QUESTIONS (3 HOURS)
3. There are two main fields in accounting, namely management accounting and
financial accounting. Discuss five differences between the two.
(5 marks)
6. Azli is a fresh graduate majoring in Accountancy from UiTM. He has just joined a
medium-sized audit firm as an audit assistant. Explain to him the objective of an
audit of financial statements.
(3 marks)
7. The most common type of audit report issued in compliance with the requirements of
the Company’s Act 1965 is the standard unqualified audit report or the “clean” audit
report. What is an audit report? Discuss any three (3) basic elements of a standard
unqualified audit report.
(5 marks)
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8. Fraud refers to an intentional act by one or more individuals among the management
team and employees. On the other hand, error refers to an unintentional mistake in
the financial statements such as mathematical error, misinterpretation of fact, etc.
As such, do you agree that an external auditor’s responsibility is extended to
identify fraud and error? Explain by giving reasons.
(5 marks)
9. In respect of tax payment schedule for a limited liability company, explain the timing
process and the possible penalty levied.
(5 marks)
10. A company is responsible to file a series of tax forms with the Inland Revenue Board
of Malaysia. List and describe the official forms that are required to be submitted to
the Inland Revenue Board, by a limited company in respect of tax matters for a
given year.
(6 marks)
(TOTAL: 50 MARKS)
QUESTION 1
Camdex Sdn Bhd, a modern furniture manufacturer has just employed a new
accountant, Encik Hamid. Encik Hamid’s background is in management accounting. His
job portfolio with Camdex Sdn Bhd also requires him to prepare a full set of financial
statements for publication purposes. He is also expected to submit tax returns to the
Inland Revenue Board. On top of that his day to day job is to manage, plan and control
the finances of the company. This includes the preparation of budgets and the
examination of variances. Occasionally, Encik Hamid is required to make decisions on
issues related to finance. The company does not have an internal audit function as yet,
but Encik Hamid is given the task to assist the external audit firm’s personnel as needed.
As part of his responsibilities tasks, Encik Rahim decided to go through the production
and costing information. Details of the major four products made and sold by Camdex
and their relevant information are given below for one period:
A B C D
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Direct labour 280 210 140 210
Machine hours (per unit) 4 3 2 3
The four products are similar and are usually produced in production runs of 200 units
and sold in batches of 100 units. The production overhead is currently absorbed by
using a machine hour rate, and the total of the production overhead for the period has
been analysed as follows:
RM
Machine department costs 208,600
Set up costs 105,000
Stores receiving 72,000
Inspection/quality control 42,000
Materials handling and dispatch 92,400
a) Calculate the total costs for each product if all overhead costs are absorbed on a
machine hour basis.
(5 marks)
b) Having familiarised himself with marginal costing, Encik Hamid has mulled over the
issue of using marginal costs for inventories in his published financial statements.
Explain with reasons whether this is a good idea.
(5 marks)
Prior to joining Camdex Sdn Bhd, Encik Hamid has also received some training in
ABC. As part of his continuous improvement plan, he is envisaging developing
ABC into the system. Discuss some of the problems that Encik Hamid may
encounter if he decides on implementing ABC within the company.
(5 marks)
d) One of the steps of implementing Activity-based Costing (ABC) into the system is
the identification of activities and the respective cost drivers. Encik Hamid has
ascertained that the cost drivers to be used are as listed below for the overhead
costs shown:
In addition, he found out that the number of requisitions raised on the stores was
20 for each product and the number of orders executed was 42, each order being
for a batch of 100 of a product.
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Calculate the total costs for each product, using activity-based costing approach.
(10 marks)
f) As part of the company’s expansion plan, a new marketing manager has recently
been appointed. The job of marketing was previously being undertaken by the
owner himself. Encik Hamid is not too sure on how he could work with the new
marketing manager. The owner of the company suggests that the marketing
manager may be able to assist Encik Hamid in budgeting. However, Encik Hamid
has some doubt whether the new marketing manager’s background would be
helpful enough in budget setting.
i. Discuss whether the new marketing manager has any significant role to
play in budget setting.
(5 marks)
ii. Explain the differences between the functional and master budgets giving some
examples of the said budgets.
(5 marks)
g) The company intends to purchase new equipment. Encik Hamid would like to
evaluate the capital investment proposal using a discounted cash flow technique.
The owner likes the idea of using the payback method as he has been using the
method for a long time and it is easy for him to understand the method. Discuss the
limitations of using the discounted cash flow techniques.
(5 marks)
h) Discuss the various ways in which Encik Hamid can assist the external auditors.
(5 marks)
(TOTAL: 50 MARKS)
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PAST YEAR SEMESTER APRIL 2009
SUGGESTED SOLUTIONS (3 HOURS)
Answer 1
There are many differences between a partnership and a limited liability company. The
following are 10 main differences.
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No Partnership Firm Company Limited By Shares
8. Reporting and • Not required to submit • Required to lodge with CCM
return any report to the CCM returns on prescribed return
forms and annual returns and
audited accounts annually.
Answer 2
The main difference between a trading enterprise income statement and the
manufacturer’s income statement lies in the cost of goods sold calculation. The table
below illustrates the difference.
Cost of goods available for sale xxx Cost of goods available for sale xxx
Less: Closing stock of goods (xxx) Less: Closing stock of finished goods (xxx)
It can be seen from above that instead of dealing with the cost of goods purchased (as in
trading firm), the manufacturing firm needs to report on the cost of goods manufactured.
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The following illustrates a cost of goods manufactured schedule applicable only for
manufacturing firms.
Manufacturing Firm
Income Statement (partial) for the year ended xx/xx/xx
RM RM RM
Opening work in progress xxx
Direct materials
Opening stock of raw materials xxx
Add: Purchases of raw materials xxx
Raw materials available for use xxx
Less: Closing stock of raw materials (xxx)
Direct materials used xxx
Direct labour xxx
Manufacturing overheads
Indirect materials xxx
Indirect labour xxx
Indirect expense xxx
Total manufacturing overhead xxx
Total manufacturing costs xxx
Total cost of work in progress xxx
Less: Closing work in progress (xxx)
Answer 3
The following table summarizes the principal differences between financial accounting
and managerial accounting. The need for various types of economic data is responsible
for many of the differences.
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as the Financial Reporting decisions.
Standards.
5. Verification Process Audited by external No independent
auditors audits.
Answer 4
In managerial accounting, standard costs are predetermined unit costs, which the
organizations use as measures of performance. Standard costs may be used by all
types of organizations, such as manufacturing companies, service businesses and not-
for-profit enterprises. Both standards and budgets are predetermined costs, and both
contribute to management planning and control.
There is a difference, however, in the way the terms are expressed. A standard is a unit
amount. A budget is a total amount. Therefore, a standard is the budgeted cost per unit
of product. As such, a standard is concerned with each individual cost component that
makes up the entire budget.
There are important accounting differences between budgets and standards. Except in
the application of manufacturing overhead to jobs and processes, budgeted data are not
journalized in cost accounting systems. In contrast, standard costs may be incorporated
into cost accounting systems. Also, a company may report its inventories at standard
cost in its internal financial statements, but it would not report inventories at budgeted
costs. Standard costs offer a number of advantages to an organization.
The organization will realize these advantages only when standard costs are carefully
established and prudently used. For example, using standards solely as a way to
apportion blame can have negative effect on managers and employees. To minimize this
effect, companies offer wage incentives to those who meet the standards.
Answer 5
(b) Seasonal factors can also distort ratios. Year-end value may not be
representative due to increase and decrease due to seasonal factors.
(c) Inflation distorts the firm’s financial statements. It will cause the recorded value to
be different from the true value.
(d) Different operating and accounting practices make comparison difficult. This is
because different accounting method applied will result in different values. For
example use straight-line method to depreciated property plant and equipment may
produce different profit and loss as compared with a company using the reducing
balance method.
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(e) It is sometimes difficult to conclude whether a ratio is good or bad. For example,
a high liquidity ratio may indicate that a company is financially sound and therefore is
efficient in the firm’s working capital management. On the other hand, too high
current ratios may also signify that the company is not managing its working capital
effectively. High current ratios may indicate overstocking and difficulty in collecting
account receivable on time, as well as a surplus of idle cash.
(f) A single ratio does not generally provide sufficient information from which to
judge the overall performance of the firm. Only when a group of ratios is used can
reasonable judgments be made.
Answer 6
The audit objective is to enable to the auditors to form and express an independent
opinion based on the audit work performed whether the financial statements are free
from material misstatements (or financial statements presenting fairly stated).
The auditor also has to form and express opinion on compliance with statutory
requirements and other regulations and to provide assistance to the organization in
improving financial controls and financial reporting within the business.
Answer 7
Audit report
Audit report is the final stage in the entire audit process. It is a written communication of
audit findings to the shareholders or to the members of the company. It may also be
read by the others such as bankers, creditors and other parties who use the information
in the financial statements. In order to avoid confusion to the readers, it is important for
the auditing profession to adopt conventional and uniform wording in auditor’s reports.
Answer 8
No. It is not the external auditor’s responsibility to identify fraud and error. According to
the International Standards on Auditing 240 (or AI240), the auditor is not and cannot be
held responsible for the prevention of fraud and error. The fact that an annual audit is
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carried out may, however, act as a deterrent. In order to act as a deterrent, the auditors
have to perform the following procedures during the audit work.
Answer 9
For a limited company in operation (i.e. in the second year and onwards), tax is payable
in 12 monthly instalments. However, during the first year of the company’s existence, it
could be in less than 12 monthly instalments.
The first instalment is on the 10th day of the second month of the basis period. If for
example, the basis period is from January to December 2008, then the first instalment
for the basis period is due on the 10th February 2008.
The monthly instalment is based on the estimated tax payable for the basis period,
divided by 12. The estimated figure for the basis period can be revised in the 6th month
and/or the 9th month.
At the end of the basis period, if tax payment is underestimated by a margin of error of
more than 30%, then a 10% penalty will be imposed on the excess. This also means that
if the margin of error for underestimated tax is within 30%, no penalty will be charged. If
tax is overpaid, then a refund can be obtained on the amount overpaid without interest
claim.
Answer 10
For a limited company, there are four main official forms prepared by the Inland
Revenue Board that are applicable. The table below enumerates the forms and their
purposes.
Form Purpose
Form CP 204 To estimate tax payable for the basis period
Form CP 204A To revise estimated tax payable for the basis period in the 6th and / or
9th month.
Return Form C To file the tax return for the basis period (the actual tax liability for the
basis period).
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PART B QUESTION 1 (50 MARKS)
b) Not a good idea. Paragraph 9 of the Financial Reporting Standards (FRS) 102 on
inventories states that inventory should be measured at the lower of cost and net
realisable value. The cost of inventories shall comprise of the cost of purchase,
costs of conversion and other costs incurred in bringing the inventories to their
present location and condition. The costs of conversion of inventories include costs
directly related to the units of production such as direct labour. They also include a
systematic allocation of fixed and variable production overheads that are incurred in
converting the raw materials into finished goods. Clearly variable costs alone
cannot be used in the valuation.
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expenses. Although ABC is generally regarded as a more accurate product costing
method, it also suffers from some inherent limitations. ABC can be expensive to
use and can still result in some arbitrary allocations of overhead costs. ABC is also
not too useful if product lines are not numerous and diverse. Even if product lines
are numerous and diverse, ABC is not too much different from absorption costing
when the production volumes and the manufacturing complexities of the products
do not differ greatly. In many developing countries where production is mainly
labour intensive and overhead costs constitute a smaller portion of total costs, ABC
does not lead to better product costing for decision making. In fact, the difficulty in
identifying the cost pools and cost drivers apart from a higher cost of
implementation makes ABC undesirable.
RM Basis RM
Machine department costs 208,600 13,000 16.04615 per machine hour
Set up costs 105,000 21 5000 per production run
Stores receiving 72,000 80 900 per requisition
Inspection/quality control 42,000 21 2000 per production run
Materials handling and
dispatch 92,400 42 2200 per order
A B C D
Workings:
Machine department costs 77,022 48,138 25,674 57,766
Set up costs 300,000 250,000 200,000 300,000
Stores receiving 18,000 18,000 18,000 18,000
Inspection/quality control 120,000 100,000 80,000 120,000
Materials handling and dispatch 26,400 22,000 17,600 26,400
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e) No, LIFO cannot be used. According to paragraph 25 of the Financial Reporting
Standards (FRS) 102, the costs of inventories other than those in paragraph 23
shall be assigned by using the First-In-First-Out (FIFO) or the weighted average
cost formula and an entity shall use the same cost formula for all inventories having
a similar nature and use to the entity. For inventory with a different nature or use,
different cost formula may be justified. Paragraph 23 clarifies that the costs of
inventories of items that are not ordinarily interchangeable and goods or services
produced and segregated for specific projects shall be assigned by using specific
identification or their individual costs.
f) Part (i)
The sales budget is the starting point for other budgets. It sets the level of activity
for other functions such as production and purchasing. As such, the sales budget is
the first budget prepared. Each of the other budgets depends on the sales budget.
The sales budget is derived from the sales forecast. It represents management’s
best estimate of sales revenue for the budget period. An inaccurate sales budget
may adversely affect net income. For example, an overly optimistic sales budget
may result in excessive inventories that may have to be sold at reduced prices. In
contrast, an unduly conservative budget may result in loss of sales revenue due to
inventory shortages. Forecasting sales is challenging. As a firm grows, the task of
predicting sales becomes even more complex. The help of a marketing manager
with his specialised expertise in forecasting sales may result in better accuracy
which will cascade into sounder decision-making along the line.
Part (ii)
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g) Discounted cash flow (DCF) techniques are the most accepted approach in capital
investment appraisal. However, the main problem with the discounted cash flow
techniques (including net present value and the internal rate of return) is the
difficulty to make accurate forecasts of future cash flows. As the period of time
under analysis becomes more extended into the future, the reliability of projected
cash flows becomes more inaccurate. For example, when evaluating investment in
an internet based project, the high risk and uncertainty characterizing the future
cash flows of this project needs to be given serious attention. Specifically DCF
assumes that future cash flow streams are highly predictable. The effects of
uncertainty are therefore tackled implicitly by discounting the expected value of the
cash flows at a risk-adjusted interest rate. However, under uncertainty, future cash
flows of these projects can no longer be characterized by a single value but rather
by a range of values of its possible consequences.
h) Encik Hamid can assist the external auditors in many different ways. The followings
are some of the ways.
Encik Hamid has to prepare management financial statements (Income
Statement, Balance Sheet, Cash Flow Statement etc.). These will be used as
the basis of the audit.
During the entrance meeting with the external auditors, Encik Hamid is
expected to advise the external auditors on areas that he suspects that potential
fraud or error might have occurred.
During the audit process itself, Encik Hamid may from time to time be
required to provide all other necessary documents and explanations to the
auditors.
During the exit meeting with the external auditors, Encik Hamid and the
auditors should agree on the audit findings and propose further adjustments to
the Financial Statements, if any.
END OF SOLUTIONS
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