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PAST YEAR SEMESTER APRIL 2009

QUESTIONS (3 HOURS)

PART A (50 MARKS)

Answer ALL questions.

1. Choice of business entity can be in the form of sole proprietorship, partnership or


company. Explain any five (5) main differences between a partnership and a
limited liability company.
(5 marks)

2. The nature of business between trading enterprises and manufacturers differs in


several ways. Discuss how the trading enterprise income statement differs from the
manufacturer’s income statement.
(7 marks)

3. There are two main fields in accounting, namely management accounting and
financial accounting. Discuss five differences between the two.
(5 marks)

4. Standard costing is commonly used within an organisation as part of a budgetary


control system. Explain the concept of standard cost.
(4 marks)

5. Numerous scholars have agreed on the usefulness of ratio analysis in providing


information concerning an organisation’s operations and financial condition.
However, it has some potential problems that require careful consideration and
judgment. Briefly explain some of the potential problems and limitations of ratio
analysis.
(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)

PART B (50 MARKS)

Answer ALL questions.

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

Output in units 1,200 1,000 800 1,200

Costs per unit RM RM RM RM


Direct material 400 500 300 600

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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)

c) Activity-based costing (ABC) is an approach to the costing and monitoring of


activities which involves identifying the activities that are responsible for the
generation of costs.

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:

Cost Cost driver


Set up costs Number of production runs
Stores receiving Requisitions raised
Inspection/quality control Number of production runs
Materials handling and dispatch Orders executed

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)

e) The company’s stock management system currently employs the Last-In-First-Out


(LIFO) technique in issuing raw materials to production. Explain with reasons
whether LIFO can be used as a basis of valuation in financial accounts. You may
make some assumptions and relate them to the relevant accounting standards.
(5 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)

END OF QUESTION PAPER

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PAST YEAR SEMESTER APRIL 2009
SUGGESTED SOLUTIONS (3 HOURS)

PART A (50 MARKS)

Answer 1

There are many differences between a partnership and a limited liability company. The
following are 10 main differences.

No Partnership Firm Company Limited By Shares


1 Legal Status • No legal status • An artificial legal entity

2. Formation • By written or oral • Incorporation under CA 1965


agreement. by lodging the various
• Registration with CCM prescribed statutory forms
(Form A) and memorandum of
association (MMA)

3. Owner (s) • Min 2 , max 20 • Private company: Min 2, Max


(Exception to max of 50 (excluding staff turn
20) member)
• Public company: Min 2 and
no Max

4. Capital • Contributed by partner • By allotting shares to


shareholders (owner of the
company)

5. Liabilities of • Unlimited liability • Limited to the amount of


owners shares subscribed by the
shareholders

6. Ownership of • Jointly owned by the • Owned by the company. The


properties partners company is the rightful owner
of the company’s properties,
not the shareholders

7. Management • Every partner is entitled • Managed by BOD which may


to participate in the or may not be shareholders
management of the firm of the company.
• At least one CO SEC and
must not be vacant for more
than one at any time.

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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.

9. Taxation • The firm is not subject • The company is subject to


to income tax. The income tax at the rate
profits generated are applicable to companies.
added to the partner’s
personal income and
the partners are liable
for thus profit under
personal income tax.

10. Termination • By filling of form C with • By undergoing legal winding


the CCM. up procedures as laid down
by the CA 1965 and
Companies (Winding Up)
rules 1972.
• Costly professional charges
will be incurred.

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.

Trading Firm Manufacturing Firm


Income Statement (partial) for the year ended Income Statement (partial) for the year ended
xx/xx/xx xx/xx/xx
RM RM
Opening stock of goods xxx Opening stock of finished goods xxx
Add: Cost of goods purchased xxx Add: Cost of goods manufactured (see xxx
schedule below)

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)

Cost of goods sold xxx Cost of goods sold 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)

Cost of goods manufactured 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.

No. Financial Accounting Managerial Accounting

1. Primary Users of  External users:  Internal users: officers


Reports shareholders, creditors and and managers
regulators
2. Types and  Financial statements.  Internal reports.
Frequency of Reports  Quarterly and annually  As frequently as
needed.
3. Purpose of Reports  General purpose  Special purpose for
specific decisions.
4. Content of Reports  Pertains to business as a  Pertains to subunits of
whole. the business.
 Highly aggregated  Very detailed.
(condensed).  Extends beyond
 Limited to double-entry double-entry
accounting and cost data. accounting to any
 Generally accepted relevant data.
accounting principles, such  Standard is relevant to

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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

Among the limitations of Financial ratios are:-

(a) Comparison with industry averages is difficult for conglomerates. If a firm is


involved in many kind of business, its category is difficult to identify and ratios
analysis can be meaningless.

(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.

Basic element of standard unqualified audit report


o Report title
o Addressee
o Introductory or opening paragraph
o Scope paragraph
o Opinion or reporting paragraph
o Name and signature of the auditor
o Date of the report
o Name and address of the audit firm

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.

 Maintain professional scepticism


 Carry out risk assessment procedures.
 Carry out detection procedures where applicable.

Notwithstanding the procedures, the management of the company assumes full


responsibility for the prevention and detection of fraud and error.

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)

a) Machine hour absorption rate =

RM104,300 + RM52,500 + RM36,000 + RM21,000+ RM46,200


= RM20/machine hour
(1,200*4) + (1,000*3) + (800*2) + (1,200*3)

The total costs for each product are thus:


A B C D

Output in units 1,200 1,000 800 1,200

Costs per unit RM RM RM RM


Direct material 400 500 300 600
Direct labour 280 210 140 210
Production Overhead 160 120 80 120
Production Cost Per Unit 840 830 520 930

Total Production 1,008,000 830,000 416,000 1,116,000

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.

c) It is possible to use activity-based costing (ABC) instead of the traditional


absorption costing in published financial statements, as long as the requirements of
paragraph 9 of the Financial Reporting Standards (FRS) 102 are met. However, the
financial community has not completely accepted ABC, and as a result, companies
rarely use it for external reporting. Most companies use ABC for management
reporting, to make better product pricing, make vs. buy, product roll-out, and other
strategic decisions. Frequently, ABC allocates expenses that are not normally
included in the inventory balances, such as general, administrative, and selling

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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.

d) Cost driver rates

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

Number of Production Run 21


Number of Requisition Raised 80
Number of Order Executed 42

A B C D

Output in units 1,200 1,000 800 1,200

Costs per unit RM RM RM RM


Direct material 480,000 500,000 240,000 720,000
Direct labour 336,000 210,000 112,000 252,000
Production Overhead 541,422 438,138 341,274 522,166
Total Production 1,357,422 1,148,138 693,274 1,494,166

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

Total Overheads 541,422 438,138 341,274 522,166

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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)

A functional budget is a budget of income and/or expenditure applicable to a


particular function. A function may refer to a department or process. Functional
budgets frequently include among other things, sales budget, production budget,
direct materials budget and capital expenditure budget. The master budget (or
summary budget) is the total budget package for an organisation; it is the end
product of the budget preparation process. It incorporates its component functional
budgets and which is finally approved, adopted and employed. A master budget is a
budget which is prepared from and summarizes all the functional budgets. A master
budget commonly takes the form of a budgeted income statement and budgeted
balance sheet. However, there is an alternative definition of a master budget used
in American literature. Here, the master budget is a set of interrelated budgets that
constitutes a plan of action for a specified time period. Using this definition, the
master budget contains two classes of budgets, namely operating budgets and
financial budgets. Operating budgets are the individual budgets that results in the
preparation of the budgeted income statement. Financial budgets are the capital
expenditure budget, the cash budget and the budgeted balance sheet. Clearly,
there are overlaps among the various definitions.

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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.

 All Balance Sheet and Income Statement items should be supported by


detailed schedules or other supporting documents. Encik Hamid must have them
ready for the external auditors.

 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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