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PIPFA Final Level practice questions

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Question 1Corporate Sector Syllabus

Under the conceptual framework for corporate financial reporting, which qualitative characteristic is enhanced when information is presented clearly, concisely and without unnecessary duplication?

  1. Comparability
  2. Timeliness
  3. Understandability Correct answer.
  4. Verifiability

Explanation

Understandability requires that information be classified and presented clearly and concisely so that users with reasonable business knowledge can comprehend it. Duplication and clutter reduce clarity, so they detract from understandability rather than from comparability, timeliness or verifiability.

Question 2Corporate Sector Syllabus

A company's board approves a dividend declared after the reporting date but before the financial statements are authorised for issue. How should this event be treated in the financial statements of the reporting period?

  1. Ignored entirely because dividends are never relevant to users
  2. Recognised as a liability at the reporting date because the board approved it before authorisation
  3. Disclosed as a non-adjusting event with no liability recognised at the reporting date Correct answer.
  4. Recognised as a prior period adjustment restating opening retained earnings

Explanation

A dividend declared after the reporting date does not create an obligation at the reporting date, so it is a non-adjusting event that is disclosed where material. Recognising the liability would misstate the financial position at year end.

Question 3Corporate Sector Syllabus

Which component of the IASB's conceptual framework defines the objective of general purpose financial reporting?

  1. To determine the taxable profit of an entity for the relevant fiscal year
  2. To provide a basis for calculating distributable reserves under company law
  3. To ensure that all entities report identical accounting policies regardless of industry
  4. To provide information useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity Correct answer.

Explanation

The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to primary users, namely investors, lenders and other creditors, in making resource allocation decisions. Taxable profit, uniform policies and distributable reserves are outside that objective.

Question 4Corporate Sector Syllabus

An entity uses the revaluation model for a class of plant. The carrying amount is 800,000 and the revalued amount is 950,000. A revaluation surplus of 100,000 from an earlier year remains in equity for the same asset. What amount is recognised in other comprehensive income on this revaluation?

  1. Nil, because all revaluation movements go to profit or loss
  2. 50,000
  3. 150,000 Correct answer.
  4. 100,000

Explanation

The whole increase of 150,000 is recognised in other comprehensive income because there is no prior revaluation decrease for that asset to reverse through profit or loss. The existing surplus of 100,000 does not cap the new surplus; it simply accumulates in the revaluation reserve.

Question 5Corporate Sector Syllabus

Under IFRS 15, a construction contract has a single performance obligation satisfied over time. Contract revenue to date is measured using costs incurred relative to total expected costs. Which term best describes this method?

  1. Input method based on costs incurred Correct answer.
  2. Expected value method
  3. Output method based on units delivered
  4. Residual approach

Explanation

Measuring progress by reference to costs incurred relative to total expected costs is an input method, because it uses the entity's inputs to the satisfaction of the performance obligation. Output methods measure progress using units delivered, milestones or time elapsed.

Question 6Corporate Sector Syllabus

A lessee classifies a lease as a finance lease. Which pattern of expense recognition applies over the lease term?

  1. A constant lease payment each period with no separation of components
  2. Interest on the lease liability only, with no depreciation
  3. Rent expense on a straight-line basis over the term
  4. Depreciation of the right-of-use asset plus interest on the lease liability, giving a front-loaded total expense Correct answer.

Explanation

For a finance lease the lessee recognises a right-of-use asset and a lease liability, then charges depreciation on the asset and interest on the liability. Because interest is calculated on the declining liability, the combined expense is higher in earlier periods.

Question 7Corporate Sector Syllabus

An entity holds a debt instrument whose contractual cash flows are solely payments of principal and interest, and the business model is to hold the asset to collect those cash flows. How is the asset measured?

  1. At cost less impairment only
  2. At fair value through profit or loss
  3. At amortised cost Correct answer.
  4. At fair value through other comprehensive income

Explanation

A financial asset is measured at amortised cost when the business model is to hold it to collect contractual cash flows and those cash flows are solely payments of principal and interest. Fair value measurement applies where the business model or cash flow characteristics differ.

Question 8Corporate Sector Syllabus

A company has 100,000 ordinary shares and 20,000 potentially dilutive options with an exercise price below the average market price. Profit attributable to ordinary shareholders is 400,000. What is the diluted earnings per share, applying the treasury share method?

  1. 4.00
  2. 3.33
  3. 3.70 Correct answer.
  4. 5.00

Explanation

The treasury share method treats the options' proceeds as used to buy shares at the average market price. If the average price is 5 per share, proceeds of 100,000 buy 20,000 shares, so all 20,000 options are dilutive, giving 120,000 shares and diluted EPS of 400,000/120,000 = 3.33. Where the exercise price is below the average price, the number of incremental shares equals options less shares assumed repurchased.

Question 9Corporate Sector Syllabus

Under IAS 12, a deferred tax liability arises when a taxable temporary difference exists. Which situation produces a taxable temporary difference?

  1. Tax base of an asset exceeds its carrying amount
  2. Carrying amount of an asset exceeds its tax base Correct answer.
  3. An item is neither recognised nor taxed in any period
  4. Carrying amount of a liability exceeds its tax base

Explanation

A taxable temporary difference arises where the carrying amount of an asset exceeds its tax base, because future taxable amounts will exceed future deductible amounts. The reverse situation creates a deductible temporary difference.

Question 10Corporate Sector Syllabus

An entity has an investment property measured at fair value. Which statement correctly describes the treatment of a gain in fair value?

  1. Deferred until the property is sold
  2. Recognised in other comprehensive income and recycled on disposal
  3. Recognised in other comprehensive income and never recycled
  4. Recognised in profit or loss for the period Correct answer.

Explanation

Under the fair value model for investment property, changes in fair value are recognised in profit or loss in the period they arise. There is no deferral and no recycling through OCI.

Question 11Corporate Sector Syllabus

A company sells goods with a right of return. At the reporting date it estimates that 5% of sales will be returned. Which accounting treatment is correct under IFRS 15?

  1. Recognise revenue only when the return period expires
  2. Recognise full revenue and a refund liability for the expected return, with a corresponding right to recover returned goods Correct answer.
  3. Recognise full revenue with no adjustment because returns are a future event
  4. Recognise no revenue until all goods are accepted by customers

Explanation

Revenue is recognised only to the extent that it is highly probable there will be no significant reversal, so the expected return is excluded and a refund liability recognised. A right to recover the returned goods is recognised as an asset with a corresponding adjustment to cost of sales.

Question 12Corporate Sector Syllabus

Which of the following is a principal threat to auditor independence when a former engagement partner joins the client as finance director?

  1. Self-interest threat
  2. Intimidation threat
  3. Advocacy threat
  4. Familiarity threat Correct answer.

Explanation

A familiarity threat arises when a close relationship with the client, including a former member of the audit team in a senior client role, makes the auditor too sympathetic to the client's interests. Safeguards may include removing the individual from the engagement.

Question 13Corporate Sector Syllabus

An auditor assesses the risk of material misstatement as high for revenue recognition. Which response is most appropriate?

  1. Increase substantive testing and perform procedures directed at the identified risk, such as testing cut-off around year end Correct answer.
  2. Reduce the extent of substantive testing and rely on analytical procedures only
  3. Rely on management's written representations in place of testing
  4. Decrease the sample size because the risk is already known

Explanation

When risk of material misstatement is assessed as high, the auditor increases the extent and changes the nature and timing of procedures to obtain more persuasive evidence. Revenue cut-off testing directly addresses the risk of premature or fictitious recognition.

Question 14Corporate Sector Syllabus

Which of the following best describes the purpose of a management representation letter obtained at the end of an audit?

  1. To provide evidence of the fair value of complex financial instruments
  2. To confirm that management has fulfilled its responsibilities and to support other audit evidence on matters such as completeness of liabilities Correct answer.
  3. To replace substantive testing of specific account balances
  4. To transfer the auditor's responsibility for the financial statements to management

Explanation

A representation letter confirms management's responsibility for the financial statements and provides written confirmation on matters relevant to the audit. It supports rather than replaces other evidence, and it cannot substitute for procedures on fair values or balances.

Question 15Corporate Sector Syllabus

A company's gearing ratio is 60% and the loan covenant requires it to remain below 55%. Which action by management would most directly address the covenant breach risk?

  1. Extending the useful life of plant without changing cash flows
  2. Converting part of the loan into equity or renegotiating the covenant Correct answer.
  3. Recognising additional revenue before delivery of goods
  4. Increasing dividend payments to shareholders

Explanation

Converting debt to equity reduces borrowings and increases equity, lowering gearing and relieving covenant pressure. Renegotiating the covenant directly addresses the breach risk. Recognising revenue early would be improper and does not address the underlying gearing.

Question 16Corporate Sector Syllabus

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

  1. Disclosed but not adjusted in any period
  2. Applied retrospectively with restatement of comparatives
  3. Applied by adjusting opening retained earnings only
  4. Applied prospectively from the date of change Correct answer.

Explanation

Changes in accounting estimates are applied prospectively, affecting the current and future periods rather than prior periods. Retrospective restatement applies to changes in accounting policy and corrections of prior period errors.

Question 17Corporate Sector Syllabus

An entity issues a convertible bond with a face value of 1,000,000, receiving proceeds of 1,000,000. The fair value of the liability component without the conversion option is 900,000. Under IFRS 9, what amount is initially recognised in equity for the conversion option?

  1. 100,000 Correct answer.
  2. 900,000
  3. 0
  4. 1,000,000

Explanation

The equity component is measured as the residual between the proceeds and the fair value of the liability component, giving 100,000. That residual is recognised in equity and is not subsequently remeasured.

Question 18Corporate Sector Syllabus

A parent owns 80% of a subsidiary and uses the proportionate share method for non-controlling interests. Which statement is correct on consolidation?

  1. Goodwill is not recognised when control is less than 100%
  2. NCI is measured at its proportionate share of the subsidiary's identifiable net assets Correct answer.
  3. NCI is always measured at fair value
  4. Goodwill includes the NCI's share of goodwill

Explanation

Under the proportionate share method, NCI is measured at its share of the acquiree's identifiable net assets, so goodwill reflects only the parent's share. Full goodwill arises only where NCI is measured at fair value.

Question 19Corporate Sector Syllabus

An entity has a defined benefit obligation of 5,000,000 and plan assets of 4,200,000 at year end. During the year, current service cost was 300,000 and net interest on the net defined benefit liability was 40,000. What is the remeasurement gain or loss if the closing net liability is to be recognised, assuming no contributions or benefits paid?

  1. A net asset of 800,000 recognised
  2. A net liability of 760,000 because net interest is deducted
  3. No net liability because plan assets offset the obligation
  4. A net liability of 800,000 recognised in the statement of financial position Correct answer.

Explanation

The net defined benefit liability is the present value of the obligation less the fair value of plan assets, giving 800,000. Service cost and net interest affect profit or loss and OCI, but the balance sheet position is the difference between the two measured amounts.

Question 20Corporate Sector Syllabus

Which of the following best describes the role of the audit committee in corporate governance?

  1. Managing the day-to-day operations of the entity
  2. Overseeing financial reporting, internal control and the external audit relationship Correct answer.
  3. Approving the audit opinion on behalf of the auditor
  4. Setting the remuneration of all operational staff

Explanation

An audit committee oversees the integrity of financial reporting, the effectiveness of internal control and the relationship with the external auditor. It does not manage operations, set operational pay or approve the auditor's opinion.

Question 21Corporate Sector Syllabus

An entity reports a provision for a legal claim. Which condition is required before a provision can be recognised under IAS 37?

  1. A possible obligation that may arise from a future event
  2. A future operating loss that management intends to avoid
  3. A constructive obligation that arises only if the entity chooses to act
  4. A present obligation arising from a past event, a probable outflow of resources and a reliable estimate Correct answer.

Explanation

A provision is recognised when there is a present obligation from a past event, it is probable that an outflow of economic benefits will be required, and a reliable estimate can be made. Possible obligations are contingent liabilities that are disclosed rather than recognised.

Question 22Corporate Sector Syllabus

A company uses a weighted average cost of capital of 12% to discount expected cash flows. The project's net present value is positive at 12% but negative at 15%. What does this indicate about the internal rate of return?

  1. The IRR is between 12% and 15% Correct answer.
  2. The IRR is exactly 15%
  3. The IRR cannot be determined from NPV information
  4. The IRR is below 12%

Explanation

The IRR is the discount rate at which NPV is zero. Since NPV changes from positive at 12% to negative at 15%, the zero point lies between those rates.

Question 23Corporate Sector Syllabus

Which statement about the statement of cash flows prepared under IAS 7 is correct?

  1. Interest paid may be classified as an operating or financing cash flow, applied consistently Correct answer.
  2. Dividends paid must always be classified as operating cash flows
  3. Non-cash transactions are included in the statement of cash flows
  4. Taxes paid are always classified as investing cash flows

Explanation

IAS 7 permits interest paid to be classified as operating or financing, and interest and dividends received as operating or investing, provided the choice is applied consistently. Non-cash transactions are excluded from the statement and disclosed separately.

Question 24Corporate Sector Syllabus

An entity has a loan of 1,000,000 at a stated rate of 8% with transaction costs of 30,000. Using the effective interest method, which statement is correct?

  1. The loan is measured at fair value through profit or loss
  2. Interest expense is calculated on the amortised cost, giving a rate above 8% Correct answer.
  3. Transaction costs are expensed immediately in full
  4. Interest expense is always the coupon of 80,000 each year

Explanation

Transaction costs are deducted from the initial carrying amount, so interest is calculated on the amortised cost using the effective interest rate, which exceeds the 8% coupon. The difference unwinds over the life of the loan.

Question 25Corporate Sector Syllabus

A company reports profit before tax of 500,000 and a tax expense of 120,000. The statutory tax rate is 20%. Which factor best explains the difference between the expected tax of 100,000 and the reported tax expense?

  1. A decrease in the statutory tax rate during the year
  2. A deferred tax asset arising from unused tax losses
  3. A permanent difference such as non-deductible expenses of 100,000 Correct answer.
  4. A change in the entity's functional currency

Explanation

Non-deductible expenses increase taxable profit without changing accounting profit, so tax expense exceeds the statutory rate applied to profit before tax. A 100,000 permanent difference at 20% explains the 20,000 excess.

Question 26Corporate Sector Syllabus

Under the IASB Conceptual Framework, which qualitative characteristic requires information to be capable of making a difference in users' decisions?

  1. Verifiability
  2. Comparability
  3. Timeliness
  4. Relevance Correct answer.

Explanation

Relevance is a fundamental qualitative characteristic: information is relevant when it has predictive value, confirmatory value, or both, so it can make a difference in decisions. Comparability, timeliness and verifiability are enhancing characteristics that improve useful information but do not by themselves make it decision-useful.

Question 27Corporate Sector Syllabus

A company's board delegates detailed oversight of the financial reporting process and internal control to an audit committee. Which composition requirement best supports effective discharge of that role?

  1. Independence from management with at least one member possessing financial expertise Correct answer.
  2. A majority of executive directors with operational responsibility
  3. Rotation of the chair every year among all board members
  4. Representation of the entity's largest institutional shareholder

Explanation

Effective audit committees need independence from management so they can challenge it, and competence in financial reporting, typically evidenced by at least one financial expert. Executive directors and major shareholders may have conflicts that undermine objective oversight of reporting and controls.

Question 28Corporate Sector Syllabus

An entity's gearing covenant requires net debt to EBITDA below 3.5 times. At year end the ratio is 3.7 times. Which action by management is consistent with the ethical responsibilities of a professional accountant?

  1. Accelerate next period's sales by offering extended credit terms to customers
  2. Reclassify a payable as equity to reduce net debt without disclosure
  3. Delay recognising a major supplier invoice until the next period
  4. Disclose the covenant breach and open negotiations with the lender for a waiver Correct answer.

Explanation

A covenant breach is a material fact that must be disclosed and addressed transparently with the lender; a waiver obtained before the reporting date may affect classification of the loan. Manipulating balances or pulling forward sales misrepresents performance and breaches integrity and objectivity.

Question 29Corporate Sector Syllabus

Which of the following is the primary purpose of the auditor's report issued under ISA 700?

  1. To give assurance on the future profitability of the entity
  2. To provide the auditor's opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable framework Correct answer.
  3. To certify that the financial statements are free from all error
  4. To confirm that the entity's internal controls are fully effective

Explanation

An audit report expresses an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. It conveys reasonable, not absolute, assurance and gives no opinion on future results or on the effectiveness of controls unless a separate engagement covers them.

Question 30Corporate Sector Syllabus

An entity uses the revaluation model for a class of property, plant and equipment under IAS 16. A revaluation surplus arises on one item. How is that surplus recognised?

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

Explanation

Under IAS 16 an increase in carrying amount from revaluation is recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus, unless it reverses a previous revaluation decrease recognised in profit or loss. It is not taken to retained earnings directly or recorded as a liability.

Question 31Corporate Sector Syllabus

An entity enters into a contract with a customer that includes a three-year maintenance service and an equipment sale. Which step of the IFRS 15 five-step model requires the entity to allocate the transaction price to distinct performance obligations?

  1. Step 2, identifying the performance obligations
  2. Step 3, determining the transaction price
  3. Step 1, identifying the contract with the customer
  4. Step 4, allocating the transaction price to the performance obligations Correct answer.

Explanation

The fourth step of IFRS 15 requires allocation of the transaction price to each performance obligation on the basis of relative stand-alone selling prices. Identifying performance obligations is step two and determining the transaction price is step three, so allocation is a separate later step.

Question 32Corporate Sector Syllabus

An entity holds a portfolio of equity investments that it manages and evaluates on a fair value basis. Which measurement category under IFRS 9 is appropriate?

  1. Cost less impairment
  2. Fair value through other comprehensive income with recycling
  3. Amortised cost
  4. Fair value through profit or loss Correct answer.

Explanation

Equity investments are measured at fair value through profit or loss unless the entity makes an irrevocable election at initial recognition to present fair value changes in other comprehensive income. Amortised cost and cost less impairment are not available for equity instruments under IFRS 9.

Question 33Corporate Sector Syllabus

Under IAS 10, which of the following events occurring after the reporting date would require adjustment of the financial statements?

  1. A decline in market prices of investments after the reporting period
  2. A fire destroying a warehouse in the following period
  3. Announcement of a plan to restructure operations not contemplated at year end
  4. A major customer bankruptcy confirming a receivable was impaired at year end Correct answer.

Explanation

IAS 10 requires adjustment for events that provide evidence of conditions existing at the reporting date, such as a customer's deteriorating financial position being confirmed by later bankruptcy. Conditions arising after the reporting date are non-adjusting and may require disclosure if material.

Question 34Corporate Sector Syllabus

An entity has a defined benefit obligation of 4,000,000 and plan assets of 3,500,000. Actuarial losses of 200,000 arise during the year. Under IAS 19, how are these remeasurement losses recognised?

  1. Directly against retained earnings without passing through OCI
  2. In profit or loss within employee benefit expense
  3. In other comprehensive income and not reclassified to profit or loss Correct answer.
  4. As a reduction of the defined benefit obligation only

Explanation

IAS 19 requires remeasurements of the net defined benefit liability, including actuarial gains and losses, to be recognised in other comprehensive income and never reclassified to profit or loss. This separates them from service cost and net interest, which are recognised in profit or loss.

Question 35Corporate Sector Syllabus

A company reports profit before tax of 800,000 and tax expense of 200,000, while the statutory rate is 20%. Which item would explain the difference if the effective rate were 25%?

  1. Non-deductible expenses such as certain fines and entertainment costs Correct answer.
  2. A reduction in the statutory tax rate enacted during the year
  3. Exempt dividend income received from a subsidiary
  4. An increase in deductible temporary differences reversing in future periods

Explanation

The effective tax rate exceeds the statutory rate when permanent differences increase taxable profit without a corresponding accounting deduction, such as non-deductible expenses. Exempt income lowers the effective rate, and rate changes affect deferred tax balances rather than creating this upward reconciliation.

Question 36Corporate Sector Syllabus

An entity has a machine with a carrying amount of 500,000 and a tax base of 400,000. The statutory tax rate is 25%. Assuming no other differences, what is the deferred tax consequence?

  1. Deferred tax asset of 25,000
  2. No deferred tax recognised
  3. Deferred tax liability of 25,000 Correct answer.
  4. Deferred tax liability of 125,000

Explanation

The taxable temporary difference is 100,000 (500,000 less 400,000), which will reverse as future taxable amounts. Multiplying by the 25% rate gives a deferred tax liability of 25,000.

Question 37Corporate Sector Syllabus

An entity's operating cash flow is 600,000, capital expenditure on new plant is 250,000 and dividends paid are 100,000. Using free cash flow to the firm as operating cash flow less capital expenditure, what is the free cash flow and how should a shortfall be interpreted?

  1. 450,000, because dividends are deducted before debt service
  2. 350,000, which is available to service debt and equity holders Correct answer.
  3. 250,000, because only the capital expenditure is deducted
  4. 600,000, because dividends are an operating outflow

Explanation

Free cash flow to the firm deducts capital expenditure from operating cash flow, giving 350,000 before any payments to providers of finance. Dividends are a return to equity holders and are not deducted when measuring cash available to all capital providers.

Question 38Corporate Sector Syllabus

An entity issues 10,000 share options to employees. The fair value per option at grant date is 6 and vesting is conditional on three years' service. Under IFRS 2, what is the expense recognised in the first year?

  1. 20,000, being one third of the total fair value Correct answer.
  2. 60,000, recognised in full at grant date
  3. 18,000, based on the year-end fair value
  4. Zero until the options vest

Explanation

IFRS 2 requires the total grant-date fair value of 60,000 to be recognised over the vesting period, so the first-year expense is one third, or 20,000. The grant-date fair value is fixed and is not remeasured for later share price changes.

Question 39Corporate Sector Syllabus

A company enters a sale and leaseback transaction, transferring an asset to a buyer-lessor and leasing it back for ten years. Under IFRS 16, how is a gain on the sale treated if the transfer qualifies as a sale?

  1. Deferred and released over the lease term in equal instalments
  2. Recognised only to the extent of the rights transferred to the buyer-lessor Correct answer.
  3. Recognised in full immediately in profit or loss
  4. Recognised in other comprehensive income

Explanation

When a sale and leaseback qualifies as a sale, the seller-lessee recognises a gain only to the extent of the rights transferred to the buyer-lessor; the portion relating to retained right-of-use is not recognised. Full immediate recognition would overstate the gain because the seller retains use of part of the asset.

Question 40Corporate Sector Syllabus

An entity has a 30% interest in an associate and significant influence. During the year the associate reports profit of 1,000,000 and pays dividends of 400,000. What is the net effect on the investor's carrying amount of the investment?

  1. No change
  2. Increase of 180,000 Correct answer.
  3. Increase of 420,000
  4. Increase of 300,000

Explanation

The equity method recognises 30% of the associate's profit, 300,000, and reduces the carrying amount by 30% of dividends received, 120,000. The net increase is therefore 180,000.

Question 41Corporate Sector Syllabus

An entity has a provision for a warranty. At the start of the year the provision is 200,000. During the year warranty claims of 150,000 are settled and a new provision of 260,000 is required at year end. What amount is charged to profit or loss for the year?

  1. 60,000
  2. 210,000 Correct answer.
  3. 260,000
  4. 150,000

Explanation

The charge equals the closing provision plus amounts settled less the opening provision: 260,000 plus 150,000 less 200,000 equals 210,000. This reconciles the movement in the liability with the expense recognised.

Question 42Corporate Sector Syllabus

An entity's inventory cost is 120,000 and its net realisable value is 105,000. Which treatment is required under IAS 2?

  1. Carry at 120,000 and disclose the difference
  2. Write down to 105,000 and recognise the loss in other comprehensive income
  3. Carry at 120,000 because cost is the default measurement
  4. Write down to 105,000 and recognise the 15,000 as an expense Correct answer.

Explanation

IAS 2 requires inventory to be measured at the lower of cost and net realisable value, so the write-down of 15,000 is recognised as an expense in profit or loss. Subsequent reversal is permitted only when justified by a rise in net realisable value.

Question 43Corporate Sector Syllabus

An auditor identifies a risk that management may have overstated revenue by recording sales before goods are shipped. Which procedure provides the most reliable evidence about cut-off at year end?

  1. Testing shipping documents around the year end and matching them to recorded sales Correct answer.
  2. Reviewing the aged trade receivables listing
  3. Analytical review of monthly revenue trends
  4. Inquiry of the sales director about shipping practices

Explanation

Matching shipping documentation dated around the reporting date to sales records provides direct, reliable evidence about whether revenue was recorded in the correct period. Inquiry alone is less reliable, and trend analysis or receivables ageing are indirect indicators of cut-off.

Question 44Corporate Sector Syllabus

An entity is the defendant in a lawsuit. Legal counsel advises that an outflow is probable but the amount cannot be measured reliably. What is the correct accounting treatment under IAS 37?

  1. Recognise no liability and make no disclosure
  2. Recognise a contingent asset
  3. Recognise a provision at the best estimate
  4. Recognise a contingent liability and disclose it unless the possibility of outflow is remote Correct answer.

Explanation

A provision requires both a probable outflow and a reliable estimate. Where the outflow is probable but the amount cannot be measured reliably, IAS 37 treats the obligation as a contingent liability that is disclosed unless the possibility of outflow is remote.

Question 45Corporate Sector Syllabus

An entity's financial statements are prepared on a going concern basis. Which condition most directly casts significant doubt on that assumption?

  1. A planned capital expenditure programme funded from retained earnings
  2. Negative operating cash flows combined with loan covenants breached and no committed refinancing Correct answer.
  3. A decline in gross margin caused by higher input costs
  4. A net loss in the current year with adequate reserves and undrawn facilities

Explanation

Going concern doubt arises from conditions such as negative cash flows together with covenant breaches and the absence of committed finance, because the entity may be unable to meet obligations as they fall due. A single loss or margin decline is manageable where reserves and facilities exist.

Question 46Corporate Sector Syllabus

An entity changes from the straight-line to the reducing balance method of depreciation for existing plant. How should this be accounted for under IAS 8?

  1. As a change in accounting estimate applied prospectively Correct answer.
  2. As a change in accounting policy applied retrospectively
  3. As a prior period error corrected retrospectively
  4. As a change in reporting entity

Explanation

A change in depreciation method reflects a revised expectation of the pattern of consumption of economic benefits and is a change in accounting estimate. It is applied prospectively from the date of change, with disclosure of the nature and effect of the change.

Question 47Corporate Sector Syllabus

A company has profit after tax of 900,000 and 300,000 ordinary shares outstanding throughout the year. It also has 100,000 convertible preference shares, each convertible into one ordinary share, which would save preference dividends of 60,000 after tax. What is the diluted earnings per share?

  1. 2.40
  2. 2.25 Correct answer.
  3. 2.75
  4. 3.00

Explanation

Diluted earnings add back the after-tax preference dividend to give 960,000, and the weighted average share count rises to 400,000, producing diluted EPS of 2.25. The convertible is dilutive because 2.25 is below the basic EPS of 3.00.

Question 48Corporate Sector Syllabus

An entity has a foreign operation whose functional currency differs from the parent's presentation currency. Exchange differences on translating the operation's assets and liabilities at the closing rate are recognised in other comprehensive income. On disposal of the operation, how is the cumulative translation reserve treated?

  1. Reclassified to profit or loss as part of the gain or loss on disposal Correct answer.
  2. Offset against goodwill arising on the original acquisition
  3. Transferred directly to retained earnings without affecting profit
  4. Retained in equity indefinitely

Explanation

Under IAS 21 the cumulative exchange differences recognised in other comprehensive income are reclassified from equity to profit or loss when the foreign operation is disposed of. This recycling ensures the total gain or loss on disposal is recognised in the period of disposal.

Question 49Corporate Sector Syllabus

An entity's taxable temporary differences include 500,000 relating to plant, offset by deductible temporary differences of 200,000. A deferred tax asset is recognised only where recovery is probable. Assuming a 25% rate and sufficient future taxable profit for the plant difference only, what net deferred tax position is reported?

  1. Liability of 125,000
  2. Liability of 75,000 Correct answer.
  3. Asset of 50,000
  4. Liability of 175,000

Explanation

The taxable temporary difference of 500,000 gives a deferred tax liability of 125,000, while the deductible difference gives a potential asset of 50,000 that is recognised because recovery is probable. Netting within the same tax jurisdiction and entity yields a net liability of 75,000.

Question 50Corporate Sector Syllabus

An auditor concludes that a material misstatement in inventory is pervasive to the financial statements. Management refuses to adjust the statements. Which opinion is appropriate under ISA 705?

  1. Qualified opinion due to material misstatement
  2. Adverse opinion due to material and pervasive misstatement Correct answer.
  3. Unmodified opinion with an emphasis of matter paragraph
  4. Disclaimer of opinion due to inability to obtain evidence

Explanation

Where the auditor has obtained sufficient evidence and concludes that misstatements are both material and pervasive, an adverse opinion is expressed. A qualified opinion is used where the misstatement is material but not pervasive, and a disclaimer applies where evidence cannot be obtained.