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Question 1Financial Accounting and Reporting

Under IAS 2 Inventories, at what amount should raw materials held for use in production be measured when the finished goods into which they will be incorporated are expected to be sold at or above cost?

  1. At the lower of cost and net realisable value
  2. At net realisable value
  3. At cost Correct answer.
  4. At fair value less costs to sell

Explanation

IAS 2 requires inventories to be measured at the lower of cost and net realisable value, but it clarifies that raw materials held for production are not written down below cost if the finished products will be sold at or above cost. This is because the materials will be recovered through the sale of the finished goods. Fair value less costs to sell is the IAS 41/IFRS 13 notion, not the IAS 2 measurement basis.

Question 2Financial Accounting and Reporting

An entity issues 1,000 ordinary shares with a nominal value of ₦1 each at a price of ₦4.50 per share, fully paid. Under IAS 32 and IAS 1, how should the proceeds be presented in equity?

  1. ₦1,000 as share capital and ₦3,500 as retained earnings
  2. ₦1,000 as share capital and ₦3,500 as share premium Correct answer.
  3. ₦4,500 as other components of equity
  4. ₦4,500 as share capital

Explanation

The nominal value of shares issued is credited to share capital (issued capital), and any consideration received above nominal value is credited to share premium (additional paid-in capital). Share premium is a separate equity reserve and is not part of retained earnings. The total equity raised is still ₦4,500, but it must be split between the two components.

Question 3Financial Accounting and Reporting

Which of the following best describes the objective of general purpose financial reporting according to the IASB Conceptual Framework?

  1. To provide information to management for internal decision making
  2. To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity Correct answer.
  3. To report the entity's compliance with statutory and regulatory requirements
  4. To enable tax authorities to assess the entity's tax liability accurately

Explanation

The Conceptual Framework states that the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity. Those decisions include buying, selling or holding equity and debt instruments and providing or settling loans. Management, tax authorities and regulators may use the reports, but they are not the primary audience the framework identifies.

Question 4Financial Accounting and Reporting

An entity recognises a provision for a court case. Which of the following is the correct treatment of the related reimbursement from an insurer that is virtually certain to be received?

  1. Ignore the reimbursement until it is actually received in cash
  2. Recognise the reimbursement as a separate asset and offset it against the provision in the statement of financial position
  3. Recognise the reimbursement as a separate asset, and present the provision and the reimbursement separately in the statement of profit or loss Correct answer.
  4. Recognise the reimbursement as a separate asset, with the expense presented net of the reimbursement in the statement of profit or loss

Explanation

IAS 37 requires a reimbursement to be recognised as a separate asset only when it is virtually certain to be received, and the amount recognised for the reimbursement must not exceed the amount of the provision. The standard specifically prohibits offsetting the reimbursement against the provision in the statement of financial position; instead, the expense relating to the provision may be presented net of the reimbursement in the statement of profit or loss. Presenting them separately in profit or loss is also acceptable and is the conservative presentation.

Question 5Financial Accounting and Reporting

An entity acquires a machine for ₦12,000,000 on 1 January. It has an estimated useful life of 8 years and a residual value of ₦2,000,000. Using the straight-line method, what is the depreciation charge for the first year?

  1. ₦1,500,000
  2. ₦1,250,000 Correct answer.
  3. ₦1,750,000
  4. ₦1,000,000

Explanation

Straight-line depreciation is calculated on the depreciable amount, which is cost less residual value: ₦12,000,000 − ₦2,000,000 = ₦10,000,000. Dividing by the 8-year useful life gives ₦1,250,000 per year. Depreciating the full cost ignores the residual value, which IAS 16 requires to be excluded from the depreciable amount.

Question 6Financial Accounting and Reporting

Under IFRS 15, an entity sells goods with a right of return allowing customers to return items within 30 days. At the point of sale, how should the entity account for the expected returns?

  1. Recognise revenue for the full amount and reduce cost of sales by the expected value of returned goods
  2. Recognise revenue only for the amount for which the entity expects to be entitled, and recognise a refund liability plus a right-of-return asset Correct answer.
  3. Recognise no revenue until the 30-day return period expires
  4. Recognise revenue for the full amount and a provision for the expected refund only when returns occur

Explanation

IFRS 15 requires revenue to be recognised for the consideration to which the entity expects to be entitled, so expected returns are excluded from revenue. The entity recognises a refund liability for its obligation to refund and a right-of-return asset (with a corresponding adjustment to cost of sales) for the right to recover the goods. This reflects the transfer of control only for goods not expected to be returned.

Question 7Financial Accounting and Reporting

Which of the following costs should be expensed rather than capitalised as part of the cost of property, plant and equipment under IAS 16?

  1. Installation and assembly costs
  2. Delivery and handling costs
  3. Site preparation costs
  4. Training costs for staff operating the new asset Correct answer.

Explanation

IAS 16 lists costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating as intended, which include site preparation, delivery and handling, installation and assembly, and professional fees. Costs of training staff to operate the asset are not included because the asset is already capable of operating as intended; training is expensed.

Question 8Financial Accounting and Reporting

An entity has a defined benefit obligation of ₦50,000,000 and plan assets with a fair value of ₦42,000,000 at the reporting date. The net defined benefit liability should be presented as:

  1. ₦50,000,000 liability and ₦42,000,000 asset separately
  2. ₦42,000,000 net liability
  3. ₦8,000,000 net asset
  4. ₦8,000,000 net liability Correct answer.

Explanation

IAS 19 requires the net defined benefit liability (or asset) to be presented in the statement of financial position as the difference between the present value of the defined benefit obligation and the fair value of plan assets. Here, ₦50,000,000 − ₦42,000,000 = ₦8,000,000 net liability. The plan assets and obligation are not presented gross on the face of the statement of financial position.

Question 9Financial Accounting and Reporting

Which of the following is the correct treatment of a change in accounting estimate under IAS 8?

  1. Apply the change retrospectively only if it is impracticable to do otherwise
  2. Disclose the change but make no adjustment to the financial statements until the next reporting period
  3. Apply the change retrospectively by restating prior period comparatives
  4. Apply the change prospectively from the date of change, recognising its effect in the current and future periods Correct answer.

Explanation

IAS 8 requires the effect of a change in accounting estimate to be recognised prospectively by including it in profit or loss in the period of the change and, if applicable, future periods. Prior period comparatives are not restated because the change results from new information or new developments. Retrospective restatement applies to changes in accounting policy and correction of prior period errors, not to changes in estimate.

Question 10Financial Accounting and Reporting

An entity has a 25% investment in an associate with a carrying amount of ₦40,000,000. In the current year the associate reports a loss of ₦200,000,000, and the entity has no legal or constructive obligation to fund further losses. What amount of the associate's loss should the entity recognise?

  1. ₦0, because the associate made a loss
  2. ₦50,000,000, with the excess disclosed as a contingent liability
  3. ₦40,000,000, reducing the investment to nil, with the unrecognised share disclosed Correct answer.
  4. ₦200,000,000, recognising a liability for the full loss

Explanation

Under IAS 28, the investor's share of an associate's losses is recognised only to the extent of the carrying amount of the investment, after which recognition ceases unless the investor has incurred legal or constructive obligations or made payments on behalf of the associate. The share of loss here would be ₦50,000,000, but the investment is only ₦40,000,000, so the investment is reduced to nil and the unrecognised share of ₦10,000,000 is disclosed.

Question 11Financial Accounting and Reporting

A company issues a 5-year bond at a discount. Using the effective interest method, how is the interest expense recognised over the life of the bond?

  1. A decreasing amount each year as the discount is amortised
  2. The full discount is expensed in the year of issue
  3. An increasing amount each year as the carrying amount accretes toward face value Correct answer.
  4. A constant amount each year based on the coupon rate

Explanation

Under the effective interest method (IFRS 9), interest expense equals the effective interest rate multiplied by the amortised cost carrying amount. When a bond is issued at a discount, the carrying amount starts below face value and accretes upward as the discount is amortised, so the interest expense increases each period. The coupon rate produces a constant cash interest payment, not the expense.

Question 12Financial Accounting and Reporting

Under IFRS 9, which of the following financial assets is measured at fair value through other comprehensive income (FVOCI)?

  1. An equity investment held for trading
  2. A debt instrument held within a business model whose objective is to hold assets to collect contractual cash flows
  3. A derivative not designated as a hedging instrument
  4. A debt instrument held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, where the cash flows are solely payments of principal and interest Correct answer.

Explanation

IFRS 9 classifies a debt instrument at FVOCI when it is held in a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and its contractual terms give rise to cash flows that are solely payments of principal and interest (SPPI). Debt held solely to collect cash flows is measured at amortised cost, while trading assets and derivatives are measured at fair value through profit or loss.

Question 13Financial Accounting and Reporting

A parent owns 80% of a subsidiary. During the year, the parent sold goods to the subsidiary for ₦10,000,000 at a mark-up of 25% on cost, and half of those goods remained in the subsidiary's inventory at year end. What is the unrealised profit to be eliminated on consolidation?

  1. ₦1,250,000
  2. ₦2,500,000
  3. ₦2,000,000
  4. ₦1,000,000 Correct answer.

Explanation

The mark-up is 25% on cost, so profit included in the ₦10,000,000 selling price is ₦10,000,000 × 25/125 = ₦2,000,000. Since only half of the goods remain in inventory, the unrealised profit is ₦2,000,000 × 50% = ₦1,000,000. This amount is eliminated against inventory and group profit.

Question 14Financial Accounting and Reporting

Which of the following best describes the treatment of a government grant related to an asset under IAS 20 when the gross presentation method is used?

  1. The grant is deducted from the carrying amount of the asset
  2. The grant is recognised immediately in retained earnings
  3. The grant is recognised as revenue in full when received
  4. The grant is recognised as deferred income and amortised to profit or loss over the asset's useful life Correct answer.

Explanation

IAS 20 permits two presentations for grants related to assets: deduct the grant from the carrying amount of the asset, or recognise the grant as deferred income and amortise it to profit or loss over the useful life of the asset on a systematic basis. The gross method therefore recognises deferred income and releases it over the asset's life to match the depreciation. Recognising the grant immediately in retained earnings or as full revenue is not permitted.

Question 15Financial Accounting and Reporting

An entity's statement of cash flows shows a profit before tax of ₦20,000,000, depreciation of ₦3,000,000, an increase in trade receivables of ₦2,000,000 and a decrease in trade payables of ₦1,000,000. Using the indirect method, what is the net cash generated from operating activities before tax paid?

  1. ₦18,000,000
  2. ₦24,000,000
  3. ₦26,000,000
  4. ₦20,000,000 Correct answer.

Explanation

Starting from profit before tax of ₦20,000,000, add back depreciation of ₦3,000,000, deduct the increase in trade receivables of ₦2,000,000 and deduct the decrease in trade payables of ₦1,000,000. The result is ₦20,000,000 + ₦3,000,000 − ₦2,000,000 − ₦1,000,000 = ₦20,000,000. Depreciation is a non-cash item, while increases in receivables and decreases in payables absorb cash.

Question 16Financial Accounting and Reporting

Under IAS 12, a deferred tax liability should be recognised on which of the following?

  1. The initial recognition of goodwill
  2. The initial recognition of an asset or liability in a business combination
  3. Taxable temporary differences arising from the revaluation of property, plant and equipment Correct answer.
  4. The initial recognition of an asset in a transaction that is not a business combination and affects neither accounting profit nor taxable profit

Explanation

IAS 12 requires deferred tax to be recognised on all taxable temporary differences, including those arising from the revaluation of property, plant and equipment, with the tax recognised in other comprehensive income. The standard provides specific exemptions for the initial recognition of goodwill and for the initial recognition of assets or liabilities in transactions that are not business combinations and affect neither accounting nor taxable profit.

Question 17Financial Accounting and Reporting

An entity leases equipment for 4 years with annual payments of ₦5,000,000 payable in arrears. The interest rate implicit in the lease is 10%. The present value of the lease payments is approximately ₦15,849,000. What is the lease liability at the end of the first year, after the first payment?

  1. ₦12,434,000 Correct answer.
  2. ₦11,434,000
  3. ₦10,849,000
  4. ₦15,849,000

Explanation

Under IFRS 16, interest accrues on the lease liability at the implicit rate, and the payment reduces the liability. Interest for year one is ₦15,849,000 × 10% = ₦1,584,900, giving ₦17,433,900 before the payment of ₦5,000,000, so the closing liability is ₦12,433,900, approximately ₦12,434,000. The liability is not reduced by the full payment alone.

Question 18Financial Accounting and Reporting

Which of the following is a fundamental qualitative characteristic of useful financial information under the Conceptual Framework?

  1. Verifiability
  2. Faithful representation Correct answer.
  3. Comparability
  4. Timeliness

Explanation

The Conceptual Framework identifies two fundamental qualitative characteristics: relevance and faithful representation. Comparability, timeliness, verifiability and understandability are enhancing qualitative characteristics that increase the usefulness of information that is already relevant and faithfully represented. Faithful representation means the information depicts the economic phenomenon in a way that is complete, neutral and free from error.

Question 19Financial Accounting and Reporting

An entity has an investment property carried under the fair value model. At the start of the year its fair value was ₦30,000,000; at year end it was ₦27,000,000. How should the change be recognised?

  1. ₦3,000,000 loss in other comprehensive income
  2. No recognition because investment properties are not depreciated
  3. ₦3,000,000 loss deferred and amortised over the remaining useful life
  4. ₦3,000,000 loss in profit or loss Correct answer.

Explanation

Under IAS 40, when the fair value model is used, a change in fair value is recognised in profit or loss in the period in which it arises. A fall from ₦30,000,000 to ₦27,000,000 gives a ₦3,000,000 loss charged to profit or loss. Investment properties under the fair value model are not depreciated, but the fair value movement is still recognised.

Question 20Financial Accounting and Reporting

In a business combination accounted for under IFRS 3, which of the following is measured at fair value at the acquisition date?

  1. Acquisition-related costs such as advisory fees
  2. Restructuring provisions expected to be incurred by the acquirer
  3. Contingent consideration classified as a liability Correct answer.
  4. Pre-existing goodwill of the acquiree

Explanation

IFRS 3 requires contingent consideration classified as a liability to be measured at fair value at the acquisition date and remeasured subsequently through profit or loss. Acquisition-related costs are expensed as incurred, and the acquirer's own expected future restructuring costs are not recognised as part of the business combination. Goodwill recognised is the acquirer's goodwill, not the acquiree's pre-existing goodwill.

Question 21Financial Accounting and Reporting

An entity has 100,000 ordinary shares in issue throughout the year. It also has 20,000 convertible preference shares, each convertible into 2 ordinary shares, which are dilutive. What is the diluted number of ordinary shares used in the diluted EPS calculation?

  1. 100,000
  2. 120,000
  3. 140,000 Correct answer.
  4. 160,000

Explanation

Diluted EPS assumes conversion of dilutive potential ordinary shares. The 20,000 convertible preference shares convert into 20,000 × 2 = 40,000 ordinary shares, which are added to the 100,000 shares already in issue, giving 140,000. The preference shares themselves are not added as shares; only the resulting ordinary shares are.

Question 22Financial Accounting and Reporting

Under IAS 36, when should an impairment loss on a cash-generating unit be allocated to the assets of the unit?

  1. Equally among all assets of the unit
  2. First to goodwill, then to the other assets of the unit pro rata to their carrying amounts Correct answer.
  3. First to the asset with the largest carrying amount, then to the rest
  4. Only to goodwill, with no allocation to other assets

Explanation

IAS 36 requires an impairment loss for a cash-generating unit to be allocated first to reduce the carrying amount of any goodwill allocated to the unit, and then to the other assets of the unit pro rata to their carrying amounts. The allocation to other assets is subject to the floor that no asset is reduced below the highest of its fair value less costs of disposal, value in use and zero.

Question 23Financial Accounting and Reporting

Which of the following items is presented in other comprehensive income rather than in profit or loss?

  1. Gain on disposal of property, plant and equipment
  2. Interest expense on borrowings
  3. Impairment loss on trade receivables
  4. Remeasurements of a defined benefit plan Correct answer.

Explanation

IAS 19 requires remeasurements of the net defined benefit liability or asset, including actuarial gains and losses, to be recognised in other comprehensive income and not reclassified to profit or loss. Gains on disposal of PPE, impairment losses on receivables and interest expense are all recognised in profit or loss.

Question 24Financial Accounting and Reporting

An entity sells goods to a customer for ₦1,000,000 with payment due in 12 months, and the customer could alternatively pay ₦950,000 immediately. The entity identifies a significant financing component and does not elect the one-year practical expedient. Under IFRS 15, how should revenue be measured?

  1. ₦975,000, being the average of the two amounts
  2. ₦1,000,000, with the ₦50,000 recognised as a contract liability
  3. ₦1,000,000, with no adjustment for the financing component
  4. ₦950,000, with the ₦50,000 difference recognised as interest income over the year Correct answer.

Explanation

Because the contract has a significant financing component and the entity does not elect IFRS 15's one-year practical expedient, revenue is measured at the cash selling price of ₦950,000. The ₦50,000 difference is recognised as interest income over the 12-month financing period.

Question 25Financial Accounting and Reporting

Which of the following is the correct treatment of a prior period error under IAS 8?

  1. Corrected by adjusting only the current year's profit or loss
  2. Disclosed in the notes without adjustment to the financial statements
  3. Corrected prospectively in the current period
  4. Corrected retrospectively by restating prior period comparatives and adjusting opening retained earnings Correct answer.

Explanation

IAS 8 requires material prior period errors to be corrected retrospectively by restating the comparative amounts for the prior period presented and adjusting the opening balance of retained earnings. If the error occurred before the earliest period presented, opening retained earnings of the earliest period presented is adjusted. Prospective correction is reserved for changes in accounting estimate.

Question 26Financial Accounting and Reporting

Under the IASB Conceptual Framework, which measurement basis is described as reflecting the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date?

  1. Fair value Correct answer.
  2. Value in use
  3. Current cost
  4. Historical cost

Explanation

The Conceptual Framework defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is a market-based exit price, not an entity-specific value. Historical cost and current cost are different measurement bases, and value in use is an entity-specific present value concept used in impairment testing.

Question 27Financial Accounting and Reporting

An entity purchases a machine for ₦12,000,000. It incurs import duties of ₦1,200,000, non-refundable purchase taxes of ₦600,000, and freight of ₦300,000. Staff training costs of ₦500,000 are also incurred to operate the machine. Under IAS 16, what is the initial cost of the machine?

  1. ₦12,000,000
  2. ₦13,800,000
  3. ₦14,600,000
  4. ₦14,100,000 Correct answer.

Explanation

Under IAS 16, the cost of an item of property, plant and equipment comprises its purchase price, import duties and non-refundable purchase taxes, and any directly attributable costs of bringing the asset to the location and condition necessary for it to be capable of operating as intended. Freight is directly attributable, but staff training costs are not capitalised because they do not bring the asset to that condition. Therefore, cost = 12,000,000 + 1,200,000 + 600,000 + 300,000 = ₦14,100,000.

Question 28Financial Accounting and Reporting

An entity has a defined benefit obligation of ₦80,000,000 and plan assets with a fair value of ₦65,000,000 at the reporting date. The net defined benefit liability is ₦15,000,000. Under IAS 19, how should this net liability be presented in the statement of financial position?

  1. As a reduction of retained earnings
  2. As a current liability only
  3. As a non-current liability only
  4. As a liability, classified as current or non-current based on the timing of settlement Correct answer.

Explanation

IAS 19 requires the net defined benefit liability (or asset) to be recognised in the statement of financial position. The entity should classify the net liability as current or non-current depending on when the obligation is expected to be settled, consistent with IAS 1 presentation requirements. It is not automatically all current or all non-current, nor is it deducted from equity.

Question 29Financial Accounting and Reporting

Under IFRS 15, an entity enters into a contract with a customer to provide a service over time. The entity determines that the performance obligation is satisfied over time. Which method of measuring progress toward complete satisfaction of the performance obligation is most appropriate when the entity has a right to payment for performance completed to date?

  1. Cash received method
  2. Output method based on units delivered or surveys of performance Correct answer.
  3. Straight-line method over the contract term
  4. Cost-to-cost method based on costs incurred relative to total expected costs

Explanation

IFRS 15 permits either input or output methods to measure progress, but the method must depict the entity's performance. When the entity has a right to payment for performance completed to date, an output method such as units delivered or surveys of performance directly measures the value transferred to the customer. A cost-to-cost input method may also be acceptable, but the question asks for the most appropriate when payment is tied to performance completed, making output methods more representative.

Question 30Financial Accounting and Reporting

An entity has a building that is owner-occupied and carries it under the cost model. It also owns a separate building that is rented to third parties and carried under the fair value model in accordance with IAS 40. During the year, the fair value of the investment property increases by ₦5,000,000. How should this increase be recognised?

  1. As a direct increase to retained earnings
  2. As a deferred income liability
  3. In profit or loss as a gain Correct answer.
  4. In other comprehensive income and accumulated in equity

Explanation

Under IAS 40, investment property carried at fair value is remeasured at each reporting date, and any gain or loss arising from a change in fair value is recognised in profit or loss for the period. The increase is not recognised in other comprehensive income nor deferred. This treatment applies regardless of whether the property is rented to third parties, as long as it meets the definition of investment property.

Question 31Financial Accounting and Reporting

Under IAS 36, an entity identifies a cash-generating unit (CGU) that includes goodwill. The recoverable amount of the CGU is less than its carrying amount. How should the impairment loss be allocated among the assets of the CGU?

  1. Entirely to goodwill until goodwill is reduced to nil, with any excess allocated to other assets pro rata Correct answer.
  2. First to the asset with the largest carrying amount, then to others pro rata
  3. First to goodwill, then to other assets pro rata to their carrying amounts
  4. Pro rata to all assets including goodwill based on carrying amounts

Explanation

IAS 36 requires that an impairment loss for a CGU be allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. This ensures that goodwill absorbs the loss first. The allocation to other assets cannot reduce their carrying amounts below certain limits, but the initial order is goodwill first.

Question 32Financial Accounting and Reporting

An entity has a 30% interest in an associate. The associate reported profit after tax of ₦20,000,000 for the year and paid dividends of ₦5,000,000. The entity applies the equity method. What amount should the entity recognise in profit or loss for its share of the associate's profit, and what is the effect of the dividend on the carrying amount of the investment?

  1. Share of profit ₦6,000,000; dividend reduces carrying amount by ₦1,500,000 Correct answer.
  2. Share of profit ₦4,500,000; dividend reduces carrying amount by ₦1,500,000
  3. Share of profit ₦6,000,000; dividend increases carrying amount by ₦1,500,000
  4. Share of profit ₦6,000,000; dividend has no effect on carrying amount

Explanation

Under the equity method, the investor recognises its share of the associate's profit or loss in profit or loss, calculated as 30% × ₦20,000,000 = ₦6,000,000. Dividends received from the associate reduce the carrying amount of the investment because they represent a distribution of the associate's net assets. The dividend reduction is 30% × ₦5,000,000 = ₦1,500,000.

Question 33Financial Accounting and Reporting

An entity issues 10,000 convertible bonds with a face value of ₦1,000 each at par. The bonds carry a coupon rate of 5% and are convertible into ordinary shares at the option of the holder. The market interest rate for similar non-convertible bonds is 8%. Under IFRS 9, how should the entity account for the convertible bonds at initial recognition?

  1. Recognise the entire proceeds as a financial liability
  2. Recognise the bonds at fair value through profit or loss
  3. Recognise the entire proceeds as equity
  4. Split the proceeds between a financial liability and an equity component using the residual method Correct answer.

Explanation

Under IFRS 9, a convertible bond that gives the holder the option to convert into a fixed number of the entity's own equity instruments is a compound financial instrument. The issuer must separate the liability component, measured as the present value of future cash flows discounted at the market rate for a similar non-convertible bond, and the equity component, measured as the residual. The entire proceeds are not classified as liability or equity alone.

Question 34Financial Accounting and Reporting

Under IAS 12, an entity recognises a deferred tax asset for unused tax losses only to the extent that it is probable that future taxable profit will be available against which the unused tax losses can be utilised. Which of the following factors is most relevant in assessing the probability of future taxable profit?

  1. The entity's dividend policy
  2. The entity's current year profit before tax
  3. The entity's credit rating
  4. The entity's history of tax losses and the existence of taxable temporary differences Correct answer.

Explanation

IAS 12 requires an entity to consider all available evidence, both positive and negative, when assessing the probability of future taxable profit. A history of recent losses and the existence of taxable temporary differences that will reverse in the same period are key factors. Current year profit alone is not sufficient, and dividend policy or credit rating are not directly relevant to the utilisation of tax losses.

Question 35Financial Accounting and Reporting

A company issues 1,000 ordinary shares with a nominal value of ₦10 each at a price of ₦25 per share. The company incurs directly attributable transaction costs of ₦2,000. Under IAS 32, how should the excess of the issue proceeds over the nominal value and the transaction costs be treated?

  1. Excess credited to share premium ₦15,000; transaction costs expensed
  2. Excess credited to share premium ₦15,000; transaction costs deducted from share premium
  3. Excess credited to share premium ₦13,000; transaction costs deducted from equity Correct answer.
  4. Excess credited to share premium ₦13,000; transaction costs expensed

Explanation

Under IAS 32, transaction costs directly attributable to the issue of new shares are deducted from equity, net of tax, and the excess of proceeds over nominal value is credited to share premium. The gross excess is 1,000 × (₦25 - ₦10) = ₦15,000. After deducting transaction costs of ₦2,000, the net share premium is ₦13,000. The costs are not expensed.

Question 36Financial Accounting and Reporting

Under IFRS 5, an entity classifies a non-current asset as held for sale. The asset has a carrying amount of ₦10,000,000 and a fair value less costs to sell of ₦8,500,000. The entity expects to sell the asset within 12 months. How should the asset be measured and presented?

  1. Measured at ₦8,500,000 and presented as a current asset Correct answer.
  2. Measured at ₦8,500,000 and presented as a non-current asset
  3. Measured at ₦10,000,000 and presented as a non-current asset
  4. Measured at ₦10,000,000 and presented as a current asset

Explanation

Under IFRS 5, a non-current asset classified as held for sale is measured at the lower of its carrying amount and fair value less costs to sell, and is presented separately in the statement of financial position as a current asset. The impairment loss of ₦1,500,000 is recognised in profit or loss. The asset is not depreciated while held for sale.

Question 37Financial Accounting and Reporting

An entity has a loan payable with a carrying amount of ₦50,000,000 and an original effective interest rate of 10%. The entity modifies the terms of the loan, and the modified cash flows discounted at the original effective interest rate give a present value of ₦48,000,000. Under IFRS 9, how should the modification be accounted for?

  1. Adjust the carrying amount to ₦48,000,000 and recognise the difference in other comprehensive income
  2. Recognise a modification gain of ₦2,000,000 in profit or loss without derecognition Correct answer.
  3. Derecognise the old loan and recognise a new loan at fair value, with the difference in profit or loss
  4. Continue to carry the loan at ₦50,000,000 and disclose the modification in the notes

Explanation

Under IFRS 9, if the modification of a financial liability does not result in derecognition (because the present value of the modified cash flows discounted at the original effective interest rate is not substantially different, often assessed as less than 10% difference), the entity adjusts the carrying amount to the present value of the modified cash flows and recognises a modification gain or loss in profit or loss. Here, the difference is ₦2,000,000, which is less than 10% of the original carrying amount, so derecognition is not required.

Question 38Financial Accounting and Reporting

A parent entity sells a subsidiary that constituted a major line of business during the year. The subsidiary's results are presented as discontinued operations. Under IFRS 5, which of the following must be disclosed separately in the statement of profit or loss and other comprehensive income?

  1. The profit or loss of the discontinued operation and the gain or loss on disposal Correct answer.
  2. Only the gain or loss on disposal
  3. Only the revenue and expenses of the discontinued operation
  4. The carrying amount of the subsidiary's assets at the reporting date

Explanation

IFRS 5 requires an entity to present separately in the statement of profit or loss and other comprehensive income the total of the post-tax profit or loss of discontinued operations and the post-tax gain or loss on the disposal of the assets or disposal group constituting the discontinued operation. This allows users to assess the financial effects of discontinued operations separately from continuing operations.

Question 39Financial Accounting and Reporting

Under IAS 21, an entity has a monetary item receivable from a foreign operation that is not expected to be settled in the foreseeable future. The entity's functional currency is the naira, and the foreign operation's functional currency is the dollar. How should exchange differences on this item be recognised in the entity's consolidated financial statements?

  1. In profit or loss of the period
  2. As a deferred tax asset or liability
  3. As an adjustment to the cost of the investment in the foreign operation
  4. In other comprehensive income and accumulated in a separate component of equity Correct answer.

Explanation

Under IAS 21, exchange differences arising on a monetary item that forms part of an entity's net investment in a foreign operation are recognised in other comprehensive income in the consolidated financial statements and accumulated in a separate component of equity. They are not recognised in profit or loss until the net investment is disposed of, at which point they are reclassified to profit or loss.

Question 40Financial Accounting and Reporting

An entity has a piece of land that it holds for undetermined future use. Under IAS 40, how should this land be classified?

  1. As investment property Correct answer.
  2. As inventory
  3. As property, plant and equipment
  4. As a non-current asset held for sale

Explanation

Under IAS 40, land held for undetermined future use is classified as investment property because it is not held for use in the production or supply of goods or services, or for administrative purposes, nor is it held for sale in the ordinary course of business. It is held for capital appreciation or future development, which meets the definition of investment property.

Question 41Audit and Assurance

Under ISA 200, what is the primary objective of an audit of financial statements?

  1. To enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework Correct answer.
  2. To provide absolute assurance that the entity will continue as a going concern
  3. To guarantee that the financial statements are free from all errors and fraud
  4. To prepare the financial statements on behalf of management

Explanation

ISA 200 establishes that the auditor's objective is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement and to express an opinion on them. Reasonable assurance is high but not absolute, and the auditor does not prepare the statements.

Question 42Audit and Assurance

Which of the following best describes the concept of materiality in an audit?

  1. The total value of assets held by the client
  2. The maximum fee the auditor may charge for the engagement
  3. The amount of misstatement that could influence the economic decisions of users of the financial statements Correct answer.
  4. The number of transactions tested during substantive procedures

Explanation

Materiality is defined in terms of the effect of misstatements on the economic decisions of users taken on the basis of the financial statements. It is a matter of professional judgement, not a fee or asset measure.

Question 43Audit and Assurance

An auditor is assessing the risk that a client's revenue is overstated because the sales manager receives a bonus based on reported revenue. This is best described as:

  1. Inherent risk arising from the incentive to overstate revenue Correct answer.
  2. Detection risk arising from insufficient substantive testing
  3. Sampling risk arising from testing only a subset of transactions
  4. Control risk arising from a deficiency in the accounting system

Explanation

Inherent risk is the susceptibility of an assertion to misstatement before consideration of any related controls, and it is heightened by incentive structures such as revenue-based bonuses. Control risk concerns the risk that controls fail to prevent or detect misstatement, while detection and sampling risks relate to the auditor's procedures.

Question 44Audit and Assurance

Which procedure provides the most reliable audit evidence regarding the existence of a bank balance at year-end?

  1. Reviewing the cash book entries recorded by the finance officer
  2. Obtaining a direct written confirmation from the bank independently of the client Correct answer.
  3. Inquiring of the financial controller about the balance
  4. Inspecting the client's internal bank reconciliation prepared by a junior clerk

Explanation

ISA 505 treats external confirmations received directly from an independent third party as more reliable evidence than internally generated documentation. Inquiries and internal reconciliations are less persuasive because they originate within the entity.

Question 45Audit and Assurance

An auditor plans to rely on a control that requires the credit controller to approve all credit limits above a threshold. Which procedure best tests the operating effectiveness of this control?

  1. Reviewing the credit policy document approved by the board
  2. Inquiring whether the credit controller understands the policy
  3. Analysing the trend in bad debts over the year
  4. Inspecting a sample of approved credit limit forms for evidence of the controller's sign-off Correct answer.

Explanation

Testing operating effectiveness requires evidence that the control operated as designed throughout the period, which inspection of approved forms and sign-offs can provide. Inquiry alone and review of policy documents do not demonstrate that the control actually operated.

Question 46Audit and Assurance

Which of the following is an example of an analytical procedure used in the risk assessment phase?

  1. Recalculating depreciation charges on a sample of assets
  2. Sending a confirmation letter to a major customer
  3. Counting cash on hand at the year-end date
  4. Comparing the current year's gross margin with prior years and industry averages to identify unusual fluctuations Correct answer.

Explanation

Analytical procedures involve evaluating financial information by analysing plausible relationships among data, such as comparing margins across periods. Confirmations, cash counts and recalculations are substantive tests of detail rather than analytical procedures.

Question 47Audit and Assurance

An auditor identifies a misstatement in inventory valuation and concludes it is material but not pervasive. What is the most appropriate modification to the audit opinion?

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

Explanation

When a misstatement is material but not pervasive, ISA 705 requires a qualified opinion. An adverse opinion is used when the misstatement is both material and pervasive, and an emphasis of matter paragraph does not substitute for a modification.

Question 48Audit and Assurance

Which of the following circumstances would most likely require the auditor to modify the opinion due to a scope limitation?

  1. The auditor is denied access to the records of a significant subsidiary Correct answer.
  2. The auditor disagrees with a disclosure that is immaterial
  3. The client changes an accounting estimate with adequate disclosure
  4. The client discloses a material uncertainty relating to a lawsuit

Explanation

A scope limitation arises when the auditor cannot obtain sufficient appropriate evidence, such as being denied access to records. This leads to a qualified opinion or disclaimer depending on pervasiveness, whereas immaterial disagreements and disclosed uncertainties do not necessarily modify the opinion.

Question 49Audit and Assurance

Which assertion is primarily addressed when the auditor performs a cut-off test on sales around the year-end date?

  1. Rights and obligations
  2. Completeness and cut-off Correct answer.
  3. Existence
  4. Classification

Explanation

Cut-off testing examines whether transactions are recorded in the correct accounting period, which relates to completeness and cut-off assertions. Existence concerns whether recorded items exist, while rights and obligations concern ownership and liabilities.

Question 50Audit and Assurance

Under ISA 230, what is the general retention period for audit documentation?

  1. No minimum period is specified
  2. Until the next audit is completed
  3. At least five years from the date of the auditor's report Correct answer.
  4. At least ten years from the date of the auditor's report

Explanation

ISA 230 requires the auditor to retain engagement documentation for a period of at least five years from the date of the auditor's report, or from the date of the group auditor's report if later. National requirements may be longer.