to be considered for production.
(c) Determination of units of products that should first be bought out.
Machine hours Available: 55,000
Maximum Units Machine
Hours
Machine
Hours
Production
based on
Required Available Hours
Available
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 24
BAK II – 5,000
40,000 15,000 5,000
BAK I – 3,000 15,000 - 1,875
BAK III – 3,5000 - - -
BAK III will not be produced.
BAK I will be bought out first because only 1,875 units were produced out of 3,000
units demanded.
(d) Computation of Net Profit:
Maximum Units Machine
Hours
Machine
Hours
Production
based on
Required Available Hours
Available
BAK II – 5,000 40,000 15,000 5,000
BAK I – 3,000 15,000 - 1,875
BAK III – 3,5000 - - -
EXAMINERS‟ REPORT
The question tests candidates‟ ability to make informed business management
decision using Marginal Costing Approach.
Question appears very unpopular among candidates. About 15% of the candidates
attempted the question.
Performance was very poor as only about 20% of the candidates who attempted the
question scored 30% and above.
Major shortcomings noticed were as follows:
Candidates exhibited insufficient familiarity with decision making scenarios.
Inability to recognize relevant costs in decision making situations.
It is recommended that:
Candidates should read and digest costing topics on decision making.
Candidates should increase the length of time spent on preparation, improve on
quality of texts and tuition.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 25
QUESTION 4
(a) Euler-Venn diagram
18
(b) (i) The total number of agents = 160
No. of agents who did not sell any policy =18
No. of agents who sold at least only the three policies = y
i.e. y = 160 – 18 = 142 agents
(ii) Let x = no of agents who sold all the policies
Then,
42 + (22 – x) + 30 + (16 – x ) + 24 + (20 – x) + x = 142
i.e. 154 – 2x = 142
2x = 154 – 142
2x = 12
x = 6 agents
(iii) No. of agents who sold motor policy = 42 + (22 – x) + x + (20 – x)
= 84 – x = 84 – 6 = 78
i.e. 78 agents
No. of agents who sold home policy = (22 – x) + 30 + x + (16 – x)
= 68 – x = 68 – 6 = 62
i.e. 62 agents
16-x 20-x
22-x
42 H
L
30
24
M
x
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 26
No. of agents who sold life policy = (20 – x) + x + (16 – x) + 24
= 60 – x = 60 – 6 = 54
i.e. 54 agents
EXAMINERS‟ REPORT
The question tests Set Theory with application to business environment.
Topic appeared very popular among candidates as about 95% of the candidates
attempted the question.
Performance was well above average. About 50% of the candidates who attempted the
question scored 50% and above.
Major pitfalls came in the following areas:
Inability to appreciate and interprete the requirements of the question.
Many candidates could not draw the Venn Diagram.
QUESTION 5
(a) Laspeyre‟s index number,
1
100
00
01
QP
QPI L
P1Q
0 P
0Q
0
440,000 275,000
679,000 388,000
15,400 6,600
18,750 6,250
90,000 50,000
1,243,150 725,850
%27.171850,725
100150,243,1
LI
(b) Marshal and Edgeworth‟s index number
1
100
)(
)(
100
101
QQP
QQpIm
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 27
P0 Q
0 P
1 Q
1 Q
0 + Q
1 P
1(Q
0 + Q
1) P
0(Q
0 + Q
1)
5,000 55 8,000 55 110 880,000 550,000
4,000 97 7,000 97 194 1,358,000 776,000
300 22 700 22 44 30,800 13,200
250 25 750 20 45 33,750 11,250
1,000 50 1,800 60 110 198,000 110,000
2,500,550 1,460,450
%22.171450,460,1
100550,500,2
mI
EXAMINERS‟ REPORT
The question tests candidates understanding and application of Index Numbers.
Topic appears very familiar with candidates as about 95% of them attempted this
question.
Performance was well above average. About 50% of the candidates who attempted the
question scored 50% and above.
Inadequacy came from the following:
Many candidates could not describe the right formulae required for solving the
problem.
Inability to identify the base year required for the calculation.
It is recommended that:
Candidates should improve on their preparation.
Strive to master relevant formulae.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 28
QUESTION 6
(a) 246200)( qqqC
qqP 200)(
)(200)(Re 2 qRqqqPqvenue
Marginal Revenue, MR = )200( 2qqdq
d
dq
dR
q2200
Marginal cost, MC = dC = 46 + 2q
dq
Marginal profit = d (R –C)
dq
)46200()200( 22 qqqqdq
d
)46200200( 22 qqqqdq
d
= 200 - 2q – 46 – 2q
= 154 – 4q
(b) (i) For maximum profit, MC=MR
i.e qq 2200246
1544 q
5.384
154 q
Unit production price = 200 – q = 200 - 38.5 =161.5
Actual price of a unit = N161,500
(c) The price elasticity of demand,
dq
dpq
ped
1
P = 200 – q ; 1dq
dp
q
q
q
qed
2001
200
At maximum profit, q = 38.5
PATHFINDER
INTERMEDIATE EXAMINATION - NOVEMBER 2010 29
1948.45.38
5.38200
de
.1 elasticisdemandthethated
EXAMINERS‟ REPORT
The question tests candidates understanding and application of Revenue and Cost
functions.
About 60% of the candidates attempted the question.
Performance was fair. About 40% of the candidates who attempted the question scored
40% and above.
A major pitfall was inability of the candidates to understand the requirements of the
question.
It is recommended that:
Candidates should improve on the quality of tuition and texts for future
examination.
Increase the amount of time spent on preparing for future examination.
PATHFINDER
INTERMEDIATE EXAMINATION - NOVEMBER 2010 30
ICAN/102/P/3 EXAMINATION NO………………………...
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
INTERMEDIATE EXAMINATION – NOVEMBER 2010
AUDIT AND ASSURANCE
Time Allowed – 3 hours
SECTION A Attempt All Questions
PART I MULTIPLE CHOICE QUESTIONS (20 Marks)
1. ONE of the major attributes of good audit evidence is
A. narrative.
B. easy to obtain.
C. competence.
D. physical existence.
E. reliability.
2. The following are risks associated with automating the business environment
EXCEPT
A. Privacy violation.
B. Computer virus.
C. Authorised access to information and data.
D. Hardware failure.
E. Data loss.
3. Which of the following is NOT a means of third party confirmation?
A. Bank confirmation letter
B. Valuation reports from experts
C. Debtors‟ circularization
D. Management representation letter
E. Solicitors‟ letter
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 31
4. ONE of the following may NOT be a criterion for assessing the internal audit
function:
A. Qualities of the directors.
B. Technical competence of staff.
C. Availability of resources.
D. Due professional care.
E. Supervision.
5. Insurance Act 2003 states that no insurer shall practice insurance business in
Nigeria unless the insurer has and maintains while carrying on that business a
paid up share capital of the following amount EXCEPT
A. Life insurance business not less than N150,000,000.00.
B. Non-Life insurance business not less than N150,000,000.00.
C. General insurance business not less than N200,000,000.00.
D. Composite insurance business not less than N350,000,000.00.
E. Re-insurance business not less than N350,000,000.00.
6. According to Banks and Other Financial Institutions Act CAP B3 LFN 2004, the
qualification of the approved auditor of a bank includes the following EXCEPT
A. Membership of one of the professional bodies recognized in Nigeria.
B. Approval by the Central Bank of Nigeria.
C. Approval by the Chartered Institute of Bankers.
D. Must be resident in Nigeria.
E. Carrying on Professional practice in Nigeria as an accountant and
auditor.
7. The functions of the Audit Committee are as follows EXCEPT
A. Reducing illegal activities and preventing fraudulent financial reporting.
B. Strengthening the role of non-executive directors with a view to
protecting them from being misled by management.
C. Increasing the credibility of audited financial statements.
D. Helping the Board of Directors in meeting their responsibilities and
reinforce the auditor‟s responsibility.
E. Confirming the appointment of the external auditor.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 32
8. Statements which state how the basic procedures contained in standards are to be
applied are described as
A. auditing procedures.
B. Guidelines.
C. statutory procedures.
D. accounting standards.
E. professional pronouncements.
9. Which of the following is in the broad category of information in the Audit
Planning Memorandum?
A. Audit engagement letter.
B. Audit working papers.
C. Background of the client.
D. List of overseas suppliers.
E. Directors service contracts.
10. The letter prepared by the auditor for the client company at the auditors‟
instance setting out description and definition of certain contingent
responsibilities is
A. representation letter.
B. solicitors‟ letter.
C. confirmation letter.
D. management letter.
E. circularization letter.
11. The concern of auditors regarding compliance with corporate governance codes
involves
A. occurrence.
B. completeness.
C. confirmation of claims in annual report.
D. cut-off procedure.
E. classification testing.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 33
12. The auditor, in carrying out his assignment, ensures that the following are in
order EXCEPT
A. consistency of the application of accounting policies.
B. compliance with legal requirements.
C. reliability of the opening balances.
D. preparation of the chairman‟s statements.
E. appropriateness of the comparative figures included in the account.
13. Auditing standards differ from auditing procedures in that procedures relate to
A. measurement of performance.
B. audit principles and practices.
C. acts to be performed.
D. audit programmes.
E. audit judgments.
14. The primary objective of the examination of financial statements by an
approved auditor of a bank is the expression of independent opinion on
A. the competence of management in accounting matters which is implied
by whether the opinion is qualified or not.
B. the conformity of the financial statements with the books of account .
C. the conformity of the financial statements with auditing standards.
D. the fairness with which the financial statements present the operational
results.
E. the conformity of the financial statements with accounting standards and
banking operational standards.
15. The primary responsibility for the adequacy of disclosure in the financial
statements of a limited liability company rests with the
A. partner assigned to the audit engagement.
B. audit manager in charge of the field work.
C. management of the company.
D. Securities and Exchange Commission.
E. Corporate Affairs Commission.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 34
16. Due professional care requires
A. a critical review of work done at every level of supervision.
B. the examination of all corroborating evidence available.
C. the exercise of error free judgment.
D. a study and review of the internal controls.
E. exercising professional care as judged by peer reviewers.
17. Which of the following best describes the reason why an independent auditor
reports on financial statements?
A. A management fraud may exist and is more likely to be
detected by independent auditors
B. Different interests may exist between the company preparing the
statements and the persons using the statements
C. A misstatement of account balances may exist and is generally corrected
as the result of the independent auditor‟s work
D. Poorly designed internal control may exist
E. Comply with the generally accepted standards of field work
18. The independent audit is important to users of financial statements because it
A. determines the future stewardship of the management of the company
whose financial statements are audited.
B. measures financial and business data in the financial statements.
C. communicates financial and business data in the financial statements.
D. involves the objective examination of, and reporting on financial
statements prepared by management.
E. reports on the accuracy of all information in the financial statements.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 35
19. Statutory Auditing can best be described as
A. a branch of accounting.
B. statutory function that attests to the results of financial information
provided by management in their stewardship function.
C. a professional activity that measures and communicates financial and
business data.
D. a regulatory function that prevents the issuance of improper financial
information.
E. a discipline that reviews the economic activities in the economy.
20. What is the responsibility of the incoming Auditor with respect to
communicating with the retiring Auditor in connection with the client?
A. The incoming Auditor has no responsibility to contact the retiring auditor
B. The incoming Auditor should obtain written clearance from the retiring
auditor
C. The incoming Auditor should contact the retiring Auditor without
obtaining permission from the prospective client
D. The incoming Auditor need not contact the retiring Auditor if he is aware
of all available relevant information
E. The incoming Auditor has no obligation to inform the retiring Auditor in
so far as he is competent to do the assignment
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 36
PART II SHORT-ANSWER QUESTIONS (20 MARKS)
1. A person that has the ability to control or exercise significant influence over the other
party is described as……………………
2. Audit risk is assessed during the …………………
3. Pension Reform Act 2004, provides that pension funds and assets shall only be held
by……………….
4. If an auditor or client cannot trace transactions from its inception to the final
destination in the accounting records, then the process lacks ………………………
5. Forensic accounting involves investigative accounting and ………………….
6. Revenue or expense items that are unusual in nature and of infrequent occurrence
are called ………………
7. The risk that the auditor expects to be present in spite of controls is known as ………..
8. State a type of statutory document that is usually found in the permanent audit
file.
9. The process of dividing a population into sub-populations each of which is a group of
sampling units which have similar characteristics is known as ………….
10. Establishing authority limits for making payments is a type of …………….…
11. Risk assessment has two main components: risk identification and ……………….
12. A collection of data that is accessible and used by a number of different users for
different purposes is known as ……………
13. In a computer environment, manual authorisation of input documentation is a form of
……………
14. Periodically the directors render accounts of their stewardship to shareholders. These
accounts of stewardship are referred to as ………………………………………
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 37
15. Section 29 of Banks and Other Financial Institutions Act CAP B3 LFN 2004 provides that
every bank shall appoint annually a person referred to as “approved auditor” and
such auditor shall be approved by …………………
16. Where Accounting Standards or guidelines issued in Nigeria conflict with international
standards or guidelines, the Nigerian Standards or guideline will
……………………………………..
17. Loss of a major market is an indicator of problem of threat to……………………..
18. State the fundamental means of communication between the auditors and the
management.
19. The audit approach that can be applied in a small charitable organisation is
………………………….
20. In addition to the characteristics of reliability and credibility of information provided
by the traditional auditing function, Assurance services also report on the
………………………. and timeliness of the information.
SECTION B – ATTEMPT ANY FOUR QUESTIONS (60 MARKS)
QUESTION 1
a. What is a “Computer Audit Program”? (3 Marks)
b. Describe three applications of such a program in connection (6 Marks)
with verification of assets.
c. Mention six uses to which a computer audit programme can be applied
in the audit of a company. (6 Marks)
(Total 15 Marks)
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 38
QUESTION 2
“The technique of internal control assessment takes on full significance in the context
of audit of large companies. In the case of smaller companies, the audit objectives are
unchanged, but the absence of normal internal control criteria will often necessitate a
different approach to the audit work.”
Required:-
(a) Comment briefly on the above statement (3 Marks)
(b) State SIX principal arguments in favour of abolishing audit requirements
for small companies. (12 Marks)
(Total 15 Marks)
QUESTION 3
Under the current global economic meltdown, an auditor is expected to take positive
steps to confirm that the client‟s company is still a going concern.
Required:
a. List TEN financial symptoms of going concern problems of an enterprise.
(5 Marks)
b. Outline the management‟s mitigation plans to ameliorate the financial threats
of going concern status of an enterprise. (5 Marks)
c. List TEN other (non-financial) symptoms that may raise problems about the
going concern status of an enterprise. (5 Marks)
(Total 15 Marks)
QUESTION 4
Write short notes on the following:
a. Database management system (DBMS) (3 Marks)
b. Operating system (3 Marks)
c. Utilities and service programs (3 Marks)
d. Translators (3 Marks)
e. Control programs (3 Marks)
(Total 15 Marks)
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 39
QUESTION 5
Auditing of computer information system should be piloted by trained information
systems auditors to prevent avoidable losses and calamities.
You are required to explain briefly:
a) The reasons for carrying out information systems audit. (5 Marks)
b) The auditor‟s role in Information Technology controls
implementation (5 Marks)
c) The Information Technology Application Controls. (5 Marks)
(Total 15 Marks)
QUESTION 6
A system of accounting will not succeed completely and accurately in processing all
transactions unless internal controls are built into the system.
You are required to state:
a) FIVE purposes of such internal controls. (5 Marks)
b) FIVE inherent limitations that may inhibit the achievement of the internal
control objectives. (5 Marks)
c) FIVE functions of the Board of Directors regarding the best practices expected in
Corporate Governance. (5 Marks)
(Total 15 Marks)
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 40
SOLUTIONS TO SECTON A
PART I MULTIPLE – CHOICE QUESTIONS
1. E
2. A
3. D
4. A
5. B
6. C
7. E
8. B
9. C
10. A
11. C
12 D
13 C
14 D
15 C
16 A
17 B
18 D
19 B
20 B
Tutorial
16. A is the correct option because all other options are subset of A.
EXAMINERS‟ REPORT
The requirements of the questions are various and they cover many areas of the
syllabus. All candidates attempted questions and recorded about 65% pass which is
an indication that they understood the requirements of the questions.
Candidates should put in more efforts with a view to improving their performance in
future.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 41
PART II SHORT ANSWER QUESTIONS
1. Related party
2. Planning Phase of the Audit
3. Pension Fund Custodians
4. Audit Trail
5. Litigation Support
6. Extraordinary items
7. Inherent Risk
8. Memorandum and Articles of Association/Partnership agreement/trust deed/
association‟s constitution
9. Stratification
10. Accounting and organisational controls
11. Risk evaluation
12. Database
13. Input Control
14. Financial statements
15. Central Bank of Nigeria
16. Prevail
17. Going concern
18. Management letter, Letter of weakness, Internal Control Memorandum,
Domestic Report, Letter of Recommendation, Constructive Service Letter
19. Vouching approach, Substantive approach
20. Relevance
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 42
Tutorials
16. The adoption of International Financial Reporting Standard (IFRS) will prevail
over the local standard.
EXAMINERS‟ REPORT
The requirements of the questions are various, covering many areas of the syllabus.
All candidates attempted the questions. The general performance level was about 55%
pass. There is, however, room for better performance.
SOLUTIONS TO SECTION B
QUESTION 1
a. A computer audit program is a software package which is also referred to as
enquiry and interrogation program. It is used for reading and interrogating
computer based files. This program enables a wide variety of information to be
extracted from computer files in a format significant for the purpose of the user. It
is necessary for details of the hardware, e.g. capacity of computer memory to be
taken into account as well as details of the layout of data fields used in the
master files prior to the utilization of the computer audit program.
b. In connection with the verification of assets, the computer audit program may be
used as follows:
(i) Debtors: Information can be extracted from debtors‟ files so as to provide
stratification according to size of amount, age, and balances which
exceed credit limits (“exception reporting”)
(ii) Stock: The computer audit program will provide an analysis of stock
according to age, materiality of individual items, items classified as
defective or obsolete and also stockholding and ordering status
(iii) Fixed Assets Register: Information can be extracted from this register to
give details of fixed assets movements during the current accounting
period, i.e. acquisitions and disposals. It will also highlight changes, if
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 43
any, in depreciation rates on individual plant and equipment and assets on
which no depreciation has been charged at all. It also includes basic data on
individual fixed assets.
c. Uses of Computer Audit Programs in the audit of a company include:
i. Selection of representative or randomly chosen transactions or items for
audit tests e.g. items number 30 and every 10th
item thereafter.
ii. Scrutiny of files and selection of exceptional items for examination e.g.
all wages payments over N1,000 or all stock lines worth more than
N100,000 in total.
iii. Comparison of two files and printing out differences e.g. payrolls at two
selected dates and periods.
iv. Preparation of exceptional reports e.g. overdue debts.
v. Stratification of data with a view to examining only material items e. g.
stock lines or debtors.
vi. Verifying data such as stock or fixed assets at the interim stage and
comparing the examined file with the year end file so that only changed
items need be examined at the final audit.
vii. Comparison of files at succeeding year ends to identify changes in the
composition of stock.
EXAMINERS‟ REPORT
The question is in three parts and its requirements are direct and straight to the point.
The candidates‟ attempt at the question was about 75%. Out of this percentage only
20% scored pass mark.
The major shortcoming is poor understanding of the requirements of the question
especially in parts (a) and (b). Candidates are advised to improve their studies on
computer and other IT applications.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 44
QUESTION 2
(a) The application of auditing standards to the audit of small companies managed
and owned substantially by the same people is a subject which the Auditing
Practices Committee is aware of.
A fundamental question in this context is whether the value derived from the
audit of such company is commensurate with the cost of carrying it out.
From the point of view of the proprietor there is clearly an advantage in having
accounts properly prepared but the additional advantage of having them
audited is marginal, unless there is a dire need to do so. The same applies to
the other shareholders who are usually small in number and closely connected
with the proprietor.
The creditors derive same benefits, but, since accounts are often filed many
months after a company‟s year end, those providing credit more often resort to
trade sources for more up-to-date information on the company‟s credit
worthiness.
(b) Some of the arguments in favour of abolishing audit requirements for small
companies are:
(i) Proprietors of such companies tend to require financial services (accounting
services, tax advice) from professional accountants, and regard the audit aspect
of the work as part of the price of incorporation, but of no added value.
(ii) Since the shareholders and directors are the same people, there is something
ludicrous about the spectacle of “directors” supplying information to the
auditors so that the latter is then in a position to report back to them (the
members).
(iii) There is no legal requirement for outside interests to be served by the auditor
and in any case, such outsiders make no contribution to the audit fee.
(iv) Many outside interests such as banks are well protected by personal guarantees
from directors and charges against company assets. They are, therefore, not
dependent on the audit for protection.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 45
(v) Creditors are able to make little use of the audit since the accounts and audit
report are filed many months after credit is given and such accounts, even if
fully understood, would provide little indication of the risks involved.
(vi) The cost of satisfying legal and regulatory requirements associated with the
audit and past audit process may be disproportional to any related value
derivable.
EXAMINERS‟ REPORT
The question is in two parts. Part (a) tests candidates‟ knowledge on the approach to
audit work for smaller companies as against that for large companies and the internal
control assessment technique to be used. Part (b) requires the candidates to state the
arguments in favour of abolishing audit requirements for smaller companies. Over
80% of the candidates attempted the question. The candidates misunderstood the
requirements of the question especially part (b) and this contributed to their poor
performance.
Candidates are advised to read and interpret questions very well before attempting
them.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 46
QUESTION 3
a. Financial symptoms of going concern problems include
i. Adverse or negative current ratio or trend;
ii. Dependence on short finance for long term needs;
iii. High gearing ratio;
iv. Dividends, tax and other statutory deductions in arrears;
v. Excess of stocks and debtors;
vi. Exceeding overdraft limits
vii. Recurring operating losses;
viii. Default on loan interest or principal repayment;
ix. Potential loss on long term contract;
x. Under capitalization particularly where there is deficiency of share
capital and reserves.
xi. Major rescheduling of debts
xii. Substantial sales of fixed assets not expected to be replaced
xiii. Denial of normal terms of trade credit by suppliers
b. The above symptoms can be mitigated by addressing alternative means of
generating adequate cashflow.
i. Disposal of assets without adversely affecting operations
ii. Postponing the replacement of assets without adversely affecting
operations;
iii. Lease assets rather than outright purchase
iv. Rolling over existing loan facilities
v. Rescheduling debts
vi. Additional capital by way of rights issue
c. Other symptoms that raise problems about going concern of an enterprise
include:
i. Loss of key management staff;
ii. Prolonged industrial action;
iii. Loss of key franchise or patent;
iv. Loss of principal supplier or customer;
v. Substantial dependence on one or certain project or product;
vi. Continuous use of obsolete machines;
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 47
vii. Natural disaster;
viii. Government legislations;
ix. Legal Disputes;
x. Ban on importation of relevant raw materials or major products.
EXAMINERS‟ REPORT
The question is in three parts, part (a) tests financial symptoms of going concern
problems, part (b) is on managements‟ mitigation plans and part (c) other symptoms
of going concern problems.
The question was attempted by about 90% of the candidates and about 40% of them
scored pass mark. The commonest pitfall was the inability of the candidates to
differentiate between financial symptoms and other (non-financial) symptoms.
Candidates are advised to understand the requirements of the questions before
attempting it.
QUESTION 4
(a) Database Management System (DBMS)
A database is an organized collection of structured data, stored with minimum
duplication of data items so as to provide a consistent and controlled pool of
data which is common to users of the system.
DBMS is a software system which constructs expands and maintains the data.
DBMS provides the following:
The interface between the user and the data in the base
Security for the data in the base
Protects data against unauthorized access
Safeguards data against corruption
Provides recovery and restart facilities after a hardware or software failure
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 48
(b) Operating System
This is a suite of programs which takes over the operations of the computer
without human intervention by an operator. The following are the functions of
the operating system:
Scheduling and loading of jobs to provide for continuous processing
Control over selection and operation of input/output devices and file
handling
Provision of complete record of all that happens during processing in form of
a log
(c) Utilities and Service Programs
These are system programs that provide useful service to the computer users by
providing facilities for performing common task of routine nature. These
programs include Sort Editor, File Copying, Dumping, File Maintenance etc.
(d) Translators
This is a program that converts written statements in one language into
statements in another language. There are three types of these programs,
namely: Assemblers, Compliers and Interpreters.
(e) Control Program
This is a program used by computer to monitor and control operations without
the need for continual intervention by the users.
EXAMINERS‟ REPORT
The question is in five parts and test candidates‟ knowledge in the area of computer-
based accounting systems.
About 60% of the candidates attempted the question and the percentage that passed
was above 20%.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 49
Candidates shied away from the question. Their lack of knowledge of this part is
“unpardonable”. Candidates are advised to consolidate their knowledge in this area
of the syllabus.
QUESTION 5
(a) Reasons for carrying out computer information system audit
The observable trend is that there are innumerable risks associated with
computerised business environment.
The auditor would ensure that adequate controls are instituted to mitigate the
innumerable risks associated with the computerised environment as analysed
below:
i. Prevention of data loss or other kinds of disasters with a view to
maintaining the integrity of data.
ii. Malicious destruction of electronic information
iii. Ensuring that valuable information is not stolen.
iv. Mitigating the risk of hacking by malicious agents.
v. Preventing espionage activities
vi. Ensuring that computer viruses and worms are curtailed.
vii. Preventing unauthorized access to information and data.
viii. Preventing computer fraud, abuse and privacy violations.
(b) Auditors‟ role in Information Technology controls implementation includes the
following:
(i) Serving as specialists in the Information Technology Strategy Committee,
to offer advice on matters concerning Information Technology controls.
(ii) Auditors should be members of Information Technology steering
committee as key advisors.
(iii) Auditors should ascertain the management framework for Information
Technology governance, e.g. Control Objective for Information
Technology (COBIT), Committee of Sponsoring Organisation (COSO).
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(iv) Auditors should get involved in the business plan development. The
strategic alignment need to make this imperative.
(v) Auditors should evaluate Information Technology business processes,
ensuring that the process fits with the organization‟s culture and
structure, and the management of risk effectively.
(c) Information Technology Application Controls are controls performed
automatically by the system. They include:
i. Completeness checks – controls that ensure all records are processed
from initiation to completion
ii. Validity checks – controls that ensure only valid data are input or
processed
iii. Identification – controls that ensure all users are uniquely and irrefutably
identified
iv. Authentication - controls that provide an authentication mechanism in
the application system
v. Authorisation – controls that ensure only approved business users have
access to the application system
vi. Problem management – controls that ensure all application systems are
recorded and managed in a timely manner
vii. Change management – controls that ensure all changes on production
environment are implemented with preserved data integrity.
viii. Input controls – controls that ensure integrity of data fed from upstream
sources into the application system.
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EXAMINERS‟ REPORT
The requirements of this question which is in three parts (a) to (c) relate to knowledge
of Information Technology in auditing. About 80% attempted the question but about
30% of them demonstrated understanding of the requirements of the question. Parts
(a) and (b) were poorly answered whereas they earn more marks in part (c) which was
correctly interpreted. The candidates‟ main undoing was lack of proper understanding
of the question. This area of the syllabus is treated in the ICAN Audit and Assurance
study pack. Candidates should endeavour to cover all the areas of the syllabus.
QUESTION 6
(a) The purposes of internal controls in a business environment includes ensuring
that:
(i) transactions are executed in accordance with proper, general or specific
authorization.
(ii) all transactions are promptly recorded at the correct amounts, in the
appropriate accounts and in the proper accounting periods, so as to
permit preparation of financial statements in accordance with relevant
legislations and applicable accounting standards.
(iii) access to assets are in accordance with proper authorization.
(iv) recorded physical assets are compared with the existing physical assets
at reasonable intervals and appropriate action taken to reconcile any
differences.
(v) policies decided on and adopted by management are consistently
followed by those responsible for implementing them.
(vi) expensive assets are properly secured and safeguarded to prevent misuse
and misappropriation.
(vii) errors and irregularities are avoided.
(b) The following limitations may inhibit the achievement of the internal control
objectives:
(i) The cost of an internal control is not disproportionate to the potential loss
which may result from its absence
(ii) Most systematic internal controls tend to be directed at routine
transactions rather than non-routine transactions
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(iii) The potential for human error due to carelessness, distraction, mistakes
of judgment and misunderstanding of instructions
(iv) The possibility of circumvention of internal controls through collusion
with parties outside or inside the entity
(v) The possibility that a person responsible for exercising authority on
internal control could abuse that responsibility, for example by
overriding internal control
(vi) The possibility that procedures may become inadequate due to changes
in conditions or that compliance with procedures may deteriorate over
time.
(vii) Pressure expected from within and outside the organization can
influence the integrity and competence of staff.
(c) Concerning Corporate Governance, the functions of the Board include:
(i) Strategic planning
(ii) Selection, performance appraisal and compensation of senior
executives.
(iii) Succession planning
(iv) Communication with shareholders
(v) Ensuring the integrity of financial controls and reports
(vi) Ensuring that ethical standards are maintained and that the company or
organization complies with the laws of the land.
EXAMINERS‟ REPORT
The question is in three parts (a) to (c).
Part (a) and (b) test candidates on internal controls while part (c) tests on Corporate
Governance.
About 80% of the candidates attempted the question and about 50% of them scored
pass mark.
The commonest pitfall in answering the question is substituting “internal auditor‟s
functions” for “purposes of internal control”. Candidates are advised to prepare
adequately for the examination.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 53
ICAN/102/P/2 EXAMINATION NO...................................
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
INTERMEDIATE EXAMINATION – NOVEMBER 2010
TAXATION
Time allowed – 3 hours
SECTION A: Attempt All Questions
PART I: MULTIPLE-CHOICE QUESTIONS (20 Marks)
1. What are the relevant years during which the right to elect by the tax payer is
exercised under commencement rules?
A. 1st
and 2nd
years of assessment
B. 1st
and 3rd
years of assessment
C. 1st
and 4th
years of assessment
D. 2nd
and 3rd
years of assessment
E. 3rd
and 4th
years of assessment.
2. What are the two types of loss reliefs?
A. Adjusted loss relief and company loss relief
B. Current year loss relief and permanent loss relief
C. Terminal loss relief and ultimate loss relief
D. Current year loss relief and last year loss relief
E. Current year loss relief and carry forward loss relief.
3. In which year of assessment can initial allowance be claimed?
A. 1st
year of assessment
B. 2nd
year of assessment
C. 3rd
year of assessment
D. 4th
year of assessment
E. All the years of assessment.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 54
4. Which is the relevant tax authority for unincorporated entities, individuals and
body of individuals?
A. Local Government Joint Revenue Committee
B. State Internal Revenue Service
C. Federal Inland Revenue Service
D. Federal Ministry of Finance
E. Joint State Revenue Committee.
5. What is the time limit for filing self assessment returns by corporate
organizations?
A. Six months before the accounting year -end
B. One year after the accounting year- end
C. One year before the accounting year- end
D. Six months after the accounting year -end
E. 3 months after the accounting year- end.
6. What is the time limit allowed for payment of undisputed tax liabilities from the
date of notice of assessment?
A. 60 days
B. 120 days
C. 180 days
D. 360 days
E. 90 days.
7. Which of the following does restriction on carry forward of losses apply?
A. Agricultural companies
B. Insurance companies
C. Individuals
D. Manufacturing companies
E. Trading organizations.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 55
8. What is the term used when the tax payer seeks to minimize his tax liabilities
within the tax law?
A. Tax allowance
B. Tax shifting
C. Tax avoidance
D. Tax incidence
E. Tax evasion.
9. In absolute referencing, $G10 means
A. that the row is absolute and the column is relative.
B. absolute reference to cell G10.
C. that the column is absolute while the row is relative.
D. that cell G10 could not be regarded as absolute.
E. that cell G10 could be varied.
10. Using an excel spreadsheet, what is the formula for calculating the monthly tax
payable by an employee, given the following information?
A B C
1 Taxable Income Annual Liability Monthly Deduction
2 232,564 40,141.00 3,345
A. A/B
B. =A+B-C
C. B/12
D. B2/12
E. =B2/12.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 56
11. If the calculated tax is lower than the statutory minimum tax, the difference is
A. subtracted from the Statutory minimum tax.
B. payable in addition to the calculated tax.
C. carried back to the first preceding taxable year.
D. carried back to the third preceding taxable year.
E. carried back to the 2nd
preceding taxable year.
12. “Child” in respect to settlements, trusts, and estates includes all the following
EXCEPT
A. step child.
B. adopted child.
C. illegitimate child.
D. own child.
E. brother.
13. A person appointed by a Will or Codicil of a deceased person to administer his
estate after his death is called ……….
A a trustee.
B a beneficiary.
C an investor.
D an administrator.
E an executor.
14. What is the time limit within which a tax payer must appeal after the
adjudication by a Commissioner for Stamp duties?
A. 7 days
B. 14 days
C. 21 days
D. 28 days
E. 30 days
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 57
15. Which of the following constitutes challenges to computer applications in
Taxation?
A. Low level IT literacy among revenue officials.
B. Cost of computer acquisition.
C. Resistance to change.
D. Computer fraud.
E. Speed and improved efficiency on the part of tax administrators.
16. Which of the following is the relevant tax authority responsible for withholding
tax relating to enterprises?
A. Federal Board of Inland Revenue
B. State Board of Internal Revenue
C. Federal Inland Revenue Service
D. Federal Inland Revenue Service Board
E. Joint Tax Board.
17. Which of the following does not suffer withholding tax?
A. Dividend
B. Rent
C. Salary
D. Fees
E. Contracts.
18. Duties charged on legal documents are called
A. excise duties.
B. instrument duties.
C. stamp duties.
D. input duties.
E. sharp duties.
19. Income derived from employment, business, profession or vocation is called
A. gross income.
B. earned income.
C. net income.
D. unearned income.
E. estimated income.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 58
20. The means by which the taxpayer seeks to minimize his tax liability through
legal acts is known as
A. tax allowance.
B. tax shifting.
C. tax avoidance.
D. tax evasion.
E. tax payment.
PART II: SHORT ANSWER QUESTIONS
1. Education tax is chargeable on ………………………
2. A person who receives or is entitled to receive benefits from an annuity under a
Settlement or Trust is -------------
3. Who is responsible for the day-to-day administration of the secretariat of the
Education Trust Fund?
4. When interacting with Spreadsheet, $AA$3 represents ………………reference.
5. The currency in which withholding tax is to be deducted and paid to the
relevant authority is the ………………….
6. What is the document required before a Qualifying Capital Ex penditure above
N500,000 is allowed by the relevant tax authority?
7. Who appoints members of the Education Tax Fund Board of Trustees?
8. In the year a partner resigns from a partnership, what is the basis of assessing
the remaining partners?
9. A computer simulation program that simulates a paper worksheet is
called……….
10. It is a general rule that ad valorem duty is not paid more than ……
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 59
11. Education tax payable by a limited liability company for any year of assessment
is based on ……………………
12. What type of assessment will a tax authority raise if a business produces
assessable income lower than reasonable income from that business?
13. Tax payer‟s right of election on commencement of business
covers………………..
14. Assessable profit less capital allowances is regarded as………………..
15. The system of collecting personal income tax due on employment income
including pensions is called …………………….
16. Dividend received by a company after deduction of withholding tax is
called…………..
17. Who presides over the Joint Tax Board?
18. When a taxpayer arranges his business activities/affairs in a manner that
enables him pay a lower tax, other than tax avoidance is referred to
as………………
19. Who settles complaints and conflicts between States‟ Tax Authorities?
20. What is the basis of assessing employment income?
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 60
SECTION B: ATTEMPT ANY FOUR QUESTIONS
QUESTION 1
Samuel, Bako and Chukwu have been trading for many years under the name of SBC &
Co, sharing profits and losses in the ratio 2:2:3 respectively. From its records, you
ascertained that the firm recorded adjusted loss of N630,000 for the year ended 31
December 2002.
You are provided with the following information:
Samuel
N
Bako
N
Chukwu
N
Salaries 210,000 240,000 450,000
Interest on capital 36,000 48,000 36,000
Bonus 18,000 12,000 30,000
Depreciation for the year was N340,000.
Additional information:
(i) Samuel has a life policy on himself with a capital sum of N480,000 and annual
premium of N4,800.
(ii) Bako is unmarried while Chukwu has two children, aged 9 and 11 years.
(iii) Samuel received N150,000 as gratuity from his former employment in public
service.
(iv) Samuel is married with five children and two dependant relatives. He spends
N3,000 annually on the dependant relatives.
Required
(a) Compute each partner‟s assessable income. (7 marks)
(b) Compute Samuel‟s income tax for the relevant year of assessment. (8 marks)
(Total 15 marks)
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QUESTION 2
(a) Zeem Limited is a manufacturing company which commenced business on
1 June 2003 the adjusted profits for the relevant years of assessment are as
follows:
N
Period ended 31/12/2003 21,000
Year ended 31/12/2004 72,000
Year ended 31/12/2005 54,000
Year ended 31/12/2006 28,800
Required:
Assuming the company took advantage of the option open to it to minimize its tax
liability, compute the assessable profits for all relevant years of assessment.
(8 marks)
(b) Abdulahi Nigeria Limited had been preparing its accounts to 30
June every year
until year 2000 when a decision was taken that accounts for 6 months should
be prepared to 31 December 2000 and thereafter, yearly.
Adjusted Profits
N
Year ended 30 June 2000 240,000
Period ended 31 December 2000 180,000
Year ended 31 December 2001 280,000
Year ended 31 December 2002 320,000
You are required to compute the assessments for the relevant years of
assessment. (7 marks)
(Total 15 marks)
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 62
QUESTION 3
Mr. James makes up his accounts to 30 September every year. Below is the account for
the year ended 30 September 2008:
N N
Gross Profit 455,000
Less: Rent 26,000
Bad debts 18,000
Repairs to Building 3,000
Donations 5,000
Preliminary expenses 3,000
Legal and Professional fees 6,000
Loss on disposal of vehicle 3,000
Depreciation 8,000
Other allowable expenses 150,000 (222,000)
Net Profit N233,000
You are provided with the following information:
(i) The gross profit included N165,000 which was a profit on sale of fixed assets.
(ii) Donations include purchase of new furniture of N1,300 donated to the Irawo
Social Club.
(iii) Legal and professional fees comprise of: N
Renewal of Short term lease 1,200
Renewal of Long lease 3,000
Cost of Tax Appeal 1,800
(iv) Bad debt included a general provision for bad and doubtful debts of N7,500
Required:
(a) Compute the adjusted profit for the relevant year of assessment (7Marks)
(b) Write short notes on:
(i) Badges of trade; and (4 Marks)
(ii) Foreign employment (4 Marks)
(Total 15 Marks)
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 63
QUESTION 4
(a) Creating a „View‟ in Microsoft Excel Spreadsheet will enable the user to view
only the rows and columns that are relevant to the user. You are the Tax
Consultant of Eko Limited and have just prepared the P.A.Y.E. of the company.
Explain the steps necessary to:
(i) Create a general “View” that contains only specific rows and columns
(5 Marks)
(ii) Create a specific “View” of the file (5 Marks)
(b.) State any FIVE contents/particulars of Notice of Appeal to a Tax Appeal Tribunal
(5 Marks)
(Total 15 Marks)
QUESTION 5
(a) In the preparation of your tax report with Excel Spreadsheet, you are required
to:
(i) Explain a worksheet; (3 Marks)
(ii) List and explain FOUR characteristics of formatting (4 Marks)
(b) XYZ BANK PLC has been trading for many years. As part of its income for the
year ended 31 December 2008, the interest on Agricultural Loan, included in
the accounts, amounted to N15million. The breakdown of the interest income
based on the terms of the loan is as stated hereunder:
Repayment Period Moratorium Period Interest Rate Loan Interest
N
5 years 24 months 15% 7,500,000
3 years 18 months 18% 2,400,000
2 years 18 months 14% 2,100,000
3 years 18 months 35% 3,000,000
15,000,000
Base lending rate is 18%.
You are required to compute the interest rate exempted from tax (8 Marks)
(Total 15 Marks)
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 64
QUESTION 6
SOULINE Company Limited engaged you as its tax Consultant with the mandate of
ensuring computation of its tax liabilities and prompt remittance of same.
The company needed your advice on payment of VAT. The following are the figures
relating to transactions for the month of February 2010
N
Purchase of Plant 700,000
Purchase of Trucks 400,000
Purchase of Excavator 1,500,000
Bought chipping materials 60,000
Bought loads of cement 80,000
Bought loads of sand 50,000
Part payment received 2,900,000
Additional payment received 1,600,000
You were informed that the company paid VAT on its purchases or bought items.
Required:
(a) Compute the VAT payable for the month of February 2010. (10 Marks)
(b) When must the VAT due be paid to the tax office? (10 Marks)
(Total 15 Marks)
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 65
TAX RATES
1. CAPITAL ALLOWANCES
Initial % Annual %
Office Equipment 50 25
Motor Vehicles 50 25
Office Building 15 10
Furniture & Fittings 25 20
Industrial Building 15 10
Non-Industrial Building 15 10
Plant and Machinery – Agricultural
Production 95 NIL
– Others 50 25
2. INVESTMENT ALLOWANCE 10%
3. TAX – FREE ALLOWANCE:
Maximum Per Year
N
Rent 150,000
Transport 20,000
Utility 10,000
Meal Subsidy 5,000
Entertainment 6,000
Leave 10% of Annual Basic Salary
4. PERSONAL INCOME TAX RELIEFS / ALLOWANCES
(a) Personal Allowance – N5,000 plus 20% of Earned Income
(b) Children Allowance – N2,500 per annum per unmarried child
subject to a maximum of four children.
(c) Dependent Relative – N2,000 each
(d) Disabled Persons – N5,000 or 10% of Earned Income (which
ever is higher)
(e) Life Assurance – Actual Premium paid
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 66
5. RATES OF PERSONAL INCOME TAX:
Taxable Income Rate of Tax
N %
First 30,000 5
Next 30,000 10
Next 50,000 15
Next 50,000 20
Over 160,000 25
Note: Annual income of N30,000 and below is exempted from tax but a
minimum tax of 0.5% will be charged on the total income.
6. COMPANIES INCOME TAX RATE 30%
7. EDUCATION TAX 2%
8. CAPITAL GAINS TAX 10%
9. VALUE ADDED TAX 5%
10. WITHHOLDING TAXES
Type of payment Rates Rates
(Companies) (Non- corporate)
Dividend, Interest, Rent 10% 10%
Royalties 15% 15%
Contract supplies 5% 5%
Building construction activities 5% 5%
Consultancy/Professional services 10% 5%
Management services 10% 5%
Commissions 10% 5%
Technical services 10% 5%
Directors fees 10% 10%
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 67
SOLUTIONS TO SECTION A
PART I: MULTIPLE-CHOICE QUESTIONS
1. D
2. E
3. A
4. B
5. D
6. A
7. B
8. C
9. C
10. E
11. B
12. E
13. E
14. C
15. E
16. B
17. C
18. C
19. B
20. C
EXAMINERS‟ REPORT
The questions test various aspects of the Syllabus.
Almost all the candidates attempted the questions and performance was good.
Candidates are advised to cover the entire Syllabus to be able to perform better
in future.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 68
PART II: SHORT-ANSWER QUESTIONS
1. an assessable profit
2. annuitant.
3. Executive Secretary of Education Trust Fund
4. absolute cell
5. currency of the transaction
6. Acceptance Certificate from the Inspectorate division of the Federal
Ministry of Industries
7. President and Commander in Chief of the Armed Forces
8. preceding year basis, (if in writing to the relevant tax authority) otherwise,
cessation rule will apply
9. spreadsheet
10. once
11. assessable profit
12. Turnover assessment
13. 2nd
and 3rd
years of assessment
14. total profit
15. Pay As You Earn (PAYE) system
16. Franked Investment Income
17. The chairman of the Federal Inland Revenue Service Board
18. tax evasion
19. The Joint Tax Board
20. Actual year basis
EXAMINERS‟ REPORT
The questions test various aspects of the Syllabus.
Almost all the candidates attempted the questions and performance was good.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 69
SOLUTIONS TO SECTION B
QUESTION 1
(a) SAMUEL, BAKO & CHUKWU (SBC & CO)
COMPUTATION OF ASSESSABLE INCOME OF EACH PARTNER
SAMUEL BAKO CHUKWU TOTAL
N N N N
Salaries 210,000 240,000 50,000 900,000
Interest on capital 36,000 48,000 36,000 120,000
Bonus 18,000 12,000 30,000 60,000
264,000 300,000 516,000 1 ,080,000
Share of adjusted
Profit/(loss ) (82,629) (82,629) (123,942) (289,200)
Assessable Income of 181,371 217,371 392,058 790,800
each partner
(b) COMPUTATION OF SAMUEL‟S INCOME TAX LIABILITY FOR 2003 ASSESSMENT
YEAR
N N
Assessable/Earned income 181,371
Less: Reliefs
Personal allowance (N5,000 + 20% x N181,371) 41,274
Children allowance (N2500 x 4) 10,000
Dependant relative (N2000 x 2) 4,000
Life assurance 4,800 (60,074)
N121,297
Income Tax Payable: N
1st N 30,000 @ 5% - 1,500.00
Next N30,000 @ 10% - 3,000.00
Next N50,000 @ 15% 7,500.00
Next N11,297 @ 20% 2,259.40
N121,297
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 70
Income tax payable 14,259.40
Note: Gratuity of Samuel from public office is exempted from tax.
Computation of Adjusted Loss:
N
Loss per accounts 630,000
Less: Depreciation 340,800
Adjusted Loss 289,200
EXAMINERS‟ REPORT
The question tests candidates‟ understanding of the assessment of partnership income.
Most candidates demonstrated a good understanding of the question and their
performance was good.
Candidates‟ commonest pitfall was their inability to separate the answers to (a) and
(b). This is because they are used to arriving at the assessment of partners under a
single procedure.
Candidates are advised to learn to separate different answers for different questions.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 71
QUESTION 2
(a) ZEEM LIMITED
COMPUTATION OF ASSESSABLE PROFITS ON COMMENCEMENT OF BUSINESS
Without Tax Payers‟ Election With Tax Payers‟ Election
Assessment Assessable
Assessable
Years Basis Period Profit Basis Period Profit
N N
2003 1/6/03-31/12/03 21,000 1/6/03-31/12/03 21,000
2004 1/6/03-31/5/04 51,000 1/1/04-31/12/04 72,000
(N21,000+ 5/12X 72,000)
2005 1/1/04 -31/12/04 72,000 1/1/05-31/12/05 54,000
123,000 126,000
2006 1/1/05-31/12/05 54,000 1/1/05-31/12/05 54,000
2007 1/1/06-31/12/06 28,800 1/1/06-31/12/06 28,800
Recommendation: The tax payer should not exercise his right of election to be
assessed on actual basis for the 2nd
and 3rd
years of assessment, because it will
produce a higher tax liability.
(b) ABDULAHI NIGERIA LIMITED
COMPUTATION OF ASSESSABLE PROFITS FOR THE RELEVANT YEARS (Based on
Old Accounting Period)
Year of Basis Period Assessable Profit
Assessment N
2001 1/7/1999-30/6/2000 240,000
2002 1/7/2000-30/6/2001
(N180,000+N140,000) 320,000
2003 1/7/2001-30/6/2002
(N140,000+N160,000) 300,000
860,000
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 72
Based on the New Accounting date
Year of Basis Period Assessable Profit
Assessment N
2001 1/1/2000-31/12/2000
(1/2xN240,000+N180,000) 300,000
2002 1/1/2001-31/12/2001 280,000
2003 1/1/2002-31/12/2002 320,000
900.000
Conclusion: Since the assessment based on new accounting date is higher than
the old accounting date, the final assessment will be N 900,000.
EXAMINERS‟ REPORT
The question tests candidates‟ knowledge of “Commencement” rules and their ability
to take a decision based on the options available to tax payers.
Candidates demonstrated a good understanding of the question and their performance
was fair.
The commonest pitfall of some candidates is their inability to assign correctly “basis
periods” to relevant years of assessment.
Candidates are advised to learn how to assign correctly “basis periods” to relevant
years of assessment and also how to apportion profits when they fall into more than
one basis period.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 73
QUESTION 3
MR JAMES
(a) COMPUTATION OF ADJUSTED PROFIT FOR 2009 YEAR OF ASSESSMENT
N N
Net Profit 233,000
Add: Disallowable Expenses
Preliminary expenses 3,000
Loss on disposal of vehicle 3,000
Depreciation 8,000
Donation: Purchase of furniture 1,300
Legal and Professional fees: Renewal of long lease 3,000
Cost of tax appeal 1,800 4,800
Bad Debts: General Provision 7,500 27,600
260,600
Less: Non-taxable income
Profit on sale of fixed assets (165,000)
ADJUSTED PROFIT N95,600
(b)ii) Badges of Trade
The question as to which activity constitutes a trade or business for the purpose
of subjecting the profit there from to tax has been a matter of judicial
controversy over the years.
The question was settled by case laws which laid down the tests against which
a particular activity is measured in order to determine whether or not a trade
has indeed been carried on.
The tests referred to as to what constitutes “Badges of trade” are:
Subjects – matter of the transactions;
Frequency of transactions;
Supplementary work;
Profit motive; and
Reason for sale.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 74
All the above principles will not be considered by the courts in deciding whether
an activity constitutes a trade or not as was done in the case of Arbiz limited v
Federal Inland Revenue Service.
(ii) Foreign employment
“Foreign employment” means an employment the duties of which are wholly
performed outside Nigeria, save during any temporary visit of the employee to
Nigeria.
An individual who holds a foreign employment on the first day of January in a
year of assessment, who first becomes liable to income tax in Nigeria for that year
by reason of his entering that employment during that year, shall be deemed to be
resident for that year in the territory in which the principal office of his
employment is situated on that day, or on the day his foreign employment
commences, as the case may be.
EXAMINERS‟ REPORT
The question tests the candidates‟ ability to compute the assessment of individual tax
payers.
Many candidates attempted the question and demonstrated a good understanding of
it with the exception of foreign income where the performance was poor.
The commonest pitfall was the inability of candidates to present the solution in a flow.
Candidates are advised to learn presentations of the assessment of individuals.
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QUESTION 4
(a)i The Steps to create a general View in Microsoft excel are:
-Click on custom view option,
-Click on View menu, and
-Click on the add button to create a view
-Click ok button
ii Steps required to create a specific view are:
-Change the settings that you want to save in the view.
-Click custom view
- Type the name for the view
-Select the option you want
- Click ok button
(b) CONTENTS OF NOTICE OF APPEAL
i) Assessment notice number and relevant year of a assessment.
ii) Amount of tax charged by the assessment.
iii) Amount of total profit on which the tax is charged as shown in the notice
of assessment.
iv) Date appellant was served notice of refusal to amend the assessment by
the FIRS.
v) Precise grounds of appeal which should be limited to those contained in
the tax payer‟s notice of objection to FIRS.
vi) Address for service of any notice, precepts or other documents by the
Secretary of the tribunal.
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EXAMINERS‟ REPORT
Part (a) of the question tests candidates‟ knowledge of the use of Microsoft Excel
Spreadsheet, while part (b) tests candidates‟ knowledge of the contents of Notice of
Appeal.
Most candidates attempted the question and performance was very poor in part (a)
but good in part (b).
Candidates‟ commonest pitfall was the inability to understand the use of Microsoft
Excel Spreadsheet.
Candidates are advised to pay attention to areas of information contained in the
Syllabus.
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QUESTION 5
(a) (i) Formatting is an act of applying commands to text, numbers and
graphics in order to transform them to a more visually attractive state.
(ii) Formatting characteristics are:
Font types
Font sizes
Font colour
Bolding
Italicizing
Underlining
Adding border
Shading
Alignment
(b) XYZ BANK PLC
Moratorium Interest Rate Agric Loan Interest Interest Exempted
N N
i) 24 months 15% 7,500,000 7,500,000
ii) 18 months 18% 2,400,000 2,400,000
iii) 18 months 14% 2,100,000 2,100,000
iv) 18 months 35% 3,000,000 NIL
Total interest exempted N12,000,000
Note: The loan Interest of N3,000,000 is disallowed because the interest rate
has exceeded the base rate of 18%.
EXAMINERS‟ REPORT
Part (a) of the question tests candidates‟ understanding of the use of Worksheet and
characteristics of formatting, while part (b) tests the candidates understanding of the
taxation of agricultural loan interest.
Most of the candidates attempted the question and performance was poor in part (a)
but fair in part (b).
Candidates‟ commonest pitfall was their inadequate understanding of the two areas
covered by the question.
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Candidates are advised to pay attention to these areas in future examinations.
QUESTION 6
SOULINE COMPANY LIMITED
COMPUTATION OF VALUE ADDED TAX PAYABLE FOR 2010 ASSESSMENT YEAR
N N
INCOME
Part payment received 2,900,000
Additional payment received 1,600,000 4,500,000
Output VAT on income received @5%
(N4,500,000 X 5%)
225,000
DIRECT EXPENSES:
Bought chipping materials 60,000
Bought load of cement 80,000
Bought load of sand 50,000 190,000
Input VAT on direct expenses @5%
(N190,000 x 5%) N9,500
NET VAT PAYABLE = 225,000 – 9,500
= N215,000
b. The VAT computed must be paid on or before the 21st
day of the
month following that in which the supply or purchase was
made.
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c. Tax invoices contain the following information:
i. Tax payer‟s Identification Number(TIN)
ii. Name, address and VAT registration number
iii. Customer‟s name and address
iv. Type of supply
v. A description of the goods and services supplied
vi. Quality of the goods and services supplied
vii. The rate of VAT
viii The rate of any cash discount offered
ix. The total VAT payable
Note: VAT on fixed assets bought are not to be remitted but
capitalized. Input VAT N2,100,000 will not be remitted.
EXAMINERS‟ REPORT
The question tests candidates‟ knowledge of the provisions of the Value Added Tax
Law.
Candidates demonstrated a good knowledge of the question but could not distinguish
between Invoice Value and Payment Received. The performance of the candidates
who attempted the question was good.
The commonest pitfall is the inability of the candidates to know that VAT on fixed asset
is to be capitalized.
Candidates are advised to study the VAT Act and also practice the computation of VAT.
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INTERMEDIATE EXAMINATION - NOVEMBER 2010 80
ICAN/102/P/4 EXAMINATION NO.................
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
INTERMEDIATE EXAMINATION-NOVEMBER 2010
BUSINESS COMMUNICATION AND RESEARCH METHODOLOGY
Time allowed-3 hours
SECTION A: Attempt all questions
PART I: MULTIPLE CHOICE QUESTIONS (20 Marks)
1. The middle value in a set of numbers arranged in order of size is identified by
A. mean.
B. median.
C. mode.
D. geometric mean.
E. harmonic mean.
2. Which of the following is a single value computed from sample data that is used
to estimate a population parameter?
A. Interval estimate.
B. Point estimate.
C. Confidence interval.
D. Confidence level.
E. Sample.
3. The sampling technique that does not guarantee randomness in the selection of
items of any sort from a study population is referred to as
A. judgement sampling.
B. stratified sampling.
C. simple random sampling.
D. systematic sampling.
E. cluster sampling.
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4. The following are stages of the communication process EXCEPT
A. Source.
B. Encoding.
C. Message.
D. Modeling.
E. Channel.
5. The method of delivering a speech off hand is
A. impromptu.
B. outline.
C. memorized.
D. blank.
E. prompt.
6. The technique used to take decisions about a population, using sample is called
A. Descriptive statistics.
B. Inferential statistics.
C. Computational statistics.
D. Essential statistics.
E. Efficient statistics.
7. The page that displays the result of data analysis on Statistical Package for
Social Sciences (SPSS) viewer is
A. string.
B. output.
C. crosstab.
D. case production.
E. help.
8. Which of the following is used to describe the effect of taking decision about the
worth of an object information?
A. Testing.
B. Evaluation.
C. Measurement.
D. Validation.
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E. Assessment.
9. All research designs do all of the following EXCEPT
A. Specifying type of data to collect.
B. Revealing confidence level.
C. Serving as a frame work.
D. Identifying population of study.
E. Serving as a blue print.
10. Which of the following cannot affect the validity of an interview?
A. Perceptual difficulty.
B. Language.
C. Cultural distortion.
D. Halo effect.
E. Inaccurate judgement.
11. A perfect negative correlation is represented by a correlation coefficient of
A. 0.00
B. 1.00
C. -1.00
D. -0.50
E. -0.25
12. Which of these Microsoft packages can be used to determine the coefficient of
variation of a given variable?
A. Info-path.
B. Power point.
C. Network.
D. Webcam.
E. Excel.
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13. Which one of these concepts illustrates the process of selecting a small number
of items for the purpose of estimating the behaviour of the entire items?
A. Sampling.
B. Sample.
C. Sampling frame.
D. Census.
E. Testing.
14. Select one of the following concepts that does not describe reliability
A. Accuracy.
B. Stability.
C. Variability.
D. Consistency.
E. Dependability.
15. Which of these types of measurement scales can a researcher use to determine
the difference between 16o
C to 17o
C and 10o
C to 11o
C reading on a
thermometer?
A. Interval scale.
B. Ratio scale.
C. Nominal scale.
D. Ordinal scale.
E. Reliability scale.
16. The statistical technique that is used to predict a respondent‟s score of one
variable on the basis of his scores on several other variables is called
A. split-half.
B. Cronbach alpha.
C. Rank Order Correlation Coefficient.
D. Regression.
E. Coefficient of Skewness.
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17. Some students in the school doubt the English teacher‟s competence. The
underlined expression is a
A. statement.
B. clause.
C. phrase.
D. part of speech.
E. predicate.
18. Which of these depicts a report in a specialised field?
A. Regular report.
B. Progress report.
C. Analytic report.
D. Technical report.
E. Informational report.
19. The following is untrue in a negatively skewed distribution EXCEPT
A. The mean is smaller than the median.
B. The mean is larger than the median.
C. The mean and median are equal.
D. The median and the mode are equal.
E. The mean is equal to variance.
20. Which one of these concepts links range, mean deviation, variance and
standard deviation?
A. Measure of degree of variability.
B. Measure of highest value.
C. Measure of class interval.
D. Measure of validity.
E. Normal distribution.
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PART II SHORT-QUESTIONS ANSWER (20 MARKS)
1. The variable which value or behaviour cannot be determined by the variable(s)
specified in a given relationship is called…………………..
2. Electronic libraries can be easily accessed through the …………………
3. A sample with the same characteristics as the population is called………….
4. In a progress research report, the part of its component that tells about the
entire activities in brief is the ……………………..
5. The sending of messages to distant but defined receiver is called…………..
6. The statistical measure that is dependent on two extreme scores in the
distribution is known as ……………………….
7. Establishing relationship between variables will require …………research
8. The aspect of a research report that gives a brief description of the entire study
is ...…….
9. The measuring scale that is regarded as the simplest and lowest level of
measurement is called ................
10. A variable that determines the value of another variable in a given relationship
is called ....……….
11. The sampling technique where a researcher selects his items at a regular
interval from a sampling frame is ...................
12. A researcher was interested in studying why the “old Accounting system” of the
1960s failed. Some members of ICAN who used the old Accounting system
during the 1960s were interviewed. These accountants are considered as
.............
13. A rule of grammar showing agreement in number, gender or person is................
14. A study population where some items cannot be easily accessed is referred to
as ........... population.
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15. The statistic that divides data set into two equal parts is ...............
16. A variable that assumes whole numbers is ...............
17. Two types of current electronic statistical packages used by research analysts
are ................. and ...................
18. Inferences on the situation in a technical report would be presented in the
................
19. A summary of a report extracted for the management of the organization is
........................
20. The part of the report in which a sample of the questionnaire used to gather
data is usually included under……………….
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SECTION B ATTEMPT ANY FOUR QUESTIONS (60 marks)
QUESTION 1
Discuss briefly any five factors that promote the flow of information in the grapevine
channel. (15 marks)
QUESTION 2
Discuss briefly five principles of effective communication. (15marks)
QUESTION 3
(a) What is sampling frame? (2 marks)
(b) Itemise the three processes involved in simple random sampling.
(3marks)
(c) Distinguish between the following sets of sampling methods:
i. Systematic and Stratified Random Sampling. (5 marks)
ii. Cluster and Quota Sampling. (5 marks)
(Total: 15 marks)
QUESTION 4
(a) Write briefly on the following sampling techniques:
(a) Stratified Sampling. (5 marks)
(b) Simple Random Sampling. (5 marks)
(c) Systematic Sampling. (5 marks)
(Total: 15 marks)
QUESTION 5
(a) Define Literature Review. (3 marks)
(b) Discuss briefly any four reasons why a researcher must carry out
Literature Review. (12 marks)
(Total: 15 marks)
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QUESTION 6
A survey on the sources of drinking water conducted among 450 dwellers in
Damaturu town revealed the following result:
You are required to
a. find the expected frequencies corresponding to the observed frequencies.
(7marks)
b. use a suitable statistical technique to test the hypothesis that the source of
drinking water is independent of the status of the dwellers at 5% level of
significance. (8 marks)
(Total: 15 marks)
Educational
Background Total
Source Literate Illiterate
Bore-hole 110 145 255
Pipe-Borne 90 105 195
Total 200 250 450
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SOLUTIONS TO SECTION A
PART I MULTIPLE – CHOICE QUESTIONS
1. B
2. B
3. A
4. D
5. A
6. B
7. B
8. C
9. B
10. A
11. C
12. E
13. A
14. C
15. A
16. D
17. C
18. D
19. A
20. A
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EXAMINERS‟ REPORT
The questions test all sections of the topics as covered in the syllabus: that is
Communication, Research Methodology and Statistics in relation to accounting
procedures. This part of the question paper is attempted by all candidates.
About 75% of the candidates scored above average.
The commonest pitfall was the candidates‟ inability to choose the appropriate option
from the given options.
It is recommended that candidates study in such a way as to understand the concepts
and technical words in all topics. In addition, candidates should work through past
question papers and access good books on the relevant subjects.
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PART II SHORT-ANSWER QUESTIONS
1. exogenous variable
2. internet
3. representative sample/unbiased sample.
4. executive summary
5. broadcasting
6. range
7. correlation
8. abstract
9. Nominal scale
10. independent variable/explanatory/predictor
11. systematic sampling
12. primary sources/respondents/interviewees
13. concord
14. infinite
15. median
16. discrete
17. SPSS/ EPI-Info/SAS/EXCEL/E-VIEW/MINITAB
18. conclusion
19. executive brief
20. appendix
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EXAMINERS‟ REPORT
The questions test all sections of the topics as covered in the syllabus, that is
Communication, Research Methodology and Statistics in relation to accounting
procedures. This part of the question paper is attempted by all candidates.
About 60% of the candidates scored below average of the allotted marks.
The commonest pitfalls were in the candidates‟ inability to understand the concepts
tested and also their inability to relate such concepts to applicative scenarios.
It is recommended that candidates pay special attention to in-depth applications of
concepts.
They should use updated study/learning materials. They could also involve themselves
in students‟ group study irrespective of status.
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SOLUTION TO SECTION B
QUESTION 1
i. Ego: It is believed that information is power. People who have important and
secret information at their disposal want to make it known that they have such
material. This is because they feel it confers a level of importance on them.\
ii. Unusual access to privileged information: Some workers by virtue of their
position and job schedules get information that they do not usually handle.
They are then able to access information before it is released into the work
environment. Having come into possession of this information, they then share
with people who are close to them. Also, when sensitive and important issues
like promotions are being handled, people who are handling them usually feel
a sense of excitement and share the information.
iii. Insecurity and conflicts: Situations, such as retrenchment, rationalization, and
downsizing in a place of work, when they are well advertised and anticipated,
tend to generate a lot of anxiety and fear. In this situation of anxiety, fear and
speculation about what would and what would not happen become the order of
the day.
iv. Relationships and allegiances: People whose friends and relations are affected
by an important but secret decision usually feel they have a sense of
responsibility to communicate such information to them.
v. Informal interactions: Informal interactions have a way of instigating people to
chat freely and in that type of circumstance and scenario, sensitive and secret
information may be communicated. The material for communication in the
grapevine channel would have been provided through this medium.
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vi. Information hoarding: In situations where information hoarding is rampant,
workers who may be affected by withheld information would do anything to get
information and where this proves difficult, speculation and rumour take over.
Even where workers get authentic information, this would be largely
embellished to satisfy the yearnings and hunger of the information seekers.
vii. Problems in the formal channel: Where the formal channel is not operating
optimally, a number of developments occur, which may stimulate the flow in
the grapevine channel. Unjust and slow handling of complaints and issues may
give an impetus to the informal channel to react to information on such matters.
EXAMINERS‟ REPORT
This question tests candidates‟ understanding of the factors that promote /aid the flow
of grapevine information in an organisation. Less than 20% of the candidates
attempted this question. Of this percentage, more than 50% of them scored below
average.
Candidates‟ commonest pitfall is lack of idea on the topic tested; candidates have no
understanding of the concept of grapevine, that is, informal communication mode and
as such could not apply it to organisation‟s scenarios.
It is recommended that candidates should read current books on informal
communication in order to apply these concepts to life situation.
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QUESTION 2
The principles of effective communication are also known as the 7Cs of
communication. These principles are: Conciseness, Concreteness, Correctness, Courtesy,
Clarity, Completeness and Consideration. They are explained below:
(i) Conciseness: Communication should contain essential information. It should
not be made unnecessarily long. Every item in any piece of communication
must be necessary and useful.
(ii) Concreteness: Communication should be vivid, lucid and convincing. It should
not be abstract. It must be easily identifiable and its meaning must be without
ambiguity and derived without ambiguity and vagueness.
(iii) Correctness: Communication should be correct. It should not contain errors; it
should not be misleading. When information is accurate and correct it can be
properly applied to achieve the desired result.
(iv) Courtesy: It is important to be polite and civil to others in any situation. Enough
recognition and respect should be accorded the receiver of any communication.
He should not be treated in just any way but should be treated with dignity and
respect.
(v) Clarity: Communication needs to be clearly conceived and encoded or
composed. The intentions of the communicator should be very clear. Equally,
the message should not be complex. It should not be difficult to understand
and should be distinct. The message should be clear.
(vi) Completeness: Communication should be complete. It should contain all the
components needed to convey the necessary information. Information
communicated in part would not produce the desired effect. It is, therefore,
desirable that all information be completed wholly.
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(vii) Consideration: Communication needs to be handled with sensitivity to the
feelings of others. This would affect the choice of message and the manner of
communicating the message because the information is not the only thing to be
considered in communication. The manner of communication is as important as
the message. One then has to consider the situation the receiver is in and how
the message would be received.
EXAMINERS‟ REPORT
The question tests candidates‟ understanding of the principles of effective
communication. More than 50% of the candidates attempted the question.
About 75% of them scored above 50% of the marks obtainable.
The commonest pitfall identified is that candidates made irrelevant points on the
process and channels of communication. A number of them could not explain the
principles though they could identify them.
It is recommended that the candidates should be exposed to extensive reading and
writing skills. Also, candidates should read various academic texts on the concept and
develop a good perception of reading culture.
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QUESTION 3
a. Sampling frame is the list of elements from which the sample is drawn. It is
referred to as the working universe or non-theoretical population.
b. The steps included in simple random sampling are:
i. Defining population sets;
ii. Numbering cases in the sampling frame;
iii. Selecting sample case using any random sampling method and /or statistical
random table.
c.i
Systematic Random Sampling Stratified Random Sampling
Selection of sample is at regular
intervals.
Sample is divided into two or more
significant strata.
Selection is not determined by any
attribute except that based on study.
Selection is determined by common
attribute of population type.
A sampling fraction is used to
determine the frequency of selection.
Sample fraction is the ratio of actual
fraction and total population.
Simple random sampling method is
used to select sample.
It is sometimes considered as non-
representative and the result cannot
be applied to all members of the
population.
The method is said to be
representative enough because the
strata contains all members of the
population.
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c ii.
Cluster Sampling Quota Sampling
It is a probability sampling method. It is a non-probability sampling
method.
Population is divided into discrete
groups.
Population sample is entirely based
on representative variability.
Population representativeness may
be high
Population representativeness is low.
It is used basically for descriptive
study.
It is used for survey study like
interview.
EXAMINERS‟ REPORT
The question tests Sampling and Sampling Procedures. Candidates were to itemise
processes of Simple Random Sampling and state the differences between Probability
and Non-probability Sampling procedures.
About 80% of the candidates attempted this question. More than 50% of this
percentage scored above average.
The major pitfall identified in this question is candidates‟ inability to recognise that
questions C (i) & (ii) are examples of differences between probability and non-
probability sampling methods; thus, finding it difficult to list enough differences to
earn them good mark.
It is recommended that candidates make use of the study pack provided by the
Institute so as to be acquainted with the required techniques for the examination.
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QUESTION 4
(a) Stratified Sampling
This is a sampling technique where study population is divided into groups with
homogenous features. The relevant sub-samples are thereafter selected within
each group or stratum using simple random techniques. The sample drawn
from each group must be proportional to the size of group in the study
population.
(b) Simple Random Sampling
This is the sampling technique where every sample item in the population is
given equal and independent chance of being selected or included in the
sample. In the process of obtaining a simple random sampling, the researcher
could use the ballot box /raffle draw, shuffled card method or the use of random
number table. This method ensures the randomness of the sample items.
(c) Systematic Sampling
This is the probability sampling that involves the selection of every nth
item from
the sampling frame that has been serially arranged. The nth
item or the regular
interval is obtained by dividing the population size by the required sample size.
Thereafter, the first item is selected from the sampling frame using random
techniques. The subsequent items are selected using the regular interval or nth
item.
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EXAMINERS‟ REPORT
The question tests understanding of candidates‟ ability to write briefly on the topic of
sampling techniques. More than 80% of the candidates attempted this question.
Of this, over 70% of the candidates scored above average.
The major pitfall identified is that candidates failed to mention the key concepts in
each of the sampling techniques examined. Also, candidates could not clearly
differentiate between the different sampling methods. This could also mean that some
of the candidates do not link the explanations to the concepts required.
It is recommended that candidates should learn and understand these concepts in
their right perspectives.
QUESTION 5
a. Literature review can be defined as the critical evaluation of past works
relevant to the research under study, with a view of identifying areas of
convergence and divergence in such past work. It is a process involving the
systematic identification, location and analysis of documents containing
information relevant to the research problem area of interest.
b. Reasons for carrying out Literature Review:
(i) To determine what has already been carried out in the past that relates
to the problem of the study.
(ii) It also enables researchers to critically study the findings of the research
work. Literature review makes it possible to determine the meaning and
relationship between variables. In addition, it enables researchers to
clarify underlying processes as well as facilitate the interpretations of
research findings.
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(iii) Literature review can be used to achieve the purpose of replication and
also help the researcher to delimit and define the problem. It helps to
find out whether a finding in one area of social, academic, political or
economic life can be found or generalized in another area.
(iv) Literature review indicates where there is gap in current literature on
subject of research study. This allows the researcher to identify where his
work would fit in and what his contribution to knowledge should be.
(v) Literature review is used to provide grounding and justification for the
researcher‟s findings and conclusions. It shows that they are not strange
and are in tandem with the subject of research and are as such
legitimate material emanating from the field of study.
(vi) To lay the basis for theoretical postulations. The researcher can only
extract theory from existing literature. This theory is the foundation on
which his work would rest. The review of literature gives the researcher
the facility of exploring diverse but relevant theoretical directions, which
would be the foundation of the work and guide the researcher in his own
theoretical postulations.
(vii) Every field has leading figures whose works determine the colouration
and direction of developments. Literature review leads the researcher to
recognize these figures, their contributions and give intellectual stature
and dignity to the work.
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EXAMINERS‟ REPORT:
The question tests candidates‟ knowledge on Literature Review as well as their basic
understanding of the need for review of literature in a research study. More than 80%
of the candidates attempted this question.
The question was well-understood by the candidates and as such about 75% scored
above average of the total marks obtainable.
The commonest pitfall was in the candidates‟ presentation of ideas. Few candidates
could not distinguish between reasons and sources of literature review.
It is recommended that candidates study extensively and prepare ahead for the
examination.
QUESTION 6
a. The expected frequencies are obtained as follows:
e = (RT) (CT)
GT
Where RT = Row Total
CT = Column Total
GT = Grand Total
e11
= 200 x 255 = 113.33
450
e 12
= 200 x 195 = 86.67
450
e 21
= 250 x 255 = 141.67
450
e 22
= 250 x 195 = 108.33 450
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To test the hypothesis:
(b). H0 : The source of drinking water is independent of the status of the
dwellers.
H1 : The source of drinking water is dependent of the status of the
dwellers.
The suitable statistical technique is 2
- test of Independence
Appropriate test statistics 2
= ∑ ( fo ─ fe)2
fe
where o = Observed frequencies
e = Expected frequencies
Fo fe fo ─ fe (fo ─ fe)2
(fo─fe)2
fe
90 113.33 - 3.33 11.09 0.13
110 86.67 3.33 11.09 0.10
105 141.67 3.33 11.09 0.10
145 108.33 -3.33 11.09 0.08
Total 0.41
2
= 0.41
Degree of Freedom = ( r ─1) ( c ─1)
=( 2 ─1) ( 2─1)
= 1
The table value of 2
at 0.05 level of significance is 3.84
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Decision:
Since the calculated value of 2
= 0.41 is less than the tabulated value
2
0.05
= 3.84, we accept the null hypothesis and reject the alternate
hypothesis.
EXAMINERS‟ REPORT:
The question tests candidates‟ knowledge of hypothesis testing using Chi-Square.
More than 80% of the candidates attempted the question.
Of this percentage, about 80% scored above average.
The commonest pitfall was that candidates approximated the parameters given, thus
arriving at varied test-results which in turn affected the findings but this did not affect
the decisions arrived at.