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Question 1Financial Reporting and Assurance

Under IFRS, which component of a defined benefit pension obligation is recognised immediately in other comprehensive income rather than in profit or loss?

  1. Current service cost for the reporting period
  2. Past service cost from a plan amendment
  3. Interest cost on the net defined benefit liability
  4. Actuarial gains and losses arising from remeasurement of the net defined benefit liability Correct answer.

Explanation

IAS 19 requires remeasurements, which include actuarial gains and losses, to be recognised in other comprehensive income and never recycled to profit or loss. Service cost and net interest are charged to profit or loss. This split matters because it affects the presentation of performance without changing total equity.

Question 2Financial Reporting and Assurance

A company sells goods with a right of return allowing customers to return items within 30 days. Under IFRS 15, how should revenue be recognised at the point of sale?

  1. Revenue for the full transaction price, with a separate provision for expected returns
  2. No revenue until the return period lapses
  3. Revenue only for the amount of consideration expected to be entitled, with a refund liability and a return asset recognised Correct answer.
  4. Revenue net of all costs of goods expected to be returned, with no refund liability

Explanation

IFRS 15 treats a right of return as variable consideration; revenue is recognised only to the extent it is highly probable there will be no significant reversal. The entity recognises a refund liability for the expected refund and a return asset for the right to recover goods. This prevents overstatement of revenue and cost of sales.

Question 3Financial Reporting and Assurance

Which of the following best describes the auditor's responsibility regarding fraud in a financial statement audit under ISA 240?

  1. The auditor is responsible for designing and implementing the entity's internal controls to prevent fraud
  2. The auditor guarantees that all fraud will be detected because of the nature of audit procedures
  3. The auditor is responsible for obtaining reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error, and must maintain professional scepticism Correct answer.
  4. The auditor's responsibility for fraud is limited to reporting suspected fraud to the police

Explanation

ISA 240 requires the auditor to obtain reasonable assurance that the financial statements are free of material misstatement, whether due to fraud or error. The auditor must maintain professional scepticism, recognising the possibility of material misstatement due to fraud. Management, not the auditor, is responsible for preventing and detecting fraud.

Question 4Financial Reporting and Assurance

An entity has a loan with a carrying amount of N100 million at 31 December 20X1. Under the loan covenant, the lender can demand repayment if the entity's current ratio falls below 1.2. At year-end the current ratio is 1.1. The financial statements are authorised for issue two months after year-end, and the lender has not waived the covenant. How should the loan be classified in the 31 December 20X1 statement of financial position?

  1. Non-current, provided the entity expects to cure the covenant before the next year-end
  2. Current, because the entity does not have the right to defer settlement for at least twelve months after the reporting period Correct answer.
  3. Current only if the lender formally calls the loan before the financial statements are authorised for issue
  4. Non-current, because the lender has not yet demanded repayment

Explanation

IAS 1 requires a liability to be classified as current when the entity does not have an unconditional right to defer settlement for at least twelve months after the reporting period. A covenant breach at the reporting date that gives the lender the right to demand repayment removes that right, even if no demand has been made. The classification is determined at the reporting date.

Question 5Financial Reporting and Assurance

Which of the following is the most appropriate audit response when the auditor assesses the risk of material misstatement at the financial statement level as high?

  1. Reduce the amount of audit evidence because the risk is pervasive
  2. Issue a qualified opinion immediately
  3. Rely entirely on substantive procedures at year-end and ignore controls
  4. Increase the extent of substantive procedures and assign more experienced staff, while maintaining an overall sceptical approach Correct answer.

Explanation

ISA 330 requires the auditor to design and implement overall responses to risks assessed at the financial statement level, such as increasing professional scepticism, assigning more experienced staff, and increasing the extent of substantive procedures. Such risks affect the audit as a whole rather than a single account balance. The auditor cannot simply rely on a single procedure or reduce evidence.

Question 6Financial Reporting and Assurance

Under IFRS 16, how does a lessee initially measure a right-of-use asset?

  1. At the total undiscounted lease payments over the lease term
  2. At the fair value of the underlying asset at the commencement date
  3. At the present value of future lease payments only
  4. At the amount of the initial lease liability, adjusted for lease payments made at or before commencement, initial direct costs, and estimated restoration costs Correct answer.

Explanation

IFRS 16 requires the right-of-use asset to be measured initially at the amount of the initial lease liability, plus payments made at or before commencement, initial direct costs, and estimated dismantling or restoration costs. The lease liability itself is the present value of lease payments not paid at commencement. Using undiscounted amounts or fair value would misstate the asset.

Question 7Financial Reporting and Assurance

Which of the following describes the auditor's use of analytical procedures at the planning stage of an audit?

  1. To determine the exact amount of the audit fee
  2. To assist in understanding the entity and identifying areas of potential risk Correct answer.
  3. To replace substantive testing of all account balances
  4. To obtain sufficient appropriate evidence that the financial statements are free from material misstatement

Explanation

ISA 315 requires the auditor to apply analytical procedures in risk assessment to enhance understanding of the entity and identify unusual transactions or areas of risk. Analytical procedures at planning are not, by themselves, sufficient appropriate audit evidence. They help direct audit effort to higher-risk areas.

Question 8Financial Reporting and Assurance

A company recognises a provision for a legal dispute. During the subsequent year, new evidence shows the probable outflow is significantly higher than originally estimated. How should the change be accounted for under IAS 37?

  1. As a prior period adjustment restating opening retained earnings
  2. As a change in accounting policy applied retrospectively
  3. As a change in accounting estimate recognised prospectively in profit or loss Correct answer.
  4. As an adjustment to goodwill

Explanation

A change in the best estimate of a provision is a change in accounting estimate under IAS 8, applied prospectively by recognising the effect in profit or loss in the period of change. It is not a prior period error because the original estimate was made on the information available at the time. Retrospective restatement would be inappropriate.

Question 9Financial Reporting and Assurance

Which of the following is a key requirement of ISA 700 regarding the auditor's report?

  1. The report must include a management representation letter as an appendix
  2. The report must be addressed to the entity's external legal counsel
  3. The report must disclose the audit fee for the engagement
  4. The report must state whether the financial statements give a true and fair view, where that term is used in the applicable financial reporting framework Correct answer.

Explanation

ISA 700 requires the auditor's report to include an opinion section stating whether the financial statements give a true and fair view or present fairly, in all material respects, in accordance with the applicable framework. The report is normally addressed to shareholders or those charged with governance. It does not include the engagement fee or the representation letter.

Question 10Financial Reporting and Assurance

An entity has an investment property measured under the fair value model. At the reporting date, the fair value has increased above carrying amount. How is the increase recognised under IAS 40?

  1. In profit or loss for the period Correct answer.
  2. In other comprehensive income and accumulated in equity
  3. As deferred income amortised over the remaining useful life
  4. As a revaluation surplus in equity with no recycling

Explanation

Under the fair value model in IAS 40, gains or losses arising from changes in fair value are recognised in profit or loss in the period in which they arise. This differs from the revaluation model for property, plant and equipment under IAS 16, where increases go to OCI. The distinction is a common exam point.

Question 11Financial Reporting and Assurance

Which of the following best describes the purpose of a management representation letter obtained under ISA 580?

  1. To transfer the auditor's responsibility for the financial statements to management
  2. To replace substantive testing of all account balances
  3. To serve as the auditor's opinion on the financial statements
  4. To provide the auditor with evidence that management has fulfilled its responsibilities and to confirm representations made during the audit Correct answer.

Explanation

ISA 580 requires the auditor to obtain written representations from management confirming that it has fulfilled its responsibilities for the preparation of the financial statements and that it has provided all relevant information. The letter supports other audit evidence and cannot substitute for it. It does not transfer responsibility or constitute an audit opinion.

Question 12Financial Reporting and Assurance

A company issues 1,000 convertible bonds with a face value of N1,000 each. The bonds carry a 5% coupon and are convertible into ordinary shares at a fixed ratio. Under IAS 32, how should the proceeds be allocated at initial recognition?

  1. Entirely to equity because the bonds are convertible
  2. Between the liability component and the equity component, with the equity component measured as the residual after deducting the liability component from the proceeds Correct answer.
  3. Between the liability component and the equity component, with the equity component measured at fair value of the shares at issuance date
  4. Entirely to the liability component because the conversion feature has no value

Explanation

IAS 32 requires a compound instrument to be split between a financial liability and an equity component. The liability is measured first at the fair value of a similar non-convertible bond, and the equity component is the residual. The conversion option is not remeasured subsequently. This prevents the entire proceeds from being classified as debt.

Question 13Financial Reporting and Assurance

Which of the following is the auditor's primary consideration when deciding whether to rely on internal controls?

  1. The auditor's familiarity with the entity's industry
  2. The size of the audit fee
  3. The number of employees in the internal audit department
  4. The assessed risk of material misstatement and the expected effectiveness of controls Correct answer.

Explanation

ISA 315 and ISA 330 require the auditor to evaluate the design and implementation of controls relevant to the audit and to determine whether it is efficient to test their operating effectiveness. The decision is driven by the risk of material misstatement and the expected reliability of the controls. Fee size and staffing levels are not the criteria.

Question 14Financial Reporting and Assurance

Under IFRS 9, how are transaction costs accounted for when a financial asset is measured at amortised cost?

  1. Recognised in other comprehensive income
  2. Expensed immediately in profit or loss
  3. Deducted from the carrying amount of the financial asset
  4. Added to the carrying amount of the financial asset and amortised using the effective interest method Correct answer.

Explanation

IFRS 9 requires transaction costs directly attributable to the acquisition of a financial asset at amortised cost to be included in the initial carrying amount and amortised through the effective interest method. This adjusts the effective yield over the life of the instrument. Expensing them immediately would overstate the effective interest rate.

Question 15Financial Reporting and Assurance

Which of the following best describes the concept of professional scepticism in an audit?

  1. An obligation to accept management's explanations without further evidence
  2. An attitude of questioning and alertness to conditions that may indicate possible misstatement due to error or fraud Correct answer.
  3. A presumption that management is dishonest in all circumstances
  4. A requirement to verify every transaction in the financial statements

Explanation

Professional scepticism is an attitude of questioning and alertness to conditions that may indicate possible misstatement, whether due to error or fraud. It involves critically assessing evidence and being alert to contradictory information. It does not mean presuming dishonesty or verifying every transaction.

Question 16Financial Reporting and Assurance

A company has a subsidiary in a hyperinflationary economy. Under IAS 21 and IAS 29, how should the subsidiary's financial statements be treated before translation into the parent's presentation currency?

  1. Translated using historical rates for all non-monetary items
  2. Restated for inflation in accordance with IAS 29 and then translated at the closing rate Correct answer.
  3. Translated using the closing rate for all items
  4. Left unchanged and consolidated without adjustment

Explanation

IAS 21 requires the financial statements of a foreign operation in a hyperinflationary economy to be restated under IAS 29 before translation. After restatement, all amounts are translated at the closing rate. This reflects the current purchasing power of the subsidiary's assets and liabilities.

Question 17Financial Reporting and Assurance

Which of the following is an example of a key audit matter that would typically be communicated in the auditor's report under ISA 701?

  1. The auditor's independence declaration
  2. A routine bank confirmation with no issues identified
  3. The date of the auditor's report
  4. A significant management judgement regarding the impairment of goodwill Correct answer.

Explanation

ISA 701 requires communication of key audit matters, which are those matters that were of most significance in the audit. Significant management judgement, such as goodwill impairment, is a common example. Routine procedures and administrative details are not key audit matters.

Question 18Financial Reporting and Assurance

Under IAS 36, when should an impairment test be performed for goodwill acquired in a business combination?

  1. Annually, and whenever there is an indication that the cash-generating unit may be impaired Correct answer.
  2. Only when there is an indication of impairment
  3. Only at the date of acquisition
  4. Every five years

Explanation

IAS 36 requires goodwill and intangible assets with indefinite useful lives to be tested for impairment annually, irrespective of whether there is an indication of impairment, and additionally whenever indicators exist. This reflects the indefinite life and the judgement involved in the carrying amount. Other assets are tested only when indicators exist.

Question 19Financial Reporting and Assurance

An auditor identifies a material misstatement in inventory valuation that management refuses to correct. The misstatement is material but not pervasive. What type of opinion should the auditor issue?

  1. Unmodified opinion with an emphasis of matter paragraph
  2. Adverse opinion
  3. Qualified opinion Correct answer.
  4. Disclaimer of opinion

Explanation

ISA 705 requires a qualified opinion when the auditor concludes that misstatements are material but not pervasive. An adverse opinion is used when misstatements are both material and pervasive. A disclaimer is used when the auditor is unable to obtain sufficient appropriate evidence and the possible effects are material and pervasive.

Question 20Financial Reporting and Assurance

Which of the following best describes the treatment of a change in accounting policy under IAS 8, where the change is not required by a new standard and no transitional provisions apply?

  1. Applied only to future transactions
  2. Applied prospectively from the date of change
  3. Applied retrospectively, with restatement of comparatives and adjustment to opening retained earnings Correct answer.
  4. Disclosed without adjustment to the financial statements

Explanation

IAS 8 requires voluntary changes in accounting policy to be applied retrospectively unless it is impracticable. Comparatives are restated and opening retained earnings adjusted as if the new policy had always been applied. Prospective application is reserved for changes in accounting estimates.

Question 21Financial Reporting and Assurance

Which of the following is the correct treatment of a contingent asset under IAS 37?

  1. Recognised immediately when a legal claim is filed
  2. Ignored entirely until cash is received
  3. Recognised as an asset when it is probable that the inflow will occur
  4. Disclosed when an inflow of economic benefits is probable, and recognised only when virtually certain Correct answer.

Explanation

IAS 37 prohibits recognition of contingent assets; they are disclosed when an inflow of economic benefits is probable. Recognition occurs only when the inflow is virtually certain, at which point the asset is no longer contingent. This is consistent with the prudence concept.

Question 22Financial Reporting and Assurance

A parent company owns 80% of a subsidiary. During the year, the parent sold inventory to the subsidiary at a profit of N10 million, and half of that inventory remains in the subsidiary's closing inventory. What adjustment is required in the consolidated financial statements?

  1. Recognise the profit in other comprehensive income
  2. Eliminate the unrealised profit of N5 million attributable to the unsold inventory Correct answer.
  3. No adjustment because the transaction is with an external party
  4. Eliminate the full profit of N10 million regardless of the inventory remaining

Explanation

IFRS 10 consolidation procedures require elimination of intragroup transactions and the related unrealised profit. Only the profit on inventory still held by the group at the reporting date is unrealised, here N5 million. The remaining N5 million is realised through sale to external parties.

Question 23Financial Reporting and Assurance

Which of the following best describes the auditor's responsibility for subsequent events under ISA 560?

  1. The auditor should perform procedures to identify events up to the date of the auditor's report and consider whether they are appropriately reflected or disclosed Correct answer.
  2. The auditor has no responsibility for events after the reporting date
  3. The auditor must audit all events for twelve months after the reporting date
  4. The auditor must adjust the financial statements for all events after the reporting date

Explanation

ISA 560 requires the auditor to perform procedures designed to identify subsequent events up to the date of the auditor's report that may require adjustment or disclosure. The auditor then considers whether the financial statements reflect them appropriately under the applicable framework. The auditor does not adjust the statements or audit all events for twelve months.

Question 24Financial Reporting and Assurance

Under IFRS 15, a construction contract is accounted for over time because the entity's performance creates an asset with no alternative use and the entity has an enforceable right to payment for performance completed to date. How is revenue recognised?

  1. At the amount of cash received during the period
  2. Only when the contract is completed
  3. Using an input or output method that depicts progress towards satisfying the performance obligation Correct answer.
  4. Evenly over the contract term regardless of progress

Explanation

IFRS 15 requires revenue for performance obligations satisfied over time to be recognised using a method that depicts the transfer of control, such as costs incurred or units delivered. The method must reflect progress towards completion. Recognising revenue only at completion or on a cash basis would misstate performance.

Question 25Financial Reporting and Assurance

Which of the following is the primary purpose of the engagement quality control review under ISQM 1?

  1. To perform the detailed substantive testing for the engagement
  2. To provide an objective evaluation of the significant judgements and conclusions of the engagement team before the report is issued Correct answer.
  3. To replace the engagement partner's responsibility for the audit
  4. To determine the audit fee for the engagement

Explanation

ISQM 1 requires an engagement quality control review for audits of listed entities and other engagements where required, providing an objective evaluation of the significant judgements and conclusions of the engagement team. The review is performed before the report is issued. It does not replace the engagement partner's responsibility or perform detailed testing.

Question 26Financial Reporting and Assurance

An entity applies IFRS 15 to a contract with a customer that includes a right of return. Under IFRS 15, how should the entity account for the expected returned goods at the point of sale?

  1. Defer recognition of all revenue until the return period has expired and the goods are confirmed retained
  2. Recognise revenue net of the refund liability but make no adjustment to cost of sales until goods are physically returned
  3. Recognise the full transaction price as revenue and disclose the return estimate only as a contingent liability
  4. Recognise a refund liability and an asset for the right to recover the goods, with a corresponding adjustment to revenue and cost of sales Correct answer.

Explanation

IFRS 15 requires an entity to recognise a refund liability for the consideration it expects to return and a separate asset representing its right to recover the returned goods, adjusting revenue and cost of sales accordingly. Revenue is measured at the amount to which the entity expects to be entitled, so the expected return is not recognised as revenue. The recovery asset is measured by reference to the former carrying amount of the inventory less expected costs of recovery.

Question 27Financial Reporting and Assurance

Under IAS 7, which of the following cash flows is classified as an investing activity in the statement of cash flows?

  1. Cash paid to suppliers for inventory purchases
  2. Interest paid on a bank overdraft
  3. Cash received from the disposal of property, plant and equipment Correct answer.
  4. Cash proceeds from issuing ordinary shares

Explanation

IAS 7 classifies acquisitions and disposals of long-term assets, including property, plant and equipment, as investing activities because they relate to resources intended to generate future income. Cash paid to suppliers is an operating activity, and issuing shares is a financing activity. Interest paid may be classified as operating or financing under IAS 7, but not as investing.

Question 28Financial Reporting and Assurance

An auditor concludes that a material uncertainty related to going concern exists and that the disclosures in the financial statements are adequate. How should this be reflected in the auditor's report under ISA 570?

  1. Include an emphasis of matter paragraph without referring to going concern in a separate section
  2. Issue a qualified opinion because a material uncertainty always prevents an unmodified opinion
  3. Include a separate section headed 'Material Uncertainty Related to Going Concern' and still express an unmodified opinion Correct answer.
  4. Express an adverse opinion and describe the uncertainty in the basis for opinion section

Explanation

Where the going concern basis is appropriate and the disclosures are adequate, ISA 570 requires the auditor to include a separate section under the heading 'Material Uncertainty Related to Going Concern' while still expressing an unmodified opinion. The section draws users' attention to the relevant note without modifying the opinion. A modified opinion arises only where the going concern basis is inappropriate or the disclosures are inadequate.

Question 29Financial Reporting and Assurance

A company has a defined benefit pension plan. At the reporting date, the present value of the defined benefit obligation has increased because of a reduction in the discount rate. Under IAS 19, how is this remeasurement recognised?

  1. As a deferred tax asset only, with no recognition in the financial statements
  2. Directly in retained earnings as a prior period adjustment
  3. In other comprehensive income, with no subsequent reclassification to profit or loss Correct answer.
  4. In profit or loss as an employee benefit expense

Explanation

Under IAS 19, actuarial gains and losses arising from changes in actuarial assumptions, including the discount rate, are remeasurements recognised in other comprehensive income. These remeasurements are not subsequently reclassified to profit or loss. They may be transferred within equity, for example to retained earnings, but are never recycled through profit or loss.

Question 30Financial Reporting and Assurance

In applying ISA 530, an auditor selects a sample of 60 items from a population of 1,200 invoices and finds three misstatements. Which approach best reflects the required evaluation of the sample results?

  1. Conclude the population is fairly stated because the misstatement rate is below 5%
  2. Extend testing to the entire population only if the misstatements are individually material
  3. Project the misstatements found in the sample to the population and consider sampling risk before reaching a conclusion Correct answer.
  4. Ignore the misstatements because the sample was selected on a random basis

Explanation

ISA 530 requires the auditor to project misstatements found in a sample to the population and to consider sampling risk when evaluating the results. The auditor then assesses whether the projection, together with the allowance for sampling risk, exceeds the tolerable misstatement. Simply comparing the raw rate to a threshold or ignoring findings does not satisfy this requirement.

Question 31Financial Reporting and Assurance

Under IAS 12, how should deferred tax be measured for an asset whose carrying amount will be recovered through use rather than through sale?

  1. Using the tax rates and laws enacted or substantively enacted by the reporting date that are expected to apply when the asset is recovered Correct answer.
  2. Using the average tax rate over the asset's expected useful life
  3. Using the tax rate applicable at the date the asset was originally acquired
  4. Using the highest statutory tax rate in the jurisdiction to be prudent

Explanation

IAS 12 requires deferred tax to be measured at the tax rates expected to apply when the asset is realised or the liability settled, based on rates enacted or substantively enacted by the reporting date. The measurement reflects the expected manner of recovery, which for an asset used in the business is through use. Historical or prudence-driven rates are not permitted.

Question 32Financial Reporting and Assurance

An auditor is assessing whether a component is significant for group audit purposes under ISA 600. Which factor most directly determines that a component is significant?

  1. The component's auditor is a different firm from the group auditor
  2. The component has a different accounting system from the parent
  3. The component's total revenue exceeds 10% of group revenue
  4. The component is likely to include significant risks of material misstatement of the group financial statements Correct answer.

Explanation

ISA 600 requires the group auditor to identify significant components, which includes components that are individually financially significant and components that are likely to include significant risks of material misstatement. The presence of such risks is a direct determinant of significance. Size thresholds, system differences and auditor identity are relevant considerations but do not by themselves define significance.

Question 33Financial Reporting and Assurance

Under IAS 40, an entity that chooses the cost model for investment property must apply which measurement basis?

  1. Revalued amount less accumulated depreciation
  2. Lower of cost and net realisable value
  3. Fair value at each reporting date with changes in profit or loss
  4. Cost less accumulated depreciation and accumulated impairment losses Correct answer.

Explanation

Under the cost model in IAS 40, investment property is measured at cost less accumulated depreciation and accumulated impairment losses, consistent with IAS 16 principles. The fair value model instead measures at fair value with changes in profit or loss. The lower of cost and net realisable value applies to inventory under IAS 2, and the revaluation model is an IAS 16 option for property, plant and equipment.

Question 34Financial Reporting and Assurance

An entity enters into a sale and leaseback transaction. The transfer qualifies as a sale under IFRS 15 and the leaseback is a finance lease. Under IFRS 16, how does the seller-lessee account for the transaction?

  1. Recognise the full sale proceeds in profit or loss and account for the leaseback as an operating lease
  2. Recognise the transaction as a secured borrowing with no derecognition of the asset
  3. Defer all gain or loss and recognise it over the lease term
  4. Recognise a right-of-use asset and a lease liability, and recognise a gain or loss only to the extent of the rights transferred to the buyer-lessor Correct answer.

Explanation

Under IFRS 16, where the transfer qualifies as a sale, the seller-lessee derecognises the asset, recognises a right-of-use asset and a lease liability, and recognises gain or loss only to the extent of the rights transferred to the buyer-lessor. The retained right of use is not treated as a sale. A secured borrowing treatment applies only where the transfer does not qualify as a sale.

Question 35Financial Reporting and Assurance

Under ISA 315 (Revised 2019), which of the following best describes the auditor's responsibility when identifying risks of material misstatement?

  1. Rely on management's risk register without further assessment
  2. Identify risks at the financial statement level and at the assertion level, including significant risks Correct answer.
  3. Identify risks only at the financial statement level
  4. Identify risks only for account balances exceeding materiality

Explanation

ISA 315 (Revised 2019) requires the auditor to identify and assess risks of material misstatement at both the financial statement level and the assertion level, including significant risks. This assessment informs the nature, timing and extent of further audit procedures. Management's risk register is an input but cannot replace the auditor's own risk identification.

Question 36Financial Reporting and Assurance

A company has a loan payable of N5,000,000 carrying interest at 12% per annum, with interest payable annually. At the reporting date, interest for the year has not yet been paid. Under accrual accounting, what is the effect on the financial statements?

  1. Recognise interest expense of N600,000 and reduce the loan principal
  2. Recognise no entry until cash is paid
  3. Recognise a prepayment of N600,000
  4. Recognise interest expense and an accrued liability of N600,000 Correct answer.

Explanation

Accrual accounting requires interest expense to be recognised as it accrues, with a corresponding accrued liability, regardless of when cash is paid. The amount is N5,000,000 × 12% = N600,000. Reducing the loan principal or deferring recognition misstates both profit and liabilities.

Question 37Financial Reporting and Assurance

An entity has a subsidiary whose functional currency differs from the parent's presentation currency. Under IAS 21, how are exchange differences arising on translation of the subsidiary's financial statements recognised?

  1. In profit or loss in the period of translation
  2. Directly against goodwill arising on acquisition
  3. As an adjustment to the subsidiary's share capital
  4. In other comprehensive income and reclassified to profit or loss on disposal of the subsidiary Correct answer.

Explanation

IAS 21 requires exchange differences arising on translation of a foreign operation to be recognised in other comprehensive income and accumulated in a separate component of equity. On disposal of the foreign operation, the cumulative amount is reclassified to profit or loss. They are not recognised in profit or loss as they arise, nor adjusted against goodwill or share capital.

Question 38Financial Reporting and Assurance

An auditor is evaluating the adequacy of the allowance for expected credit losses under IFRS 9. Which procedure provides the most relevant audit evidence about the completeness of the allowance?

  1. Confirming the bank balances held as collateral
  2. Recalculating the arithmetic of the model's formulas
  3. Testing the input data and assumptions used in the expected credit loss model, including forward-looking information Correct answer.
  4. Reviewing the prior year's audit working papers

Explanation

The allowance for expected credit losses under IFRS 9 depends heavily on model inputs, assumptions and forward-looking information, so testing those inputs and assumptions provides the most relevant evidence about completeness and accuracy. Recalculation tests arithmetic only, and collateral confirmation addresses a different assertion. Prior year working papers are not sufficient evidence for the current period.

Question 39Financial Reporting and Assurance

Under IAS 10, a customer goes bankrupt after the reporting date but before the financial statements are authorised for issue, and the bankruptcy confirms a receivable that was impaired at the reporting date. How should this be treated?

  1. Ignored because it occurred after the reporting date
  2. As an adjusting event, adjusting the receivable and the financial statements Correct answer.
  3. As a non-adjusting event, with disclosure only
  4. As an adjusting event only if the amount is material to revenue

Explanation

IAS 10 treats events after the reporting date that provide evidence of conditions existing at the reporting date as adjusting events. A bankruptcy confirming an impairment that existed at the reporting date requires adjustment of the receivable. Non-adjusting treatment applies to conditions arising after the reporting date.

Question 40Financial Reporting and Assurance

Under ISQM 1, which of the following is a component of a firm's system of quality management?

  1. Engagement performance, including monitoring and remediation Correct answer.
  2. Only the firm's governance and leadership
  3. Only the firm's risk assessment process
  4. Only the firm's information and communication

Explanation

ISQM 1 establishes eight components of a system of quality management, including the firm's risk assessment process, governance and leadership, relevant ethical requirements, acceptance and continuance, engagement performance, resources and information and communication, together with monitoring and remediation. Engagement performance is one of these components. The other options each identify only a single component, not the complete answer.

Question 41Corporate Finance and Treasury Management

A Nigerian manufacturer expects to receive USD 2 million in 90 days. The treasury team wants to eliminate the risk that the naira strengthens against the dollar before settlement. Which instrument locks in the exchange rate today while deferring the actual currency exchange to the settlement date?

  1. A standby letter of credit
  2. A spot purchase of dollars today
  3. An overdraft in naira
  4. A forward contract with the bank Correct answer.

Explanation

A forward contract fixes the rate now but executes the currency exchange on a future value date, which matches the timing of the expected receivable and removes translation risk. Buying spot dollars today would settle immediately and create an unwanted naira outflow and holding cost.

Question 42Corporate Finance and Treasury Management

Which statement best describes the core objective of treasury management in a large corporate?

  1. Setting the company's product pricing strategy
  2. Ensuring liquidity, managing financial risk and optimising funding cost Correct answer.
  3. Preparing statutory financial statements for filing
  4. Maximising speculative trading gains on surplus cash

Explanation

Treasury exists to safeguard liquidity, control financial risks such as interest rate and currency exposure, and obtain funding at the lowest prudent cost. Speculative trading and product pricing sit outside the treasury mandate.

Question 43Corporate Finance and Treasury Management

A company has a 60-day payables period, a 45-day receivables period and a 30-day inventory holding period. What is its cash conversion cycle?

  1. 15 days Correct answer.
  2. 45 days
  3. 75 days
  4. 135 days

Explanation

The cash conversion cycle equals inventory days plus receivables days minus payables days, so 30 + 45 - 60 = 15 days. A short positive cycle means cash is tied up for only a brief period between paying suppliers and collecting from customers.

Question 44Corporate Finance and Treasury Management

Which cash management technique pools the balances of several subsidiary accounts into a single concentration account to reduce external borrowing?

  1. Cash concentration or sweeping Correct answer.
  2. Bank reconciliation
  3. Positive pay
  4. Lockbox collection

Explanation

Sweeping or concentration transfers surplus balances from subsidiary accounts into a central account, allowing the group to net positions and reduce reliance on overdrafts. Lockbox and positive pay address collection speed and fraud control rather than balance pooling.

Question 45Corporate Finance and Treasury Management

A firm issues commercial paper at a discount and repays face value at maturity. Which cost measure correctly reflects the annualised cost of this instrument?

  1. The discount divided by face value, annualised
  2. The discount divided by the proceeds received, annualised Correct answer.
  3. The bank prime rate plus a margin
  4. The coupon rate stated on the paper

Explanation

Commercial paper pays no coupon; the issuer receives proceeds below face value, so the true cost is the discount expressed as a yield on the funds actually obtained. Using face value understates the cost because the issuer never received that amount.

Question 46Corporate Finance and Treasury Management

A treasurer wants to reduce interest rate risk on a floating-rate loan without exchanging principal. Which derivative achieves this by swapping floating interest payments for fixed ones?

  1. An equity index future
  2. An interest rate swap Correct answer.
  3. A forward rate agreement settling a single period
  4. A cross-currency swap

Explanation

An interest rate swap lets a borrower exchange floating-rate payments for fixed-rate payments on a notional principal, converting uncertain interest cost into a known amount. No principal is exchanged, which distinguishes it from a cross-currency swap.

Question 47Corporate Finance and Treasury Management

Which of the following best explains why a company holds a transaction motive for cash?

  1. To guard against unexpected cash shortfalls
  2. To meet day-to-day payments arising from ordinary business Correct answer.
  3. To satisfy compensating balance requirements of lenders
  4. To exploit unexpected bargain purchases

Explanation

The transaction motive reflects the need to hold cash to settle routine operating payments such as wages, suppliers and taxes. Precautionary and speculative motives cover contingencies and opportunistic investments respectively.

Question 48Corporate Finance and Treasury Management

A company's debt covenant requires a minimum interest cover of 3.0 times. EBIT is NGN 180 million and interest expense is NGN 70 million. What is the position?

  1. Covenant met with cover of 2.57 times
  2. Covenant breached with cover of 0.39 times
  3. Covenant breached with cover of 2.57 times Correct answer.
  4. Covenant met with cover of 3.57 times

Explanation

Interest cover is EBIT divided by interest expense, so 180/70 = 2.57 times, which is below the 3.0 times threshold. The company therefore breaches the covenant and may need to negotiate a waiver or reduce borrowing.

Question 49Corporate Finance and Treasury Management

Which document typically sets out the delegated authority limits for placing deposits and executing foreign exchange deals within a corporate treasury?

  1. The share register
  2. The annual report and accounts
  3. The treasury policy and delegated authority matrix Correct answer.
  4. The purchase order register

Explanation

A treasury policy, supported by a delegated authority matrix, defines who may approve deals, counterparty limits and permitted instruments. This governance document is the primary control against unauthorised dealing.

Question 50Corporate Finance and Treasury Management

A company wants to raise long-term finance without diluting existing shareholders and without fixed mandatory interest payments. Which instrument best fits this requirement?

  1. A convertible bond
  2. Redeemable preference shares with a fixed dividend Correct answer.
  3. A bank term loan
  4. Ordinary share issue

Explanation

Redeemable preference shares can provide long-term capital with a dividend that is typically fixed but paid only when declared, avoiding mandatory interest and immediate dilution of ordinary shareholders. A convertible bond avoids fixed dividends but carries mandatory interest and eventual dilution on conversion.