Question 1

SDF is a quoted company. Which of the following matters should normally be dealt with by SDF's audit committee?

Options :

A : The external auditor has requested a higher fee than normal for the forthcoming financial year because new legislation will require additional audit work.

B : The Head of Internal Audit is concerned that a recent internal audit investigation may have revealed serious compliance failures.

C : The external auditor is concerned that an accounting policy selected by the Finance Director does not comply with the spirit of the relevant accounting standard.

D : The external auditor has identified a material error, due to a clear miscalculation, in the draft financial statements.

E : The Finance Director will be retiring within the next year and a replacement will have to be found.

Answer: A,B,C

Question 2

Having carried out a full capital appraisal for a construction project, HCompanyhasapproved the project with initial outflows of $6,000,000 anda net present value of $1,200,000.
The implementation phase has been commenced with 25% of the costs already committed.However whenthe ground was opened, an underground waterway was revealedwhich will need to be diverted if the project is to proceed. Work to carry out this diversion has been estimated at $1,300,000.
Which of the following factors will define whether the project should go ahead or not?

Options :

A : The project actually has a higher NPV than before.

B : The project now has a negative NPV.

C : Abandoning the project will have an adverse effect on shareholder confidence.

D : There will be abandonment costs to restore the site.

E : There may be other unexpected costs to be met if the project continues.

Answer: A,D

Question 3

An electricity company owns and operates a nuclear power station located ten miles from a large city. A recent and very extensive engineering examination of the power station concludes with the estimate that the probability of a major nuclear disaster within the next 20 years is 0.2%.
Which of the following best explains the relevance of quantifying the risk in that way?

Options :

A : There is no acceptable level of risk for a major nuclear accident and so the probability has little information value in itself.

B : The probability is so low as to be ignored.

C : The directors will be able to argue that they were not negligent in the event of a major disaster within the 20 year period.

D : The calculation of a precise probability demonstrates that the engineers who conducted the inspection are experts in their field.

Answer: A

Question 4

Company W produces mobile phone components and has recently tendered for a substantial contract. The results of the tendering process will not become available until three months from now. If the company is successful it will require 2,000 units of a commodity which is currently traded in an open commodity market for $740 per unit. However, there has been speculation that this commodity could increase substantially in price over the next three months and so the company is considering purchasing the commodity now and storing it for three months.
The funds to buy the commodity would be borrowed at an annual interest rate of 7% and the storage cost of the product would be $5.40 per unit per month. The storage costs would be paid at the end of the three month storage period.
Which of the following represents the gain or loss (to the nearest thousand dollars) that will accrue to Company W assuming that the price of the commodity rises to $800 in three months' time?

Options :

A : $62,000 gain

B : $95,000 gain

C : $88,000 gain

D : $16,000 loss

Answer: A

Question 5

The management of U isreviewing internal controls throughout the company. Ithasnoted the following:-
1. In the trade receivables section, journal adjustments are made by the clerks, without any reference to their supervisor. Journal adjustments may relate to sales returns, discounts allowed, or transfers between accounts.
2. In the purchasing department, the purchasing manager selects and approves all suppliers, astheyarethe only person with sufficient experience to do so. They usea very limited number of suppliers becausethey can rely on these suppliers to provide goods of the quality required at a competitive price. They donot keep any documents in relation to negotiations with other potential suppliers or other quotes obtained.
In relation to the above, which of the following statements are valid?

Options :

A : The fact that the purchasing manager uses a very small number of suppliers is, in itself, a sign of poor internal controls.

B : It is acceptable for clerks in the trade receivables section to make journal adjustments without authorisation provided the amounts involved are not material to U-s financial statements.

C : It is acceptable for clerks in the trade receivable section to make journal adjustments without authorisation, provided they have no access to cash receipts.

D : The fact that the purchasing manager does not keep documentation relating to negotiations with suppliers, or potential suppliers,is evidence that they are involved in fraudulent activity.

E : Clerks making journal adjustments without reference to their supervisor is evidence of inadequate separation of duties.

F : The way the role of purchasing manager is carried out in U increases the chance that the company will fall victim to fraudulent activity.

Answer: A