KASNEB CA26 common mistakes
KASNEB CA26 · Understand the traps and how to avoid them.
On a partnership admission or retirement, revaluing assets and raising goodwill in the old partners' capital accounts using the new profit-sharing ratio.
Candidates memorize the adjustment entries but confuse the ratio in which the past adjustment belongs with the ratio that applies to future profits.
What to do instead
Before writing any entry, label two columns: old ratio for pre-admission goodwill and revaluation, new ratio for future profit sharing. Post goodwill and revaluation only through the old ratio unless the question states a different agreement.
In incomplete-records questions, calculating profit as closing capital minus opening capital plus drawings, or otherwise reversing the drawings and capital-introduced signs.
The formula is recalled as a string rather than derived from the capital account, so additions and deductions are applied in the wrong direction.
What to do instead
Reconstruct a statement of affairs to get opening and closing capital, then build a capital account: opening capital + capital introduced + profit - drawings = closing capital. Rearrange only after the account balances.
Calculating WACC using book values for debt and equity weights while using a market-based cost of equity, or using pre-tax cost of debt without adjusting for tax.
Candidates mix data sources because the formula is remembered as a weighted average without checking that weights and costs refer to the same valuation basis.
What to do instead
Choose one basis, normally market values, and use it consistently. Compute after-tax cost of debt as Kd(1 - t), use market value of equity and market value of debt, and show the weights explicitly before calculating WACC.
In capital budgeting, adding depreciation back to accounting profit and then discounting the result at the cost of equity even when the project is financed partly by debt.
Candidates equate accounting profit with cash flow and use a single discount rate as a default, ignoring the financing and risk profile of the project.
What to do instead
Build a free cash flow schedule: operating cash flow after tax, less capital expenditure, less working capital changes. Discount at a project-specific WACC or an appropriate risk-adjusted rate, and state why the rate was chosen.
In credit appraisal, computing debt service cover using EBITDA that includes non-cash gains or one-off income and omitting scheduled principal repayments from debt service.
Candidates treat profit-based EBITDA as cash available for debt service and focus on interest cover because it is simpler.
What to do instead
Prepare a cash-flow-based CFADS figure, excluding non-cash and one-off items. Include both interest and principal in debt service, then calculate DSCR for each forecast year and identify the minimum year.
Assessing a borrower's liquidity only with the current ratio and not examining receivables aging, inventory holding period, or the cash conversion cycle.
Ratio analysis is treated as a checklist item, so a single acceptable current ratio is taken as proof of liquidity.
What to do instead
For the same borrower, calculate quick ratio, receivables days, inventory days, payables days, and cash conversion cycle. Cross-check the current ratio against the aging profile and flag any reclassification of slow-moving inventory or overdue receivables.
Answering a corporate governance scenario by listing governance principles in general terms without linking each principle to the specific facts and recommending an action.
Candidates revise governance as definitions to be recalled rather than as an applied framework for evaluating board behaviour.
What to do instead
Use a fixed structure: identify the governance principle engaged, quote the relevant fact, explain the breach or strength, then recommend a specific board or committee action. Repeat for each principle rather than writing a general essay.
In a risk-management question, listing risks descriptively without assigning likelihood, impact, inherent versus residual rating, control owner, or response type.
Candidates treat risk identification as the whole answer and are not used to producing a risk register with assessed and controlled ratings.
What to do instead
Present a table with risk event, cause, consequence, inherent likelihood and impact, existing controls, residual rating, risk owner, and response (avoid, reduce, transfer, accept). Ensure every risk in the scenario appears in the table.
In an IT audit question, testing only application output controls and treating general IT controls such as access management, change management, and IT operations as if they were the same layer of control.
Candidates memorize lists of controls without understanding that general IT controls support the reliable operation of application controls.
What to do instead
Separate the answer into general IT controls and application controls. For GITCs, test access provisioning and review, program change approval and testing, and backup/incident operations. For application controls, test input, processing, and output controls, then explain how weak GITCs undermine reliance on application controls.
In spreadsheet-based financial modelling questions, hard-coding calculated values into totals or overwriting formulas with numbers to make the model balance.
Candidates prioritize getting a displayed figure quickly and do not separate assumptions, calculations, and outputs.
What to do instead
Build the model in three zones: inputs and assumptions, calculations, and outputs. Link every total by formula, use a separate check cell for balance or reconciliation, and never type a calculated number into a cell that should depend on assumptions.