James died on 22 January 2015. He had made the following gifts during his lifetime:(1) On 9 October 2007, a cash gift of ￡35,000 to a trust. No lifetime inheritance tax was payable in respect of this gift.(2) On 14 May 2013, a cash gift of ￡420,000 to his daughter.(3) On 2 August 2013, a gift of a property valued at ￡260,000 to a trust. No lifetime inheritance tax was payable in respect of this gift because it was covered by the nil rate band. By the time of James’ death on 22 January 2015, the property had increased in value to ￡310,000.On 22 January 2015, James’ estate was valued at ￡870,000. Under the terms of his will, James left his entire estate to his children.The nil rate band of James’ wife was fully utilised when she died ten years ago.The nil rate band for the tax year 2007–08 is ￡300,000, and for the tax year 2013–14 it is ￡325,000.Required:(a) Calculate the inheritance tax which will be payable as a result of James’ death, and state who will be responsible for paying the tax. (6 marks)(b) Explain why it might have been beneficial for inheritance tax purposes if James had left a portion of his estate to his grandchildren rather than to his children. (2 marks)(c) Explain why it might be advantageous for inheritance tax purposes for a person to make lifetime gifts even when such gifts are made within seven years of death.Notes:1. Your answer should include a calculation of James’ inheritance tax saving from making the gift of property to the trust on 2 August 2013 rather than retaining the property until his death.2. You are not expected to consider lifetime exemptions in this part of the question. (2 marks)
The town of Brighttown in Euraria has a mayor (elected every five years by the people in the town) who is responsible for, amongst other things, the transport policy of the town.A year ago, the mayor (acting as project sponsor) instigated a ‘traffic lite’ project to reduce traffic congestion at traffic lights in the town. Rather than relying on fixed timings, he suggested that a system should be implemented which made the traffic lights sensitive to traffic flow. So, if a queue built up, then the lights would automatically change to green (go). The mayor suggested that this would have a number of benefits. Firstly, it would reduce harmful emissions at the areas near traffic lights and, secondly, it would improve the journey times for all vehicles, leading to drivers ‘being less stressed’. He also cited evidence from cities overseas where predictable journey times had been attractive to flexible companies who could set themselves up anywhere in the country. He felt that the new system would attract such companies to the town.The Eurarian government has a transport regulation agency called OfRoad. Part of OfRoad’s responsibilities is to monitor transport investments and it was originally critical of the Brighttown ‘traffic lite’ project because the project’s benefits were intangible and lacked credibility. The business case did not include a quantitative cost/benefit analysis. OfRoad has itself published a benefits management process which classifies benefits in the following way.Financial: A financial benefit can be confidently allocated in advance of the project. Thus if the investment will save $90,000 per year in staff costs then this is a financial benefit.Quantifiable: A quantifiable benefit is a benefit where there is sufficient credible evidence to suggest, in advance, how much benefit will result from the project. This benefit may be financial or non-financial. For example, energy savings from a new building might be credibly predicted in advance. However, the exact amount of savings cannot be accurately forecast.Measurable benefit: A measurable benefit is a benefit which can only be confidently assessed post-implementation, and so cannot be reliably predicted in advance. Increase in sales from a particular initiative is an example of a measurable benefit. Measurable benefits may either be financial or non-financial.Observable benefit: An observable benefit is a benefit which a specific individual or group will decide, using agreed criteria, has been realised or not. Such benefits are usually non-financial. Improved staff morale might be an example of an observable benefit.One month ago, the mayoral elections saw the election of a new mayor with a completely distinct transport policy with different objectives. She wishes to address traffic congestion by attracting commuters away from their cars and onto public transport. Part of her policy is a traffic light system which gives priority to buses. The town council owns the buses which operate in the town and they have invested heavily in buses which are comfortable and have significantly lower emissions than the conventional cars used by most people in the town. The new mayor wishes to improve the frequency, punctuality and convenience of these buses, so that they tempt people away from using their cars. This will require more buses and more bus crews, a requirement which the mayor presents as ‘being good for the unemployment rate in this town’. It will also help the bus service meet the punctuality service level which it published three years ago, but has never yet met. ‘A reduction in cars and an increase in buses will help us meet our target’, the mayor claims.The mayor has also suggested a number of initiatives to discourage people from taking their cars into the town. She intends to sell two car parks for housing land (raising $325,000) and this will reduce car park capacity from 1,000 to 800 car spaces per day. She also intends to raise the daily parking fee from $3 to $4. Car park occupancy currently stands at 95% (it is difficult to achieve 100% for technical reasons) and the same occupancy rate is expected when the car park capacity is reduced.The new mayor believes that her policy signals the fact that Brighttown is serious about its green credentials. ‘This’, she says, ‘will attract green consumers to come and live in our town and green companies to set up here. These companies and consumers will bring great benefit to our community.’ To emphasise this, she has set up a Go Green team to encourage green initiatives in the town.The ‘traffic lite’ project to tackle congestion proposed by the former mayor is still in the development stage. The new mayor believes that this project can be modified to deliver her vision and still be ready on the date promised by her predecessor.Required:(a) A ‘terms of reference’ (project initiation document, project charter) was developed for the ‘traffic lite’ project to reduce traffic congestion.Discuss what changes will have to be made to this ‘terms of reference’ (project initiation document, project charter) to reflect the new mayor’s vision of the project. (5 marks)(b) The new mayor wishes to re-define the business case for the project, using the benefits categorisation suggested by OfRoad. Identify costs and benefits for the revised project, classifying each benefit using the guidance provided by OfRoad. (14 marks)(c) Stakeholder management is the prime responsibility of the project manager.Discuss the appropriate management of each of the following three stakeholders identified in the revised (modified) project.(i) The new mayor;(ii) OfRoad;(iii) A private motorist in Brighttown who uses his vehicle to commute to his job in the town. (6 marks)
You are the audit manager of Chestnut Co and are reviewing the key issues identified in the files of two audit clients.Palm Industries Co (Palm)Palm’s year end was 31 March 2015 and the draft financial statements show revenue of $28·2 million, receivables of $5·6 million and profit before tax of $4·8 million. The fieldwork stage for this audit has been completed.A customer of Palm owed an amount of $350,000 at the year end. Testing of receivables in April highlighted that no amounts had been paid to Palm from this customer as they were disputing the quality of certain goods received from Palm. The finance director is confident the issue will be resolved and no allowance for receivables was made with regards to this balance.Ash Trading Co (Ash)Ash is a new client of Chestnut Co, its year end was 31 January 2015 and the firm was only appointed auditors in February 2015, as the previous auditors were suddenly unable to undertake the audit. The fieldwork stage for this audit is currently ongoing.The inventory count at Ash’s warehouse was undertaken on 31 January 2015 and was overseen by the company’s internal audit department. Neither Chestnut Co nor the previous auditors attended the count. Detailed inventory records were maintained but it was not possible to undertake another full inventory count subsequent to the year end.The draft financial statements show a profit before tax of $2·4 million, revenue of $10·1 million and inventory of $510,000.Required:For each of the two issues:(i) Discuss the issue, including an assessment of whether it is material;(ii) Recommend ONE procedure the audit team should undertake to try to resolve the issue; and(iii) Describe the impact on the audit report if the issue remains UNRESOLVED.Notes:1 The total marks will be split equally between each of the two issues.2 Audit report extracts are NOT required.
Which of the following statements relating to internal and external auditors is correct?A.Internal auditors are required to be members of a professional bodyB.Internal auditors’ scope of work should be determined by those charged with governanceC.External auditors report to those charged with governanceD.Internal auditors can never be independent of the company
Under certain circumstances, profits made on transactions between members of a group need to be eliminated from the consolidated financial statements under IFRS.Which of the following statements about intra-group profits in consolidated financial statements is/are correct?(i) The profit made by a parent on the sale of goods to a subsidiary is only realised when the subsidiary sells the goods to a third party(ii) Eliminating intra-group unrealised profits never affects non-controlling interests(iii) The profit element of goods supplied by the parent to an associate and held in year-end inventory must be eliminated in fullA.(i) onlyB.(i) and (ii)C.(ii) and (iii)D.(iii) only
In 2014 Mr Yuan inherited an estate of RMB2 million from his uncle who had died two months earlier.What is the correct treatment of the estate income for individual income tax purposes?A.The estate income is not taxableB.The estate income will be taxed as occasional (ad hoc) incomeC.The estate income will be taxed as other incomeD.The estate income will be taxed as service income
The following information is available for a manufacturing company which produces multiple products:(i) The product mix ratio(ii) Contribution to sales ratio for each product(iii) General fixed costs(iv) Method of apportioning general fixed costsWhich of the above are required in order to calculate the break-even sales revenue for the company?A.All of the aboveB.(i), (ii) and (iii) onlyC.(i), (iii) and (iv) onlyD.(ii) and (iii) only
C Co uses material B, which has a current market price of $0·80 per kg. In a linear program, where the objective is to maximise profit, the shadow price of material B is $2 per kg. The following statements have been made:(i) Contribution will be increased by $2 for each additional kg of material B purchased at the current market price(ii) The maximum price which should be paid for an additional kg of material B is $2(iii) Contribution will be increased by $1·20 for each additional kg of material B purchased at the current market price(iv) The maximum price which should be paid for an additional kg of material B is $2·80Which of the above statements is/are correct?A.(ii) onlyB.(ii) and (iii)C.(i) onlyD.(i) and (iv)
You are an audit manager at Rockwell Co, a firm of Chartered Certified Accountants. You are responsible for the audit of the Hopper Group, a listed audit client which supplies ingredients to the food and beverage industry worldwide.The audit work for the year ended 30 June 2015 is nearly complete, and you are reviewing the draft audit report which has been prepared by the audit senior. During the year the Hopper Group purchased a new subsidiary company, Seurat Sweeteners Co, which has expertise in the research and design of sugar alternatives. The draft financial statements of the Hopper Group for the year ended 30 June 2015 recognise profit before tax of $495 million (2014 – $462 million) and total assets of $4,617 million (2014: $4,751 million). An extract from the draft audit report is shown below:Basis of modified opinion (extract)In their calculation of goodwill on the acquisition of the new subsidiary, the directors have failed to recognise consideration which is contingent upon meeting certain development targets. The directors believe that it is unlikely that these targets will be met by the subsidiary company and, therefore, have not recorded the contingent consideration in the cost of the acquisition. They have disclosed this contingent liability fully in the notes to the financial statements. We do not feel that the directors’ treatment of the contingent consideration is correct and, therefore, do not believe that the criteria of the relevant standard have been met. If this is the case, it would be appropriate to adjust the goodwill balance in the statement of financial position.We believe that any required adjustment may materially affect the goodwill balance in the statement of financial position. Therefore, in our opinion, the financial statements do not give a true and fair view of the financial position of the Hopper Group and of the Hopper Group’s financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards.Emphasis of Matter ParagraphWe draw attention to the note to the financial statements which describes the uncertainty relating to the contingent consideration described above. The note provides further information necessary to understand the potential implications of the contingency.Required:(a) Critically appraise the draft audit report of the Hopper Group for the year ended 30 June 2015, prepared by the audit senior.Note: You are NOT required to re-draft the extracts from the audit report. (10 marks)(b) The audit of the new subsidiary, Seurat Sweeteners Co, was performed by a different firm of auditors, Fish Associates. During your review of the communication from Fish Associates, you note that they were unable to obtain sufficient appropriate evidence with regard to the breakdown of research expenses. The total of research costs expensed by Seurat Sweeteners Co during the year was $1·2 million. Fish Associates has issued a qualified audit opinion on the financial statements of Seurat Sweeteners Co due to this inability to obtain sufficient appropriate evidence.Required:Comment on the actions which Rockwell Co should take as the auditor of the Hopper Group, and the implications for the auditor’s report on the Hopper Group financial statements. (6 marks)(c) Discuss the quality control procedures which should be carried out by Rockwell Co prior to the audit report on the Hopper Group being issued. (4 marks)
Section B – TWO questions ONLY to be attemptedPerkin manufactures electronic components for export worldwide, from factories in Ceeland, for use in smartphones and hand held gaming devices. These two markets are supplied with similar components by two divisions, Phones Division (P) and Gaming Division (G). Each division has its own selling, purchasing, IT and research and development functions, but separate IT systems. Some manufacturing facilities, however, are shared between the two divisions.Perkin’s corporate objective is to maximise shareholder wealth through innovation and continuous technological improvement in its products. The manufacturers of smartphones and gaming devices, who use Perkin’s components, update their products frequently and constantly compete with each other to launch models which are technically superior.Perkin has a well-established incremental budgeting process. Divisional managers forecast sales volumes and costs months in advance of the budget year. These divisional budgets are then scrutinised by the main board, and revised significantly by them in line with targets they have set for the business. The finalised budgets are often approved after the start of the accounting year. Under pressure to deliver consistent returns to institutional shareholders, the board does not tolerate failure by either division to achieve the planned net profit for the year once the budget is approved. Last year’s results were poor compared to the annual budget. Divisional managers, who are appraised on the financial performance of their own division, have complained about the length of time that the budgeting process takes and that the performance of their divisions could have been better but was constrained by the budgets which were set for them.In P Division, managers had failed to anticipate the high popularity of a new smartphone model incorporating a large screen designed for playing games, and had not made the necessary technical modifications to the division’s own components. This was due to the high costs of doing so, which had not been budgeted for. Based on the original sales forecast, P Division had already committed to manufacturing large quantities of the existing version of the component and so had to heavily discount these in order to achieve the planned sales volumes.A critical material in the manufacture of Perkin’s products is silver, which is a commodity which changes materially in price according to worldwide supply and demand. During the year supplies of silver were reduced significantly for a short period of time and G Division paid high prices to ensure continued supply. Managers of G Division were unaware that P Division held large inventories of silver which they had purchased when the price was much lower.Initially, G Division accurately forecasted demand for its components based on the previous years’ sales volumes plus the historic annual growth rate of 5%. However, overall sales volumes were much lower than budgeted. This was due to a fire at the factory of their main customer, which was then closed for part of the year. Reacting to this news, managers at G Division took action to reduce costs, including closing one of the three RD facilities in the division.However, when the customer’s factory reopened, G Division was unwilling to recruit extra staff to cope with increased demand; nor would P Division re-allocate shared manufacturing facilities to them, in case demand increased for its own products later in the year. As a result, Perkin lost the prestigious preferred supplier status from their main customer who was unhappy with G Division’s failure to effectively respond to the additional demand. The customer had been forced to purchase a more expensive, though technically superior, component from an alternative manufacturer.The institutional shareholders’ representative, recently appointed to the board, has asked you as a performance management expert for your advice. ‘We need to know whether Perkin’s budgeting process is appropriate for the business, and how this contributed to last year’s poor performance’, she said, ‘and more importantly, how do we need to change the process to prevent this happening in the future, such as a move to beyond budgeting.’Required:(a) Evaluate the weaknesses in Perkin’s current budgeting system and whether it is suitable for the environment in which Perkin operates. (13 marks)(b) Evaluate the impact on Perkin of moving to beyond budgeting. (12 marks)
Moonstar Co is a property development company which is planning to undertake a $200 million commercial property development. Moonstar Co has had some difficulties over the last few years, with some developments not generating the expected returns and the company has at times struggled to pay its finance costs. As a result Moonstar Co’s credit rating has been lowered, affecting the terms it can obtain for bank finance. Although Moonstar Co is listed on its local stock exchange, 75% of the share capital is held by members of the family who founded the company. The family members who are shareholders do not wish to subscribe for a rights issue and are unwilling to dilute their control over the company by authorising a new issue of equity shares. Moonstar Co’s board is therefore considering other methods of financing the development, which the directors believe will generate higher returns than other recent investments, as the country where Moonstar Co is based appears to be emerging from recession.Securitisation proposalsOne of the non-executive directors of Moonstar Co has proposed that it should raise funds by means of a securitisation process, transferring the rights to the rental income from the commercial property development to a special purpose vehicle. Her proposals assume that the leases will generate an income of 11% per annum to Moonstar Co over a ten-year period. She proposes that Moonstar Co should use 90% of the value of the investment for a collateralised loan obligation which should be structured as follows:– 60% of the collateral value to support a tranche of A-rated floating rate loan notes offering investors LIBOR plus 150 basis points– 15% of the collateral value to support a tranche of B-rated fixed rate loan notes offering investors 12%– 15% of the collateral value to support a tranche of C-rated fixed rate loan notes offering investors 13%– 10% of the collateral value to support a tranche as subordinated certificates, with the return being the excess of receipts over payments from the securitisation processThe non-executive director believes that there will be sufficient demand for all tranches of the loan notes from investors. Investors will expect that the income stream from the development to be low risk, as they will expect the property market to improve with the recession coming to an end and enough potential lessees to be attracted by the new development.The non-executive director predicts that there would be annual costs of $200,000 in administering the loan. She acknowledges that there would be interest rate risks associated with the proposal, and proposes a fixed for variable interest rate swap on the A-rated floating rate notes, exchanging LIBOR for 9·5%.However the finance director believes that the prediction of the income from the development that the non-executive director has made is over-optimistic. He believes that it is most likely that the total value of the rental income will be 5% lower than the non-executive director has forecast. He believes that there is some risk that the returns could be so low as to jeopardise the income for the C-rated fixed rate loan note holders.Islamic financeMoonstar Co’s chief executive has wondered whether Sukuk finance would be a better way of funding the development than the securitisation.Moonstar Co’s chairman has pointed out that a major bank in the country where Moonstar Co is located has begun to offer a range of Islamic financial products. The chairman has suggested that a Mudaraba contract would be the most appropriate method of providing the funds required for the investment.Required:(a) Calculate the amounts in $ which each of the tranches can expect to receive from the securitisation arrangement proposed by the non-executive director and discuss how the variability in rental income affects the returns from the securitisation. (11 marks)(b) Discuss the benefits and risks for Moonstar Co associated with the securitisation arrangement that the non-executive director has proposed. (6 marks)(c) (i) Discuss the suitability of Sukuk finance to fund the investment, including an assessment of its appeal to potential investors. (4 marks)(ii) Discuss whether a Mudaraba contract would be an appropriate method of financing the investment and discuss why the bank may have concerns about providing finance by this method. (4 marks)
There has been significant divergence in practice over recognition of revenue mainly because International Financial Reporting Standards (IFRS) have contained limited guidance in certain areas. The International Accounting Standards Board (IASB) as a result of the joint project with the US Financial Accounting Standards Board (FASB) has issued IFRS 15 Revenue from Contracts with Customers. IFRS 15 sets out a five-step model, which applies to revenue earned from a contract with a customer with limited exceptions, regardless of the type of revenue transaction or the industry. Step one in the five-step model requires the identification of the contract with the customer and is critical for the purpose of applying the standard. The remaining four steps in the standard’s revenue recognition model are irrelevant if the contract does not fall within the scope of IFRS 15.Required:(a) (i) Discuss the criteria which must be met for a contract with a customer to fall within the scope of IFRS 15. (5 marks)(ii) Discuss the four remaining steps which lead to revenue recognition after a contract has been identified as falling within the scope of IFRS 15. (8 marks)(b) (i) Tang enters into a contract with a customer to sell an existing printing machine such that control of the printing machine vests with the customer in two years’ time. The contract has two payment options. The customer can pay $240,000 when the contract is signed or $300,000 in two years’ time when the customer gains control of the printing machine. The interest rate implicit in the contract is 11·8% in order to adjust for the risk involved in the delay in payment. However, Tang’s incremental borrowing rate is 5%. The customer paid $240,000 on 1 December 2014 when the contract was signed. (4 marks)(ii) Tang enters into a contract on 1 December 2014 to construct a printing machine on a customer’s premises for a promised consideration of $1,500,000 with a bonus of $100,000 if the machine is completed within 24 months. At the inception of the contract, Tang correctly accounts for the promised bundle of goods and services as a single performance obligation in accordance with IFRS 15. At the inception of the contract, Tang expects the costs to be $800,000 and concludes that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will occur. Completion of the printing machine is highly susceptible to factors outside of Tang’s influence, mainly issues with the supply of components.At 30 November 2015, Tang has satisfied 65% of its performance obligation on the basis of costs incurred to date and concludes that the variable consideration is still constrained in accordance with IFRS 15. However, on 4 December 2015, the contract is modified with the result that the fixed consideration and expected costs increase by $110,000 and $60,000 respectively. The time allowable for achieving the bonus is extended by six months with the result that Tang concludes that it is highly probable that the bonus will be achieved and that the contract still remains a single performance obligation. Tang has an accounting year end of 30 November. (6 marks)Required:Discuss how the above two contracts should be accounted for under IFRS 15. (In the case of (b)(i), the discussion should include the accounting treatment up to 30 November 2016 and in the case of (b)(ii), the accounting treatment up to 4 December 2015.)Note: The mark allocation is shown against each of the items above.Professional marks will be awarded in question 4 for clarity and quality of presentation. (2 marks)
You are the audit supervisor of Maple Co and are currently planning the audit of an existing client, Sycamore Science Co (Sycamore), whose year end was 30 April 2015. Sycamore is a pharmaceutical company, which manufactures and supplies a wide range of medical supplies. The draft financial statements show revenue of $35·6 million and profit before tax of $5·9 million.Sycamore’s previous finance director left the company in December 2014 after it was discovered that he had been claiming fraudulent expenses from the company for a significant period of time. A new finance director was appointed in January 2015 who was previously a financial controller of a bank, and she has expressed surprise that Maple Co had not uncovered the fraud during last year’s audit.During the year Sycamore has spent $1·8 million on developing several new products. These projects are at different stages of development and the draft financial statements show the full amount of $1·8 million within intangible assets. In order to fund this development, $2·0 million was borrowed from the bank and is due for repayment over a ten-year period. The bank has attached minimum profit targets as part of the loan covenants.The new finance director has informed the audit partner that since the year end there has been an increased number of sales returns and that in the month of May over $0·5 million of goods sold in April were returned.Maple Co attended the year-end inventory count at Sycamore’s warehouse. The auditor present raised concerns that during the count there were movements of goods in and out the warehouse and this process did not seem well controlled.During the year, a review of plant and equipment in the factory was undertaken and surplus plant was sold, resulting in a profit on disposal of $210,000.Required:(a) State Maples Co’s responsibilities in relation to the prevention and detection of fraud and error. (4 marks)(b) Describe SIX audit risks, and explain the auditor’s response to each risk, in planning the audit of Sycamore Science Co. (12 marks)(c) Sycamore’s new finance director has read about review engagements and is interested in the possibility of Maple Co undertaking these in the future. However, she is unsure how these engagements differ from an external audit and how much assurance would be gained from this type of engagement.Required:(i) Explain the purpose of review engagements and how these differ from external audits; and (2 marks)(ii) Describe the level of assurance provided by external audits and review engagements. (2 marks)
Cherry Blossom Co (Cherry) manufactures custom made furniture and its year end is 30 April. The company purchases its raw materials from a wide range of suppliers. Below is a description of Cherry’s purchasing system.When production supervisors require raw materials, they complete a requisition form. and this is submitted to the purchase ordering department. Requisition forms do not require authorisation and no reference is made to the current inventory levels of the materials being requested. Staff in the purchase ordering department use the requisitions to raise sequentially numbered purchase orders based on the approved suppliers list, which was last updated 24 months ago. The purchasing director authorises the orders prior to these being sent to the suppliers.When the goods are received, the warehouse department verifies the quantity to the suppliers despatch note and checks that the quality of the goods received are satisfactory. They complete a sequentially numbered goods received note (GRN) and send a copy of the GRN to the finance department.Purchase invoices are sent directly to the purchase ledger clerk, who stores them in a manual file until the end of each week. He then inputs them into the purchase ledger using batch controls and gives each invoice a unique number based on the supplier code. The invoices are reviewed and authorised for payment by the finance director, but the actual payment is only made 60 days after the invoice is input into the system.Required:In respect of the purchasing system of Cherry Blossom Co:(i) Identify and explain FIVE deficiencies; and(ii) Recommend a control to address each of these deficiencies.Note: The total marks will be split equally between each part.
Is the following statement true or false?A significant change in the ownership of an existing audit client is a factor which makes it appropriate for the auditor to review the terms of engagement.A.TrueB.False